<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
on July 24, 1996
Registration Statement No. 333-
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------------------------------
AMRESCO Residential Securities Corporation
(Exact name of Registrant as specified in its governing instruments)
-----------------------------------------------------
DELAWARE 75-2620414
-----------------------
(State of Incorporation) (I.R.S. Employer Identification Number)
Before August 9, 1996 After August 9, 1996
1845 Woodall Rodgers Freeway 700 N. Pearl Street, Suite 2400
Dallas, Texas 75201 Dallas, Texas 75201
(Address of principal executive offices) (214) 953-7700
(214) 953-7700
-----------------------------------------------------
H. John Steele, Esq.
Arter & Hadden
1801 K Street, N.W.
Suite 400K
Washington, DC 20006
(202) 775-7169
Fax: (202) 857-0172
(Name and address of agent for service)
-----------------------------------------------------
Please send copies of communications to:
Michael W. Trickey Karen H. Cornell
Senior Vice President of Finance Deputy General Counsel
AMRESCO Residential Credit Corporation AMRESCO, Inc.
3401 Centrelake Drive, Suite 480 1845 Woodall Rodgers Freeway
Ontario, California 91761 Dallas, Texas 75201
(909) 605-7600 (214) 953-7700
Fax: (909) 941-7619 Fax: (214) 953-7757
-----------------------------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC. From time to
time after the effective date of this Registration Statement as determined by
market conditions and pursuant to Rule 415.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
Box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
-----------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=================================================================================================================================
Proposed Maximum Proposed Maximum
Title of Securities Amount Being Offering Price Aggregate Offering Amount of
Being Registered Registered Per Unit* Price Registration Fee
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage Loan Asset Backed $2,000,000,000.00 100% $2,000,000,000.00 $689,655.17
Certificates
=================================================================================================================================
<FN>
* Estimated solely for purposes of calculating the registration fee.
</FN>
</TABLE>
-----------------------------------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a),
may determine.
<PAGE>
This registration statement registers up to $2,000,000,000.00 of
mortgage asset-backed pass-through certificates and debt securities
collateralized by various types of mortgage collateral described herein. The
registration statement contains two forms of prospectuses covering, (i)
one-to-four ("single") family residential first and junior lien, fixed and
adjustable rate mortgage loans or interests therein represented by agency or
private label pass-through securities and (ii) multifamily/commercial mortgage
loans. Each of the single family mortgage prospectus and the
multifamily/commercial prospectus is accompanied by one or more forms of
prospectus supplement describing certain structures that are expected to be
employed by the Registrant. As described in the Prospectus, each transaction may
have Classes of Certificates with various characteristics, mortgage assets with
various characteristics, various forms and terms of credit enhancement, one or
more subservicers, various underwriting and servicing standards with respect to
mortgage assets, various tax consequences and various other characteristics,
each of which will be fully described in the actual form of prospectus
supplement filed pursuant to Rule 424(b).
The forms of the single family and multifamily/commercial prospectuses
are similar in many respects in that they both relate to real estate security
for the related mortgage obligations. The primary differences between these
prospectuses are under the captions addressing risk factors, certain legal
aspects of the mortgage loans, servicing of the mortgage loans and the
description of the securities, as it now appears more likely in the
multifamily/commercial context than in the single family context that internal
cash flow allocations (e.g., senior/subordinate securities) will provide the
predominate credit enhancement on those securities.
2
<PAGE>
<TABLE>
<CAPTION>
CROSS REFERENCE SHEET
Items and Caption in Form S-3 Location in Prospectus
<S> <C> <C>
1. Forepart of Registration Statement and Outside Front Cover
Page of Prospectus.............................................. Forepart of Registration
Statement and Outside Front
Cover Page **
2. Inside Front and Outside Back Cover Pages of Prospectus............ Inside Front Cover Page and
Outside Back Cover Page of
Prospectus **
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges....................................... Summary**; The Seller**; Risk
Factors**
4. Use of Proceeds.................................................... Use of Proceeds**
5. Determination of Offering Price.................................... *
6. Dilution........................................................... *
7. Selling Security-Holders........................................... *
8. Plan of Distribution............................................... Plan of Distribution **
9. Description of Securities to be Registered......................... Outside Front Cover; Summary;
The Trusts; The Securities;
Administration of Agreement
and Servicing of Mortgage
Loans **
10. Interests of Named Experts and Counsel............................. *
11. Material Changes................................................... *
12. Incorporation of Certain Information by Reference.................. Inside Front Cover Page**;
Incorporation of Certain
Documents by Reference**
13. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities...................................... See Page II-2
- --------------------------
<FN>
* Answer negative or item inapplicable.
** To be completed from time to time by Prospectus Supplement.
</FN>
</TABLE>
3
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This preliminary prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.
Subject to Completion, Dated ___________, 199__
PROSPECTUS SUPPLEMENT
(To Prospectus Dated January 24, 1996)
$____________
AMRESCO Residential Securities Corporation Mortgage Loan Trust 199__-__
$___________ Class A-1 Adjustable Rate Certificates
$___________ _____% Class A-2
Certificates $___________ _____%
Class A-3 Certificates $___________
_____% Class A-4 Certificates
$___________ _____% Class A-5
Certificates $___________ _____%
Class A-6 Certificates $___________
_____% Class A-7 Certificates*
$___________ Class A-8 Adjustable Rate Certificates
----------
[Advanta Mortgage Corp. USA
Long Beach Mortgage Company
Option One Mortgage Corporation]
Servicers
AMRESCO RESIDENTIAL SECURITIES CORPORATION
Depositor
----------
LOGO
AMRESCO
AMRESCO Residential Securities Corporation
The AMRESCO Residential Securities Corporation Mortgage Loan
Pass-Through Certificates, Series 199__-__ (the "Certificates") will consist of
(i) the Class A-1 Certificates, Class A-2 Certificates, Class A-3 Certificates,
Class A-4 Certificates, Class A-5 Certificates, Class A-6 Certificates and Class
A-7 Certificates (collectively, the "Fixed Rate Group Certificates"), (ii) the
Class A-8 Certificates (the "Adjustable Rate Group Certificates"); and together
with the Fixed Rate Group Certificates, the "Class A Certificates"), (iii) one
or more classes of subordinate interest-only Certificates and (iv) a residual
class (the "Class R Certificates"; and together with such other subordinate
Certificates, the "Subordinate Certificates"). Only the Class A Certificates are
offered hereby.
[Surety Name]
On or before the issuance of the Certificates, the Depositor will
obtain from [Surety Name] (the "Certificate Insurer") two financial guaranty
insurance policies relating to the Class A Certificates (the "Certificate
Insurance Policies") in favor of the Trustee. The Certificate Insurance Policies
will in accordance with their respective terms provide for 100% coverage of the
scheduled principal amount of, and scheduled interest due on, the Class A
Certificates.
The Certificates represent undivided ownership interests in one of two
pools (each, a "Mortgage Loan Group") of fixed and adjustable rate mortgage
loans (the "Mortgage Loans") held by AMRESCO Residential Securities Corporation
Mortgage Loan Trust 199__-__ (the "Trust"). The Fixed Rate Group Certificates
will represent undivided ownership interests in the Mortgage Loans in Group I
and the Pre-Funding Account (as defined herein) solely. The Adjustable Rate
Group Certificates will represent undivided ownership interests in the Mortgage
Loans in Group II (the Six-Month LIBOR Loans and the 2/28 Loans (each as defined
herein)) and the Pre-Funding Account solely. All of the Mortgage Loans are
secured solely by first lien mortgages or deeds of trust. The Class A
Certificates also represent an undivided ownership interest in all monies due
under the respective Mortgage Loans after __________, 199__ (the "Cut-Off
Date"), security interests in the properties which secure the Mortgage Loans
(the "Mortgaged Properties"), the financial guaranty insurance policies, funds
on deposit in certain trust accounts, and certain other property.
For a discussion of significant matters affecting investment in the
Certificates, see "Risk Factors" beginning on page S-15 and "Prepayment and
Yield Considerations" beginning on page S-47 herein and "Risk Factors" beginning
on page 7 in the Prospectus.
(Cover continued on next page)
----------
THE CLASS A CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY AND
DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, THE SELLER, THE
SERVICERS, THE TRUSTEE OR
ANY OF THEIR AFFILIATES. NEITHER THE CLASS A CERTIFICATES NOR THE MORTGAGE
LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY.
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
----------
The Class A Certificates will be purchased by the Underwriters from the
Depositor and will be offered by the Underwriters from time to time to the
public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. Proceeds to the Depositor from the sale of the
Class A Certificates will be approximately $__________, plus accrued interest on
the Fixed Rate Group Certificates (except the Class A-1 Certificates) at the
applicable Pass-Through Rate from __________, 199__ to, but not including, the
Closing Date, before deducting expenses payable by the Depositor estimated to be
approximately $250,000.
The Class A Certificates are offered subject to prior sale, when, as,
and if accepted by the Underwriters and subject to the Underwriters' right to
reject orders in whole or in part. It is expected that delivery of the Class A
Certificates will be made in book-entry form through the facilities of The
Depository Trust Company ("DTC"), CEDEL S.A. and the Euroclear System on or
about __________, 199__. The Class A Certificates will be offered in Europe and
the United States of America.
- --------
* The Class A-7 Certificate's Pass-Through Rate is subject to adjustment after
the Clean-Up Call Date, as described in the Summary of Terms herein.
[UNDERWRITER]
[UNDERWRITER]
[UNDERWRITER]
The date of this Prospectus Supplement is ___________, 199__
<PAGE>
(Cover continued from previous page)
The Trust will be created pursuant to a Pooling and Servicing Agreement
(the "Pooling and Servicing Agreement") to be dated as of __________, 199__,
among the Depositor, the Seller, the Servicers and Bankers Trust Company, as
Trustee (the "Trustee").
The Pooling and Servicing Agreement provides that additional Mortgage
Loans (the "Subsequent Mortgage Loans") may be purchased by the Trust from the
Depositor from time to time on or before __________, 199__ from funds on deposit
in the Pre-Funding Account. Each Subsequent Mortgage Loan so acquired by the
Trust will be assigned to one (and only one) of the Mortgage Loan Groups. On the
Closing Date aggregate cash amounts of approximately $__________ and $__________
will be deposited with the Trustee in the Pre-Funding Account to be used to
acquire Subsequent Mortgage Loans for Group I and Group II, respectively.
It is a condition to issuance of the Class A Certificates that the
Class A Certificates be rated "Aaa" by Moody's, "AAA" by Standard and Poor's and
"AAA" by Fitch.
Distributions of interest will be made to the Owners of the
Certificates on the 25th day of each month (or, if such day is not a business
day, the next business day) beginning __________, 199__. Interest will be passed
through on each Payment Date to the Owners of the Class A Certificates based on
the related Certificate Principal Balance (as defined herein), and at the rate
applicable to the related Class of the Class A Certificates (each, a
"Pass-Through Rate"). On any Payment Date on or prior to the Clean-Up Call Date
(as defined herein), the Pass-Through Rate for the Class A-7 Certificates is
8.075% and, thereafter, will be the lesser of 8.825% and the weighted average of
the Coupon Rates of the Mortgage Loans in Group I, less 0.64625%. The
Pass-Through Rate for the Class A-1 Certificates and the Class A-8 Certificates
adjusts monthly based upon One-Month LIBOR (as defined herein) or as otherwise
described herein. Distributions in reduction of the Certificate Principal
Balances will be made on each Payment Date in the manner and the amounts
described herein. Distributions on the Subordinate Certificates are subordinate
to distributions on the Class A Certificates to the extent described herein.
The yield to investors on the Class A Certificates sold at prices other
than par may be sensitive to the rate and timing of principal payments
(including prepayments, repurchases, defaults and liquidations) on the Mortgage
Loans in the related Group, which may vary over time. See "Prepayment and Yield
Considerations" herein and "Risk Factors" and "Yield, Prepayment and Maturity
Considerations" in the Prospectus.
An election will be made to treat certain assets of the Trust as a
"real estate mortgage investment conduit" (a "REMIC")
for federal income tax purposes. All of the Class A Certificates will constitute
"regular interests" in a REMIC. See "Certain Federal Income Tax Consequences"
herein and in the Prospectus.
----------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
The Certificates offered by this Prospectus Supplement will be part of
a separate series of Certificates being offered by the Depositor pursuant to its
Prospectus dated January 24, 1996, of which this Prospectus Supplement is a part
and which accompanies this Prospectus Supplement. The Prospectus contains
important information regarding this offering which is not contained herein, and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission a
Registration Statement under the Securities Act of 1933 with respect to the
Certificates. This Prospectus Supplement and the related Prospectus, which form
a part of the Registration Statement, omit certain information contained in such
Registration Statement pursuant to the Rules and Regulations of the Commission.
The Registration Statement can be inspected and copied at the Public Reference
Room of the Commission at 450 Fifth Street, N.W., Washington, D.C., and the
Commission's regional offices at Seven World Trade Center, 13th Floor, New York,
New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such materials can be obtained at prescribed
rates from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549.
REPORTS TO OWNERS
Monthly and annual reports concerning the Certificates and the Trust
will be sent by the Trustee to the Owners of Class A Certificates. So long as
any Class A Certificate is in book-entry form, such reports will be sent to Cede
& Co., as the nominee of DTC and as Owner of such Class A Certificates pursuant
to the Pooling and Servicing Agreement. DTC will supply such reports to Owners
of any such Class A Certificates in accordance with its procedures.
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
Page
-----
SUMMARY OF TERMS............................................................S-1
RISK FACTORS...............................................................S-16
THE PORTFOLIO OF MORTGAGE LOANS............................................S-20
General...............................................................S-20
Guidelines............................................................S-20
Prepayment Penalties..................................................S-28
Representations Relating to the Mortgage Loans........................S-28
The Servicers.........................................................S-29
General...............................................................S-39
USE OF PROCEEDS............................................................S-40
THE DEPOSITOR..............................................................S-40
THE SELLER.................................................................S-40
THE MORTGAGE LOAN POOLS....................................................S-40
General...............................................................S-40
Initial Mortgage Loans -- Group I.....................................S-41
Initial Mortgage Loans -- Group II....................................S-45
Conveyance of Subsequent Mortgage Loans...............................S-52
PREPAYMENT AND YIELD CONSIDERATIONS........................................S-52
General...............................................................S-52
Mandatory Prepayment..................................................S-53
Projected Prepayment and Yield for Class A Certificates...............S-53
Payment Lag Feature of Certain Fixed Rate Group Certificates..........S-58
THE ORIGINATORS............................................................S-58
FORMATION OF THE TRUST AND TRUST PROPERTY..................................S-58
ADDITIONAL INFORMATION.....................................................S-59
DESCRIPTION OF THE CLASS A CERTIFICATES....................................S-59
General...............................................................S-59
Payment Dates.........................................................S-59
Distributions.........................................................S-60
Overcollateralization Provisions......................................S-62
Crosscollateralization Provisions.....................................S-64
Pre-Funding Account...................................................S-64
Capitalized Interest Account..........................................S-65
Calculation of One-Month LIBOR........................................S-65
Book Entry Registration of the Class A Certificates...................S-65
Assignment of Rights..................................................S-68
THE CERTIFICATE INSURANCE POLICIES AND THE
CERTIFICATE INSURER...................................................S-69
THE POOLING AND SERVICING AGREEMENT........................................S-72
Covenant of the Seller to Take Certain Actions with Respect
to the Mortgage Loans in Certain Situations.......................S-72
Assignment of Mortgage Loans..........................................S-73
Servicing.............................................................S-74
Removal and Resignation of a Servicer.................................S-78
Reporting Requirements................................................S-79
Removal of Trustee for Cause..........................................S-80
Governing Law.........................................................S-81
Amendments............................................................S-81
Termination of the Trust..............................................S-81
Optional Termination..................................................S-81
CERTAIN FEDERAL INCOME TAX CONSEQUENCES....................................S-82
REMIC Election........................................................S-82
ERISA CONSIDERATIONS.......................................................S-83
RATINGS....................................................................S-84
LEGAL INVESTMENT CONSIDERATIONS............................................S-84
UNDERWRITING...............................................................S-85
REPORT OF EXPERTS..........................................................S-86
CERTAIN LEGAL MATTERS......................................................S-86
GLOBAL CLEARANCE, SETTLEMENT AND TAX
DOCUMENTATION PROCEDURES..............................................Annex I
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS................................A-1
AUDITED FINANCIAL STATEMENTS FOR
THE CERTIFICATE INSURER...................................................B-1
UNAUDITED FINANCIAL STATEMENTS FOR
THE CERTIFICATE INSURER...................................................C-1
<PAGE>
Prospectus
Page
----
SUMMARY OF PROSPECTUS...................................................... 1
RISK FACTORS............................................................... 7
DESCRIPTION OF THE CERTIFICATES............................................ 10
General............................................................... 11
Classes of Certificates............................................... 11
Distributions of Principal and Interest............................... 13
Book Entry Registration............................................... 14
List of Owners of Certificates........................................ 14
THE TRUSTS................................................................. 15
Mortgage Loans........................................................ 15
Contracts............................................................. 17
Mortgage-Backed Securities............................................ 17
Other Mortgage Securities............................................. 17
CREDIT ENHANCEMENT......................................................... 18
SERVICING OF MORTGAGE LOANS AND CONTRACTS.................................. 22
Payments on Mortgage Loans............................................ 23
Advances.............................................................. 23
Collection and Other Servicing Procedures............................. 23
Primary Mortgage Insurance............................................ 25
Standard Hazard Insurance............................................. 25
Title Insurance Policies.............................................. 27
Claims Under Primary Mortgage Insurance Policies and Standard Hazard
Insurance Policies; Other Realization Upon Defaulted Loan......... 27
Servicing Compensation and Payment of Expenses........................ 27
Master Servicer....................................................... 28
ADMINISTRATION............................................................. 28
Assignment of Mortgage Assets......................................... 28
Evidence as to Compliance............................................. 31
The Trustee........................................................... 31
Administration of the Certificate Account............................. 31
Reports............................................................... 32
Forward Commitments; Pre-Funding...................................... 33
Servicer Events of Default............................................ 33
Rights Upon Servicer Event of Default................................. 33
Amendment............................................................. 34
Termination........................................................... 34
USE OF PROCEEDS............................................................ 35
THE DEPOSITOR.............................................................. 35
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS............................... 35
General............................................................... 35
Foreclosure........................................................... 36
Soldiers' and Sailors' Civil Relief Act............................... 41
The Contracts......................................................... 41
The Title I Program................................................... 44
LEGAL INVESTMENT MATTERS................................................... 44
ERISA CONSIDERATIONS....................................................... 45
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................... 47
Federal Income Tax Consequences For REMIC Certificates................ 47
Taxation of Regular Certificates...................................... 48
Taxation of Residual Certificates..................................... 54
Treatment of Certain Items of REMIC Income and Expense................ 56
Tax-Related Restrictions on Transfer of Residual Certificates......... 58
Sale or Exchange of a Residual Certificate............................ 60
Taxes That May Be Imposed on the REMIC Pool........................... 60
Liquidation of the REMIC Pool......................................... 61
Administrative Matters................................................ 61
Limitations on Deduction of Certain Expenses.......................... 61
Taxation of Certain Foreign Investors................................. 62
Backup Withholding.................................................... 63
Reporting Requirements................................................ 63
Federal Income Tax Consequences for Certificates as to Which
No REMIC Election Is Made......................................... 63
Standard Certificates..................................................63
Premium and Discount.................................................. 65
Stripped Certificates................................................. 66
Reporting Requirements and Backup Withholding......................... 69
Taxation of Certain Foreign Investors................................. 69
Taxation of Securities Classified as Partnership Interests............ 69
PLAN OF DISTRIBUTION....................................................... 70
LEGAL MATTERS.............................................................. 70
FINANCIAL INFORMATION...................................................... 70
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS...............................A-1
<PAGE>
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Reference is made to the Index to Location of Principal
Defined Terms for the location of certain capitalized terms.
Issuer: AMRESCO Residential Securities Corporation
Mortgage Loan Trust 199__-__ (the "Trust").
Certificates Offered: $___________ Mortgage Loan Pass-Through
Certificates, Series 199__-__ to be issued
in the following Classes (each, a "Class"):
<TABLE>
<CAPTION>
Initial Certificate Pass-Through
Principal Balance Rate Class
<S> <C> <C> <C>
$___________ (1) Class A-1 Certificates
$___________ _____% Class A-2 Certificates
$___________ _____% Class A-3 Certificates
$___________ _____% Class A-4 Certificates
$___________ _____% Class A-5 Certificates
$___________ _____% Class A-6 Certificates
$___________ _____% (2) Class A-7 Certificates
$___________ (3) Class A-8 Certificates
</TABLE>
(1) On each Payment Date, the Class A-1
Pass-Through Rate will be equal to the
lesser of (i) the rate equal to the London
interbank offered rate for one-month United
States dollar deposits ("One- Month LIBOR")
(calculated as described under "Description
of the Class A Certificates -- Calculation
of One-Month LIBOR" herein) plus _____% per
annum and (ii) the weighted average of the
Coupon Rates on the Mortgage Loans in Group
I, less _____% per annum (the "Fixed Rate
Group Available Funds Cap"). The weighted
average of the Coupon Rates on the Mortgage
Loans in Group I as of the Cut-Off Date is
_____%.
(2) The Pass-Through Rate with respect to
the Class A-7 Certificates shall as of any
Payment Date after the Payment Date on which
the Outstanding Certificate Principal
Balance has declined to less than 10% of the
original Certificate Principal Balance
("Clean-Up Call Date") will be the lesser of
8.825% and the Fixed Rate Group Available
Funds Cap.
(3) On each Payment Date, the Class A-8
Pass-Through Rate will be equal to the
lesser of (i) with respect to any Payment
Date which occurs on or prior to the
Clean-Up Call Date, the rate equal to
One-Month LIBOR plus _____% per annum (and
for any Payment Date thereafter, One-Month
LIBOR plus _____% per annum), and (ii) the
weighted average of the Coupon Rates on the
Mortgage Loans in Group II, less _____% per
annum (the "Adjustable Rate Group Available
Funds Cap"). The weighted average of the
Coupon Rates on the Mortgage Loans in Group
II as of the Cut-Off Date is _____%.
The Class A-1 Certificates, Class A-2
Certificates, Class A-3 Certificates, Class
A-4 Certificates, Class A-5 Certificates,
Class A-6 Certificates and Class A-7
Certificates are collectively referred to
herein as the "Fixed Rate Group
Certificates," and the Class A-8
Certificates are also referred to herein as
the "Adjustable Rate Group Certificates."
The Fixed Rate Group Certificates and the
Adjustable Rate Group Certificates are
collectively referred to as the "Class A
Certificates."
Depositor: AMRESCO Residential Securities Corporation
(the "Depositor"), a Delaware corporation.
Seller: AMRESCO Residential Mortgage Corporation
(the "Seller"), a Delaware corporation.
Servicers: [Advanta Mortgage Corporation USA
("Advanta"), with principal executive
offices located at 16875 West Bernardo
Drive, San Diego, CA 92127, Long
S-1
<PAGE>
Beach Mortgage Company ("Long Beach"), with
principal executive offices located at 1100
Town and County Road, Orange, California
92668 and Option One Mortgage Corporation
("Option One") with principal executive
offices at 2020 East First Street, Suite
100, Santa Ana, CA 92705 (each a "Servicer"
and collectively, the "Servicers").
Trustee: Bankers Trust Company, a New York banking
corporation (the "Trustee"). The Trustee's
principal executive office is located at 4
Albany Street, New York, New York 10006.
Cut-Off Date: As of the close of business on __________,
199__.
Closing Date: On or about __________, 199__.
Description of
the Certificates: The Mortgage Loan Pass-Through Certificates
(the "Certificates") will consist of the
Class A Certificates, one or more classes of
subordinate interest-only Certificates and a
residual class (the "Class R Certificates"
and together with such other subordinate
Certificates, the "Subordinate
Certificates"). The Certificates will be
issued pursuant to a Pooling and Servicing
Agreement (the "Pooling and Servicing
Agreement") to be dated as of __________,
199__, among the Depositor, the Seller, the
Servicers and the Trustee. Only the Class A
Certificates will be offered hereby.
On the Closing Date, an aggregate cash
amount of approximately $16,400,000
(approximately $__________ and $__________
of which shall be allocated to Group I and
Group II, respectively) (the "Original
Pre-Funded Amount") will be deposited in a
trust account in the name of the Trustee
(the "Pre-Funding Account"). It is intended
that additional fixed rate and adjustable
rate Mortgage Loans satisfying the criteria
specified in the Pooling and Servicing
Agreement (the "Subsequent Mortgage Loans")
will be purchased by the Trust from the
Depositor from time to time on or before
__________, 199__ from funds on deposit in
the Pre-Funding Account. Each Subsequent
Mortgage Loan so acquired by the Trust will
be assigned to one (and only one) of the
Mortgage Loan Groups. As a result, the
aggregate principal balance of the Mortgage
Loans in each Group will increase by an
amount equal to the aggregate principal
balance of the related Subsequent Mortgage
Loans so purchased and the amount in the
Pre-Funding Account will decrease by the
same amount.
As described below, on the Closing Date,
cash will be deposited in the Capitalized
Interest Account (as defined herein) held by
the Trustee. Funds in the Capitalized
Interest Account will be applied by the
Trustee to cover shortfalls in interest
during the Funding Period (as described
under "Pre- Funding Account") on the
Certificates attributable to the provisions
allowing for purchase of Subsequent Mortgage
Loans.
Denominations: The Class A Certificates are issuable in
book entry form in minimum original
principal amounts of $1,000 and integral
multiples thereof.
The Mortgage Loans: The mortgage loans to be conveyed to the
Trust by the Depositor on the Closing Date
(the "Initial Mortgage Loans") consist of
fixed and adjustable rate conventional
mortgage loans evidenced by promissory notes
(the "Notes") secured by first lien deeds of
trust, security deeds or mortgages (the
"Mortgages"), which are located in _____
states and the District of Columbia. The
properties securing the Initial Mortgage
Loans (the "Mortgaged Properties") consist
primarily of single-family residences (which
may be
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<PAGE>
attached, detached, part of a two-to-four
family dwelling, a condominium unit or a
unit in a planned unit development). The
Mortgaged Properties may be owner-occupied
and non-owner occupied investment
properties. No Loan-to- Value Ratio (based
upon appraisals made at the time of
origination) exceeded 90% as of the Cut-Off
Date. The Initial Mortgage Loans are not
insured by either primary or pool mortgage
insurance policies; however, certain
distributions due to the Owners of the Class
A Certificates (the "Owners") are insured by
the Certificate Insurer pursuant to the
Certificate Insurance Policy. See "Credit
Enhancement" herein. The Mortgage Loans are
not guaranteed by the Seller or any
affiliate thereof.
Unless otherwise noted, all statistical
percentages in this Prospectus Supplement
are measured by the aggregate principal
balance of the Initial Mortgage Loans (the
"Original Aggregate Loan Balance") or of the
Initial Mortgage Loans in the applicable
Mortgage Loan Group, in each case as of the
Cut-Off Date. The statistical
characteristics of the Mortgage Loans will
vary upon the transfer into Group I and
Group II of Subsequent Mortgage Loans.
Group I. As of the Cut-Off Date, the average
Loan Balance of the Initial Mortgage Loans
in Group I was $___________; the interest
rates (the "Coupon Rates") of such Initial
Mortgage Loans ranged from _____% to _____%
per annum; the weighted average
Loan-to-Value Ratio of such Initial Mortgage
Loans was _____%; the weighted average
Coupon Rate of such Initial Mortgage Loans
was _____% per annum; and the weighted
average remaining term to maturity of such
Initial Mortgage Loans was _____ months. The
remaining terms to maturity as of the
Cut-Off Date of the Initial Mortgage Loans
in Group I ranged from _____ months to 360
months. The maximum Loan Balance of the
Initial Mortgage Loans in Group I as of the
Cut-Off Date was $___________. Initial
Mortgage Loans in Group I requiring
"balloon" payments represented not more than
_____% of the Original Aggregate Loan
Balance of the Initial Mortgage Loans in
Group I. No Initial Mortgage Loan in Group I
will mature later than June 1, 2026. As a
percentage of the Original Aggregate Loan
Balance of the Initial Mortgage Loans in
Group I, _____% were secured by mortgages on
single-family dwellings, _____% by mortgages
on two-to-four family dwellings, _____% by
mortgages on condominiums, _____% by
mortgages on planned unit developments,
_____% by mortgages on manufactured homes,
_____% by mortgages on townhouses and _____%
by mortgages on other dwellings.
All of the Initial Mortgage Loans in Group I
(the "Fixed Rate Loans") bear interest at a
fixed rate for the life of such Initial
Mortgage Loans. _____% of the Initial
Mortgage Loans in Group I were originated by
Long Beach, and the remaining Initial
Mortgage Loans in Group I were originated by
New Century Mortgage Corporation ("New
Century"). See "The Initial Mortgage Loan
Pools -- Initial Mortgage Loans -- Group I"
herein. All of the Subsequent Mortgage Loans
to be included in Group I have been
purchased by the Seller from Walsh
Securities, Inc. and identified for sale to
the Trust.
Group II. As of the Cut-Off Date, the
average Loan Balance of the Initial Mortgage
Loans in Group II was $___________; the
Coupon Rates of such Initial Mortgage Loans
ranged from _____% to _____% per annum; the
weighted average Loan-to-Value Ratio of such
Initial Mortgage Loans was _____%; the
weighted average Coupon Rate of such Initial
Mortgage Loans was _____% per annum; and the
weighted average remaining term to maturity
of such Initial Mortgage Loans was _____
months. The remaining terms to maturity as
of the Cut-Off Date of the Initial Mortgage
Loans in Group II
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<PAGE>
ranged from _____ months to _____ months.
The maximum Loan Balance of the Initial
Mortgage Loans in Group II as of the Cut-Off
Date was $___________. None of the Initial
Mortgage Loans in Group II contain "balloon"
payments. No Initial Mortgage Loan in Group
II will mature later than June 1, 2026. As a
percentage of the Original Aggregate Loan
Balance of the Initial Mortgage Loans in
Group II, _____% were secured by mortgages
on two-to-four family dwellings, _____% by
mortgages on condominiums, _____% by
mortgages on planned unit developments,
_____% by mortgages on single-family
dwellings, _____% by mortgages on
manufactured homes and _____% by mortgages
on other dwellings. See "The Mortgage Loan
Pools -- Initial Mortgage Loans -- Group II"
herein.
All of the Initial Mortgage Loans in Group
II have maximum Coupon Rates. The weighted
average maximum Coupon Rate of the Initial
Mortgage Loans in Group II is _____% per
annum, with maximum Coupon Rates that range
from approximately _____% to _____% per
annum. The Initial Mortgage Loans in Group
II have a weighted average gross margin as
of the Cut-Off Date of _____%. The gross
margin for the Initial Mortgage Loans in
Group II ranges from _____% to _____%.
_____% of the Initial Mortgage Loans in
Group II (the "Six-Month LIBOR Loans") bear
interest at rates that adjust, along with
the related monthly payments, semiannually
based on Six-Month LIBOR. _____% of the
Six-Month LIBOR Loans have a semiannual
reset cap of _____% and a lifetime reset cap
of _____%. _____% of the Six-Month LIBOR
Loans have a semiannual reset cap of _____%,
substantially all of which have a lifetime
reset cap of _____%. The Six-Month LIBOR
Loans consist of Initial Mortgage Loans
aggregating $____________.
_____% of the Initial Mortgage Loans in
Group II (the "2/28 Loans") bear interest at
a fixed rate of interest for a period of two
years after origination and thereafter have
semiannual interest rate and payment
adjustments at frequencies and in the same
manner as the Six-Month LIBOR Loans, subject
to a _____% periodic rate adjustment cap
after the first adjustment. The 2/28 Loans
consist of Initial Mortgage Loans
aggregating $___________.
_____% of the Initial Mortgage Loans in
Group II were originated by Long Beach and
_____% were originated by New Century.
All of the Subsequent Mortgage Loans to be
included in Group II have been purchased by
the Seller from Walsh Securities, Inc. and
identified for sale to the Trust.
Final Scheduled
Payment Dates: The Final Scheduled Payment Dates for
each of the respective classes of Class A
Certificates are as follows, although it is
anticipated that the actual final Payment
Date for each Class may occur earlier than
the Final Scheduled Payment Date. See
"Prepayment and Yield Considerations"
herein.
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<PAGE>
Final Scheduled
Payment Date
Class A-1 Certificates: ____________, _____
Class A-2 Certificates: ____________, _____
Class A-3 Certificates: ____________, _____
Class A-4 Certificates: ____________, _____
Class A-5 Certificates: ____________, _____
Class A-6 Certificates: ____________, _____
Class A-7 Certificates: ____________, _____
Class A-8 Certificates: ____________, _____
Distributions--General: On the 25th day of each month, or if such
day is not a Business Day, then the next
succeeding Business Day, commencing
__________, 199__ (each such day being a
"Payment Date"), the Trustee will be
required to distribute to the Owners of the
Fixed Rate Group Certificates (other than
the Class A-1 Certificates) of record as of
the last day of the calendar month
immediately preceding the calendar month in
which such Payment Date occurs and to the
Owners of the Class A-1 Certificates and the
Class A-8 Certificates of record as of the
day immediately preceding such Payment Date
(each such date, the "Record Date") the
"Class A Distribution Amount" for the
related Class which shall be the sum of (x)
Current Interest and (y) the Principal
Distribution Amount for the related Class
(each as defined below).
For each Payment Date, interest due with
respect to the Fixed Rate Group Certificates
(other than the Class A-1 Certificates) will
be interest which has accrued thereon during
the calendar month immediately preceding the
month in which such Payment Date occurs; the
interest due with respect to the Class A-1
Certificates and the Class A-8 Certificates
will be the interest which has accrued
thereon at the applicable Pass-Through Rate
from the preceding Payment Date (or from the
Closing Date in the case of the first
Payment Date) to and including the day prior
to the current Payment Date. Each period
referred to in the prior sentence relating
to the accrual of interest is the "Accrual
Period" for the related Class of Class A
Certificates. All calculations of interest
on the Fixed Rate Group Certificates (other
than the Class A-1 Certificates) will be
made on the basis of a 360-day year assumed
to consist of twelve 30-day months.
Calculations of interest on the Class A-1
Certificates and the Class A-8 Certificates
will be made on the basis of the actual
number of days elapsed in the related
Accrual Period and a year of 360 days.
A "Business Day" is any day other than a
Saturday, Sunday or a day on which banking
institutions in California or New York City
or in the city in which the corporate trust
office of the Trustee is located are
authorized or obligated by law or executive
order to close.
Allocations of Interest
and Principal: The Class A Distribution Amount
relating to each Group of Mortgage Loans for
each Payment Date (to the extent funds are
available therefor) shall be allocated among
the Class A Certificates in the following
amounts and in the following order of
priority:
(i) First, to the Owners of each of the
Class A Certificates of the related Group,
the related Current Interest on a pro rata
basis (in accordance with the amounts of
such Current Interest) without any priority
among such Class A Certificates; and
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<PAGE>
(ii) Second, to the Owners of the related
Class of Class A Certificates (A) the
Principal Distribution Amount (as defined
below) applicable to Group I shall be
distributed as follows: (I) first, to the
Owners of the Class A-1 Certificates until
the Class A-1 Certificate Principal Balance
is reduced to zero; (II) second, to the
Owners of the Class A-2 Certificates until
the Class A-2 Certificate Principal Balance
is reduced to zero; (III) third, to the
Owners of the Class A-3 Certificates, until
the Class A-3 Certificate Principal Balance
is reduced to zero; (IV) fourth, to the
Owners of the Class A-4 Certificates, until
the Class A-4 Certificate Principal Balance
is reduced to zero; (V) fifth, to the Owners
of the Class A-5 Certificates, until the
Class A-5 Certificate Principal Balance is
reduced to zero; (VI) sixth, to the Owners
of the Class A-6 Certificates, until the
Class A-6 Certificate Principal Balance is
reduced to zero; and (VII) seventh, to the
Owners of the Class A-7 Certificates, until
the Class A-7 Certificate Principal Balance
is reduced to zero; and (B) the Principal
Distribution Amount applicable to Group II
shall be distributed to the Owners of the
Class A-8 Certificates until the Class A-8
Certificate Principal Balance is reduced to
zero.
See "Description of the Class A
Certificates--Distributions," "--Overcolla-
teralization Provisions" and "--Crosscolla-
teralization Provisions" herein for a
discussion of all transfers and disburse-
ments of funds held in the Certificate
Account.
"Current Interest" with respect to each
Class of Class A Certificates means, with
respect to any Payment Date (i) the
aggregate amount of interest accrued during
the preceding Accrual Period on the
Certificate Principal Balance of the related
Class A Certificates immediately prior to
such Payment Date plus (ii) the Preference
Amount (as defined below) as it relates to
interest previously paid on such Class of
the Class A Certificates prior to such
Payment Date plus (iii) the Carry Forward
Amount, if any, with respect to such Class
of Class A Certificates.
The "Carry Forward Amount" with respect to
any Class of the Class A Certificates for
any Payment Date is the sum of (x) the
amount, if any, by which (i) the Class A
Distribution Amount (as defined herein)
allocable to such Class as of the
immediately preceding Payment Date exceeded
(ii) the amount of the actual distribution
made to the Owners of such Class of Class A
Certificates on such immediately preceding
Payment Date plus (y) 30 days' interest on
the interest portion of such amount,
calculated at the related Pass-Through Rate
in effect with respect to such Class of
Class A Certificates as of such Payment
Date.
The Fixed Rate Group Certificates are
"sequential pay" classes such that the
Owners of the Class A-7 Certificates will
receive no payments of principal until the
Class A-6 Certificate Principal Balance has
been reduced to zero, the Owners of the
Class A-6 Certificates will receive no
payments of principal until the Class A-5
Certificate Principal Balance has been
reduced to zero, the Owners of the Class A-5
Certificates will receive no payments of
principal until the Class A-4 Certificate
Principal Balance has been reduced to zero,
the Owners of the Class A-4 Certificates
will receive no payments of principal until
the Class A-3 Certificate Principal Balance
has been reduced to zero, the Owners of the
Class A-3 Certificates will receive no
payments of principal until the Class A-2
Certificate Principal Balance has been
reduced to zero, and the Owners of the Class
A-2 Certificates will receive no payments of
principal until the Class A-1 Certificate
Principal Balance has been reduced to zero.
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<PAGE>
The credit enhancement provisions of the
Trust result in a limited acceleration of
principal payments to the Owners of the
Classes of Class A Certificates during
certain periods and may result in no
payments of principal being allocated to any
Class of the Class A Certificates during
certain periods. See "Description of the
Class A Certificates --
Overcollateralization Provisions" and
"Description of the Class A Certificates --
Crosscollateralization Provisions" herein.
Such credit enhancement provisions also have
an effect on the weighted average lives of
the Class A Certificates. See "Prepayment
and Yield Considerations" herein. In
addition, the following discussion makes use
of a number of technical defined terms which
are defined under "Description of the Class
A Certificates--Overcollateralization
Provisions" and "Description of the Class A
Certificates -- Crosscollateralization
Provisions" herein.
On each Payment Date, distributions in
reduction of the Certificate Principal
Balance of the Class A Certificates will be
made in the amounts described herein. The
"Principal Distribution Amount" for each
Mortgage Loan Group and Payment Date shall
be the lesser of:
(a) the Total Available Funds (as defined
below) for the related Mortgage Loan Group
plus any related Insured Payments actually
made by the Certificate Insurer minus the
related Current Interest with respect to the
related Class A Certificates; and
(b) the excess, if any, of (i) the sum of:
(A) the Preference Amount with
respect to principal owed to the Owners of
the Class A Certificates for the related
Group that remains unpaid as of such Payment
Date;
(B) all scheduled installments of
principal actually collected or advanced by
the related Servicer during the related
Remittance Period and all unscheduled
collections of principal (other than Prepaid
Installments) actually collected by the
related Servicer during the related
Prepayment Period;
(C) the principal portion of the
Loan Purchase Price with respect to each
Mortgage Loan in the related Mortgage Loan
Group that was repurchased on or prior to
the related Monthly Remittance Date, to the
extent such amount is actually received by
the Trustee on or prior to the related
Monthly Remittance Date;
(D) any Substitution Amounts (i.e.,
the excess, if any, of the Loan Balance of a
Mortgage Loan being replaced over the
outstanding principal balance of a
replacement Mortgage Loan) delivered on the
related Monthly Remittance Date in
connection with a substitution of a Mortgage
Loan in the related Mortgage Loan Group, to
the extent such Substitution Amounts are
actually received by the Trustee on or prior
to the related Monthly Remittance Date;
(E) all Net Liquidation Proceeds
actually collected by the related Servicer
with respect to the Mortgage Loans in the
related Mortgage Loan Group during the
related Prepayment Period (to the extent
such Net Liquidation Proceeds are related to
principal) to the extent such Net
Liquidation Proceeds are actually received
by the Trustee on or prior to the related
Monthly Remittance Date;
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<PAGE>
(F) the amount of any Subordination
Deficit with respect to the related Mortgage
Loan Group for such Payment Date;
(G) the portion of the proceeds
received with respect to the related
Mortgage Loan Group by the Trustee upon
termination of the Trust (to the extent such
proceeds relate to principal);
(H) with respect to each Group, any
moneys released from the Pre- Funding
Account as a prepayment of the related Class
of Class A Certificates on the Payment Date
which immediately follows the end of the
Funding Period; and
(I) the amount of any Subordination
Increase Amount with respect to the related
Mortgage Loan Group for such Payment Date to
the extent of any Net Monthly Excess Cash
Flow available for such purpose;
over
(ii) the amount of any Subordination
Reduction Amount with respect to the related
Mortgage Loan Group for such Payment Date.
The "Remittance Period" with respect to any
Monthly Remittance Date is the period
commencing on the second day of the month
preceding the month in which the Monthly
Remittance Date occurs and ending on the
first day of the month in which such Monthly
Remittance Date occurs. A "Monthly
Remittance Date" is any date on which funds
on deposit in the Principal and Interest
Account are required to be remitted by the
Servicers to the Certificate Account, which
is the 20th day of each month, or if such
day is not a Business Day, the next
succeeding Business Day, commencing in
__________, 199__. The Prepayment Period
with respect to any Monthly Remittance Date
is the period commencing on the 16th day of
the month preceding the month in which the
Monthly Remittance Date occurs and ending on
the 15th day of the month in which such
Monthly Remittance Date occurs (except that
the first Prepayment Period shall commence
on __________, 199__ and end on __________,
199__).
A "Liquidated Mortgage Loan" is, in general,
a defaulted Mortgage Loan as to which the
Servicer has determined that all amounts
that it expects to recover on such Mortgage
Loan have been recovered (exclusive of any
possibility of a deficiency judgment).
The Owners of the Class A Certificates are
entitled to receive ultimate recovery of
Realized Losses which occur in the related
Mortgage Loan Group to the extent such
Realized Losses create a Subordination
Deficit in the related Mortgage Loan Group,
and payment in recovery of such losses will
be in the form of an Insured Payment on the
next following Payment Date if not covered
through Net Monthly Excess Cashflow from the
related Mortgage Loan Group or
crosscollateralization from the other
Mortgage Loan Group.
A "Subordination Deficit" with respect to a
Mortgage Loan Group and a Payment Date is
the amount, if any, by which (x) the related
Certificate Principal Balance, after taking
into account all distributions to be made on
such Payment Date, exceeds (y) the sum of
(i) the aggregate Loan Balances of the
Mortgage Loans in the related Mortgage Loan
Group as of the close of business on the
last day of the related Prepayment Period
and (ii) the respective amount, if any, on
deposit in the Pre-Funding Account as of the
close of business on the
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<PAGE>
last day of the related Remittance Period in
respect of such Mortgage Loan Group.
"Preference Amount" means any amount
previously distributed to an Owner on a
Class A Certificate that is recoverable and
sought to be recovered as a voidable
preference by a trustee in bankruptcy under
the United States Bankruptcy Code as amended
from time to time, in accordance with a
final nonappealable order of a court having
competent jurisdiction.
A "Subordination Increase Amount" with
respect to a Mortgage Loan Group and Payment
Date is the amount of Net Monthly Excess
Cashflow actually applied as an acceleration
of principal on the related Class A
Certificates until the related Subordination
Deficiency Amount (i.e., generally, the
excess, if any, of the Specified
Subordinated Amount over the Subordinated
Amount) is reduced to zero. A "Subordination
Reduction Amount" with respect to a Mortgage
Loan Group and a Payment Date is the amount
of principal on the related Mortgage Loans
that would otherwise be paid to the related
Class A Certificates and is instead
available to satisfy other cash flow
priorities of the Trust, including
distributions to the Owners of the Class R
Certificates until the Excess Subordinated
Amount (i.e., generally, the excess, if any,
of the Subordinated Amount over the
Specified Subordinated Amount) is reduced to
zero. Net Monthly Excess Cashflow,
Subordination Deficiency Amount, Specified
Subordinated Amount, Subordinated Amount and
Excess Subordinated Amount are defined in
"Description of the Class A
Certificates--Overcollateralization
Provisions--Overcollateralization from
Cashflow Structure" herein.
Servicing: [Advanta, Long Beach and Option One] will
each serve as a Servicer under the Pooling
and Servicing Agreement with respect to
certain Mortgage Loans. Each Servicer will
be responsible for the servicing of the
related Mortgage Loans and will receive from
interest collected on the applicable
Mortgage Loans a monthly servicing fee on
each such Mortgage Loan equal to the Loan
Balance as of the beginning of the related
Remittance Period multiplied by the
applicable Servicing Fee Rate (such product,
the "Servicing Fee"). See "The Pooling and
Servicing Agreement-- Servicing" herein.
Each Servicer is obligated to make cash
advances ("Advances") with respect to
delinquent payments of principal of and
interest on any Mortgage Loan, other than
Balloon Payments with respect to Balloon
Mortgage Loans, serviced by it to the extent
described in "Servicing of Mortgage
Loans--Advances" herein. The Trustee will be
obligated as a successor servicer to make
any such Advance if a Servicer fails in its
obligation to do so, to the extent provided
in the Pooling and Servicing Agreement.
Credit Enhancement: The Credit Enhancement provided for the
benefit of the Owners of the Class A
Certificates consists of (x) the
overcollateralization and
crosscollateralization mechanics which
utilize the internal cash flows of the Trust
and (y) the Certificate Insurance Policies
(as defined below).
Overcollateralization. The credit
enhancement provisions of the Trust result
in a limited acceleration of payment of the
Class A Certificates (in the aggregate)
relative to the amortization of the related
Mortgage Loans until the required level of
overcollateralization is reached. The
accelerated amortization is achieved by the
application of certain excess interest to
the payment of Class A Certificate
principal. This acceleration feature
creates, with respect to each Mortgage Loan
Group, overcollateralization (i.e., the
excess of the aggregate
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<PAGE>
outstanding Loan Balances of the Mortgage
Loans in the related Mortgage Loan Group,
over the aggregate related Class A
Certificate Principal Balance). Once the
required level of overcollateralization is
reached, and subject to the provisions
described in the next paragraph, the
acceleration feature will cease, until
necessary to maintain the required level of
overcollateralization.
The Pooling and Servicing Agreement provides
that, subject to certain floors, caps and
triggers, the required level of
overcollateralization with respect to a
Mortgage Loan Group may increase or decrease
over time. An increase would result in a
temporary period of accelerated amortization
of the Class A Certificates to increase the
actual level of overcollateralization to its
required level; a decrease would result in a
temporary period of decelerated amortization
to reduce the actual level of
overcollateralization to its required level.
See "Description of the Class A Certificates
-- Overcollateralization Provisions" herein.
As a result of the "sequential pay" feature
of the Fixed Rate Group Certificates, any
such accelerated principal will be paid to
that class of the Fixed Rate Group
Certificates then entitled to receive
distributions of principal.
Crosscollateralization. In addition to the
foregoing, the Pooling and Servicing
Agreement provides for crosscolla-
teralization through the application of
certain excess amounts generated by one
Mortgage Loan Group to fund shortfalls in
Available Funds and the required
overcollateralization level in the other
Mortgage Loan Group, subject to certain
prior debt service and credit enhancement
requirements of such Mortgage Loan Group.
See "Prepayment and Yield Considerations",
"Description of the Class A Certificates--
Overcollateralization Provisions" and
"Description of the Class A Certificates--
Crosscollateralization Provisions" herein
and "Credit Enhancement" in the Prospectus.
Certificate Insurance Policies. [Surety
Name] (the "Certificate Insurer") will issue
the financial guaranty insurance policies
(the "Certificate Insurance Policies"), one
with respect to the Fixed Rate Group
Certificates and one with respect to the
Adjustable Rate Group Certificates, pursuant
to which it will irrevocably and
unconditionally guarantee payment on each
Payment Date to the Trustee for the benefit
of the Owners of each Class of Class A
Certificates of an amount equal to the
Insured Distribution Amount for such Payment
Date. The amount of the actual payment, if
any, made by the Certificate Insurer to the
Owners of the Class A Certificates under the
related Certificate Insurance Policy on each
Payment Date (the "Insured Payment") is the
sum of (i) any shortfall in the amount
required to pay the Subordination Deficit
for such Payment Date from a source other
than the related Certificate Insurance
Policy, (ii) any shortfall in the amount
required to pay Current Interest for such
Payment Date from a source other than the
related Certificate Insurance Policy and
(iii) any shortfall in the amount required
to pay the Preference Amount for such
Payment Date from a source other than the
related Certificate Insurance Policy. The
effect of the Certificate Insurance Policies
is to guaranty the timely payment of
interest on, and the ultimate payment of the
<PAGE>
principal amount of, each Class of Class A
Certificates. No payments in respect of
principal will be made under the Certificate
Insurance Policies unless a Subordination
Deficit occurs.
Except upon the occurrence of a default by
the Certificate Insurer, the Certificate
Insurer shall have the right to exercise
certain rights of the Owners of the related
Class A Certificates, as specified in the
Pooling and Servicing
S-10
<PAGE>
Agreement, without any consent of such
Owners; and such Owners may exercise such
rights only with the prior written consent
of the Certificate Insurer, except as
provided in the Pooling and Servicing
Agreement. In addition, to the extent of
unreimbursed payments under the Certificate
Insurance Policies, the Certificate Insurer
will be subrogated to the rights of the
Owners of the related Class A Certificates
on which such Insured Payments were made. In
connection with each Insured Payment on a
related Class A Certificate, the Trustee, as
attorney-in-fact for the Owner thereof, will
be required to assign to the Certificate
Insurer the rights of such Owner with
respect to the Class A Certificate to the
extent of such Insured Payment.
The Certificate Insurance Policies do not
guarantee any specified rate of prepayments,
nor do the Certificate Insurance Policies
provide funds to redeem the Certificates on
any specified date. The Certificate
Insurer's obligation under the Certificate
Insurance Policies will be discharged to the
extent that funds are received by the
Trustee for distribution to the Owners of
the Class A Certificates. See "The
Certificate Insurance Policies and the
Certificate Insurer" herein.
Pre-Funding Account: On the Closing Date, the Original Pre-Funded
Amount will be deposited in the Pre-Funding
Account which account will be in the name
of, and maintained by, the Trustee on behalf
of the Trust and used to acquire Subsequent
Mortgage Loans for addition to Group I and
Group II. With respect to each Group, during
the period (the "Funding Period") from and
including the Closing Date until the
earliest of (i) the date on which the amount
on deposit in the Pre- Funding Account with
respect to the related Group is less than
$100,000, and (ii) __________, 199__, the
Pre-Funded Amount will be maintained in the
Pre- Funding Account. The Original
Pre-Funded Amount will be reduced during the
Funding Period by the amount thereof used to
purchase Subsequent Mortgage Loans in
accordance with the Pooling and Servicing
Agreement. The amount on deposit in the
Pre-Funding Account at any time is the
"Pre-Funded Amount". Subsequent Mortgage
Loans purchased by and added to the Trust on
any date (each, a "Subsequent Transfer
Date") must satisfy the criteria set forth
in the Pooling and Servicing Agreement. Any
Pre-Funded Amount remaining at the end of
the Funding Period for the related Group
will be distributed to the Owners of the
related Class of Class A Certificates then
entitled to receive distributions of
principal on the Payment Date that
immediately follows the end of such Funding
Period in reduction of the Certificate
Principal Balance of such Owners'
Certificates, thus resulting in a partial
principal prepayment of such Class of Class
A Certificates as specified herein under
"Description of the Certificates--
Distributions." All interest and other
investment earnings on amounts on deposit in
the Pre-Funding Account will be deposited in
the Capitalized Interest Account. The
Pre-Funding Account will not be an asset of
the REMIC (as defined herein).
Although no assurance can be given, it is
intended that the principal amount of
Subsequent Mortgage Loans sold to the Trust
and added to the Trust will require
application of substantially all of the
Original Pre-Funded Amount and it is not
intended that there will be any material
amount of principal prepaid to the holders
of any Class of the Class A Certificates
from the Pre-Funding Account. In the event
that the Depositor is unable to sell
Subsequent Mortgage Loans to the Trust in an
amount equal to the Original Pre-Funded
Amount, principal prepayments to Owners of
the related Class of the Class A
Certificates will occur no later than the
Payment Date in ________ 199__ in an amount
equal to
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<PAGE>
the Pre-Funded Amount with respect to the
related Mortgage Loan Group remaining at the
end of the Funding Period.
Capitalized Interest Account: On the Closing Date, cash will be deposited
in a trust account (the "Capitalized
Interest Account") in the name of, and
maintained by, the Trustee on behalf of the
Trust. The amount on deposit in the
Capitalized Interest Account, including
reinvestment income thereon, will be used by
the Trustee to fund the excess, if any, of
(i) the sum of the amount of interest
accruing during the related Accrual Period
on the amount by which the aggregate
Certificate Principal Balance of the related
Class of Class A Certificates exceeds the
aggregate Loan Balance of the Mortgage Loans
in the related Group plus the Trustee Fee
and Premium Amount with respect to each
Certificate Insurance Policy accruing during
the related Accrual Period on such excess
balance over (ii) the amount of any
reinvestment income on monies on deposit in
the Pre-Funding Account; such amounts on
deposit will be so applied by the Trustee on
the Payment Date in ________ 199__ to fund
such excess, if any. Any amounts remaining
in the Capitalized Interest Account not
needed for such purpose will be paid to the
Depositor at the end of the Funding Period.
The Capitalized Interest Account will not be
an asset of the REMIC (as defined herein).
Mandatory Prepayment of
Certificates: In the event that at the end of the Funding
Period, not all of the Original Pre- Funded
Amount has been used to acquire Subsequent
Mortgage Loans, then the Owners of the
related Class of Class A Certificates then
entitled to receive distributions of
principal will receive a prepayment no later
than the Payment Date in ________ 199__ in
an amount equal to the portion of the
Original Pre- Funded Amount remaining and
allocable to the related Group.
Optional Termination: The Owners of Class R Certificates will have
the right to purchase all the Mortgage Loans
on any Monthly Remittance Date after the
Clean-Up Call Date. If such Owners do not
exercise such right, the Servicers will also
have the right, collectively, to purchase
all of the Mortgage Loans they are servicing
on any monthly Remittance Date when the
outstanding Certificate Principal Balance
has declined to 5% or less of the original
Certificate Principal Balance and, if the
Servicers do not exercise such right, the
Certificate Insurer shall have such right.
Any such purchase by the Servicers or the
Certificate Insurer will be required to be
made on the same Payment Date, so that the
Trust would be liquidated on the next
succeeding Payment Date. See "The Pooling
and Servicing Agreement--Optional
Termination" herein.
Book-Entry Registration
of the Class A
Certificates: The Class A Certificates will initially be
issued in book-entry form. Persons acquiring
beneficial ownership interests in such Class
A Certificates ("Beneficial Owners") may
elect to hold their interests through The
Depository Trust Company ("DTC"), in the
United States, or Centrale de Livraison de
Valeurs Mobilieres, S.A. ("CEDEL") or the
Euroclear System ("Euroclear"), in Europe.
Transfers within DTC, CEDEL or Euroclear, as
the case may be, will be in accordance with
the usual rules and operating procedures of
the relevant system. So long as the Class A
Certificates are Book-Entry Certificates (as
defined herein), such Certificates will be
evidenced by one or more Certificates
registered in the name of Cede & Co.
("Cede"), as the nominee of DTC or one of
the European Depositaries. Cross market
transfers between persons holding directly
or indirectly through DTC, on the one hand,
and counterparties holding directly or
indirectly through CEDEL or Euroclear, on
the other, will be
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<PAGE>
effected by DTC through Citibank N.A.
("Citibank") or Morgan Guaranty Trust
Company of New York ("Morgan", and together
with Citibank, the "European Depositaries"),
the relevant depositaries of CEDEL and
Euroclear, respectively, and each a
participating member of DTC. The Class A
Certificates will initially be registered in
the name of Cede. The interests of the
Owners of such Certificates will be
represented by book-entries on the records
of DTC and participating members thereof. No
Beneficial Owner will be entitled to receive
a definitive certificate representing such
person's interest, except in the event that
Definitive Certificates (as defined herein)
are issued under the limited circumstances
described herein. All references in this
Prospectus Supplement to any Class A
Certificates reflect the rights of
Beneficial Owners only as such rights may be
exercised through DTC and its participating
organizations for so long as such Class A
Certificates are held by DTC. See
"Description of the Class A Certificates --
Book-Entry Registration of the Class A
Certificates" herein, and Annex I hereto,
and "Description of the Certificates--
Book-Entry Registration" in the Prospectus.
Ratings: It is a condition of issuance of the Class A
Certificates that the Class A Certificates
receive ratings of "AAA" by Standard &
Poor's, A Division of The McGraw-Hill
Companies ("Standard & Poor's"), "Aaa" by
Moody's Investors Service, Inc. ("Moody's"),
and "AAA" by Fitch Investors Service, L.P.
("Fitch"). Standard & Poor's, Moody's and
Fitch are referred to herein collectively as
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
entity. See "Prepayment and Yield
Considerations" and "Ratings" herein. No
person is obligated to maintain any rating
on any Certificate, and, accordingly, there
can be no assurance that the ratings
assigned to any Class of Certificates upon
initial issuance thereof will not be lowered
or withdrawn at any time thereafter.
Risk Factors: Credit Considerations. For information with
regard to the Mortgage Loans and their
related risks, see "Risk Factors--Risk of
Higher Delinquencies Associated with
Guidelines" and "The Mortgage Loan Pool"
herein.
Prepayment Considerations. For information
regarding the consequences of prepayments of
the Mortgage Loans and of the failure of the
Depositor to convey Subsequent Mortgage
Loans to the Trust during the Funding Period
in an amount equal to the Original
Pre-Funded Amount, see "Prepayment and Yield
Considerations" and "Risk Factors--
Sensitivity to Prepayments" and "--The
Subsequent Mortgage Loans and the
Pre-Funding Account" herein.
Other Considerations. For a discussion of
other risk factors that should be considered
by prospective investors in the Class A
Certificates, see "Risk Factors" herein and
in the Prospectus.
Federal Tax Aspects: An election will be made to treat the Trust
Estate (exclusive of the Pre-Funding Account
and the Capitalized Interest Account)
created by the Pooling and Servicing
Agreement as a "real estate mortgage
investment conduit" ("REMIC"). The
Certificates (other than the Class R
Certificates) will constitute "regular
interests" in the REMIC. The Class R
Certificates will be designated as the
"residual interest" in the REMIC.
<PAGE>
Owners of the Class A Certificates,
including Owners that generally report
income on the cash method of accounting,
will be required to include interest on the
Class A Certificates in income in accordance
with the accrual method of accounting. The
Class A Certificates may be considered to
have been issued
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<PAGE>
with original issue discount or at a
premium. Any such original issue discount
will be includable in the income of the
Owner as it accrues under a method taking
into account the compounding of interest and
using the Prepayment Assumption. See
"Prepayment and Yield Considerations" and
"Certain Federal Income Tax Consequences"
herein. Premium may be deductible by the
Owner either as it accrues or when principal
is received. No representation is made as to
whether the Mortgage Loans will prepay in
accordance with the Prepayment Assumption,
or any other rate. In general, as a result
of the qualification of the Class A
Certificates as regular interests in a
REMIC, the Class A Certificates will be
treated as "qualifying real property loans"
under Section 593(d) of the Internal Revenue
Code of 1986, as amended (the "Code"),
"regular . . . interest(s) in a REMIC" under
Section 7701(a)(19)(C) of the Code and "real
estate assets" under Section 856(c) of the
Code in the same proportion that the assets
in the REMIC consist of qualifying assets
under such sections. In addition, interest
on the Class A Certificates will be treated
as "interest on obligations secured by
mortgages on real property" under Section
856(c) of the Code to the extent that such
Certificates are treated as "real estate
assets" under Section 856(c) of the Code.
ERISA Considerations: A fiduciary of any employee benefit plan or
other retirement arrangement subject to the
Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or Section 4975
of the Code (a "Plan") should review
carefully with its legal advisors whether
the purchase or holding of the Class A
Certificates offered hereby could give rise
to a transaction that is prohibited or is
not otherwise permitted either under ERISA
or Section 4975 of the Code or whether there
exists any statutory or administrative
exemption applicable to an investment
therein.
The U.S. Department of Labor has issued to
the Underwriters individual prohibited
transaction exemptions which generally
exempt from the application of certain of
the prohibited transaction provisions of
Section 406 of ERISA and the excise taxes
imposed on such prohibited transactions by
Sections 4975(a) and (b) of the Code
transactions relating to the purchase, sale
and holding of pass-through certificates
underwritten by the Underwriters and the
servicing and operation of related asset
pools, provided that certain conditions are
satisfied.
A fiduciary of a Plan should review the
sections entitled "ERISA Considerations" in
the Prospectus and this Supplement and
consider the issues discussed therein, and
should consult with its legal advisors prior
to making an investment in the Class A
Certificates.
Legal Investment
Considerations: The Class A 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 in one of the two highest rating
categories by one or more nationally
recognized statistical rating organizations.
As such, the Class A Certificates will be
legal investments for certain entities to
the extent provided in SMMEA, subject to
state laws overriding SMMEA. In addition,
institutions whose investment activities are
subject to review by federal or state
regulatory authorities may be or may become
subject to restrictions, which may be
retroactively imposed by such regulatory
authorities, on the investment by such
institutions in certain forms of mortgage
related securities. Furthermore, certain
states have enacted legislation overriding
the legal investment provisions of SMMEA. In
addition, institutions whose activities are
subject to review by federal or state
regulatory authorities may be
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<PAGE>
or may become subject to restrictions, which
may be retroactively imposed by such
regulatory authorities, on the investment by
such institutions in certain forms of
mortgage related securities.
[Although the Class _____ Certificates are
expected to be rated "AAA" by Standard &
Poor's and "Aaa" by Moody's, the Class A
Certificates will not constitute "mortgage
related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") because the Group _____
Mortgage Loans include second liens.
Accordingly, many institutions with legal
authority to invest in comparably rated
securities based on first home equity loans
may not be legally authorized to invest in
the Class _____ Certificates.]
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<PAGE>
RISK FACTORS
Prospective investors in the Class A Certificates should consider the
following risk factors (as well as the risk factors set forth under "Risk
Factors" in the Prospectus) in connection with the purchase of the Class A
Certificates.
Sensitivity to Prepayments. A majority of the Mortgage Loans may not be
prepaid in whole or, above a certain percentage, in part at any time without
penalty. See "The Portfolio of Mortgage Loans--Prepayment Penalties" herein for
a description of prepayment penalty provisions applicable to the Mortgage Loans.
In addition, all of the Mortgage Loans contain due-on-sale provisions which, to
the extent enforced by the Servicer, will result in prepayment of such Mortgage
Loans. Furthermore, the Seller intends to initiate a refinance policy as
described in "The Portfolio of Mortgage Loans-Prepayment Penalties" herein which
could have an impact on prepayments of the Mortgage Loans. See "Prepayment and
Yield Considerations" herein and "Certain Legal Aspects of Mortgage
Assets--Enforceability of Certain Provisions" in the Prospectus. The rate of
prepayments on fixed rate mortgage loans, such as the Mortgage Loans in Group I,
is sensitive to prevailing interest rates. Generally, if prevailing interest
rates fall significantly below the interest rates on the Mortgage Loans in Group
I, such loans are likely to be subject to higher prepayment rates than if
prevailing rates remain at or above the interest rates on the Mortgage Loans in
Group I. Conversely, if prevailing interest rates rise significantly above the
interest rates on the Mortgage Loans in Group I, the rate of prepayments is
likely to decrease.
The average life of the Class A Certificates, and, if purchased at
other than par, the yields realized by Owners of the Class A Certificates, will
be sensitive to levels of payment (including prepayments relating to the
Mortgage Loans (the "Prepayments")) on the Mortgage Loans. In general, the yield
on a Class A Certificate that is purchased at a premium from the outstanding
principal amount thereof will be adversely affected by a higher than anticipated
level of Prepayments of the Mortgage Loans and enhanced by a lower than
anticipated level. Conversely, the yield on a Class A Certificate that is
purchased at a discount from the outstanding principal amount thereof will be
enhanced by a higher than anticipated level of Prepayments and adversely
affected by a lower than anticipated level. The Servicers have agreed in the
Pooling and Servicing Agreement not to target Mortgagors in their related
Mortgage Loan Group in solicitations to borrowers to refinance their mortgages,
unless such solicitation is consistent with the Seller's refinance policy. See
"Prepayment and Yield Considerations" herein.
[Nature of Collateral. Because _____% of the aggregate Loan Balance of
the Initial Mortgage Loans are secured by second liens subordinate to the rights
of the mortgagee or beneficiary under the related first mortgage or deed of
trust, the proceeds from any liquidation, insurance or condemnation proceedings
with respect to such Mortgage Loans will be available to satisfy the outstanding
balance of a Mortgage Loan only to the extent that the claims of such first
mortgagee or beneficiary have been satisfied in full, including any related
foreclosure costs. In addition, a second mortgagee may not foreclose on the
property securing a second mortgage unless it forecloses subject to the first
mortgage, in which case it must either pay the entire amount due on the first
mortgage to the first mortgagee at or prior to the foreclosure sale or undertake
the obligation to make payments on the first mortgage in the event the mortgagor
is in default thereunder. In servicing second mortgages in its portfolio, it is
generally the Servicer's practice to satisfy the first mortgage at or prior to
the foreclosure sale. The Servicer may also advance funds to keep the first
mortgage current until such time as the Servicer satisfies the first mortgage.
The Trust will have no source of funds (and may not be permitted under the REMIC
provisions of the Code) to satisfy the first mortgage or make payments due to
the first mortgagee. The Servicer generally will be required to advance such
amounts in accordance with the Pooling and Servicing Agreement. See "The Pooling
and Servicing Agreement--Servicing and Sub-Servicing" herein.
An overall decline in the residential real estate market, the general
condition of a Property, or other factors, could adversely affect the values of
the Properties such that the outstanding balances of the Mortgage Loans,
together with any senior liens on the Properties, equal or exceed the value of
the Properties. A decline in the value of a Property would affect the interest
of the Trust in the Property before having any effect on the interest of the
related first mortgagee, and could cause the Trust's interest in the Property to
be extinguished. If such a decline occurs, the actual rates of delinquencies,
foreclosures and losses on the Mortgage Loans could be higher than those
currently experienced in the mortgage lending industry in general. In addition,
adverse economic conditions (which
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<PAGE>
may or may not affect real property values) may affect the timely payment by
borrowers of scheduled payments of principal and interest on the Mortgage Loans
and, accordingly, the actual rates of delinquencies, foreclosures and losses
with respect to the Trust.]
The Subsequent Mortgage Loans and the Pre-Funding Account. If the
principal amount of eligible Subsequent Mortgage Loans available during the
Funding Period and sold by the Depositor to the Trust is less than 100% of the
Original Pre-Funded Amount, a prepayment of principal to Owners of the related
Class of the Class A Certificates then entitled to receive payments of principal
will occur as described herein. See "Social, Economic and Other Factors" below.
In addition, any conveyance of Subsequent Mortgage Loans is subject to the
following conditions, among others: (i) each such Subsequent Mortgage Loan must
satisfy the representations and warranties specified in the agreement pursuant
to which such Subsequent Mortgage Loans are transferred to the Trust (each a
"Subsequent Transfer Agreement") and in the Pooling and Servicing Agreement;
(ii) the Depositor will not select such Subsequent Mortgage Loans in a manner
that it believes is adverse to the interest of the Owners of the Certificates or
the Certificate Insurer; (iii) the Depositor will deliver certain opinions of
counsel with respect to the validity of the conveyance of such Subsequent
Mortgage Loans; and (iv) as of each cut-off date (each, a "Subsequent Cut-Off
Date") applicable thereto, the Mortgage Loans, including the Subsequent Mortgage
Loans to be conveyed by the Depositor as of such Subsequent Cut-Off Date, will
satisfy the criteria set forth in the Pooling and Servicing Agreement, as
described herein under "The Mortgage Loan Pool--Conveyance of Subsequent
Mortgage Loans."
To the extent that amounts on deposit in the Pre-Funding Account have
not been fully applied to the purchase of Subsequent Mortgage Loans by the Trust
for inclusion in the related Mortgage Loan Group by the end of the Funding
Period, the Owners of the related Class of the Class A Certificates then
entitled to receive payments of principal will receive a prepayment of principal
in an amount equal to the related Pre-Funded Amount remaining in the Pre-Funding
Account on the first Payment Date following the end of the Funding Period (in no
event later than the ________ 199__ Payment Date). Although no assurances can be
given, the Depositor expects that the principal amount of Subsequent Mortgage
Loans sold to the Trust will require the application of substantially all
amounts on deposit in the Pre-Funding Account and that there will be no material
principal prepayment to the Owners of the Class A Certificates from the
Pre-Funding Account.
Each Subsequent Mortgage Loan must satisfy the eligibility criteria
referred to above at the time of its addition. Following the transfer of
Subsequent Mortgage Loans, it is anticipated that the aggregate characteristics
of the Mortgage Loans then held in the related Mortgage Loan Group will not vary
significantly from those of the Initial Mortgage Loans. See "The Mortgage Loan
Pool--Conveyance of Subsequent Mortgage Loans" herein.
The Seller has acquired and identified for sale to the Trust a
sufficient amount of Subsequent Mortgage Loans to fully utilize the Pre-Funding
Amount.
Risk of Higher Delinquencies Associated with Guidelines. The
Underwriting Guidelines (as described herein under "The Portfolio of Mortgage
Loans--Guidelines") are intended to assess the credit quality of a mortgagor and
the value of the mortgaged property and to evaluate the adequacy of such
property as collateral for the mortgage loan. The Originators provide loans
primarily to mortgagors who do not qualify for loans conforming to FNMA and
FHLMC guidelines but who also have substantial equity in their property.
Furthermore, the Underwriting Guidelines do not prohibit a borrower from
obtaining secondary financing at the time of origination of the Originator's
first lien, which financing would reduce the equity the borrower would otherwise
have in the related mortgaged property that is indicated in the Originators'
loan-to-value determination.
As a result of the Underwriting Guidelines, the Mortgage Loans are
likely to experience rates of delinquency, foreclosure and bankruptcy that are
higher, and that may be substantially higher, than those experienced by mortgage
loans underwritten to FNMA and FHLMC conforming guidelines. Furthermore, changes
in the values of Mortgaged Properties may have a greater effect on the
delinquency, foreclosure, bankruptcy and loss experience of the Mortgage Loans
than on mortgage loans originated in a more traditional manner. No assurance can
be given that the values of the Mortgaged Properties have remained or will
remain at the levels in effect on the dates of origination of the related
Mortgage Loans.
S-17
<PAGE>
Effect of Mortgage Loan Yield on Class A-1 and Class A-8 Pass-Through
Rate; Basis Risk. The Class A-1 Pass-Through Rate is based upon the value of an
index (One-Month LIBOR), while the Coupon Rates on the Group I Mortgage Loans
are fixed. Consequently, the interest which becomes due on such Mortgage Loans
in Group I (net of the Servicing Fees, the Trustee Fees and the Premium Amount)
during any Remittance Period may be less than the amount of interest that would
accrue at One-Month LIBOR plus the margin on the Class A-1 Certificates during
the related Accrual Period; the interest payable on the Class A-1 Certificates
is subject to the Fixed Rate Group Available Funds Cap and will be limited to
such amount. The Class A-1 Certificates do not contain any "carry-forward" or
"catch-up" feature if the amount of interest paid is so limited.
The calculation of the Class A-8 Pass-Through Rate is based upon the
value of an index (One-Month LIBOR) which is different from the value of the
index applicable to a substantial portion of the Initial Mortgage Loans in Group
II (Six-Month LIBOR) as described under "The Mortgage Loan Pool -- Initial
Mortgage Loans -- Group II" herein and is subject to the Adjustable Rate Group
Available Funds Cap. The Adjustable Rate Group Available Funds Cap effectively
limits the amount of interest accrued on the Adjustable Rate Group Certificates
to the weighted average of the Coupon Rates on the Mortgage Loans in Group II,
less _____%. _____% of the Initial Mortgage Loans in Group II adjust
semi-annually based upon the London interbank offered rate for Six-Month United
States dollar deposits ("Six-Month LIBOR"), whereas the Pass-Through Rate on the
Class A-8 Certificates adjusts monthly based upon One-Month LIBOR as described
under "Description of the Class A Certificates -- Calculation of One-Month
LIBOR" herein, subject to the Adjustable Rate Group Available Funds Cap. _____%
of the Initial Mortgage Loans in Group II are 2/28 Loans that provide for a
fixed interest rate for a period of two years following origination. Thereafter,
such Mortgage Loans provide for interest rate and payment adjustments in a
manner similar to the Six-Month LIBOR Loans. One-Month LIBOR and Six-Month LIBOR
may respond to different economic and market factors, and there is not
necessarily a correlation between them. Thus, it is possible, for example, that
One-Month LIBOR may rise during periods in which Six-Month LIBOR is stable or is
falling or that, even if both One-Month LIBOR and Six-Month LIBOR rise during
the same period, One-Month LIBOR may rise more rapidly than Six-Month LIBOR.
Furthermore, even if One-Month LIBOR and Six-Month LIBOR were at the same level,
various factors may cause the Adjustable Rate Group Available Funds Cap to limit
the amount of interest that would otherwise accrue on the Adjustable Rate Group
Certificates. In particular, the Class A-8 Pass- Through Rate adjusts monthly,
while the interest rates of the Initial Mortgage Loans in Group II adjust less
frequently, with the result that the Adjustable Rate Group Available Funds Cap
may limit increases in the Class A-8 Pass-Through Rate for extended periods in a
rising interest rate environment. In addition, the Initial Mortgage Loans in
Group II are subject to periodic adjustment caps and maximum rate caps which
also may result in the Adjustable Rate Group Available Funds Cap limiting
increases in the Class A-8 Pass-Through Rate. Finally, the Initial Mortgage
Loans in Group II accrue interest on the basis of a 360-day year assumed to
consist of twelve 30- day months, while calculations of interest on the
Adjustable Rate Group Certificates will be made on the basis of the actual
number of days elapsed in the related Accrual Period and a year of 360 days.
This may result in the Adjustable Rate Group Available Funds Cap limiting the
Class A-8 Pass-Through Rate in Accrual Periods that have more than 30 days.
Consequently, the interest which becomes due on the Initial Mortgage Loans in
Group II (net of the Servicing Fee, the Premium Amount and the Trustee Fee
related to Group II) during any Remittance Period may not equal the amount of
interest that would accrue at One-Month LIBOR plus the margin on the Adjustable
Rate Group Certificates during the related Accrual Period. Furthermore, if the
Available Funds Cap determines the Class A-8 Pass-Through Rate for a Payment
Date, the value of the Adjustable Rate Group Certificates may be temporarily or
permanently reduced. It is anticipated that Subsequent Mortgage Loans in Group
II will have features similar to the Initial Mortgage Loans in Group II,
resulting in the same limitations on the Class A-8 Pass- Through Rate as are
described above. The Class A-8 Certificates do not contain any "carry-forward"
or "catch-up" feature if the amount of interest paid is limited as described
above.
Social, Economic and Other Factors. The ability of the Trust to invest
in Subsequent Mortgage Loans is largely dependent upon the ability of the Seller
to originate or purchase additional mortgage loans. The ability of the Seller to
originate or purchase additional mortgage loans may be affected by a variety of
social and economic factors. Economic factors include interest rates,
unemployment levels, the rate of inflation and consumer perception of economic
conditions generally. However, the Seller is unable to determine and has no
basis to predict whether or to what extent economic or social factors will
affect its origination ability or its ability to purchase additional mortgage
loans.
S-18
<PAGE>
Other Legal Considerations. Applicable state laws generally regulate
interest rates and other charges, require certain disclosure, and require
licensing of the Originators. 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 related Originator will be
required to repurchase any Mortgage Loans which, at the time of origination,
fail to comply with applicable federal and state laws and regulations, which
failure results in a material adverse effect on the Trust, the Certificate
Insurer or the parties to the Pooling and Servicing Agreement. 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 Servicers to collect all or part of the principal of or interest
on the Mortgage Loans, may entitle the Mortgagor to a refund of amounts
previously paid and, in addition, could subject the Seller, the Servicers or the
related Originator to damages and administrative enforcement. See "Certain Legal
Aspects of Mortgage Assets" in the Prospectus.
The Mortgage Loans are also subject to federal laws, including:
(i) 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;
(ii) 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
(iii) the Fair Credit Reporting Act, which regulates the use
and reporting of information related to the Mortgagor's credit
experience.
Violations of certain provisions of these federal laws may limit the ability of
the related Servicer to collect all or part of the principal of or interest on
the Mortgage Loans and in addition could subject the Originators, the Seller or
the Servicers to damages and administrative enforcement. The Originators will be
required to repurchase any Mortgage Loans which, at the time of origination, did
not comply with such federal laws or regulations. See "Certain Legal Aspects of
the Mortgage Assets" in the Prospectus.
The federal Soldiers' and Sailors' Civil Relief Act of 1940 may affect
the ability of the related Servicer to collect full amounts of interest on
certain Mortgage Loans and could interfere with the ability of the related
Servicer to foreclose on certain properties. See "Certain Legal Aspects of the
Mortgage Assets--Soldiers' and Sailors' Civil Relief Act of 1940" in the
Prospectus.
Risk of Seller Insolvency. The Seller believes that the transfer of the
Mortgage Loans to the Depositor and by the Depositor to the Trust constitutes a
sale by the Seller to the Depositor and by the Depositor to the Trust and,
accordingly, that such Mortgage Loans will not be part of the assets of the
Seller in the event of the insolvency of the Seller and will not be available to
the creditors of the Seller. However, in the event of an insolvency of the
Seller, it is possible that a bankruptcy trustee or a creditor of the Seller may
argue that the transaction between the Seller and the Depositor was a pledge of
such Mortgage Loans in connection with a borrowing by the Seller rather than a
true sale. Such an attempt, even if unsuccessful, could result in delays in
distributions on the Certificates.
On the Closing Date, the Trustee and the Seller will have received an
opinion of Arter & Hadden, counsel to the Seller, with respect to the true sale
of the Initial Mortgage Loans from the Seller to the Depositor and from the
Depositor to the Trustee, in form and substance satisfactory to the Trustee, the
Certificate Insurer and the Rating Agencies.
Risk of Higher Default Rates Associated with California Real Property.
Because 58.57% by principal amount of the Mortgaged Properties relating to
Initial Mortgage Loans are located in the State of California, an overall
decline in the related residential real estate markets could adversely affect
the values of the Mortgaged
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Properties securing such Initial Mortgage Loans causing the Loan Balances of the
related Initial Mortgage Loans to equal or exceed the value of such Mortgaged
Properties.
The standard hazard insurance policy required to be maintained under
the terms of each Mortgage Loan does not insure against physical damage arising
from earth movement (including earthquakes, landslides and mudflows). See
"Servicing of Mortgage Loans and Contracts--Standard Hazard Insurance" in the
Prospectus.
Risk Associated with the Certificate Insurer. If the protection
afforded by overcollateralization and crosscollateralization is insufficient and
if, upon the occurrence of a Subordination Deficit, the Certificate Insurer is
unable to meet its obligations under the Certificate Insurance Policies, then
the Owners of the Class A Certificates could experience a loss on their
investment.
THE PORTFOLIO OF MORTGAGE LOANS
General
The Mortgage Loan Pool primarily includes newly originated loans which
were purchased by the Depositor from the Seller, which acquired such loans from
the related Originators.
Each Originator has made certain representations and warranties with
respect to Mortgage Loans originated or sold by it, as specified below, and,
upon a breach of such representations and warranties occurring after sale of the
related Mortgage Loan to the Trust, may be required to repurchase such Mortgage
Loan from the Trust.
Guidelines
The information set forth below with regard to the Originators'
guidelines (collectively, the "Underwriting Guidelines") has been provided to
the Depositor or compiled from information provided to the Depositor by the
Originators. Neither the Depositor, the Seller, the Underwriters nor any of
their respective affiliates have made any independent investigation of such
information, nor has any Originator made any such investigation with respect to
information about the other Originators' guidelines or the Seller's Performance
Assumption Groupings.
Long Beach Originated Mortgage Loans
Mortgage Loans originated by Long Beach (the "Long Beach Loans") were
originated generally in accordance with guidelines (the "Long Beach Guidelines")
established by Long Beach's underwriting department (or that of Long Beach's
predecessor in interest, Long Beach Bank, F.S.B.) under Long Beach's "B-1st,"
"B-1st Fast Trac," "B-1st QuickCredit," "B-1st QuickCredit Fast Trac" or "B-1st
Stated Income" residential loan programs (the "Long Beach Programs"). Long
Beach's Guidelines are primarily intended to evaluate the value and adequacy of
the mortgaged property as collateral and are also intended to consider the
mortgagor's credit standing and repayment ability. On a case-by-case basis and
only with the approval of two or more senior lending officers, Long Beach 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-to-income ratio, good
credit history, stable employment and time in residence at the applicant's
current address. It is expected that a substantial number of the Mortgage Loans
to be included in the Mortgage Pool will represent such underwriting exceptions.
Under the Long Beach Programs, the underwriting department of Long
Beach or of the originator reviews and verifies the loan applicant's sources of
income (except under the B-1st Stated Income and Fast Trac programs), calculates
the amount of income from all such sources indicated on the loan application,
reviews the credit history of the applicant and calculates the debt-to-income
ratio to determine the applicant's ability to repay the loan, and reviews the
mortgaged property for compliance with the Long Beach Guidelines. The Long Beach
Guidelines are applied in accordance with a procedure which complies with
applicable federal and state laws and regulations and requires (i) an appraisal
of the mortgaged property which conforms to FHLMC and FNMA standards and (ii) a
review of such appraisal, which review may be conducted by a Long Beach staff
appraiser or representative and,
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depending upon the original principal balance and loan-to-value ratio of the
mortgaged property may include a desk review of the original appraisal or a
drive-by review appraisal of the mortgaged property. The Long Beach Guidelines
permit single-family loans with loan-to-value ratios at origination of up to 90%
(75% under the B-1st Stated Income program), depending on the type and use of
the property, the creditworthiness of the mortgagor and the debt-to-income
ratio. Under the B-1st program, the maximum combined loan-to-value ratio for
purchase money mortgage loans, including any second deeds of trust subordinate
to Long Beach's first deed of trust, is 90%.
All of the Mortgage Loans originated in the Long Beach Programs are
based on loan application packages submitted through mortgage brokerage
companies or at Long Beach's retail branches or are purchased from approved
originators pursuant to the Long Beach Guidelines described herein. Loan
application packages submitted through mortgage brokerage companies, containing
in each case relevant credit, property and underwriting information on the loan
request, are compiled by the applicable mortgage brokerage company and submitted
to Long Beach for approval and funding. The mortgage brokerage companies receive
a portion of the loan origination fee charged to the mortgagor at the time the
loan is made. No single mortgage brokerage company accounts for more than 5%,
measured by outstanding principal balance, of the single-family mortgage loans
originated by Long Beach.
Each prospective mortgagor completes an application which includes
information with respect to the applicant's liabilities, income, credit history
and employment history, as well as certain other personal information. Long
Beach requires a credit report on each applicant from a credit reporting
company. The applicant must generally provide to Long Beach or the originator a
letter explaining all late payments on mortgage debt and, generally, consumer
(i.e., non-mortgage) debt. The report typically contains information relating to
such matters as credit history with local and national merchants and lenders,
installment debt payments and any record of defaults, bankruptcy, repossession,
suits or judgments. Under the B-1st program, self-employed individuals are
generally required to submit their two most recent federal income tax returns.
As part of its quality control system, Long Beach reverifies information with
respect to the foregoing matters that has been provided by the mortgage
brokerage company prior to funding a loan and periodically audits files based on
a random sample of closed loans. In the course of its pre-funding audit, Long
Beach reverifies the income of each mortgagor or, for a self-employed
individual, reviews the income documentation obtained pursuant to the Long Beach
Guidelines (except under the B-1st Stated Income program). Long Beach generally
verifies the source of funds for the down payment.
Mortgaged properties that are to secure mortgage loans underwritten
under the Long Beach Programs are appraised by qualified independent appraisers
who are approved by Long Beach's internal chief appraiser. In most cases,
below-average properties (including properties requiring major deferred
maintenance) are not acceptable as security for Long Beach mortgage loans in the
Long Beach Programs. Each appraisal 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. Every independent appraisal is reviewed by a Long Beach staff appraiser or
representative before the loan is funded.
The Long Beach Guidelines are less stringent than the standards
generally acceptable to FNMA and FHLMC with regard to the mortgagor's credit
standing and repayment ability. Mortgagors who qualify under the Long Beach
Programs generally have payment histories and debt ratios which would not
satisfy FNMA and FHLMC underwriting guidelines and may have a record of major
derogatory credit items such as outstanding judgments or prior bankruptcies. The
Long Beach Guidelines establish the maximum permitted loan-to-value ratio for
each loan type based upon these and other risk factors.
The B-1st QuickCredit and B-1st QuickCredit Fast Trac residential loan
programs are alternative risk grading programs whereby the various risk
categories are assigned in a manner similar to that used for the B-1st and B-1st
Fast Trac loan programs except that consumer credit history is not used to
determine the appropriate risk grading. As in the B-1st and B-1st Fast Trac
residential loan programs, the B-1st QuickCredit and B-1st QuickCredit Fast Trac
residential loan programs use consumer credit to determine debt-to-income
ratios. Maximum loan-to-value ratios and maximum loan amounts are generally
lower under the B-1st QuickCredit and B-1st QuickCredit Fast Trac residential
loan programs than those permitted under the B-1st or B-1st Fast Trac
residential loan programs, respectively. In general, the B-1st QuickCredit
residential loan program is similar to the B-1st residential loan program except
that the B-1st QuickCredit residential loan program does not consider consumer
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credit history, requires lower maximum loan-to-value ratios and requires lower
maximum loan amounts. In most other respects, the requirements of the B-1st
QuickCredit and the B-1st QuickCredit Fast Trac residential loan programs
correspond to the requirements of the B-1st and B-1st Fast Trac residential loan
programs, respectively.
Under the B-1st Stated Income residential loan program, the mortgagor's
employment and income sources must be stated on the mortgagor's application. The
mortgagor's income as stated must be reasonable for the related occupation and
such determination as to reasonableness is subject to the loan underwriter's
discretion. However, the mortgagor's income as stated on the application is not
independently verified. Verification of employment is required for salaried
mortgagors only. Maximum loan-to-value ratios are generally lower under the
B-1st Stated Income residential loan program than those permitted under the
B-1st residential loan program. Except as otherwise stated above, the same
mortgage credit, consumer credit and collateral property underwriting guidelines
apply to the B-1st Stated Income residential loan program as apply to the B-1st
residential loan program.
Long Beach requires title insurance on all mortgage loans in the Long
Beach Programs secured by liens on real property. Long Beach 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
single-family loan or the replacement cost of the property, whichever is less.
Long Beach Guidelines -- Seller's Performance Assumption Groupings
Under the Long Beach Programs, various risk categories are used to
grade the likelihood that the mortgagor will satisfy the repayment conditions of
the mortgage 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 mortgagor'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, the Long Beach Programs
establish lower maximum loan-to-value ratios and maximum loan amounts for loans
graded in such categories.
The Long Beach Guidelines have the following categories and criteria
for grading the potential likelihood that an applicant will satisfy the
repayment obligations of a mortgage loan:
"Ambassador;" Credit Grade: "A." Under the "A" risk category,
the applicant must have generally repaid installment of revolving debt
according to its terms and demonstrated steady employment over the last
five years. A maximum of one 30-day late payment, and no 60-day late
payments, within the last 12 months is permitted on an existing
mortgage loan. No collection accounts or charge-offs may remain open
after the funding of the loan. No bankruptcy, discharge or notice of
default filings may have occurred during the preceding three years. The
mortgaged property must be in at least average condition. Mortgage
loans originated under the "Ambassador" program must be owner-occupied.
A maximum Loan- to-Value Ratio of 85% is permitted for a purchase
and/or refinance mortgage loan on a single family property, and a
maximum Loan-to-Value Ratio of 75% is permitted on a mortgaged property
consisting of two-to-four units and condominium properties. The debt
service-to-income ratio generally ranges from 45% or less to 55% or
less based on the mortgagor's net disposable income. Ambassador loans
are classified in the Seller's PAG II category (as defined below).
"Program I;" Credit Grade: "A-." Under the "A-" risk category,
the applicant generally must have repaid installment of revolving debt
according to its terms and have demonstrated steady employment over the
last two years. A maximum of one 30-day late payment, and no 60-day
late payments, within the last 12 months is permitted on an existing
mortgage loan. Minor derogatory items are permitted on a case-by-case
basis as to non-mortgage credit when the majority of the consumer
credit is deemed good. No bankruptcy, discharge or notice of default
filings may have occurred during the preceding three years. The
mortgaged property must be in at least average condition. A maximum
Loan-to-Value Ratio of 80% is permitted for a purchase money and/or
refinance mortgage loan on a single family property, and a maximum
Loan-to-Value Ratio of 75% is permitted on a mortgaged property
consisting of two-to-four units and condominium properties. A maximum
Loan-to-Value Ratio of 70% is permitted for non-owner
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occupied purchase money and refinance loans on single family and
condominium properties, and a maximum Loan-to-Value Ratio of 65% is
permitted for a mortgage loan on a non-owner occupied mortgaged
property consisting of two units or second home properties. Generally,
the debt service-to- income ratio must be 47%, but this may be allowed
to be increased to 55% based on the mortgagor's net disposable income.
Program I loans are classified in the Seller's PAG II category (as
defined below).
"Program II;" Credit Grade: "B+." Under the "B+" risk
category, the applicant must have generally repaid installment of
revolving debt according to its terms and have demonstrated steady
employment over the last two years. A maximum of two 30-day late
payments, and no 60-day late payments, within the last 12 months is
permitted on an existing mortgage loan. One to three minor derogatory
items that are 90 days or more late are permitted on a case-by-case
basis as to non-mortgage credit when the majority of the consumer
credit is deemed good. No bankruptcy, discharge or notice of default
filings may have occurred during the preceding three years. The
mortgaged property must be in at least average condition. A maximum
Loan-to-Value Ratio of 80% is permitted for a purchase money and/or
refinance mortgage loan on a single family property, and a maximum
Loan-to-Value Ratio of 75% is permitted on a mortgaged property
consisting of two-to-four units and condominium properties. A maximum
Loan-to-Value Ratio of 70% is permitted for non-owner occupied purchase
money and refinance mortgage loans on single family and condominium
properties and a maximum Loan-to-Value Ratio of 65% is permitted for
non-owner occupied purchase money and refinance mortgage loans on
mortgaged properties consisting of two units or second homes
properties. Generally, the debt service-to-income ratio must be 50% or
less, but this may be increased to 55% based on the mortgagor's net
disposable income. Program II loans are classified in the Seller's PAG
II category (as defined below).
"Program III;" Credit Grade: "B." Under the "B" risk category,
the applicant must have generally repaid installment of revolving debt
according to its terms and have demonstrated steady employment over the
last two years. A maximum of four 30-day late payments within the last
12 months is acceptable on an existing mortgage loan. One to three
minor derogatory items that are late 90 days or more are permitted on a
case-by-case basis as to non-mortgage credit when the majority of the
consumer credit is deemed good. Any and all payments 60 days or more
late within the past 12 months may not represent more than 50% of the
credit reported during that period. No bankruptcy, discharge or notice
of default filings may have occurred during the preceding two years.
The mortgaged property must be in at least average condition. A maximum
Loan-to-Value Ratio of 80% is permitted for a purchase money and/or
refinance mortgage loan on a single family property, and a maximum
Loan-to-Value Ratio of 75% is permitted on mortgaged properties
consisting of two-to-four units and condominiums. For non-owner
occupied purchase money and refinance properties, the maximum
Loan-to-Value Ratio is 70% for single family and condominium
properties, and 65% for non-owner occupied mortgaged properties
consisting of two units or second homes. Generally, the debt
service-to-income ratio must be 50% or less but this may be increased
to 55% based on the mortgagor's net disposable income. Program III
loans are classified in the Seller's PAG III category (as defined
below).
"Program IV;" Credit Grade: "B-." Under the "B-" risk
category, the applicant must have generally repaid installment and
revolving debt according to its terms and have demonstrated steady
employment over the last two years. A maximum of one 60-day late
payment within the last 12 months, and a maximum of at most 30 days
late at time of application is permitted on an existing mortgage loan.
Certain non-consumer credit, collections, or judgments, may be
disregarded on a case-by-case basis. Payments 60 days or more late
within the last 12 months may not represent more than 50% of the credit
items reported during that period. No bankruptcy, discharge or notice
of default filings may have occurred within the preceding two years.
The mortgaged property must be in at least average condition. A maximum
Loan-to-Value Ratio of 75% is permitted for a purchase money and/or
refinance mortgage loan on an owner-occupied single family property.
For non-owner occupied purchase and refinance properties, the maximum
Loan-to-Value Ratio is 65% for single family and second home
properties. Generally, the debt service-to-income ratio must not exceed
55%. Program IV loans are classified in the Seller's PAG III category
(as defined below).
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"Program V;" Credit Grade: "C." Under the "C" risk category,
the applicant may have experienced significant credit problems in the
past. A maximum of two 60-day and one 90-day late payments, or three
60-day late payments and no 90-day late payments within the last 12
months is permitted on an existing mortgage loan. An existing mortgage
loan is not required to be current at the time the application is
submitted. Consumer credit derogatory items will be considered on a
case-by-case basis. No bankruptcy, discharge or notice of default
filings may have occurred during the preceding twelve months. The
mortgaged property must be in at least average condition. A maximum
Loan-to-Value Ratio of 75% is permitted for a purchase money and
refinance mortgage loan on an owner-occupied single family property.
For non-owner occupied purchase money and refinance properties, the
maximum Loan-to-Value Ratio is 60% for single family and second home
properties. Generally, the debt service-to-income ratio must not exceed
55%; however, 55%-60% will be considered on a case-by-case basis.
Program V loans are classified in the Seller's PAG IV category (as
defined below).
"Program VI;" Credit Grade: "C-." Under the "C-" risk
category, the applicant may have experienced significant credit
problems in the past. A maximum of two 60-day and one 90-day late
payments, or three 60-day late payments and no 90-day late payments
within the last 12 months is permitted on an existing mortgage loan. On
a case-by-case basis, the applicant may have a notice of
default/foreclosure within the last 24 months with a good explanation.
The applicant may not currently be in bankruptcy; however, the
applicant may have had a bankruptcy with a good explanation and proof
of dismissal/discharge. Consumer derogatory items will be considered on
a case-by-case basis. Long Beach underwriters must be satisfied that
the problem that caused the "C-" credit no longer exists and that there
is a reasonable expectation that the applicant will repay the mortgage
loan according to the terms and conditions agreed upon. The mortgaged
property must be in at least average condition. A maximum Loan-
to-Value Ratio of 70% is permitted for a purchase money mortgage loan,
and a maximum Loan-to-Value Ratio of 65% is permitted for a refinance
of an owner-occupied single family property. On a case-by-case basis,
the maximum Loan-to-Value Ratio permitted for a non-owner occupied
purchase money and refinance mortgage loan is 50%. Generally, the debt
service-to-income ratio must not exceed 55%; however, 55%-60% will be
considered on a case-by-case basis. Program VI loans are classified in
the Seller's PAG V category (as defined below).
Approximately _____%, _____%, _____%, and _____% of the Long Beach
Loans in Group I and _____%, _____%, _____%, and _____% of the Long Beach Loans
in Group II are in Seller's PAG II, Seller's PAG III, Seller's PAG IV and
Seller's PAG V risk categories, respectively.
Mortgage Loans Originated by Other Originators
The following discussion addresses Mortgage Loans originated by
Originators other than Long Beach. The Mortgage Loans have been originated by
the Originators in accordance with the Underwriting Guidelines established by
each of them and reviewed and approved by the Seller. The Underwriting
Guidelines are primarily intended to evaluate the value and adequacy of the
mortgaged property as collateral and are also intended to consider the
mortgagor's credit standing and repayment ability. On a case-by-case basis, the
Originator may determine that, based upon compensating factors, a prospective
mortgagor not strictly qualifying under the Underwriting Guidelines warrants an
underwriting exception. Compensating factors may include, but are not limited
to, low loan-to-value ratio, low debt-to-income ratio, good credit history,
stable employment, pride of ownership and time in residence at the applicant's
current address. It is expected that a substantial number of the Mortgage Loans
to be included in the Mortgage Pool will represent such underwriting exceptions.
Under the Underwriting Guidelines, the Originators review and verify
the loan applicant's sources of income (except under the stated income
programs), calculate the amount of income from all such sources indicated on the
loan application, review the credit history of the applicant and calculate the
debt-to-income ratio to determine the applicant's ability to repay the loan, and
review the mortgaged property for compliance with their Underwriting Guidelines.
The Underwriting Guidelines are applied in accordance with a procedure which
complies with applicable federal and state laws and regulations and requires (i)
an appraisal of the mortgaged property which conforms to FHLMC and FNMA
standards and (ii) a review of such appraisal, which review may be conducted
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by the Originator's staff appraiser or representative and, depending upon the
original principal balance and loan-to-value ratio of the mortgaged property may
include a desk review of the original appraisal or a drive-by review appraisal
of the mortgaged property. The Underwriting Guidelines permit single-family
loans with loan-to-value ratios at origination of up to 90% for the highest
credit grading category (75% under the stated income programs), depending on the
type and use of the property, the creditworthiness of the mortgagor and the
debt-to-income ratio. Under the Underwriting Guidelines, the maximum combined
loan-to-value ratio for purchase money mortgage loans may differ from those
applicable to refinancings.
All of the Mortgage Loans are based on loan application packages
submitted through mortgage brokerage companies or at the related Originator's
retail branches or are purchased from originators approved by the Originators.
Loan application packages submitted through mortgage brokerage companies,
containing in each case relevant credit, property and underwriting information
on the loan request, are compiled by the applicable mortgage brokerage company
and submitted to the Originator for approval and funding. The mortgage brokerage
companies receive a portion of the loan origination fee charged to the mortgagor
at the time the loan is made.
Each prospective mortgagor completes an application which includes
information with respect to the applicant's liabilities, income, credit history
and employment history, as well as certain other personal information. Each
Originator requires a credit report on each applicant from a credit reporting
company. The applicant must provide to the related Originator or the originator
a letter explaining all late payments on mortgage debt and, generally, consumer
(i.e., non-mortgage) debt. The report typically contains information relating to
such matters as credit history with local and national merchants and lenders,
installment debt payments and any record of defaults, bankruptcy, repossession,
suits or judgments. Self-employed individuals are generally required to submit
their two most recent federal income tax returns. As part of their quality
control systems, each Originator generally reverifies information with respect
to the foregoing matters that has been provided by the mortgage brokerage
company prior to funding a loan and periodically audits files based on a random
sample of closed loans. In the course of their pre-funding audit, each
Originator generally reverifies the income of each mortgagor or, for a
self-employed individual, reviews the income documentation obtained pursuant to
the Underwriting Guidelines (except under stated income programs). If the
loan-to-value ratio is greater than a predetermined level, the Originators
generally verify the source of funds for the down payment; however, the related
Originator may not verify the source of funds if the loan-to-value ratio is less
than such level.
Mortgaged properties that are to secure mortgage loans are generally
appraised by qualified independent appraisers who are approved by the related
Originator. In most cases, below-average properties (including properties
requiring major deferred maintenance) are not acceptable as security for
mortgage loans under the Underwriting Guidelines. Each appraisal 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. Except with respect to purchase money mortgage
loans, every independent appraisal is generally reviewed by the related
Originators before the loan is funded, and a drive-by review or appraisal is
generally performed in connection with loan amounts over a certain predetermined
dollar amount established for each State. With respect to purchase money
mortgage loans, an independent appraisal may be reviewed the Originator.
The Underwriting Guidelines are less stringent than the standards
generally acceptable to FNMA and FHLMC with regard to the mortgagor's credit
standing and repayment ability. Mortgagors who qualify under the Underwriting
Guidelines generally have payment histories and debt ratios which would not
satisfy FNMA and FHLMC underwriting guidelines and may have a record of major
derogatory credit items such as outstanding judgments or prior bankruptcies. The
Underwriting Guidelines establish the maximum permitted loan-to-value ratio for
each loan type based upon these and other risk factors.
The Mortgage Loans originated by the Originators other than Long Beach
were originated consistent with and generally conform to "Full Documentation",
"Limited Documentation", or "Stated Income Documentation" residential loan
programs. Under each of the programs, the related Originator generally reviews
the applicant's source of income, calculates the amount of income from sources
indicated on the loan application or similar documentation, reviews the credit
history of the applicant, calculates the debt service-to-income ratio to
determine the applicant's ability to repay the loan, reviews the type and use of
the property being financed, and reviews the
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property. In determining the ability of the applicant to repay the loan, a rate
is established that generally is equal to the lesser of the fully indexed
interest rate on the loan being applied for or one percent above the initial
interest rate on such loan. The Underwriting Guidelines require that mortgage
loans be underwritten in a standardized procedure which complies with applicable
federal and state laws and regulations and requires the Originator's
underwriters to be satisfied that the value of the property being financed, as
indicated by an appraisal and a review of the appraisal, currently supports the
outstanding loan balance. In general, the maximum loan amount for mortgage loans
originated under the programs is $3,500,000. Mortgage loans may, however, be
originated generally up to $500,000, provided the LTV is at least 5% below the
applicable residential loan program maximum that would otherwise apply. The
Underwriting Guidelines permit one-to-four-family loans to have LTV's at
origination of generally up to 90%, depending on, among other things, the
purpose of the mortgage loan, a mortgagor's credit history, repayment ability
and debt service-to-income ratio, as well as the type and use of the property.
With respect to mortgage loans secured by mortgaged properties acquired by a
mortgagor under a "lease option purchase," the LTV of the related mortgage loan
is generally based on the appraised value at the time of origination of such
mortgage loan.
The Underwriting Guidelines require that income be verified for each
applicant and that the source of funds (if any) required to be deposited by the
applicant into escrow under its various programs as follows: Under the Full
Documentation programs, applicants generally are required to submit two written
forms of verification of stable income for 24 months (or, if the LTV is less
than or equal to 65%, for 12 months). Under the Limited Documentation programs,
generally one such form of verification is required for 12 months. Under the
Stated Income Documentation programs, generally an applicant may be qualified
based upon monthly income as stated on the mortgage loan application if the
applicant meets certain criteria. All the foregoing programs typically require
that with respect to each applicant, there be a telephone verification of the
applicant's employment. Verification of the source of funds (if any) required to
be deposited by the applicant into escrow in the case of a purchase money loan
is generally required under the Full Documentation program guidelines. No such
verification is required under the other programs.
The Underwriting Guidelines require title insurance on all mortgage
loans secured by liens on real property. The Underwriting Guidelines also
require 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 single-family loan or the replacement cost of the property, whichever is
less.
Under the Underwriting Guidelines, various risk categories are used to
grade the likelihood that the mortgagor will satisfy the repayment conditions of
the mortgage 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 mortgagor'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, the Underwriting
Guidelines establish lower maximum loan-to-value ratios and maximum loan amounts
for loans graded in such categories.
ARCC Performance Assumption Grouping
The Seller, through its manager AMRESCO Residential Credit Corporation
("ARCC"), performs due diligence on all mortgage loan portfolios which it
acquires, including the Mortgage Loans included in the Trust Estate. Part of
ARCC's review includes a review of the credit-grading process of the related
Originators. ARCC has developed Performance Assumption Groupings ("PAGs") which
are similar to a credit-grading criteria. ARCC determines which PAG the
originators' related credit grade most closely matches, and all loans which the
Originator has placed in that credit grade are placed in the related PAG
category. Because there are multiple factors in both the credit grades
identified by the originators and the PAG categories, it is unlikely that any
credit grade designation will match up exactly to any PAG category. ARCC uses
its best efforts to match the categories based upon its projection of asset
performance for the related credit grade and PAG. It should be noted that while
the Originators have specific criteria for credit grades, they have the
discretion to place a loan in a credit grade for which it does not meet all of
the criteria, based upon consideration of all relevant factors. It should
further be noted
S-26
<PAGE>
that ARCC does not make any attempt to determine how individual loans would fall
under the PAG criteria described below, but only associates the existing credit
grades of the Originator to the various PAG categories.
Seller's PAG I
--------------
The maximum LTV for all eligible properties, owner or
non-owner occupied, purchase money or refinance, should be 90% or less.
The maximum back-end debt ratio should not exceed 50%. The prospective
mortgagor should have approximately five (5) years of established
credit with five (5) trade lines. In the last 12 months, mortgage
credit should show no delinquencies in excess of 30 days, and in the
last 24 months, should show delinquencies only for 30 days or less. The
credit history should reveal no foreclosures. In the last 12 months,
installment and revolving accounts should indicate no delinquencies for
major credit, and a maximum of 30 days for minor credit. In the last 24
months, both major and minor credit should be a maximum of 30 days
delinquent. There should be no evidence of judgments, charge offs,
collections or bankruptcies affecting the mortgagor. In last 36 months,
the prospective mortgagor should have had only minor collection actions
totaling less than $500.
Seller's PAG II
---------------
The maximum LTV for all eligible properties, owner or
non-owner occupied, purchase money or refinance, should be 85% or less.
The maximum back end debt ratio should not exceed 50%. The customer
should have approximately three (3) years of established credit with
three (3) trade lines. In the last 12 months, mortgage credit should
show no more than two 30-day delinquencies and no 60-day delinquencies,
and all credits should be current at the time of origination; in the
last 24 months, the credit history should show a maximum of 30 day
delinquencies. In the last 12 months, installment and revolving
accounts should include no more than two 30-day delinquencies for major
credit and a maximum of 60 day delinquency for minor credit. In the
last 24 months, the maximum delinquency should be 60 days for both
major and minor credit. In the last 12 months, there should be no
collection action taken against the prospective mortgagor. In the last
24 months, there should be no judgments or charge offs against the
prospective mortgagor, and discharged bankruptcies should have
reestablished credit with no delinquencies. In the last 36 months,
mortgagor should be subject to only minor collection actions totaling
less than $1,000.
Seller's PAG III
----------------
The maximum LTV for all eligible properties, owner or
non-owner occupied, purchase money or refinance, should be 80% or less.
The maximum back end debt ratio should not exceed 50%. The customer
should have approximately two (2) years of established credit with two
(2) trade lines. In the last 12 months, mortgage credit should show no
more than three 30-day delinquencies and one 60-day delinquency.
Mortgage credit should be a maximum 30 days delinquent at the time of
origination, and in the last 24 months, a maximum of 60 days
delinquent. In the last 12 months, installment and revolving accounts
should show no more than two 60-day delinquencies for major credit and
a maximum delinquency of 90 days for minor credit. In the last 24
months, installment and revolving accounts should be a maximum 90 days
delinquent for both major and minor credit. In the last 12 months,
there should be no judgments or charge offs, and only minor collection
actions totaling less than $500 against the prospective mortgagor. In
the last 24 months, the prospective mortgagor is permitted to have
judgments or charge offs totaling less than $500, and discharged
bankruptcies with a maximum 30-day delinquency on reestablished credit.
In the last 36 months, collection actions totaling less than $2,500 are
permitted.
Seller's PAG IV
---------------
The maximum LTV for all eligible properties, owner or
non-owner occupied, purchase money or refinance, should be 75% or less.
The maximum back-end debt ratio should not exceed 55%. There is no
requirement for an established credit history. In the last 12 months,
mortgage credit should include no more than four 30-day delinquencies
and two 60-day delinquencies, and mortgage credit should be a
S-27
<PAGE>
maximum of 90 days delinquent at the time of origination. In the last
12 months, installment and revolving accounts should show no more than
two 90-day delinquencies for major credit and a maximum of 90 day
delinquencies for minor credit. In the last 24 months, installment and
revolving accounts should be a maximum 90 days delinquent for both
major and minor credit. In the last 12 months, mortgagor may have
discharged bankruptcies with maximum 30 day delinquency on
reestablished credit, and collection actions totaling less than $2,500
are permitted. In the last 24 months, total judgments and charge offs
should be less than $2,500.
Seller's PAG V
--------------
The maximum LTV for all eligible properties, owner or
non-owner occupied, purchase money or refinance, should be 65% or less.
The maximum back-end debt ratio should not exceed 55%. There is no
requirement for an established credit history. In the last 12 months,
mortgage credit should be a maximum of 120 days delinquent, and no
foreclosure may be pending at the time of origination. In the last 24
months, mortgage credit should be a maximum of 120 days delinquent.
There are no stipulations regarding other derogatory information other
than that bankruptcies should have been discharged.
Approximately _____%, _____%, _____%, and _____% of the Initial Group I
Mortgage Loans (including Long Beach Loans) and _____%, _____%, _____%, and
_____% of the Initial Group II Mortgage Loans (including Long Beach Loans) are
in the Seller's PAG II, PAG III, PAG IV, and PAG V, categories, respectively.
Approximately _____%, _____%, and _____% of the Initial Group I
Mortgage Loans that are not Long Beach Loans and _____%, _____%, and _____% of
the Initial Group II Mortgage Loans that are not Long Beach Loans are in the
Full Documentation, Limited Documentation and Stated Income Documentation
programs, respectively.
Prepayment Penalties
Any Mortgage Loan may be prepaid in full or in part at any time;
however, approximately _____% of the Initial Mortgage Loans in Group I and
_____% of the Initial Mortgage Loans in Group II provide for the payment by the
Mortgagor of a prepayment charge in limited circumstances on certain full or
partial prepayments made for up to five years from the date of execution of the
related Note. The amount of the prepayment charge is as provided in the related
Note. In general, the Note provides that a prepayment charge will apply if, in
any twelve-month period generally during the first five years from the date of
origination of such Mortgage Loan, the Mortgagor prepays an aggregate amount
exceeding 20% of the original principal balance of such Mortgage Loan. The
amount of the prepayment charge will generally be equal to six months' advance
interest calculated on the basis of the rate in effect at the time of such
prepayment on the amount prepaid in excess of 20% of the original balance of
such Mortgage Loan.
The Seller plans to initiate a refinance policy with the Originators
who originated Mortgage Loans for the Trust and for other trusts in which the
Seller or an affiliate of the Seller owns a residual interest in an effort to
retain borrowers who the Seller or the Originators believe are likely to
refinance their loans due to interest rate changes or other reasons. Although
the policy is expected to permit the Originators to solicit such borrowers in
accordance with the Seller's policy, the Depositor believes that this practice
will not likely result in a material change in the prepayment experience of the
Trust because the solicited borrowers would have been expected to refinance
through other originators in any event.
Representations Relating to the Mortgage Loans
Each Originator will have made representations and warranties in
respect of the Mortgage Loans sold by such Originator to the Seller in a loan
purchase and sale agreement (each, a "Transfer Agreement"), which will be
assigned to the Trust. Such representations and warranties generally include,
among other things, that: (i) the information with respect to each Mortgage Loan
set forth in the related Schedule of Mortgage Loans is true and correct as of
the specified date; (ii) each Mortgaged Property is improved by a one-to-four
family residential
S-28
<PAGE>
dwelling, which may include condominiums, townhouses and manufactured housing
permanently attached to foundations; (iii) each Mortgage Loan had, at the time
of origination, either an attorney's certification of title or a title search or
title policy; (iv) as of the Cut-Off Date each Mortgage Loan was secured by a
valid and subsisting first lien of record on the Mortgaged Property subject in
all cases only to the exceptions to title set forth in the title insurance
policy, if any, with respect to the related Mortgage Loan; (v) each Originator
held good and indefeasible title to, and was the sole owner of, each Mortgage
Loan when conveyed by such Originator; and (vi) each Mortgage Loan was
originated in accordance with applicable law and is the valid, legal and binding
obligation of the related Mortgagor.
If an Originator cannot cure a breach of any representation or warranty
made by it in respect of a Mortgage Loan that materially and adversely affects
the interests of the Owners or the Certificate Insurer in such Mortgage Loan
within a time period specified in the Transfer Agreement, such Originator will
be obligated under the related Transfer Agreement to purchase from the Trust
such Mortgage Loan at a price (the "Loan Purchase Price") set forth in the
related Transfer Agreement which Loan Purchase Price will be no less than the
principal balance thereof as of the date of purchase plus one month's interest
at the Mortgage Rate (net of the applicable Servicing Fee) (the "Net Coupon
Rate").
As to any such Mortgage Loan required to be repurchased by an
Originator as provided above, rather than repurchase the Mortgage Loan, such
Originator may, at its sole option, remove such Mortgage Loan (a "Deleted
Mortgage Loan") from the Trust and cause the substitution in its place of
another Mortgage Loan of like kind (a "Qualified Replacement Mortgage" as such
term is defined in the Agreement); however, such substitution of a defective
Mortgage Loan may not be made if such substitution would cause the REMIC Trust
not to qualify as a REMIC or result in a prohibited transaction tax under the
Code (generally after two years from the Startup Day).
Upon receipt of notice by a Servicer or upon a Servicer becoming aware
that a representation and warranty made by an Originator in the Transfer
Agreement has been breached, such Servicer will be required to promptly notify
the related Originator, the Certificate Insurer, the Trustee and the Seller of
such breach and request that such Originator cure such breach or honor its
repurchase or substitution obligations for the benefit of the Trust. The
foregoing will constitute the sole remedy available to the Trust for a breach of
representation by an Originator.
The Servicers
The information set forth below concerning the Servicers has been
provided to the Depositor by the related Servicer. Neither the Depositor, the
Seller, the Underwriters nor any of their respective affiliates have made any
independent investigation of such information, nor has either Servicer made any
such investigation with respect to information about the other Servicer.
Advanta
Advanta Mortgage Corp. USA ("Advanta") will act as one of the Servicers
of the Mortgage Loans pursuant to the Pooling and Servicing Agreement. Advanta
is an indirect subsidiary of Advanta Corp., a Delaware corporation ("Advanta
Parent"), a publicly traded company based in Horsham, Pennsylvania with assets
as of March 31, 1996 in excess of $5.0 billion.
Advanta Parent, through its subsidiaries (including Advanta) managed
assets (including mortgage loans) in excess of $16.1 billion as of March 31,
1996.
As of March 31, 1996, Advanta and its subsidiaries were servicing
approximately 34,000 mortgage loans in the Owned and Managed Servicing Portfolio
representing an aggregate outstanding principal balance of approximately $1.9
billion, and approximately 29,900 mortgage loans in the Third-Party Servicing
Portfolio representing an aggregate outstanding principal balance of
approximately $923 million.
Owned and Managed Servicing Portfolio. The following tables set forth
information relating to the delinquency, loan loss and foreclosure experience of
Advanta for its servicing portfolio, excluding certain loans
S-29
<PAGE>
serviced by Advanta that were not originated or purchased and reunderwritten by
affiliates of Advanta (the "Owned and Managed Servicing Portfolio"), of fixed
and variable rate mortgage loans as of March 31, 1996, and for each of the four
prior years. In addition to the Owned and Managed Servicing Portfolio, Advanta
serviced as of March 31, 1996, approximately 29,900 mortgage loans with an
aggregate principal balance as of such date of approximately $923 million; such
loans were not originated by Advanta or affiliates of Advanta and are being
serviced for third parties on a contract servicing basis (the "Third Party
Servicing Portfolio"). No loans in the Third Party Servicing Portfolio are
included in the tables set forth below.
DELINQUENCY AND FORECLOSURE EXPERIENCE OF
ADVANTA'S OWNED AND MANAGED SERVICING PORTFOLIO
OF MORTGAGE LOANS
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------------------------------------------------------------------------------
Three Months Ending
1992 1993 1994 1995 March 31, 1996
---------------------------------------------------------------------------------------------------------------------
By By By By By
By No. Dollar Dollar Dollar Dollar Dollar
of Amount By No. Amount By No. Amount By No. Amount By No. Amount
Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio 22,318 $908,541 25,460 $1,149,864 26,446 $1,346,100 32,592 $1,797,582 $34,422 $1,928,336
Delinquency
percentage(1)
30-59 days 2.71% 2.59% 2.43% 2.22% 2.01% 1.57% 2.67% 2.44% 1.97% 1.94%
60-89 days 0.64 0.64 0.77 0.63 0.57 0.45 0.72 0.71 0.65 0.65
90 days or 1.52 1.69% 2.19 2.12 1.85 1.51 1.69 1.23 1.58 1.25
---- ----- ---- ---- ---- ---- ---- ---- ---- ----
more
Total 4.87% 4.92% 5.39% 4.97% 4.43% 3.53% 5.08% 4.38% 4.20% 3.84%
Foreclosure 2.13% 2.78% 1.32% 1.62% 1.35% 1.38% 1.29% 1.53% 1.37% 1.62%
rate(2)
REO 0.35% -- 0.42% -- 0.47% -- 0.52% -- 0.49% --
properties(3)
- ------------------------
<FN>
(1) The period of delinquency is based on the number of days payments are
contractually past due. The delinquency statistics for the period exclude
loans in foreclosure.
(2) "Foreclosure Rate" is the number of mortgage loans or the dollar amount of
mortgage loans in foreclosure as a percentage of the total number of
mortgage loans or the dollar amount of mortgage loans, as the case may be,
as of the date indicated.
(3) REO Properties (i.e., "real estate owned" properties -- properties
relating to mortgages foreclosed or for which deeds in lieu of foreclosure
have been accepted, and held by Advanta pending disposition) percentages
are calculated using the number of loans, not the dollar amount.
</FN>
</TABLE>
S-30
<PAGE>
LOAN LOSS EXPERIENCE
OF ADVANTA'S OWNED AND MANAGED SERVICING PORTFOLIO
OF MORTGAGE LOANS*
<TABLE>
<CAPTION>
Year Ending December 31,
--------------------------------------------------------------------------------------
1992 1993 1994 1995 March 31,
1996
--------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Average amount outstanding(1) $786,178 $1,049,447 $1,225,529 $1,540,238 $1,850,765
Gross losses(2) $6,069 $14,115 $20,886 $13,978 $3,341
Recoveries(3) $145 $123 $179 $148 $15
Net losses(4) $5,924 $13,992 $20,707 $13,830 $3,326
Net losses as a percentage of
average amount outstanding 0.75% 1.33% 1.69% 0.90% 0.72%(5)
- ------------------------
<FN>
(1) "Average Amount Outstanding" during the period is the arithmetic average
of the principal balances of the mortgage loans outstanding on the last
business day of each month during the period.
(2) "Gross Losses" are amounts which have been determined to be uncollectible
relating to mortgage loans for each respective period.
(3) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
(4) "Net Losses" represents "Gross Losses" minus "Recoveries".
(5) Annualized
* Managed portfolio statistics restated to exclude interest advances on serviced
portfolio to be consistent with presentation of owned portfolio.
</FN>
</TABLE>
Advanta experienced an increase in the net loss rate on its Owned and
Managed Servicing Portfolio during the period 1990 through 1994. It believes
that such increase was due to four primary factors; the seasoning of its
portfolio, economic conditions, a decline in property values in certain regions
and the acceleration of charge-offs on loans in 1994. In addition, the level of
net losses during such period was negatively impacted by the performance on the
Non-Income Verification ("NIV") loan program. The net loss rates as a percentage
of the average amount outstanding on its Owned and Managed Servicing Portfolio,
excluding NIV loans, are 0.82%, 1.42%, 0.88% and 0.45% for the periods ending
December 31, 1995, December 31, 1994, December 31, 1993 and December 31, 1992
respectively.*
- -----------------
* Managed portfolio statistics restated to exclude interest advances on serviced
portfolio to be consistent with presentation of owned portfolio.
Long Beach Mortgage Company
Long Beach Mortgage Company (referred to herein as "Long Beach"), a
Delaware corporation, was incorporated in June 1994, and is approved as a
seller/servicer for FNMA and FHLMC and as a non-supervised mortgagee by the U.S.
Department of Housing and Urban Development. On October 7, 1994, Long Beach
succeeded to the mortgage banking business formerly conducted by Long Beach
Bank, F.S.B., a federally chartered savings bank (the "Bank"), including all
operating systems, computers, files and substantially all personnel maintained
and utilized by the Bank in its mortgage banking operations prior to its
reorganization.
The principal business of Long Beach is originating, purchasing,
selling and servicing residential real estate loans secured by one- to
four-family properties ("single-family") and multi-family properties containing
five or more units ("multi-family"). The initial working capital for Long
Beach's operations was provided by Long Beach Financial Services Company. Its
principal sources of funds are anticipated to be sales of loans and
mortgage-backed securities, bank lines of credit, term loans and other
borrowings. At March 31, 1996, Long Beach had 90 offices, consisting of 33 loan
origination centers located in California and 57 loan origination centers
located in Arizona, Colorado, Georgia, Illinois, Indiana, Michigan, Minnesota,
Nevada, New Mexico, Oregon, Utah, Washington and Wisconsin.
Lending Activities and Loan Sales. Long Beach originates single-family and
multi-family real estate loans through referrals from mortgage brokerage
companies and through its network of offices and loan origination centers. Long
S-31
<PAGE>
Beach also participates in secondary market activities by originating and
selling mortgage loans, participations in loans, or mortgage-backed securities
in the secondary market, generally retaining loan servicing; however, in some
cases Long Beach's whole loan sale agreements provide for the transfer of
servicing rights. In addition, Long Beach intends to retain mortgage loans in
its own portfolio to provide a stable source of interest income and to provide
collateral to secure borrowings.
Before Long Beach originates any mortgage loans which are based on
application packages submitted through a mortgage brokerage company that is new
to Long Beach, such mortgage brokerage company is examined by Long Beach through
license and reference checks and through a personal visit by a senior Long Beach
representative. If at any time Long Beach determines that a mortgage brokerage
company consistently submits applications for loans which do not meet Long
Beach's underwriting and quality control standards, Long Beach terminates its
relationship with that mortgage brokerage company.
Long Beach's primary lending activity is funding loans to enable
mortgagors to purchase or refinance residential real property, which loans are
secured by first or second liens on the related real property. Long Beach's loan
portfolio also includes loans for commercial and industrial properties. Long
Beach's single-family real estate loans are predominantly "conventional"
mortgage loans, meaning that they are not insured by the Federal Housing
Administration (the "FHA") or partially guaranteed by the U.S. Department of
Veterans Affairs (the "VA").
The following table summarizes Long Beach's (including that of its
predecessor-in interest Long Beach Bank) one- to four-family residential
mortgage loan origination and sales activity for the periods shown below. Sales
activity may include sales of mortgage loans purchased by Long Beach from other
loan originators.
<TABLE>
<CAPTION>
Year Ended December 31, Three Months
Ended
--------------------------------------------------------------------------------------------------
1992 1993 1994 1995 March 31,
1996
--------------------------------------------------------------------------------------------------
(Dollars in Thousands)
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Originations.................... $959,534 $786,374 $1,062,593 $1,112,890 $369,631
Sales........................... $1,081,001 $788,291 $1,081,841 $1,108,162 $376,473
</TABLE>
Loan Servicing. Generally, Long Beach services all the mortgage loans it
originates whether those loans are sold or retained in its portfolio. Servicing
includes collecting and remitting loan payments, accounting for principal and
interest, contacting delinquent mortgagors, and supervising foreclosure in the
event of unremedied defaults. Long Beach's servicing activities are audited
regularly by its internal auditors and examined periodically by applicable
regulatory authorities. Certain financial records of Long Beach relating to its
loan servicing activities are reviewed annually as part of the audit of Long
Beach's financial statements conducted by its independent accountants.
Collection Procedures; Delinquency and Loss Experience. When a mortgagor fails
to make a required payment on a residential mortgage loan, Long Beach attempts
to cause the deficiency to be cured by corresponding with the mortgagor. In most
cases deficiencies are cured promptly. Pursuant to Long Beach's customary
procedures for residential mortgage loans serviced by it for its own account,
Long Beach generally mails a notice of intent to foreclose to the mortgagor
after the loan has become 31 days past due (two payments due but not received)
and, within one month thereafter, if the loan remains delinquent, typically
institutes appropriate legal action to foreclose on the property securing the
loan. If foreclosed, the property is sold at public or private sale and may be
purchased by Long Beach. In California, real estate lenders are generally unable
as a practical matter to obtain a deficiency judgment against the mortgagor on a
loan secured by single-family real estate.
S-32
<PAGE>
Long Beach Programs -- Servicing Portfolio
The following table sets forth Long Beach's delinquency and loss
experience (including that of its predecessor in interest, the Bank) at the
dates indicated on its servicing portfolio of mortgage loans originated under
the Long Beach Programs (the majority of such mortgage loans reflected in the
following table are adjustable rate mortgage loans):
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------
1992 1993 1994 1995 March 31,
1996
----------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total Outstanding Principal Balance......... 1,561,256 $1,948,978 $2,422,604 $2,405,639 $2,394,192
Number of Loans............................. 12,257 16,289 21,291 22,775 23,121
DELINQUENCY
Period of Delinquency:
31-60 Days
Principal Balance........................ 12,630 $13,079 $16,816 $32,483 $36,046
Number of Loans.......................... 91 106 131 286 338
Delinquency as a Percentage of Total
Outstanding Principal Balance.......... 0.81% 0.67% 0.69% 1.35% 1.51%
Delinquency as a Percentage of
Number of Loans........................ 0.74% 0.65% 0.62% 1.26% 1.46%
61-90 Days
Principal Balance........................ $10,753 $13,144 $18,104 $21,249 $25,907
Number of Loans.......................... 75 93 129 188 220
Delinquency as a Percentage of Total
Outstanding Principal Balance.......... 0.69% 0.67% 0.75% 0.88% 1.08%
Delinquency as a Percentage of
Number of Loans........................ 0.61% 0.57% 0.61% 0.83% 0.95%
91 Days or More
Principal Balance........................ $48,643 $60,621 $70,034 $94,201 $102,503
Number of Loans.......................... 334 418 509 765 860
Delinquency as a Percentage of Total
Outstanding Principal Balance.......... 3.12% 3.11% 2.89% 3.92% 4.28%
Delinquency as a Percentage of
Number of Loans........................ 2.72% 2.57% 2.39% 3.36% 3.72%
Total Delinquencies:
Principal Balance........................ $72,026 $86,844 $104,953 $147,933 $164,456
Number of Loans.......................... 500 617 769 1,239 1,418
Delinquency as a Percentage of Total
Outstanding Principal Balance.......... 4.61% 4.46% 4.33% 6.15% 6.87%
Delinquency as a Percentage of
Number of Loans........................ 4.08% 3.79% 3.61% 5.44% 6.13%
FORECLOSURES PENDING(1)
Principal Balance........................ $50,104 $64,443 $77,960 $102,962 $108,600
Number of Loans.......................... 342 449 583 859 922
Foreclosures Pending as a Percentage of
Total Outstanding Principal Balance.... 3.21% 3.31% 3.22% 4.28% 4.54%
Foreclosures Pending as a Percentage of
Number of Loans........................ 2.79% 2.76% 2.74% 3.77% 3.99%
NET LOAN GAINS (LOSSES) for the Period(2)... $ (3,198) $ (13,449) $ (24,617) $ (24,320) $ (6,552)
NET LOAN GAINS (LOSSES) as a Percentage of
Total outstanding Principal Balance........ (0.20)% (0.69)% (1.02)% (1.01)% (0.27)%
- -------------
<FN>
(1) Mortgage loans which are in foreclosure but as to which title to the
mortgaged property has not been acquired, at the end of the period
indicated. Foreclosures pending are included in the delinquencies set
forth above.
(2) Net Loan Gains (Losses) is calculated for loans conveyed to REMIC trust
funds as the aggregate of the net loan gain (loss) for all such loans
liquidated during the period indicated. The net loan gain (loss) for any
such loan is equal to the difference between (a) the principal balance
plus accrued interest through the date of liquidation plus all liquidation
expenses related to such loan and (b) all amounts received in connection
with the liquidation of such loan. The majority of Long Beach Program
loans serviced by Long Beach have been conveyed to REMIC trust funds.
</FN>
</TABLE>
S-33
<PAGE>
As of March 31, 1996, 400 one- to four-family residential properties
relating to loans in Long Beach's total servicing portfolio had been acquired
through foreclosure or deed-in-lieu of foreclosure and were not liquidated, 334
of which properties relate to the B 1st, B 1st Fast Trac, B 1st QuickCredit and
B 1st QuickCredit Fast Trac residential mortgage loan servicing portfolio.
There can be no assurance that the delinquency and loss experience of
the Long Beach Loans will correspond to the loss experience of Long Beach's
mortgage portfolio set forth in the foregoing table. The statistics shown above
represent the delinquency and loss experience for residential mortgages
originated under the Long Beach Programs and serviced by Long Beach only for the
years presented, whereas the aggregate delinquency and loss experience on the
Long Beach Loans will depend on the results obtained over the life of the Trust.
Long Beach's portfolio includes mortgage loans with payment and other
characteristics which are not representative of the payment and other
characteristics of the Long Beach Loans. A substantial number of the Long Beach
Loans may also have been originated based on Long Beach Guidelines that are less
stringent than those generally applicable to the servicing portfolio reflected
in the foregoing table. In addition, it should be noted that a portion of the
period covered by the foregoing table was one in which real estate values were
appreciating, particularly in the areas of California where properties securing
the related loans were located. However, over the last several years, the
residential real estate markets in many regions of the country, including
California, have experienced general deterioration, and should such decline in
property values continue such that the principal balances of the Long Beach
Loans and any secondary financing on the related Mortgaged Properties become
equal to or greater than the value of such Mortgaged Properties, the actual
rates of delinquencies, foreclosures and losses could be higher than those
previously experienced by Long Beach. In addition, 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 Long Beach
Loans and, accordingly, the actual rates of delinquencies, foreclosures and
losses with respect to the Long Beach Loans.
S-34
<PAGE>
Residential Loan Servicing Portfolio
The following table sets forth Long Beach's delinquency and loss
experience (including that of its predecessor in interest, the Bank) at the
dates indicated on its entire servicing portfolio (inclusive of loans originated
under the Long Beach Programs) of residential (including multi-family) mortgage
loans:
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------
1992 1993 1994 1995 March 31,
1996
-------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total Outstanding Principal Balance. $2,249,834 $2,434,615 $2,721,665 $2,790,704 $2,958,208
Number of Loans..................... 19,235 21,159 24,669 26,776 28,717
DELINQUENCY
Period of Delinquency:
31-60 Days
Principal Balance.................. $ 21,394 $ 21,834 $ 20,923 $ 35,503 $ 39,604
Number of Loans.................... 220 224 195 327 391
Delinquency as a Percentage of
Total Outstanding Principal
Balance........................ 0.95% 0.90% 0.77% 1.27% 1.34%
Delinquency as a Percentage of
Number of Loans................ 1.14% 1.06% 0.79% 1.22% 1.36%
61-90 Days
Principal Balance $ 18,360 $ 19,321 $ 24,013 $ 25,237 $ 28,199
Number of Loans.................... 173 177 193 253 261
Delinquency as a Percentage of
Total Outstanding Principal
Balance........................ 0.82% 0.79% 0.88% 0.90% 0.95%
Delinquency as a Percentage of
Number of Loans................ 0.90% 0.84% 0.78% 0.95% 0.91%
91 Days or More
Principal Balance.................. $ 85,403 $ 92,100 $ 97,202 $109,703 $119,329
Number of Loans.................... 764 765 771 977 1,104
Delinquency as a Percentage of
Total Outstanding Principal
Balance........................ 3.80% 3.78% 3.57% 3.93% 4.03%
Delinquency as a Percentage of
Number of Loans................ 3.97% 3.62% 3.13% 3.65% 3.84%
Total Delinquencies:
Principal Balance.................. $125,157 $133,255 $142,138 $170,444 $187,132
Number of Loans.................... 1,157 1,166 1,159 1,557 1,756
Delinquency as a Percentage of
Total Outstanding Principal
Balance........................ 5.56% 5.47% 5.22% 6.11% 6.33%
Delinquency as a Percentage of
Number of Loans................ 6.02% 5.51% 4.70% 5.82% 6.11%
FORECLOSURES PENDING(1)
Principal Balance.................. $ 87,439 $ 96,810 $111,514 $132,679 $131,924
Number of Loans.................... 737 748 955 1,200 1,153
Foreclosures Pending as a
Percentage of Total Outstanding
Principal Balance.............. 3.89% 3.98% 4.10% 4.75% 4.46%
Foreclosures Pending as a
Percentage of Number of Loans..
3.83% 3.54% 3.87% 4.48% 4.02%
NET LOAN GAINS (LOSSES) for the
Period(2).......................... $(10,796) $ (35,474) $ (51,296) $(37,914) $ (8,523)
NET LOAN GAINS (LOSSES) as a
Percentage of Total Outstanding
Principal Balance.................. (0.48)% (1.46)% (1.88)% (1.36)% (0.29)%
- -------------
<FN>
(1) Mortgage loans which are in foreclosure but as to which title to the
mortgaged property has not been acquired, at the end of the period
indicated. Foreclosures pending are included in the delinquencies set
forth above.
(2) Net Loan Gains (Losses) is calculated for loans conveyed to REMIC trust
funds as the aggregate of the net loan gain (loss) for all such loans
liquidated during the period indicated. The net loan gain (loss) for any
such loan is equal to the difference between (a) the principal balance
plus accrued interest through the date of liquidation plus all liquidation
expenses related to such loan and (b) all amounts received in connection
with the liquidation of such loan. The majority of residential loans
serviced by Long Beach have been conveyed to REMIC trust funds.
</FN>
</TABLE>
S-35
<PAGE>
The delinquency and loss experience percentages set forth above in the
immediately preceding table are calculated on the basis of the total mortgage
loans serviced as of the end of the periods indicated. However, because the
total outstanding principal balance of residential loans serviced by Long Beach
has increased from $1,209,505,000 at December 31, 1990 to $2,958,208,000 at
March 31, 1996, the total outstanding principal balance of residential loans
serviced as of the end of any indicated period includes many loans that will not
have been outstanding long enough to give rise to some or all of the indicated
periods of delinquency. In the absence of such substantial and continual
additions of newly originated loans to the total amount of loans serviced, the
percentages indicated above would be higher and could be substantially higher.
The actual delinquency percentages with respect to the Long Beach Loans may be
expected to be substantially higher than the delinquency percentages indicated
above because the composition of the Long Beach Loans will not change.
In addition, over the last several years, there has been a general
deterioration of the real estate market and weakening of the economy in many
regions of the country, including California. The general deterioration of the
real estate market has been reflected in increases in delinquencies of loans
secured by real estate, slower absorption rates of real estate into the market
and lower sales prices for real estate. The general weakening of the economy has
been reflected in decreases in the financial strength of mortgagors and
decreases in the value of collateral serving as security for loans. If the real
estate market and economy continue to decline, Long Beach may experience an
increase in delinquencies on the loans it services and higher net losses on
liquidated loans.
In the opinion of Long Beach, the period to period changes in the
delinquency and loss experience set forth in the table above are attributable
primarily to the introduction and seasoning of higher credit risk mortgage
loans, as measured by credit risk category under Long Beach's underwriting
guidelines, and a general downturn in the California economy.
Option One Mortgage Corporation
Option One Mortgage Corporation ("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.
As of December 31, 1994, Option One was a wholly-owned subsidiary of
Plaza Home Mortgage Bank, which was in turn a wholly-owned subsidiary of Plaza
Home Mortgage Corporation ("PHMC"). On March 3, 1995, Fleet National Bank, Rhode
Island acquired 100% of the outstanding stock of PHMC. Following such
acquisition, Option One became a subsidiary of Fleet National Bank, Rhode
Island, which is in turn a subsidiary of Fleet Financial Group, Inc. As of
December 31, 1995, Option One had three loan origination centers in California
and one loan origination center in each of Florida, Georgia, Illinois, Ohio,
Texas and Virginia.
Option One operates as a stand-alone mortgage banking company with
functional reporting responsibility to Fleet Financial Group, Inc. Option One is
a FNMA approved servicer. Option One assumed full servicing responsibilities for
the non-conforming credit servicing portfolio of PHMC on May 4, 1995, all of
which portfolio had been originated by Option One. Prior to such acquisition,
Option One acted as subservicer on such portfolio performing the functions of
delinquency advancing, investor reporting, remitting cash collected, preparing
pertinent reports and making collections on delinquent mortgage loans,
foreclosures and real estate owned.
The following tables set forth, as of December 31, 1993, 1994 and 1995
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 servicing portfolio of
mortgage loans originated under the Option One Guidelines (which portfolio does
not include 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 is one month past due on a contractual
basis. Such tables restate PHMC's performance statistics relating only to the
non-conforming mortgage loans previously subserviced by Option One. Such
servicing was subsequently transferred to Option One.
S-36
<PAGE>
<TABLE>
<CAPTION>
Delinquencies and Foreclosures
(Dollars in Thousands)
At December 31, At December 31, At December 31,
1993 1994 1995
-------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent Percent
By No. By By No. by By No. By By No. by By No. By By No. by
of Dollar of Dollar of Dollar of Dollar of Dollar of Dollar
Loans Amount Loans Amount Loan Amount Loans Amount Loans Amount Loans Amount
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio................. 1,233 $146,352 N/A N/A 6,115 $615,488 N/A N/A 12,686 1,153,199 N/A N/A
Period of Delinquency:
31 - 59 days........... 2 251 .16 .17 32 3,247 .52 .53 126 11,364 .99 .99
60 - 89 days........... 3 265 .24 .18 17 1,637 .28 .27 87 8,138 .69 .71
90 days or more........ 2 282 .16 .19 28 3,556 .46 .58 294 28,982 2.32 2.51
- --- --- --- -- ----- --- --- --- ------ ---- ----
Total Delinquent Loans.......... 7 798 .56 .54 77 8,440 1.26 1.38 507 48,484 4.00 4.21
Loans in Foreclosure*........... 4 415 .32 .28 50 5,328 .82 .87 301 28,874 2.37 2.50
- --------------------
<FN>
* Loans in foreclosure are also included under the heading "Total Delinquent
Loans."
</FN>
</TABLE>
<TABLE>
<CAPTION>
Real Estate Owned
(Dollars in Thousands)
At December 31, At December 31, At December 31,
1993 1994 1995
-------------------------------------------------------------------------------------------
By Dollar By Dollar By Dollar
By No. Amount By No. Amount By No. Amount
of Loans of Loans of Loans of Loans of Loans of Loans
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio............ 1,233 $146,352 6,115 $615,488 12,686 1,153,199
Foreclosed Loans(1)........ 0 0 12 1,512 80 7,634
Foreclosed Ratio(2)........ 0 .00 .20 .25 .63 .66
- ------------------------
<FN>
(1) For the purposes of these tables, Foreclosed Loans means the principal
balance of mortgage loans secured by mortgaged properties the title to
which has been acquired by 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.
</FN>
</TABLE>
S-37
<PAGE>
Loan Loss Experience on
Option One's Servicing Portfolio
of Mortgage Loans
(Dollars in Thousands)
Year Ending December 31,
-----------------------------------------
1993 1994 1995
-----------------------------------------
Total Portfolio (1) $146,352 $615,488 $1,153,199
Gross Losses (2) $0 $17 $1,291
Recoveries (3) $0 $0 --
Net Losses (4) $0 $17 $1,291
Net Losses as a Percentage of Total
Portfolio 0.00% 0.00% .11%
- -----------------------------------
(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) "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.
(3) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
(4) "Net Losses" means "Gross Losses" minus "Recoveries."
The following tables set forth, as of December 31, 1993, 1994 and 1995
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 is one month past due on a contractual
basis. Such tables restate PHMC's performance statistics relating only to the
non-conforming mortgage loans previously subserviced by Option One. Such
servicing was subsequently transferred to Option One.
Delinquencies and Foreclosures
(Dollars in Thousands)
<TABLE>
<CAPTION>
At December 31, At December 31, At December 31,
1993 1994 1995
-------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent Percent
By No. By By No. by By No. By By No. by By No. By By No. by
of Dollar of Dollar of Dollar of Dollar of Dollar of Dollar
Loans Amount Loans Amount Loan Amount Loans Amount Loans Amount Loans Amount
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio................. 1,233 $146,352 N/A N/A 6,115 $615,488 N/A N/A 14,625 1,367,031 N/A N/A
Period of Delinquency:
31 - 59 days........... 2 251 .16 .17 32 3,247 .52 .53 161 16,501 1.10 1.21
60 - 89 days........... 3 265 .24 .18 17 1,637 .28 .27 104 10,117 .71 .74
90 days or more........ 2 282 .16 .19 28 3,556 .46 .58 388 40,275 2.65 2.95
- --- --- --- -- ----- --- --- --- ------ ---- ----
Total Delinquent Loans.......... 7 798 .56 .54 77 8,440 1.26 1.38 653 66,893 4.46 4.90
Loans in Foreclosure*........... 4 415 .32 .28 50 5,328 .82 .87 388 38,985 2.65 2.85
- --------------------
<FN>
* Loans in foreclosure are also included under the heading "Total Delinquent
Loans."
</FN>
</TABLE>
S-38
<PAGE>
<TABLE>
<CAPTION>
Real Estate Owned
(Dollars in Thousands)
At December 31, At December 31, At December 31,
1993 1994 1995
-------------------------------------------------------------------------------------------
By Dollar By Dollar By Dollar
By No. Amount By No. Amount By No. Amount
of Loans of Loans of Loans of Loans of Loans of Loans
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio............ 1,233 $146,352 6,115 $615,488 14,625 1,367,031
Foreclosed Loans(1)........ 0 0 12 1,512 100 9,632
Foreclosed Ratio(2)........ 0 .00 .20 .25 .68 .70
- ------------------------
<FN>
(1) For the purposes of these tables, Foreclosed Loans means the principal
balance of mortgage loans secured by mortgaged properties the title to
which has been acquired by 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.
</FN>
</TABLE>
Loan Loss Experience on
Option One's Servicing Portfolio
of Mortgage Loans
(Dollars in Thousands)
Year Ending December 31,
------------------------------------------
1993 1994 1995
------------------------------------------
Total Portfolio (1) $146,352 $615,488 $1,367,031
Gross Losses (2) $0 $17 $1,506
Recoveries (3) $0 $0 ---
Net Losses (4) $0 $17 $1,506
Net Losses as a Percentage of Total
Portfolio 0.00% 0.00% .11%
- -----------------------------------
(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) "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.
(3) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
(4) "Net Losses" means "Gross Losses" minus "Recoveries."
General
There can be no assurance that the delinquency experience of the Option
One Loans will correspond to the delinquency experience of Option One's mortgage
portfolio set forth in the foregoing tables. See "The Portfolio of Mortgage
Loans -- General" herein. The statistics shown above represent the delinquency
experience for Option One's residential mortgage servicing portfolio only for
the periods presented, whereas the delinquency experience on the Option One
Loans will depend on the results obtained over the life of such Option One
Loans. Option One's residential mortgage servicing portfolio includes mortgage
loans with a variety of payment, credit and other
S-39
<PAGE>
characteristics (including geographic location) which may not be representative
of the payment, credit and other characteristics of the Option One Loans. Option
One has limited default information with respect to the mortgage loans
originated under the Guidelines and is unable to predict the delinquency and
foreclosure that might be expected with respect to the Option One Loans. See
"Risk Factors -- Risk of Higher Delinquencies Associated with Guidelines"
herein. 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. In addition,
adverse economic conditions may affect the timely payment by Mortgagors of
scheduled payments of principal and interest on the Option One Loans and
accordingly, the actual rates of delinquencies and foreclosures with respect to
the Mortgage Loan Pool.
No industrywide data is available for mortgage loans for mortgagors
with less than FNMA credit quality. See "The Portfolio of Mortgage Loans --
Guidelines" herein.
USE OF PROCEEDS
The Depositor will sell the Initial Mortgage Loans to the Trust
concurrently with delivery of the Certificates. Net proceeds from the sale of
the Class A Certificates will be applied by the Depositor to the purchase of the
Initial Mortgage Loans from the Seller, to the deposit of the Initial Pre-Funded
Amount in the Pre-Funding Account and to the deposit of certain amounts to the
Capitalized Interest Account. Such net proceeds less the Initial Pre-Funded
Amount and the amount deposited in the Capitalized Interest Account will
(together with the Subordinate Certificates retained by the Depositor or its
affiliates) represent the purchase price to be paid by the Trust to the
Depositor for the Initial Mortgage Loans.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware on November 9,
1995 and is a wholly-owned subsidiary of AMRESCO, INC. The Depositor maintains
its principal offices at 700 N. Pearl Street, Suite 2400, Dallas, Texas 75201.
Neither the Depositor nor any of its affiliates will insure or guarantee
distributions on the Certificates.
THE SELLER
The Seller was incorporated in the State of Delaware on October 13,
1995 and is a wholly-owned subsidiary of AMRESCO, INC. The Seller maintains its
principal offices at 700 N. Pearl Street, Suite 2400, Dallas, Texas 75201.
Neither the Seller nor any of its affiliates will insure or guarantee
distributions on the Certificates.
THE MORTGAGE LOAN POOLS
General
The statistical information presented in this Prospectus Supplement
concerning the pool of Mortgage Loans is based on the pool of Initial Mortgage
Loans as of the Cut-Off Date. Subsequent Mortgage Loans are intended to be
purchased by the Trust from the Depositor for inclusion in the Trust from time
to time on or before __________, 199__ from funds on deposit in the Pre-Funding
Account. The Initial Mortgage Loans, any Qualified Replacement Mortgages and the
Subsequent Mortgage Loans are referred to herein collectively as the "Mortgage
Loans." The Subsequent Mortgage Loans, if available, to be purchased by the
Trust will be sold by the Originators to the Seller, by the Seller to the
Depositor and then by the Depositor to the Trust.
This subsection describes generally certain characteristics of the
Initial Mortgage Loans. Unless otherwise specified herein, references herein to
percentages of loan principal balances relating to the Initial Mortgage Loans
refer in each case to the approximate percentage of the aggregate principal
balance of the Initial Mortgage Loans as of the Cut-Off Date, based on the
scheduled principal balances of the Initial Mortgage Loans or the Initial
Mortgage Loans in the applicable Mortgage Loan Group, in each case as of the
Cut-Off Date, after giving effect to all principal payments due on or prior to
the Cut-Off Date. The Initial Mortgage Loan Pool consists of fixed
S-40
<PAGE>
rate and adjustable-rate Mortgage Loans with remaining terms to maturity of not
more than 360 months (including both fully amortizing Mortgage Loans and Balloon
Mortgage Loans). The Initial Mortgage Loans have the characteristics set forth
below as of the Cut-Off Date. Percentages expressed herein based on Loan
Balances and number of Initial Mortgage Loans have been rounded, and in the
tables set forth herein the sum of the percentages may not equal the respective
totals due to such rounding.
Each Mortgage Loan in the Trust will be assigned to one of two mortgage
loan groups consisting of Mortgage Loans which bear fixed rates only, in the
case of Group I, and Mortgage Loans which bear adjustable interest rates only,
in the case of Group II. The Fixed Rate Group Certificates represent undivided
ownership interests in all Mortgage Loans contained in Group I, and
distributions on the Fixed Rate Group Certificates will be based primarily on
amounts available for distribution in respect of Mortgage Loans in Group I. The
Adjustable Rate Group Certificates represent undivided ownership interests in
all Mortgage Loans contained in Group II, and distributions on the Adjustable
Rate Group Certificates will be based primarily on amounts available for
distribution in respect of Mortgage Loans in Group II.
The Loan-to-Value Ratios shown below were calculated based upon the
appraised values of the Mortgaged Properties at the time of origination (the
"Appraised Values"). No assurance can be given that values of the Mortgaged
Properties have remained or will remain at their levels on the dates of
origination of the related Mortgage Loans. If the residential real estate market
has experienced or should experience an overall decline in property values such
that the outstanding balance of any Mortgage Loan becomes equal to or greater
than the value of the Mortgaged Property, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry.
Initial Mortgage Loans -- Group I
The information set forth with respect to Group I is based upon data
provided to the Depositor by each of the related Originators and has been
compiled by the Depositor. Neither the Depositor, the Seller, the Servicers, the
Underwriters, the Originators nor any of their respective affiliates have made
or will have made any representation as to the accuracy or completeness of such
compiled information.
As of the Cut-Off Date, the average Loan Balance of the Initial
Mortgage Loans in Group I was $___________; the weighted average Loan-to-Value
Ratio of the Initial Mortgage Loans in Group I was _____%; the weighted average
remaining term to maturity was _____ months; the weighted average original term
to maturity was _____ months. The remaining terms to maturity as of the Cut-Off
Date of the Initial Mortgage Loans in Group I ranged from _____ months to 360
months. The minimum and maximum Loan Balances of Initial Mortgage Loans in Group
I as of the Cut-Off Date were $___________ and $___________, respectively.
Balloon Mortgage Loans represent not more than _____% of the Original Aggregate
Loan Balance of the Initial Mortgage Loans in Group I. No Initial Mortgage Loan
in Group I will mature later than June 1, 2026.
All of the Initial Mortgage Loans in Group I bear interest at a fixed
rate for the life of the related Mortgage Loans. The Initial Mortgage Loans in
Group I consist of Mortgage Loans aggregating $___________. The Coupon Rates of
the Initial Mortgage Loans in Group I ranged from _____% per annum to _____% per
annum. The weighted average Coupon Rate of the Initial Mortgage Loans in Group I
was _____% per annum.
S-41
<PAGE>
Geographic Distribution of Mortgaged Properties--Initial Group I Mortgage Loans
The geographic distribution of Initial Mortgage Loans in Group I by
state, as of the Cut-Off Date, was as follows:
% of Aggregate
Number of Group I Aggregate Group I Group I
Geographic Area Mortgage Loans Loan Balance Loan Balance
- --------------- -------------- ------------ ------------
Alabama
Arizona
California
Colorado
District of Columbia
Florida
Georgia
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maryland
Michigan
Minnesota
Missouri
Nevada
New Jersey
New Mexico
New York
North Carolina
Ohio
Oregon
Pennsylvania
Tennessee
Texas
Utah
Washington
West Virginia
Wisconsin
Wyoming
Total 100.00%
======
S-42
<PAGE>
Original Loan-to-Value Ratios -- Initial Group I Mortgage Loans
The original loan-to-value ratios as of the date of origination of the
Initial Mortgage Loans in Group I (based upon appraisals made at the time of
origination thereof) (the "Loan-to-Value Ratios") as of the Cut-Off Date were
distributed as follows:
<TABLE>
<CAPTION>
% of Aggregate
Range of Number of Group I Aggregate Group I Group I
Original LTVs Mortgage Loans Loan Balance Loan Balance
- ------------- -------------- ------------ ------------
<S> <C>
5.01 - 10.00%
10.01 - 15.00%
15.01 - 20.00%
20.01 - 25.00%
25.01 - 30.00%
30.01 - 35.00%
35.01 - 40.00%
40.01 - 45.00%
45.01 - 50.00%
50.01 - 55.00%
55.01 - 60.00%
60.01 - 65.00%
65.01 - 70.00%
70.01 - 75.00%
75.01 - 80.00%
80.01 - 85.00%
85.01 - 90.00%
Total: 100.00%
=======
</TABLE>
Cut-Off Date Coupon Rates -- Initial Group I Mortgage Loans
The Coupon Rates borne by the Notes relating to the Initial Mortgage
Loans in Group I were distributed as follows as of the Cut-Off Date:
<TABLE>
<CAPTION>
% of Aggregate
Range of Number of Group I Aggregate Group I Group I
Coupon Rates Mortgage Loans Loan Balance Loan Balance
- ------------ -------------- ------------ ------------
<S> <C>
6.501 - 7.000%
7.501 - 8.000%
8.001 - 8.500%
8.501 - 9.000%
9.001 - 9.500%
9.501 - 10.000%
10.001 - 10.500%
10.501 - 11.000%
11.001 - 11.500%
11.501 - 12.000%
12.001 - 12.500%
12.501 - 13.000%
13.001 - 13.500%
13.501 - 14.000%
14.001 - 14.500%
14.501 - 15.000%
Total 100.00%
======
</TABLE>
S-43
<PAGE>
Cut-Off Date Loan Balances -- Initial Group I Mortgage Loans
The distribution of the outstanding principal amounts of the Initial
Mortgage Loans in Group I as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
% of Aggregate
Number of Group I Aggregate Group I Group I
Range of Loan Balances Mortgage Loans Loan Balance Loan Balance
<S> <C>
$0.01 - $50,000.00
50,000.01 - 100,000.00
100,000.01 - 150,000.00
150,000.01 - 200,000.00
200,000.01 - 250,000.00
250,000.01 - 300,000.00
300,000.01 - 350,000.00
350,000.01 - 400,000.00
400,000.01 - 450,000.00
450,000.01 - 500,000.00
Total 100.00%
======
</TABLE>
Types of Mortgaged Properties -- Initial Group I Mortgage Loans
The Mortgaged Properties securing the Initial Mortgage Loans in Group I
as of the Cut-Off Date were of the property types as follows:
<TABLE>
<CAPTION>
% of Aggregate
Number of Group I Aggregate Group I Group I
Property Types Mortgage Loans Loan Balance Loan Balance
- -------------- -------------- ------------ ------------
<S> <C>
Single-family
PUD
Townhouses
Condominiums
Manufactured Home
Apartment 2-4 Units
Other
Total 100.00%
======
</TABLE>
Months Since First Payment Date -- Initial Group I Mortgage Loans
The distribution of the number of months since the date of origination
of the Initial Mortgage Loans in Group I as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
% of Aggregate
Months Elapsed Number of Group I Aggregate Group I Group I
Since Origination Mortgage Loans Loan Balance Loan Balance
- ----------------- -------------- ------------ ------------
<S> <C>
0 - 6
7 - 12
Total 100.00%
======
</TABLE>
S-44
<PAGE>
Remaining Term to Maturity -- Initial Group I Mortgage Loans
The distribution of the number of months remaining to maturity of the
Initial Mortgage Loans in Group I as of the CutOff Date was as follows:
<TABLE>
<CAPTION>
% of Aggregate
Months Remaining Number of Group I Aggregate Group I Group I
to Maturity Mortgage Loans Loan Balance Loan Balance
- ----------- -------------- ------------ ------------
<S> <C>
0 - 60
61 - 120
121 - 180
181 - 240
241 - 360
Total 100.00%
======
</TABLE>
Occupancy Status -- Initial Group I Mortgage Loans
The occupancy status of the Mortgaged Properties securing the Initial
Mortgage Loans in Group I as of the Cut-Off Date was as follows
<TABLE>
<CAPTION>
% of Aggregate
Number of Group I Aggregate Group I Group I
Occupancy Status Mortgage Loans Loan Balance Loan Balance
- ---------------- -------------- ------------ ------------
<S> <C>
Owner Occupied
Non-Owner Occupied
Total 100.00%
======
</TABLE>
Initial Mortgage Loans -- Group II
The information set forth with respect to Group II is based upon data
provided to the Depositor by Long Beach and each of the related Originators and
has been compiled by the Depositor. Neither the Depositor, the Seller, the
Servicers, the Underwriters, the Originators nor any of their respective
affiliates have made or will have made any representation as to the accuracy or
completeness of such compiled information.
As of the Cut-Off Date, the average Loan Balance of the Initial
Mortgage Loans in Group II was $___________; the Coupon Rates of the Initial
Mortgage Loans in Group II ranged from _____% per annum to _____% per annum; the
weighted average Loan-to-Value Ratio of the Initial Mortgage Loans in Group II
was _____%; the weighted average Coupon Rate of the Initial Mortgage Loans in
Group II was _____% per annum; the weighted average remaining term to maturity
was _____ months; and the weighted average original term to maturity was _____
months. The remaining terms to maturity as of the Cut-Off Date of the Initial
Mortgage Loans in Group II ranged from _____ months to _____ months. The minimum
and maximum Loan Balances of Initial Mortgage Loans in Group II as of the
Cut-Off Date were $___________ and $___________, respectively. None of the
Initial Mortgage Loans in Group II provided for "balloon" payments. No Initial
Mortgage Loan in Group II will mature later than June 1, 2026.
All of the Initial Mortgage Loans in Group II have maximum Coupon
Rates. The weighted average maximum Coupon Rate of the Initial Mortgage Loans in
Group II was _____% per annum, with maximum Coupon Rates that range from _____%
per annum to _____% per annum. The weighted average minimum Coupon Rate of the
Initial Mortgage Loans in Group II was _____% per annum, with minimum Coupon
Rates that range from _____% to _____% per annum. The Initial Mortgage Loans in
Group II have a weighted average gross margin as of the Cut-Off Date of _____%.
The gross margin for the Initial Mortgage Loans in Group II range from _____% to
_____%.
S-45
<PAGE>
_____% of the Initial Mortgage Loans in Group II bear interest at a
rate that adjusts based on Six-Month LIBOR (the "Six-Month LIBOR Loans").
Substantially, all of the interest rates on the Six-Month LIBOR Loans adjust
semiannually, along with the monthly payments, and have periodic rate adjustment
caps. _____% of the Six- Month LIBOR Loans have a semiannual reset cap of _____%
and lifetime reset cap of _____% and _____% have a semiannual reset cap of 1
1/2%, substantially all of which have a lifetime reset cap of _____%. _____% of
the Initial Mortgage Loans in Group II bear interest at a fixed rate of interest
for a period of two years after origination and thereafter provide for interest
rate and payment adjustments at frequencies and in the same manner as the Six-
Month LIBOR Loans and subject to generally a _____% periodic rate adjustment cap
(the "2/28 Loans").
Geographic Distribution of Mortgaged Properties -- Initial Group II
Mortgage Loans
The geographic distribution of Initial Mortgage Loans in Group II by
state, as of the Cut-Off Date, was as follows:
<TABLE>
<CAPTION>
% of Aggregate
Number of Group II Aggregate Group II Group II
Geographic Area Mortgage Loans Loan Balance Loan Balance
- --------------- -------------- ------------ ------------
<S> <C>
Alabama
Arizona
California
Colorado
District of Columbia
Florida
Georgia
Idaho
Illinois
Indiana
Kansas
Kentucky
Louisiana
Maryland
Michigan
Minnesota
Missouri
Nevada
New Jersey
New Mexico
Ohio
Oregon
Pennsylvania
Texas
Utah
Washington
Wisconsin
Total 100.00%
======
</TABLE>
S-46
<PAGE>
Original Loan-to-Value Ratios -- Initial Group II Mortgage Loans
The original Loan-to-Value Ratios of the Initial Mortgage Loans in
Group II as of the Cut-Off Date were distributed as follows:
<TABLE>
<CAPTION>
% of Aggregate
Range of Number of Group II Aggregate Group II Group II
Original LTV's Mortgage Loans Mortgage Loan Balance Mortgage Loan Balance
- -------------- -------------- --------------------- ---------------------
<S> <C>
15.01 - 20.00%
25.01 - 30.00%
30.01 - 35.00%
35.01 - 40.00%
40.01 - 45.00%
45.01 - 50.00%
50.01 - 55.00%
55.01 - 60.00%
60.01 - 65.00%
65.01 - 70.00%
70.01 - 75.00%
75.01 - 80.00%
80.01 - 85.00%
85.01 - 90.00%
Total 100.00%
======
</TABLE>
Cut-Off Date Coupon Rates -- Initial Group II Mortgage Loans
The Coupon Rates borne by the Notes relating to the Initial Mortgage
Loans in Group II were distributed as follows as of the Cut-Off Date:
<TABLE>
<CAPTION>
% of Aggregate
Range of Number of Group II Aggregate Group II Group II
Coupon Rates Mortgage Loans Mortgage Loan Balance Mortgage Loan Balance
- ------------ -------------- --------------------- ---------------------
<S> <C>
6.001 - 6.500%
6.501 - 7.000%
7.001 - 7.500%
7.501 - 8.000%
8.001 - 8.500%
8.501 - 9.000%
9.001 - 9.500%
9.501 - 10.000%
10.001 - 10.500%
10.501 - 11.000%
11.001 - 11.500%
11.501 - 12.000%
12.001 - 12.500%
12.501 - 13.000%
13.001 - 13.500%
13.501 - 14.000%
14.001 - 14.500%
14.501 - 15.000%
Total 100.00%
======
</TABLE>
S-47
<PAGE>
Cut-Off Date Loan Balances -- Initial Group II Mortgage Loans
The distribution of the outstanding principal amounts of the Initial
Mortgage Loans in Group II as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
% of Aggregate
Number of Group II Aggregate Group II Group II
Range of Loan Balances Mortgage Loans Mortgage Loan Balance Mortgage Loan Balance
- ---------------------- -------------- --------------------- ---------------------
<S> <C>
$0.01 - $50,000.00
50,000.01 - 100,000.00
100,000.01 - 150,000.00
150,000.01 - 200,000.00
200,000.01 - 250,000.00
250,000.01 - 300,000.00
300,000.01 - 350,000.00
350,000.01 - 400,000.00
400,000.01 - 450,000.00
450,000.01 - 500,000.00
Total 100.00%
======
</TABLE>
Types of Mortgaged Properties -- Initial Group II Mortgage Loans
The Mortgaged Properties securing the Initial Mortgage Loans in Group
II as of the Cut-Off Date were of the property types as follows:
<TABLE>
<CAPTION>
% of Aggregate
Number of Group II Aggregate Group II Group II
Property Types Mortgage Loans Mortgage Loan Balance Mortgage Loan Balance
- -------------- -------------- --------------------- ---------------------
<S> <C>
Single Family
PUD
Condominiums
Manufactured Home
Apartment 2-4 Units
Other
Total 100.00%
======
</TABLE>
Months Since Origination -- Initial Group II Mortgage Loans
The distribution of the number of months since the date of origination
of the Initial Mortgage Loans in Group II as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
% of Aggregate
Months Elapsed Number of Group II Aggregate Group II Group II
Since Origination Mortgage Loans Mortgage Loan Balance Mortgage Loan Balance
- ----------------- -------------- --------------------- ---------------------
<S> <C>
0 - 6
Total 100.00%
======
</TABLE>
S-48
<PAGE>
Remaining Term to Maturity -- Initial Group II Mortgage Loans
The distribution of the number of months remaining to maturity of the
Initial Mortgage Loans in Group II as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
% of Aggregate
Months Remaining Number of Group II Aggregate Group II Group II
to Maturity Mortgage Loans Mortgage Loan Balance Mortgage Loan Balance
- ----------- -------------- --------------------- ---------------------
<S> <C>
0 - 120
121 - 180
181 - 240
241 - 360
Total 100.00%
======
</TABLE>
Occupancy Status Initial -- Group II Mortgage Loans
The occupancy status of the Mortgaged Properties securing the Initial
Mortgage Loans in Group II as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
% of Aggregate
Number of Group II Aggregate Group II Group II
Occupancy Status Mortgage Loans Mortgage Loan Balance Mortgage Loan Balance
- ---------------- -------------- --------------------- ---------------------
<S> <C>
Owner Occupied
Non Owner Occupied
Total 100.00%
======
</TABLE>
S-49
<PAGE>
Margins -- Initial Group II Mortgage Loans
The margins borne by the Notes relating to the Initial Mortgage Loans
in Group II as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
% of Aggregate
Number of Group II Aggregate Group II Group II
Margins Mortgage Loans Mortgage Loan Balance Mortgage Loan Balance
------- -------------- --------------------- ---------------------
<S> <C>
3.500% - 3.750%
3.751% - 4.000%
4.001% - 4.250%
4.251% - 4.500%
4.501% - 4.750%
4.751% - 5.000%
5.001% - 5.250%
5.251% - 5.500%
5.501% - 5.750%
5.751% - 6.000%
6.001% - 6.250%
6.251% - 6.500%
6.501% - 6.750%
6.751% - 7.000%
7.001% - 7.250%
7.251% - 7.500%
7.501% - 7.750%
7.751% - 8.000%
8.001% - 8.250%
Total 100.00%
======
</TABLE>
S-50
<PAGE>
Maximum Coupon Rates -- Initial Group II Mortgage Loans
The maximum Coupon Rates borne by the Notes relating to the Initial
Mortgage Loans in Group II as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
% of Aggregate
Maximum Number of Group II Aggregate Group II Group II
Coupon Rates Mortgage Loans Mortgage Loan Balance Mortgage Loan Balance
- ------------ -------------- --------------------- ---------------------
<S> <C>
13.001 - 13.500%
13.501 - 14.000%
14.001 - 14.500%
14.501 - 15.000%
15.001 - 15.500%
15.501 - 16.000%
16.001 - 16.500%
16.501 - 17.000%
17.001 - 17.500%
17.501 - 18.000%
18.001 - 18.500%
18.501 - 19.000%
19.001 - 19.500%
19.501 - 20.000%
20.001 - 20.500%
20.501 - 21.000%
21.001 - 21.500%
21.501 - 22.000%
Total 100.00%
======
</TABLE>
Next Rate Adjustment Date Change -- Initial Group II Mortgage Loans
Next rate adjustment date change for each of the Notes relating to the
Initial Mortgage Loans in Group II as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
% of Aggregate
Date of Next Coupon Number of Group II Aggregate Group II Group II
Rate Change Mortgage Loans Loan Balance Loan Balance
----------- -------------- ------------ ------------
<S> <C>
August 1, 1996
September 1, 1996
October 1, 1996
November 1, 1996
December 1, 1996
March 1, 1998
April 1, 1998
May 1, 1998
June 1, 1998
Total 100.00%
======
</TABLE>
S-51
<PAGE>
Conveyance of Subsequent Mortgage Loans
The Pooling and Servicing Agreement permits the Trust to acquire
approximately $__________ and $__________ in aggregate principal balance of
Subsequent Mortgage Loans for addition to Group I and Group II, respectively.
Accordingly, the statistical characteristics of the Mortgage Loan Pool and each
Group will vary as of any Subsequent Cut-Off Date upon the acquisition of
Subsequent Mortgage Loans.
The obligation of the Trust to purchase Subsequent Mortgage Loans on a
Subsequent Transfer Date is subject to the following requirements, among others
(which may be waived or modified by the Certificate Insurer): (i) such
Subsequent Mortgage Loan may not be 30 or more days contractually delinquent as
of the related Subsequent Cut-Off Date; (ii) the remaining term to maturity of
such Subsequent Mortgage Loan may not exceed 360 months; (iii) no Subsequent
Mortgage Loan will have a Coupon Rate less than _____%; and (iv) following the
purchase of such Subsequent Mortgage Loans by the Trust, the Mortgage Loans
(including the Subsequent Mortgage Loans) (a) will have a weighted average
Coupon Rate of at least _____% for Group I and _____% for Group II; (b) will
have a weighted average Loan-to-Value Ratio of not more than _____% for Group I
and _____% for Group II; (b) will not have Balloon Loans with a principal
balance in excess of _____% and _____% of the Original Aggregate Loan Balance of
the Mortgage Loans in Group I and Group II, respectively, (d) will not have a
weighted average remaining term to stated maturity of more than _____ months for
Group I and _____ for Group II; and (e) will have no Mortgage Loan with a
principal balance in excess of $___________ for Group I and $___________ for
Group II.
All of the Mortgage Loans are "Actuarial Loans", which provide that
interest is charged to the Mortgagors thereunder, and payments are due from such
Mortgagors, as of a scheduled day of each month which is fixed at the time of
origination. Scheduled monthly payments made by the Mortgagors on the Actuarial
Loans either earlier or later than the scheduled due dates thereof will not
affect the amortization schedule or the relative application of such payments to
principal and interest.
PREPAYMENT AND YIELD CONSIDERATIONS
General
The weighted average life of, and, if purchased at other than par
(disregarding, for purposes of this discussion, the effect on an investor's
yield resulting from the timing of the settlement date and those considerations
discussed below under "Payment Lag Feature of Certain Fixed Rate Group
Certificates"), the yield to maturity on the Class A Certificates will be
affected by the rate of payment of principal of the Mortgage Loans in the
related Mortgage Loan Group, including for this purpose Prepayments,
liquidations due to defaults, casualties and condemnations, and repurchases by
the Originators of Mortgage Loans. The actual rate of principal prepayments on
pools of mortgage loans is influenced by a variety of economic, tax, geographic,
demographic, social, legal and other factors and has fluctuated considerably in
recent years. In addition, the rate of principal prepayments may differ among
pools of mortgage loans at any time because of specific factors relating to the
mortgage loans in the particular pool, including, among other things, the age of
the mortgage loans, the geographic locations of the properties securing the
loans and the extent of the mortgagors' equity in such properties, changes in
the mortgagors' housing needs, job transfers and unemployment.
As with fixed rate obligations generally, the rate of prepayment on a
pool of mortgage loans with fixed rates such as the Mortgage Loans in Group I is
affected by prevailing market rates for mortgage loans of a comparable term and
risk level. When the market interest rate is below the mortgage coupon,
mortgagors may have an increased incentive to refinance their mortgage loans.
Depending on prevailing market rates, the future outlook for market rates and
economic conditions generally, some mortgagors may sell or refinance mortgaged
properties in order to realize their equity in the mortgaged properties, to meet
cash flow needs or to make other investments.
The Mortgage Loans in Group II are adjustable rate mortgage loans. As
is the case with conventional fixed rate mortgage loans, adjustable rate
mortgage loans may be subject to a greater rate of principal prepayments in a
declining interest rate environment. For example, if prevailing interest rates
fall significantly, adjustable-rate mortgage loans could be subject to higher
prepayment rates than if prevailing interest rates remain constant because the
availability of fixed rate mortgage loans at competitive interest rates may
encourage mortgagors to refinance
S-52
<PAGE>
their adjustable rate mortgage loan to "lock in" a lower fixed interest rate.
However, no assurance can be given as to the level of prepayments that the
Mortgage Loans will experience.
In addition to the foregoing factors affecting the weighted average
life of each Class of the Class A Certificates, the subordination provisions of
the Trust result in a limited acceleration of the Class A Certificates relative
to the amortization of the related Mortgage Loans until the related Specified
Subordination Amount is reached. The accelerated amortization is achieved by the
application of certain excess interest and principal to the payment of the Class
A Certificate Principal Balance. This acceleration feature creates
overcollateralization which results from the excess of the aggregate Loan
Balances of the Mortgage Loans over the Class A Certificate Principal Balance.
Once the required level of overcollateralization is reached, the acceleration
feature will cease, unless necessary to maintain the required level of
overcollateralization.
A majority of the Mortgage Loans contain prepayment penalty provisions.
For a discussion of such provisions, see "The Portfolio of Mortgage
Loans--Prepayment Penalties" herein.
Mandatory Prepayment
In the event that at the end of the Funding Period, not all of the
Original Pre-Funded Amount has been used to acquire Subsequent Mortgage Loans,
then the related Class of Class A Certificates then entitled to receive payments
of principal will receive a partial prepayment on the Payment Date in ________
199__ in an amount equal the portion of the Original Pre-Funded Amount remaining
and allocable to each such Class.
Although no assurances can be given, the Depositor expects that the
principal amount of Subsequent Mortgage Loans sold to the Trust will require the
application of substantially all the amount on deposit in the Pre- Funding
Account and that there should be no material principal prepaid to the Owners of
the Class A Certificates.
Projected Prepayment and Yield for Class A Certificates
As indicated above, if purchased at other than par, the yield to
maturity on a Class A Certificate will be affected by the rate of the payment of
principal of the Mortgage Loans. If the actual rate of payments on the Mortgage
Loans is slower than the rate anticipated by an investor who purchases a Class A
Certificate at a discount, the actual yield to such investor will be lower than
such investor's anticipated yield. If the actual rate of payments on the
Mortgage Loans is faster than the rate anticipated by an investor who purchases
a Class A Certificate at a premium, the actual yield to such investor will be
lower than such investor's anticipated yield.
The "Final Scheduled Payment Date" for each Class of the Class A
Certificates is as follows: Class A-1, ____________, _____, Class A-2,
____________, _____, Class A-3, ____________, _____, Class A-4, ____________,
_____, Class A-5, ____________, _____, Class A-6, ____________, _____, Class
A-7, ____________, _____, and Class A-8, ____________, _____. These dates are
the dates on which the "Initial Certificate Principal Balance" set forth in the
summary hereof for the related Class as of the Closing Date less all amounts
previously distributed to the Owners on account of principal (such amount as to
any Class of the Class A Certificates and as of any time, the related "Class A
Certificate Principal Balance" and as to the Class A Certificates collectively,
the "Certificate Principal Balance") would be reduced to zero assuming that no
Prepayments are received on the Mortgage Loans in the related Group, that
scheduled monthly payments of principal of and interest on each of the related
Mortgage Loans are timely received and no optional termination or mandatory
termination is exercised. The weighted average life of the Class A Certificates
is likely to be shorter than would be the case if payments actually made on the
Mortgage Loans conformed to the foregoing assumptions, and the final Payment
Date with respect to the Class A Certificates could occur significantly earlier
than the related Final Scheduled Payment Date because (i) Prepayments are likely
to occur, (ii) the Owners of the Class R Certificates may cause a termination of
the Trust when the outstanding Certificate Principal Balance is less than 10% of
the original Certificate Principal Balance and (iii) the Servicers may each
purchase all Mortgage Loans serviced by them, thereby causing a termination of
the Trust when the outstanding Certificate Principal Balance is less than 5% of
the Original Certificate Balance.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average life of any
Class of the Class A Certificates will be influenced by the rate at which
principal of the Mortgage Loans in the related Mortgage Loan Group is paid,
which may be in the form of scheduled amortization or prepayments (for this
purpose, the term "prepayment" includes Prepayments and liquidations due to
default).
The tables relating to the Certificates are calculated at various Home
Equity Prepayment ("HEP") assumptions. HEP assumes that a pool of loans prepays
in the first month of the life of such loan at a constant
S-53
<PAGE>
prepayment rate that corresponds in CPR to one-tenth the given HEP percentage
and increases by an additional one-tenth each month thereafter until the tenth
month, where it remains at a CPR equal to the given HEP percentage. The
"Constant Prepayment Rate" or "CPR" represents an assumed annualized rate of
prepayment relative to the then outstanding principal balance on a pool of new
mortgage loans. The Prepayment Assumption does not purport to be a historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of mortgage loans, including the Mortgage Loans. The
Depositor believes that no existing statistics of which it is aware provide a
reliable basis for Owners of Class A Certificates to predict the amount or the
timing of receipt of prepayments on the Mortgage Loans.
It is very unlikely that the Mortgage Loans will prepay at rates
consistent with the Prepayment Assumption until maturity or that all of the
Mortgage Loans in the related Mortgage Loan Group will prepay at the same rate.
There will be discrepancies between the actual characteristics of the Mortgage
Loans included in the Trust and the assumed characteristics used in preparing
the following tables. Any discrepancy may have an effect upon the percentages of
Initial Certificate Principal Balance outstanding set forth in the table and the
weighted average lives of the Class A Certificates.
Since the tables were prepared on the basis of the assumptions in the
following paragraph, there will likely be discrepancies between the
characteristics of the actual Mortgage Loans and the characteristics of the
Mortgage Loans assumed in preparing the tables. Any such discrepancy will likely
have an effect upon the percentages of the Certificate Principal Balances
outstanding and weighted average lives of the Class A Certificates set forth in
the tables. In addition, since the actual Mortgage Loans in the Trust have
characteristics which differ from those assumed in preparing the tables set
forth below, the distributions of principal on the Class A Certificates may be
made earlier or later than as indicated in the tables.
For the purpose of the tables below, it is assumed that: (i) each
Mortgage Loan Group consists of Mortgage Loans with the characteristics set
forth in the table below, (ii) the Closing Date for the Certificates occurs on
__________, 199__, (iii) distributions on the Certificates are made on the 25th
day of each month regardless of the day on which the Payment Date actually
occurs, commencing in ________ 199__ in accordance with the priorities described
herein, (iv) the difference between the Gross Coupon Rate and the Net Coupon
Rate is equal to the Servicing Fee and the Net Coupon Rate is further reduced by
the Premium Amount and the Trustee Fee, (v) prepayments include 30 day's
interest thereon, (vi) optional termination or mandatory termination is
exercised on the date on which the Outstanding Certificate Principal Balance has
declined to less than 10% of the original Certificate Principal Balance, (vii)
the "Specified Subordinated Amount" (as defined under "Description of the Class
A Certificates -- Overcollateralization Provisions") for each Mortgage Loan
Group is set initially as specified in the Pooling and Servicing Agreement and
thereafter decreases in accordance with the provisions of the Pooling and
Servicing Agreement, (viii) all of the Pre-Funded Amount is used to acquire
Subsequent Mortgage Loans on __________, 199__ and prior to such date, each
Subsequent Mortgage Loan accrues interest at the related Net Coupon Rates
indicated in the table below, (ix) the Coupon Rate for each Mortgage Loan in
Group II is adjusted on its next rate adjustment date (and on subsequent rate
adjustment dates, if necessary) to equal the sum of (a) an assumed final
constant level of the applicable index of _____% per annum, with respect to
Six-Month LIBOR and _____% per annum with respect to One-Year CMT and (b) the
respective gross margin (such sum being subject to the applicable periodic
adjustment cap, maximum interest rate and minimum interest rate (which minimum
interest rate will equal the initial coupon)), (x) the Class A-1 and Class A-8
Pass-Through Rates remain constant at _____% and _____% per annum, respectively,
(xi) all Mortgage Loans pay on their respective due dates in accordance with
their respective terms, (xii) the Initial Certificate Principal Balance of each
Class of Certificates is as set forth and under "Summary of Terms --
Certificates Offered" herein.
S-54
<PAGE>
Initial Group I Mortgage Loans
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Original Remaining
Term to Term to
Principal Gross Coupon Net Coupon Maturity Maturity
Balance Rate Rate (in months) (in months)
- -----------------------------------------------------------------------------------------------------------------
Subsequent Group I Mortgage Loans
Original Remaining
Term to Term to
Principal Gross Coupon Net Coupon Maturity Maturity
Balance Rate Rate (in months) (in months)
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Initial Group II Mortgage Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Original Remaining
Gross Periodic Term to Term to
Principal Coupon Net Gross Net Rate Months to Rate Change Maturity Maturity
Balance Rate Coupon Rate Margin Life Cap Cap Next Reset Frequency (in months) (in months) Index
- ------------------------------------------------------------------------------------------------------------------------------------
Six-Month LIBOR
Six-Month LIBOR
Six-Month LIBOR
Six-Month LIBOR
Six-Month LIBOR
Six-Month LIBOR
</TABLE>
<TABLE>
<CAPTION>
Subsequent Group II Mortgage Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Original Remaining
Gross Periodic Term to Term to
Principal Coupon Net Gross Net Rate Months to Rate Change Maturity Maturity
Balance Rate Coupon Rate Margin Life Cap Cap Next Reset Frequency (in months) (in months) Index
- ------------------------------------------------------------------------------------------------------------------------------------
Six-Month LIBOR
One Year CMT
</TABLE>
S-55
<PAGE>
The following tables set forth the percentages of the initial principal
amount of the Class A Certificates that would be outstanding after each of the
dates shown, assuming (1) for the Fixed Rate Certificates, the Group I Mortgage
Loans prepay according to the indicated percentages of the Prepayment Assumption
under each Fixed Rate Certificate below and the Group II Mortgage Loans prepay
at 21% of the Prepayment Assumption and (2) for the Adjustable Rate
Certificates, the Group I Mortgage Loans prepay at 21% of the Prepayment
Assumption and the Group II Mortgage Loans prepay according to the indicated
percentages of the Prepayment Assumption under the Adjustable Rate Certificate
below, except that under the 0% Prepayment Assumption for all Certificates, the
Group I Mortgage Loans and the Group II Mortgage Loans prepay at 0% of the
Prepayment Assumption.
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
Class A-1 Class A-2
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Payment Date 0% 15% 18% 20% 22% 24% 28% 0% 15% 18% 20% 22% 24% 28%
-- --- --- --- --- --- --- -- --- --- --- --- --- ---
Initial Balance
June 25, 1997
June 25, 1998
June 25, 1999
June 25, 2000
June 25, 2001
June 25, 2002
June 25, 2003
June 25, 2004
June 25, 2005
June 25, 2006
June 25, 2007
June 25, 2008
June 25, 2009
June 25, 2010
June 25, 2011
June 25, 2012
June 25, 2013
June 25, 2014
June 25, 2015
June 25, 2016
June 25, 2017
June 25, 2018
June 25, 2019
June 25, 2020
June 25, 2021
June 25, 2022
June 25, 2023
June 25, 2024
June 25, 2025
June 25, 2026
June 25, 2027
Weighted Avg Life(1)
</TABLE>
<TABLE>
<CAPTION>
Class A-3 Class A-4
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Payment Date 0% 15% 18% 20% 22% 24% 28% 0% 15% 18% 20% 22% 24% 28%
-- --- --- --- --- --- --- -- --- --- --- --- --- ---
Initial Balance
June 25, 1997
June 25, 1998
June 25, 1999
June 25, 2000
June 25, 2001
June 25, 2002
June 25, 2003
June 25, 2004
June 25, 2005
June 25, 2006
June 25, 2007
June 25, 2008
June 25, 2009
June 25, 2010
June 25, 2011
June 25, 2012
June 25, 2013
June 25, 2014
June 25, 2015
June 25, 2016
June 25, 2017
June 25, 2018
June 25, 2019
June 25, 2020
June 25, 2021
June 25, 2022
June 25, 2023
June 25, 2024
June 25, 2025
June 25, 2026
June 25, 2027
Weighted Avg Life(1)
- -----------------------------
<FN>
(1) The weighted average life of the Class A Certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial
respective Certificate Principal Balance for such Class of Class A
Certificate.
</FN>
</TABLE>
S-56
<PAGE>
The following tables set forth the percentages of the initial principal
amount of the Class A Certificates that would be outstanding after each of the
dates shown, assuming (1) for the Fixed Rate Certificates, the Group I Mortgage
Loans prepay according to the indicated percentages of the Prepayment Assumption
under each Fixed Rate Certificate below and the Group II Mortgage Loans prepay
at 21% of the Prepayment Assumption and (2) for the Adjustable Rate
Certificates, the Group I Mortgage Loans prepay at 21% of the Prepayment
Assumption and the Group II Mortgage Loans prepay according to the indicated
percentages of the Prepayment Assumption under the Adjustable Rate Certificate
below, except that under the 0% Prepayment Assumption for all Certificates, the
Group I Mortgage Loans and the Group II Mortgage Loans prepay at 0% of the
Prepayment Assumption.
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
Class A-5 Class A-6
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Payment Date 0% 15% 18% 20% 22% 24% 28% 0% 15% 18% 20% 22% 24% 28%
-- --- --- --- --- --- --- -- --- --- --- --- --- ---
Initial Balance
June 25, 1997
June 25, 1998
June 25, 1999
June 25, 2000
June 25, 2001
June 25, 2002
June 25, 2003
June 25, 2004
June 25, 2005
June 25, 2006
June 25, 2007
June 25, 2008
June 25, 2009
June 25, 2010
June 25, 2011
June 25, 2012
June 25, 2013
June 25, 2014
June 25, 2015
June 25, 2016
June 25, 2017
June 25, 2018
June 25, 2019
June 25, 2020
June 25, 2021
June 25, 2022
June 25, 2023
June 25, 2024
June 25, 2025
June 25, 2026
June 25, 2027
Weighted Avg
Life(1)
</TABLE>
<TABLE>
<CAPTION>
Class A-7 Class A-8
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Payment Date 0% 15% 18% 20% 22% 24% 28% 0% 15% 18% 20% 22% 24% 28%
-- --- --- --- --- --- --- -- --- --- --- --- --- ---
Initial Balance
June 25, 1997
June 25, 1998
June 25, 1999
June 25, 2000
June 25, 2001
June 25, 2002
June 25, 2003
June 25, 2004
June 25, 2005
June 25, 2006
June 25, 2007
June 25, 2008
June 25, 2009
June 25, 2010
June 25, 2011
June 25, 2012
June 25, 2013
June 25, 2014
June 25, 2015
June 25, 2016
June 25, 2017
June 25, 2018
June 25, 2019
June 25, 2020
June 25, 2021
June 25, 2022
June 25, 2023
June 25, 2024
June 25, 2025
June 25, 2026
June 25, 2027
Weighted Avg Life(1)
- -----------------------------
<FN>
(1) The weighted average life of the Class A Certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial
respective Certificate Principal Balance for such Class of Class A
Certificate.
</FN>
</TABLE>
S-57
<PAGE>
Payment Lag Feature of Certain Fixed Rate Group Certificates
Pursuant to the Pooling and Servicing Agreement, an amount equal to
Mortgagor payments with respect to each Mortgage Loan in Group I (net of the
Servicing Fee) received by the Servicer during each Remittance Period is to be
remitted to the Trustee on or prior to the related Monthly Remittance Date;
however, the Trustee will not be required to distribute any such amounts to the
Owners until the next succeeding Payment Date. As a result, the monthly
distributions to the Owners of the Fixed Rate Group Certificates (other than the
Class A-1 Certificates) generally reflect an Accrual Period reflecting Mortgagor
payments during the prior calendar month, and the first Payment Date will not
occur until __________, 199__. Thus, the effective yield to the Owners of the
Fixed Rate Group Certificates (other than the Class A-1 Certificates) will be
below that otherwise produced by the related Pass-Through Rate because the
distribution of the related Class A Distribution Amount in respect of any given
month will not be made until on or about the 25th day of the following month.
THE ORIGINATORS
The Mortgage Loan Pool consists of Mortgage Loans purchased or
originated by three originators (the "Originators") with aggregate outstanding
Loan Balances of $___________. The largest Originator of such loans is Long
Beach Mortgage Company, which originated _____% of the Initial Mortgage Loans in
Group I and _____% of the Initial Mortgage Loans in Group II. The other
Originator is New Century, which originated _____% of the Initial Mortgage Loans
in Group I and _____% of the Initial Mortgage Loans in Group II. The Seller has
purchased approximately $___________ of mortgage loans from Walsh Securities,
Inc., approximately $__________ of which are expected to be used to satisfy the
Pre-Funding Account purchase requirement for Group I and approximately
$__________ of which are expected to be used to satisfy the Pre-Funding Account
purchase requirement for Group II.
FORMATION OF THE TRUST AND TRUST PROPERTY
AMRESCO Residential Securities Corporation Mortgage Loan Trust 199__-__
(the "Trust") will be created and established pursuant to the Pooling and
Servicing Agreement. The Depositor will convey without recourse the Mortgage
Loans to the Trust and the Trust will issue the Class A Certificates and the
Subordinate Certificates.
The property of the Trust will include (a) the Mortgage Loans (other
than payments due on the Mortgage Loans on or prior to the Cut-Off Date with
respect to those Mortgage Loans that were current as of the Cut-Off Date)
together with the related Mortgage Loan documents and the Seller's interest in
any Mortgaged Property which secures a Mortgage Loan and all payments thereon
and proceeds of the conversion, voluntary or involuntary, of the foregoing, (b)
such amounts as may be held by the Trustee in the Certificate Account, the
Pre-Funding Account, the Capitalized Interest Account and any other accounts
held by the Trustee for the Trust together with investment earnings on such
amounts and such amounts as may be held in the name of the Trustee in the
Principal and Interest Account, if any, exclusive of investment earnings thereon
(except as otherwise provided in the Pooling and Servicing Agreement) whether in
the form of cash, instruments, securities or other properties, (c) the
Certificate Insurance Policies, (d) proceeds of all the foregoing (including,
but not by way of limitation, all proceeds of any hazard insurance and title
insurance policy relating to the Mortgage Loans, cash proceeds, accounts,
accounts receivable, notes, drafts, acceptances, chattel paper, checks, deposit
accounts, rights to payment of any and every kind, and other forms of
obligations and receivables which at any time constitute all or part of or are
included in the proceeds of any of the foregoing) to pay the Certificates as
specified in the Pooling and Servicing Agreement and (e) certain rights of the
Seller under the Transfer Agreements (collectively, the "Trust Estate").
The Class A Certificates will not represent an interest in or an
obligation of, nor will the Mortgage Loans be guaranteed by, the Depositor, the
Trustee, the Seller, the Servicers, the Originators or any of their affiliates.
Prior to its formation, the Trust will have had no assets or
obligations. Upon formation, the Trust will not engage in any business activity
other than acquiring, holding and collecting payments on the Mortgage Loans,
issuing the Certificates and distributing payments thereon. The Trust will not
acquire any receivables or assets other than the Mortgage Loans and the rights
appurtenant thereto and will not have any need for additional capital resources.
To the extent that mortgagors make scheduled payments under the Mortgage Loans,
the Trust will have sufficient liquidity to make distributions on the
Certificates. As the Trust does not have any operating history and will not
engage in any business activity other than issuing the Certificates and making
distributions thereon, there has not been included any historical or pro forma
ratio of earnings to fixed charges with respect to the Trust.
S-58
<PAGE>
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Initial Mortgage
Loans and the Mortgaged Properties is based upon the pool as constituted at the
close of business on the Cut-Off Date, as adjusted (with respect to all Initial
Mortgage Loans that were current as of the Cut-Off Date) for the scheduled
principal payments due on or before such date. Prior to the issuance of the
Class A Certificates, Initial Mortgage Loans may be removed from the pool as a
result of incomplete documentation or non-compliance with representations and
warranties set forth in the Pooling and Servicing Agreement, if the Depositor
deems such removal necessary or appropriate. A limited number of other Initial
Mortgage Loans may be included in the pool prior to the issuance of the
Certificates.
A current report on Form 8-K will be available to purchasers of the
Class A Certificates and will be filed and incorporated by reference into the
Registration Statement together with the Pooling and Servicing Agreement with
the Securities and Exchange Commission within fifteen days after the initial
issuance of the Class A Certificates. In the event Initial Mortgage Loans are
removed from or added to the pool as set forth in the preceding paragraph, such
removal or addition will be noted in the current report on Form 8-K. A current
report on Form 8-K will also be filed within fifteen days of the end of the
Funding Period reflecting the additions to the Trust.
DESCRIPTION OF THE CLASS A CERTIFICATES
General
Each Certificate will represent certain undivided, fractional ownership
interests in the Trust Estate created and held pursuant to the Pooling and
Servicing Agreement, subject to the limits and the priority of distribution
described therein.
As described in "The Mortgage Loan Pool" herein, the Mortgage Loan Pool
is divided into two Groups, Group I, which contains only fixed rate Mortgage
Loans, and Group II, which contains only adjustable rate Mortgage Loans. For
each Mortgage Loan Group, the related Class of Class A Certificates will
evidence the right to receive on each Payment Date the Class A Distribution
Amount for such Class of Class A Certificates, in each case until the related
Class A Certificate Principal Balance is reduced to zero.
Payment Dates
On each Payment Date, the Owners of each Class of the Class A
Certificates will be entitled to receive, from amounts then on deposit in the
certificate account established and maintained by the Trustee in accordance with
the Pooling and Servicing Agreement (the "Certificate Account") and until the
Certificate Principal Balance of such Class of Class A Certificates is reduced
to zero, the Class A Distribution Amount as of such Payment Date, as described
below. Distributions will be made in immediately available funds to Owners of
Class A Certificates by wire transfer or otherwise, to the account of such Owner
at a domestic bank or other entity having appropriate facilities therefor, if
such Owner has so notified the Trustee, or by check mailed to the address of the
person entitled thereto as it appears on the register (the "Register")
maintained by the Trustee as registrar (the "Registrar"). Beneficial Owners may
experience some delay in the receipt of their payments due to the operations of
DTC. See "Risk Factors--Book Entry Registration" in the Prospectus, "Description
of the Class A Certificates--Book Entry Registration of the Class A
Certificates" herein and "Description of the Certificates--Book Entry
Registration" in the Prospectus.
The Pooling and Servicing Agreement will provide that an Owner will be
required to send its Certificate to the Trustee prior to receiving the final
distribution on such Owner's Certificate. The Pooling and Servicing Agreement
additionally will provide that, in any event, any Certificate as to which the
final distribution thereon has been made shall be deemed canceled for all
purposes under or pursuant to the Pooling and Servicing Agreement and the
Certificate Insurance Policy.
Each Owner of record of the related Class of the Class A Certificates
will be entitled to receive such Owner's Percentage Interest in the amounts due
such Class on such Payment Date. The "Percentage Interest" of a Class A
Certificate as of any date of determination will be equal to the percentage
obtained by dividing the principal balance of such Certificate as of the Cut-Off
Date by the Certificate Principal Balance for the related Class of the Class A
Certificates as of the Cut-Off Date.
S-59
<PAGE>
Distributions
Upon receipt, the Trustee will be required to deposit into the
Certificate Account, (i) the total of the principal and interest collections on
the Mortgage Loans, including any Net Liquidation Proceeds, required to be
remitted by the Servicers, together with any Substitution Amount and any Loan
Purchase Price, (ii) the related Capitalized Interest Requirement and any
Pre-Funding Account Earnings, (iii) any Insured Payment, and (iv) the proceeds
of any liquidation of the Trust Estate. The Trustee will also be required to
deposit into the Certificate Account any Pre-Funded Amounts to be distributed as
a prepayment at the end of the Funding Period.
The Pooling and Servicing Agreement establishes a pass-through rate on
each Class of the Class A Certificates (each, a "Pass-Through Rate") as set
forth in the Summary herein under "Certificates Offered." The Pass-Through Rate
of Fixed Rate Group Certificates will be as set forth on the cover hereof;
provided, that, (i) the Pass-Through Rate with respect to the Class A-1
Certificates will equal the lesser of (a) the London interbank offered rate for
one-month United States dollar deposits (calculated as described under
"--Calculation of One-Month LIBOR" below) as of the second to last business day
prior to the immediately preceding Payment Date (or as of the second to last
business day prior to the Closing Date with respect to the ________ 199__
Payment Date) (the "One-Month LIBOR Determination Date") plus _____% per annum
and (b) the Fixed Rate Group Available Funds Cap and (ii) on each Payment Date
after the Clean-Up Call Date, the Class A-7 Pass-Through Rate will be equal to
the lesser of (a) _____% per annum and (b) the Fixed Rate Group Available Funds
Cap. The Pass-Through Rate with respect to the Class A-8 Certificates will equal
the lesser of (i) with respect to any Payment Date which occurs on or prior to
the Clean-Up Call Date, One-Month LIBOR as of the One-Month LIBOR Determination
Date plus _____% per annum (and for any Payment Date after the Clean-Up Call
Date, One-Month LIBOR plus _____% per annum), and (ii) the Adjustable Rate Group
Available Funds Cap.
On each Payment Date, the Trustee is required to make the following
disbursements and transfers from moneys then on deposit in the Certificate
Account as specified below in the following order of priority of each such
transfer and disbursement:
(i) First, out of Total Monthly Excess Spread, the Trustee shall
disburse the Premium Amount to the Certificate Insurer;
(ii) Second, to the Trustee, the Trustee Fees and reimbursable
expenses with respect to such Mortgage Loan Group then due;
(iii) Third, the Trustee shall allocate an amount equal to the sum
of (x) the Total Monthly Excess Spread with respect to such
Mortgage Loan Group and Payment Date plus (y) any
Subordination Reduction Amount with respect to such Mortgage
Loan Group and Payment Date (net of the Trustee Fees with
respect to such Mortgage Loan Group and the amounts payable to
the Certificate Insurer with respect to such Mortgage Loan
Group (the "Premium Amount") as described in clauses (i) and
(ii) above) (such net sum being the "Total Monthly Excess
Cashflow" with respect to such Mortgage Loan Group and Payment
Date) in the following order of priority:
(A) first, such Total Monthly Excess Cashflow shall be
allocated to the payment of the Class A Distribution
Amount pursuant to clauses (v)(A) and (B) below on
such Payment Date with respect to the related
Mortgage Loan Group in an amount equal to the amount,
if any, by which (x) the sum of (i) the related
Current Interest and (ii) the Subordination Deficit,
if any, for such Payment Date exceeds (y) the
Available Funds with respect to such Mortgage Loan
Group for such Payment Date (the amount of such
difference with respect to a Mortgage Loan Group
being an "Available Funds Shortfall" for such
Mortgage Loan Group);
(B) second, any portion of the Total Monthly Excess
Cashflow with respect to such Mortgage Loan Group
remaining after the application described in clause
(A) above shall be allocated against any Available
Funds Shortfall with respect to the other Mortgage
Loan Group;
(C) third, any portion of the Total Monthly Excess
Cashflow with respect to such Mortgage Loan Group
remaining after the allocations described in clauses
(A) and (B) above shall
S-60
<PAGE>
be paid to the Certificate Insurer in respect of
amounts owed on account of any Reimbursement Amount
owed to the Certificate Insurer with respect to the
related Mortgage Loan Group; and
(D) fourth, any portion of the Total Monthly Excess
Cashflow with respect to such Mortgage Loan Group
remaining after the allocations described in clauses
(A), (B) and (C) above shall be paid to the
Certificate Insurer in respect of any Reimbursement
Amount with respect to the other Mortgage Loan Group;
(iv) Fourth, the amount, if any, of the Total Monthly Excess
Cashflow with respect to such Mortgage Loan Group on a Payment
Date remaining after the allocations described in clause (iii)
above (the "Net Monthly Excess Cashflow" with respect to such
Mortgage Loan Group for such Payment Date) is required to be
applied in the following order or priority:
(A) first, such Net Monthly Excess Cashflow shall be used
to reduce to zero, through the allocation of a
Subordination Increase Amount to the payment of the
Class A Distribution Amount pursuant to clause (v)
below, any Subordination Deficiency Amount (as
defined in the Pooling and Servicing Agreement) with
respect to such Mortgage Loan Group as of such
Payment Date;
(B) second, any Net Monthly Excess Cashflow remaining
after the application described in clause (A) above
shall be used to reduce to zero, through the payment
of a Subordination Increase Amount, the Subordination
Deficiency Amount, if any, with respect to the other
Mortgage Loan Group; and
(C) third, any Net Monthly Excess Cashflow remaining
after the application described in clauses (A) and
(B) above shall be paid to the Servicers to the
extent of any unreimbursed Delinquency Advances and
Servicing Advances to the extent deemed by the
Servicer to be nonrecoverable and unreimbursed
Servicing Fees; and
(v) Fifth, following the making by the Trustee of all allocations,
transfers and disbursements described above from amounts then
on deposit in the Certificate Account with respect to the
related Mortgage Loan Group, the Trustee shall distribute:
(A) To the Owners of the Class A Certificates of the
related Group, the related Current Interest, on a pro
rata basis without any priority among such Class A
Certificates;
(B) To the Owners of the related Class of Class A
Certificates, (i) the Principal Distribution Amount
applicable to Group I shall be distributed as
follows: (a) first, to the Owners of the Class A-1
Certificates until the Class A-1 Certificate
Principal Balance is reduced to zero; (b) second, to
the Owners of the Class A-2 Certificates, until the
Class A-2 Certificate Principal Balance is reduced to
zero; (c) third, to the Owners of the Class A-3
Certificates, until the Class A-3 Certificate
Principal Balance is reduced to zero; (d) fourth, to
the Owners of the Class A-4 Certificates, until the
Class A-4 Certificate Principal Balance is reduced to
zero; (e) fifth, to the Owners of the Class A-5
Certificates until the Class A-5 Certificate
Principal Balance is reduced to zero; (f) sixth, to
the Owners of the Class A-6 Certificates, until the
Class A-6 Certificate Principal Balance is reduced to
zero; and (g) seventh, to the Owners of the Class A-7
Certificates, until the Class A-7 Certificate
Principal Balance is reduced to zero; and (ii) the
Principal Distribution Amount applicable to Group II
shall be distributed to the Owners of the Class A-8
Certificates until the Class A-8 Certificate
Principal Balance is reduced to zero; and
(C) To the Owners of the Subordinate Certificates, all
remaining distributable amounts as specified in the
Pooling and Servicing Agreement.
"Total Net Monthly Excess Spread" as to either Mortgage Loan Group and
any Payment Date equals the excess, if any, of (x) the interest which is
collected on the Mortgage Loans during a Remittance Period (net of the related
Servicing Fee, the related Premium Amount and of certain miscellaneous
administrative amounts) plus the
S-61
<PAGE>
interest portion of any Delinquency Advances and any Compensating Interest over
(y) the sum of the Class A Current Interest.
"Available Funds" as to any Mortgage Loan Group and Payment Date is the
amount on deposit in the Certificate Account on such Payment Date (net of Total
Monthly Excess Cashflow and disregarding the amounts of any Insured Payments
with respect to a Mortgage Loan Group to be made on such Payment Date).
"Total Available Funds" as to any Mortgage Loan Group and Payment Date
is (x) the amount on deposit in the Certificate Account (net of Total Monthly
Excess Cashflow) on such Payment Date plus (y) any amounts of Total Monthly
Excess Cashflow with respect to a Mortgage Loan Group to be applied on such
Payment Date (disregarding the amount of any Insured Payment with respect to a
Mortgage Loan Group to be made on such Payment Date) plus, (z) any deposit to
the Certificate Account from the Pre-Funding Account and Capitalized Interest
Account expected to be made in accordance with the Pooling and Servicing
Agreement.
The Trustee or Paying Agent shall (i) receive as attorney-in-fact of
each Owner of Class A Certificates any Insured Payment from the Certificate
Insurer and (ii) disburse the same to each Owner of Class A Certificates. The
Pooling and Servicing Agreement will provide that to the extent the Certificate
Insurer makes Insured Payments, either directly or indirectly (as by paying
through the Trustee or Paying Agent), to the Owners of such Class A
Certificates, if any, the Certificate Insurer will be subrogated to the rights
of such Owners of Class A Certificates with respect to such Insured Payments,
and shall receive reimbursement for such Insured Payments as provided in the
Pooling and Servicing Agreement, but only from the sources and in the manner
provided in the Pooling and Servicing Agreement for the payment of the Class A
Distribution Amount to Owners of Class A Certificates, if any; such subrogation
and reimbursement will have no effect on the Certificate Insurer's obligations
under the Certificate Insurance Policy.
The Pooling and Servicing Agreement provides that the term "Available
Funds" does not include Insured Payments and does not include any amounts that
cannot be distributed to the Owners of Class A Certificates, if any, by the
Trustee as a result of proceedings under the United States Bankruptcy Code.
Each Owner of a Class A Certificate will be required promptly to notify
the Trustee in writing upon the receipt of a court order relating to a
Preference Amount and will be required to enclose a copy of such order with such
notice to the Trustee.
Overcollateralization Provisions
Overcollateralization Resulting from Cash Flow Structure. The Pooling
and Servicing Agreement requires that, on each Payment Date, Net Monthly Excess
Cashflow (as defined above) be applied with respect to each Mortgage Loan Group
on such Payment Date as an accelerated payment of principal on the related Class
A Certificates, but only to the limited extent hereafter described.
This has the effect of accelerating the amortization of the Class A
Certificates relative to the amortization of the related Mortgage Loans. To the
extent that any Net Monthly Excess Cashflow is not so used for either Mortgage
Loan Group, the Pooling and Servicing Agreement provides that it will be used to
reimburse the Servicers with respect to certain amounts owing to them, and,
thereafter, paid to the Owners of the Class R Certificates.
Pursuant to the Pooling and Servicing Agreement, Net Monthly Excess
Cashflow will be applied as an accelerated payment of principal on the Class A
Certificates until the Subordinated Amount has increased to the level required.
"Subordinated Amount" means, with respect to each Payment Date and each Mortgage
Loan Group, the excess, if any, of (x) the sum of (i) the aggregate Loan
Balances of the related Mortgage Loans [in such Mortgage Loan Group] as of the
close of business on the last day of the preceding Remittance Period and (ii)
any amount on deposit in the Pre-Funding Account with respect to such Mortgage
Loan Group at such time exclusive of any Pre- Funding Account Earnings (as
defined in the Pooling and Servicing Agreement) over (y) the related Certificate
Principal Balance as of such Payment Date (after taking into account the payment
of the related Class A Principal Distribution Amount (except for any
Subordination Deficit or Subordination Increase Amount) on such Payment Date).
Any amount of Net Monthly Excess Cashflow actually applied as an accelerated
payment of principal with respect to a Mortgage Loan Group is a "Subordination
Increase Amount." The required level of the Subordinated Amount with respect to
a Mortgage Loan Group and Payment Date is the related "Specified Subordinated
Amount."
The Pooling and Servicing Agreement generally provides that the
Specified Subordinated Amount with respect to
S-62
<PAGE>
a Mortgage Loan Group may, over time, decrease, or increase, subject to certain
floors, caps and triggers, including triggers that allow the related Specified
Subordinated Amount to decrease or "step down" based on the performance on the
related Mortgage Loans with respect to certain tests specified in the Pooling
and Servicing Agreement based on delinquency rates and cumulative losses. If
certain delinquency and/or loss levels set forth in the Pooling and Servicing
Agreement are exceeded, the "Specified Subordinated Amount" may become
unlimited. Net Monthly Excess Cashflow will then be applied to the payment in
reduction of principal of the related Class A Certificates during the period
that the related Mortgage Loan Group is unable to meet certain tests specified
in the Pooling and Servicing Agreement based on delinquency rates and cumulative
losses.
In the event that the Specified Subordinated Amount is permitted to
decrease or "step down" on a Payment Date in the future or in the event that an
Excess Subordinated Amount otherwise exists, the Pooling and Servicing Agreement
provides that some or all of the principal which would otherwise be distributed
to the Owners of the Class A Certificates on such Payment Date shall be
available to satisfy other cash flow priorities of the Trust, including
distributions to the Owners of the Class R Certificates over the period
specified in the Pooling and Servicing Agreement until the Excess Subordinated
Amount is reduced to zero. This has the effect of decelerating the amortization
of related Class A Certificates relative to the amortization of the related
Mortgage Loans and of reducing the related Subordinated Amount. With respect to
any Payment Date, the excess, if any, of (x) the related Subordinated Amount on
such Payment Date after taking into account all distributions to be made on such
Payment Date (except for any distributions of related Subordination Reduction
Amounts as described in the next sentence) over (y) the related Specified
Subordinated Amount is the "Excess Subordinated Amount" for such Payment Date.
If, on any Payment Date, the Excess Subordinated Amount is, or, after taking
into account all other distributions to be made on such Payment Date would be,
greater than zero (i.e., the related Subordinated Amount is or would be greater
than the related Specified Subordinated Amount), then any amounts relating to
principal which would otherwise be distributed to the Owners of the Class A
Certificates on such Payment Date shall instead be distributed to the Owners of
the Class R Certificates (to the extent available therefor) in an amount equal
to the lesser of (x) the related Excess Subordinated Amount and (y) the amount
available for distribution on account of principal with respect to the related
Class A Certificates on such Payment Date; such amount being a "Subordination
Reduction Amount." As a result of the cash flow structure of the Trust,
Subordination Reduction Amounts may result even prior to the occurrence of any
decrease or "step down" in the related Specified Subordinated Amount. This is
because the Owners of the Class A Certificates will generally be entitled to
receive 100% of collected principal, even though the Class A Certificate
Principal Balance will, following the accelerated amortization resulting from
the application of the Net Monthly Excess Cashflow, represent less than 100% of
the aggregate Loan Balance. Accordingly, with respect to a Mortgage Loan Group,
in the absence of the provisions relating to Subordination Reduction Amounts,
the Subordinated Amount would increase above the Specified Subordinated Amount
requirements even without the further application of any Net Monthly Excess
Cashflow.
The Pooling and Servicing Agreement provides generally that, on any
Payment Date, all amounts collected on account of scheduled principal with
respect to the related Remittance Period and unscheduled principal with respect
to the related Prepayment Period (other than any such amount applied to the
payment of a Subordination Reduction Amount) will be distributed to the Owners
of the related Class A Certificates on such Payment Date. If any Mortgage Loan
became a Liquidated Loan during such prior Remittance Period, the Net
Liquidation Proceeds related thereto and allocated to principal may be less than
the principal balance of the related Mortgage Loan; the amount of any such
insufficiency is a "Realized Loss." In addition, the Pooling and Servicing
Agreement provides that the principal balance of any Mortgage Loan which becomes
a Liquidated Loan shall thenceforth equal zero. The Pooling and Servicing
Agreement does not contain any requirement that the amount of any Realized Loss
be distributed to the Owners of the related Class A Certificates on the Payment
Date which immediately follows the event of loss; i.e., the Pooling and
Servicing Agreement does not require the current recovery of losses. However,
the occurrence of a Realized Loss will reduce the related Subordinated Amount
(and may result in a Subordination Deficit as described below under
"--Overcollateralization and the Certificate Insurance Policies"), which to the
extent that such reduction causes such Subordinated Amount to be less than the
related Specified Subordinated Amount applicable to the related Payment Date,
will require the payment of a Subordination Increase Amount on such Payment Date
(or, if insufficient funds are available on such Payment Dates, on subsequent
Payment Dates, until the Subordinated Amount equals the related Specified
Subordinated Amount). The effect of the foregoing is to allocate losses to the
Owners of the Subordinate Certificates by reducing, or eliminating entirely,
payments of Total Monthly Excess Spread and of Subordination Reduction Amounts
which such Owners would otherwise receive.
S-63
<PAGE>
Overcollateralization and the Certificate Insurance Policies. The
Pooling and Servicing Agreement defines a "Subordination Deficit" with respect
to a Payment Date as the amount, if any, by which (x) the related Certificate
Principal Balance with respect to a Payment Date, after taking into account all
distributions to be made on such Payment Date (except for any Subordination
Deficit and Subordination Increase Amount), exceeds (y) the sum of (a) the
aggregate Loan Balances of the related Mortgage Loans as of the close of
business on the last day of the related Prepayment Period and (b) the amount, if
any, on deposit in the Pre-Funding Account on such Payment Date and allocable to
the related Mortgage Loan Group, exclusive of Pre-Funding Account Earnings. The
Pooling and Servicing Agreement requires the Trustee to make a claim for an
Insured Payment under the related Certificate Insurance Policy not later than
the second Business Day prior to any Payment Date as to which the Trustee has
determined that a Subordination Deficit will occur for the purpose of applying
the proceeds of such Insured Payment as a payment of principal to the Owners of
the related Class A Certificates on such Payment Date. No payments in respect of
principal will be made under such Certificate Insurance Policy unless a
Subordination Deficit occurs. Each Certificate Insurance Policy is thus similar
to the subordination provisions described above insofar as such Certificate
Insurance Policy guarantees ultimate, rather than current, payment of the
amounts of any Realized Losses to the Owners of the Class A Certificates.
Investors in the Class A Certificates should realize that, under extreme loss or
delinquency scenarios applicable to the related Mortgage Loan Group that occur
when no Subordination Deficit exists, they may temporarily receive no
distributions of principal when they would otherwise be entitled thereto under
the principal allocation provisions described herein. Nevertheless, the exposure
to risk of loss of principal to the Owners of the Class A Certificates depends
in part on the ability of the Certificate Insurer to satisfy its obligations
under the relevant Certificate Insurance Policy.
Crosscollateralization Provisions
In addition to the use of Total Monthly Excess Cashflow with respect to
a Mortgage Loan Group to pay related Available Funds Shortfalls, such Total
Monthly Excess Cashflow will be available to pay Available Funds Shortfalls for
the other Mortgage Loan Group as described in clauses (iii)(A) and (iii)(B)
under the caption "-- Distributions" above. Furthermore, in addition to the use
of Net Monthly Excess Cashflow with respect to a Mortgage Loan Group to
distribute related Subordination Increase Amounts in reduction of related
Subordination Deficits, such Net Monthly Excess Cashflow will be available to
distribute Subordination Increase Amounts in reduction of Subordination
Deficiency Amounts related to the other Mortgage Loan Group as described in
clauses (iv) (A) and (iv) (B) under the caption "-- Distributions" above. The
occurrence of a disproportionate amount of Available Funds Shortfalls with
respect to one of the Mortgage Loan Groups may result in the continuation of
Subordination Deficiencies with respect to the other Mortgage Loan Group to the
extent that Net Monthly Excess Cashflow with respect to the better-performing
Mortgage Loan Group is diminished due to the allocation of Total Monthly Excess
Cashflow from such Mortgage Loan Group to cover Available Funds Shortfalls
occurring in the other Mortgage Loan Group.
Pre-Funding Account
On the Closing Date, the Original Pre-Funded Amount will be deposited
in the Pre-Funding Account, which account shall be in the name of and maintained
by the Trustee and shall be part of the Trust Estate. During the Funding Period,
the Pre-Funded Amount will be maintained in the Pre-Funding Account. The
Original Pre-Funded Amount will be reduced during the Funding Period by the
amount thereof used to purchase Subsequent Mortgage Loans in accordance with the
Pooling and Servicing Agreement. Any Pre-Funded Amount remaining at the end of
the Funding Period for the related Group will be distributed to the Owners of
the related Class of Class A Certificates then entitled to receive payments of
interest on the Payment Date that immediately follows the end of such Funding
Period in reduction of the Certificate Principal Balance of such Owner's
Certificates, thus resulting in a principal prepayment of such Class of Class A
Certificates.
Amounts on deposit in the Pre-Funding Account will be invested in the
investments permitted by the Pooling and Servicing Agreement (the "Eligible
Investments"). All interest and any other investment earnings on amounts on
deposit in the Pre-Funding Account will be deposited in the Capitalized Interest
Account prior to each Payment Date during the Funding Period. The Pre-Funding
Account will not be an asset of the REMIC.
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Capitalized Interest Account
On the Closing Date cash will be deposited in the Capitalized Interest
Account, which account shall be in the name of and maintained by the Trustee and
shall be part of the Trust. The amount on deposit in the Capitalized Interest
Account, including reinvestment income thereon and amounts deposited thereto
from the Pre-Funding Account, will be used by the Trustee to fund the excess, if
any, of (i) the sum of the amount of interest accruing at the weighted average
Pass-Through Rate in the case of the Fixed Rate Group Certificates and the
applicable Pass- Through Rate on the Adjustable Rate Group Certificates on the
amount by which the aggregate Certificate Principal Balance of the related
Class(es) of Class A Certificates exceeds the aggregate Loan Balance of the
Mortgage Loans in the related Group plus the related Premium Amount accruing on
such excess balance over (ii) the amount of any reinvestment income on monies on
deposit in the Pre-Funding Account; such amounts on deposit will be so applied
by the Trustee on each Payment Date in the Funding Period to fund such excess,
if any. Any amounts remaining in the Capitalized Interest Account at the end of
the Funding Period and not needed for such purpose will be paid to the Depositor
and will not thereafter be available for distribution to the Owners of the Class
A Certificates.
Amounts on deposit in the Capitalized Interest Account will be invested
in Eligible Investments. The Capitalized Interest Account will not be an asset
of the REMIC.
Calculation of One-Month LIBOR
On each One-Month LIBOR Determination Date (as defined above), the
Trustee will determine One-Month LIBOR for the next Accrual Period for the Class
A-1 and Class A-8 Certificates.
"One-Month LIBOR" means, as of any One-Month LIBOR Determination Date,
the rate for deposits in United States dollars for a period equal to the
relevant Accrual Period (commencing on the first day of such Accrual Period)
which appears in the Telerate Page 3750 as of 11:00 a.m., London time, on such
date. If such rate does not appear on Telerate Page 3750, the rate for that day
will be determined on the basis of the rates at which deposits in United States
dollars are offered by the Reference Banks at approximately 11:00 a.m., London
time, on that day to prime banks in the London interbank market for a period
equal to the relevant Accrual Period (commencing on the first day of such
Accrual Period). The Trustee will request the principal London office of each of
the Reference Banks to provide a quotation of its rate. If at least two such
quotations are provided, the rate for that day will be the arithmetic mean of
the quotations. If fewer than two quotations are provided as requested, the rate
for that day will be the arithmetic mean of the rates quoted by major banks in
New York City, selected by the Trustee, at approximately 11:00 a.m., New York
City time, on that day for loans in United States dollars to leading European
banks for a period equal to the relevant Accrual Period (commencing on the first
day of such Accrual Period).
"Telerate Page 3750" means the display page currently so designated on
the Dow Jones Telerate Service (or such other page as may replace that page on
that service for the purpose of displaying comparable rates or prices) and
"Reference Banks" means leading banks selected by the Trustee and engaged in
transactions in Eurodollar deposits in the international Eurocurrency market.
Book Entry Registration of the Class A Certificates
The Class A Certificates will be book-entry Certificates (the
"Book-Entry Certificates"). Persons acquiring beneficial ownership interests in
such Book-Entry Certificates ("Beneficial Owners") may elect to hold their Book-
Entry Certificates directly through DTC in the United States, or CEDEL or
Euroclear (in Europe) if they are Participants of such systems ("Participants"),
or indirectly through organizations which are Participants. The Book- Entry
Certificates will be issued in one or more certificates per class of Class A
Certificates which in the aggregate equal the principal balance of such Class A
Certificates 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 will act as depositary for CEDEL and Morgan
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 representing principal amounts of $1,000 and in integral multiples
in excess thereof. Except as described below, no Beneficial Owner will be
entitled to receive a physical certificate representing such Certificate (a
"Definitive Certificate"). Unless and
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until Definitive Certificates are issued, it is anticipated that the only
"Owner" of such Book-Entry Certificates will be Cede & Co., as nominee of DTC.
Beneficial Owners will not be Owners as that term is used in the Pooling and
Servicing Agreement. Beneficial Owners are only permitted to exercise their
rights indirectly through Participants and DTC.
The Beneficial Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a DTC Participant and on
the records of CEDEL or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Book-Entry Certificates from the Trustee through DTC and DTC
Participants. While such Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to such Certificates and is required to receive and transmit
distributions of principal of, and interest on, such Certificates. Participants
and indirect Participants with whom Beneficial 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
Beneficial Owners. Accordingly, although Beneficial Owners will not possess
certificates, the Rules provide a mechanism by which Beneficial Owners will
receive distributions and will be able to transfer their interest.
Beneficial Owners will not receive or be entitled to receive
certificates representing their respective interests in the Class A
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Beneficial Owners who are not
Participants may transfer ownership of Class A Certificates only through
Participants and indirect Participants by instructing such Participants and
indirect Participants to transfer such Class A Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Class A
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of such Class A Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and indirect Participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Beneficial 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 below) or Euroclear Participant (as defined below) to a DTC
Participant will be received with value on the DTC settlement date but will be
available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlements in DTC. For information with respect to tax
documentation procedures relating to the Certificates, see "Certain Federal
Income Tax Consequences -- Taxation of Certain Foreign Investors" and "-- Backup
Withholding" in the Prospectus and "Global Clearance, Settlement and Tax
Documentation Procedures--Certain U.S. Federal Income Tax Documentation
Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between 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
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accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its Participants ("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, regulations and procedures governing DTC and DTC
Participants as in effect from time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participant organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for Participants of
Euroclear ("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 now 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
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
Payment Date by the Trustee to DTC. DTC will be responsible for crediting the
amount of such payments to the accounts of the applicable DTC Participants in
accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing such payment to the Beneficial Owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the Beneficial Owners of the Book-Entry Certificates
that it represents.
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Under a book-entry format, Beneficial Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distributions with respect to
Certificates held through CEDEL or Euroclear will be credited to the cash
accounts of CEDEL Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. Because DTC can only act
on behalf of Financial Intermediaries, the ability of a Beneficial Owner to
pledge Book-Entry Certificates to persons or entities that do not participate in
the Depository system, or otherwise take actions in respect of such Book-Entry
Certificates, may be limited due to the lack of physical certificates for such
Book-Entry Certificates. In addition, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
market since certain potential investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust provided by the Trustee to
Cede, as nominee of DTC, may be made available to Beneficial Owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such Beneficial Owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
Owners of the Book-Entry Certificates under the Pooling and Servicing Agreement
only at the direction of one or more Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates are credited, to the extent that such
actions are taken on behalf of Financial Intermediaries whose holdings include
such Book-Entry Certificates. CEDEL or the Euroclear Operator, as the case may
be, will take any action permitted to be taken by an Owner under the Pooling and
Servicing 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 Class A Certificates which conflict with actions taken with
respect to other Class A Certificates.
Definitive Certificates will be issued to Beneficial Owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as a 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, elects to terminate a book-entry system through DTC or (c) DTC, at
the direction of the Beneficial Owners representing a majority of the
outstanding Percentage Interests of the Class A Certificates, advises the
Trustee in writing that the continuation of a book-entry system through DTC (or
a successor thereto) is no longer in the best interests of Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Beneficial
Owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book- Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as Owners
under the Pooling and Servicing Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Certificates among Participants
of DTC, CEDEL and Euroclear, they are under no obligation to perform or continue
to perform such procedures and such procedures may be discontinued at any time.
Assignment of Rights
An Owner may pledge, encumber, hypothecate or assign all or any part of
its right to receive distributions under any Certificate, but such pledge,
encumbrance, hypothecation or assignment shall not constitute a transfer of an
ownership interest sufficient to render the transferee an Owner of the Trust
without compliance with the provisions of the Pooling and Servicing Agreement
described above. Notwithstanding the foregoing, the Pooling and Servicing
Agreement provides that the Certificate Insurer may, in connection with a
subrogation of the Certificate Insurer to the rights of the Owners of the Class
A Certificates to an amount equal to Insured Payments for which the Certificate
Insurer has not received reimbursement, be considered to be an "Owner" to the
extent (but only to the extent) of such rights.
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THE CERTIFICATE INSURANCE POLICIES AND THE CERTIFICATE INSURER
The following information has been supplied by the Certificate Insurer
for inclusion in this Prospectus Supplement. No representation is made by the
Underwriters, the Seller, the Servicers, the Depositor or any of their
affiliates as to the accuracy or completeness of such information.
The Certificate Insurer, in consideration of the payment of the
premiums and subject to the terms of the Certificate Insurance Policies, will
unconditionally and irrevocably guarantee to any Owner that an amount equal to
each full and complete Insured Payment will be received by the Trustee or its
successor, as trustee for the Owners, on behalf of the Owners from the
Certificate Insurer, for distribution by the Trustee to each Owner of each
Owner's proportionate share of the Insured Payment. The Certificate Insurer's
obligations under the Certificate Insurance Policies with respect to a
particular Insured Payment shall be discharged to the extent funds equal to the
applicable Insured Payment are received by the Trustee, whether or not such
funds are properly applied by the Trustee. Insured Payments shall be made only
at the time set forth in such Certificate Insurance Policy and no accelerated
Insured Payments shall be made regardless of any acceleration of the Offered
Certificates, unless such acceleration is at the sole option of the Certificate
Insurer.
Notwithstanding the foregoing paragraph, the Certificate Insurance
Policies do not cover shortfalls, if any, attributable to the liability of the
Trust, any REMIC created within the Trust or the Trustee for withholding taxes,
if any (including interest and penalties in respect of any such liability).
The Certificate Insurer will pay any Insured Payment that is a
Preference Amount on the second Business Day following receipt on a Business Day
by the Fiscal Agent (as described below) of (i) a certified copy of the order
requiring the return of such Preference Amount, (ii) an opinion of counsel
satisfactory to the Certificate Insurer that such order is final and not subject
to appeal, (iii) an assignment in such form as is reasonably required by the
Certificate Insurer, irrevocably assigning to the Certificate Insurer all rights
and claims of the Owner relating to or arising under the Offered Certificates
against the debtor which made such preference payment or otherwise with respect
to such Preference Amount, (iv) appropriate instruments to effect the
appointment of the Certificate Insurer as agent for such Owner in any legal
proceeding related to such preference payment, such instruments being in a form
satisfactory to the Certificate Insurer and (v) a Notice (as described below);
provided, that if such documents are received after 5:00 p.m. New York City time
on such Business Day, they will be deemed to be received on the following
Business Day. Such payments shall be disbursed to the receiver or trustee in
bankruptcy named in the final order of the court exercising jurisdiction on
behalf of the Owner and not to any Owner directly unless such Owner has returned
principal or interest paid on the Offered Certificates to such receiver or
trustee in bankruptcy, in which case such payment shall be disbursed to such
Owner.
The Certificate Insurer will pay any other amount payable under a
Certificate Insurance Policy no later than 12:00 noon, New York City time, on
the later of the Payment Date on which the Deficiency Amount is due or the
second Business Day following receipt in New York, New York, on a Business Day
by State Street Bank and Trust Company, N.A., as Fiscal Agent for the
Certificate Insurer or any successor fiscal agent appointed by the Certificate
Insurer (the "Fiscal Agent") of a Notice (as described below); provided that if
such Notice is received after 5:00 p.m. New York City time on such Business Day,
it will be deemed to be received on the following Business Day. If any such
Notice received by the Fiscal Agent is not in proper form or is otherwise
insufficient for the purpose of making a claim under a Certificate Insurance
Policy, it shall be deemed not to have been received by the Fiscal Agent for
purposes of this paragraph, and the Certificate Insurer or the Fiscal Agent, as
the case may be, shall promptly so advise the Trustee and the Trustee may submit
an amended Notice.
Insured Payments due under a Certificate Insurance Policy, unless
otherwise stated therein, will be disbursed by the Fiscal Agent to the Trustee
on behalf of Owners by wire transfer of immediately available funds in the
amount of the Insured Payment less, in respect of Insured Payments related to
Preference Amounts, any amount held by the Trustee for the payment of such
Insured Payment and legally available therefor.
The Fiscal Agent is the agent of the Certificate Insurer only and the
Fiscal Agent shall in no event be liable to Owners for any acts of the Fiscal
Agent or any failure of the Certificate Insurer to deposit or cause to be
deposited, sufficient funds to make payments due under the related Certificate
Insurance Policy.
As used in the related Certificate Insurance Policy, the following
terms shall have the following meanings:
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"Agreement" means the Pooling and Servicing Agreement dated as
of __________, 199__ among AMRESCO Residential Securities Corporation,
as Depositor, AMRESCO Residential Securities Corporation, as Seller,
Long Beach Mortgage Company and Advanta Mortgage Corp. USA, as
Servicers, and the Trustee, as Trustee, without regard to any amendment
or supplement thereto, unless the Certificate
Insurer shall have consented in writing thereto.
"Business Day" means any day other than a Saturday, a Sunday
or a day on which banking institutions in California, New York City or
in the city in which the corporate trust office of the Trustee under
the Agreement is located are authorized or obligated by law or
executive order to close.
"Deficiency Amount" means with respect to the related Mortgage
Loan Group and Payment Date, the excess of (i) the sum of the related
Current Interest and the then existing Subordination Deficit for the
related Mortgage Loan Group, if any, over (ii) the Total Available
Funds (net of the Premium Amount for such Mortgage Loan Group) for such
Mortgage Loan Group.
"Insured Payment" means (i) as of any Payment Date an amount
equal to the Deficiency Amount plus (ii) any Preference Amount then due
and owing under the Certificate Insurance Policy.
"Mortgage Loan Group" means Group I or Group II, as the case
may be.
"Notice" means the telephonic or telegraphic notice, promptly
confirmed in writing by telecopy substantially in the form of Exhibit A
attached to the Certificate Insurance Policy, the original of which is
subsequently delivered by registered or certified mail, from the
Trustee specifying the Insured Payment which shall be due and owing on
the applicable Payment Date.
"Owner" means each Owner (as defined in the Agreement) who, on
the applicable Payment Date, is entitled under the terms of the
applicable Offered Certificate to payment under the Certificate
Insurance Policy.
"Preference Amount" means any amount previously distributed to
an Owner on a Offered Certificate that is recoverable and sought to be
recovered as a voidable preference by a trustee in bankruptcy pursuant
to the United States Bankruptcy Code (11 U.S.C.) as amended from time
to time, in accordance with a final nonappealable order of a court
having competent jurisdiction.
Capitalized terms used in each Certificate Insurance Policy and not
otherwise defined therein will have the respective meanings set forth in the
Agreement as of the date of execution of such Certificate Insurance Policy,
without giving effect to any subsequent amendment to or modification of the
Agreement unless such amendment or modification has been approved in writing by
the Certificate Insurer.
Any notice under a Certificate Insurance Policy or service of process
on the Fiscal Agent of the Certificate Insurer may be made at the address listed
below for the Fiscal Agent of the Certificate Insurer or such other address as
the Certificate Insurer shall specify in writing to the Trustee.
The notice address of the Fiscal Agent is 61 Broadway, 15th Floor, New
York, New York, 10006, Attention: Municipal Registrar and Paying Agent, or such
other address as the Fiscal Agent shall specify to the Trustee in writing.
Each Certificate Insurance Policy is being issued under and pursuant
to, and shall be construed under, the laws of the State of New York, without
giving effect to the conflict of laws principles thereof.
The insurance provided by each Certificate Insurance Policy is not
covered by the Property/Casualty Insurance Security Fund specified in Article 76
of the New York Insurance Law.
The Certificate Insurance Policies are not cancelable for any reason.
The premium on a Certificate Insurance Policy is not refundable for any reason
including payment, or provision being made for payment, prior to the maturity of
the Offered Certificates.
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The Certificate Insurer, formerly known as [Surety Name], is the
principal operating subsidiary of [Surety Name], a New York Stock Exchange
listed company. [Surety Name] is not obligated to pay the debts of or claims
against the Certificate Insurer. The Certificate Insurer is domiciled in the
State of New York and licensed to do business in all 50 states, the District of
Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern
Mariana Islands, the Virgin Islands of the United States and the Territory of
Guam. The Certificate Insurer has one European branch in the Republic of France.
All information regarding the Certificate Insurer, a wholly owned
subsidiary of [Surety Name], including the financial statements of the
Certificate Insurer for the year ended December 31, 1995, prepared in accordance
with generally accepted accounting principles, included in the Annual Report on
Form 10-K of [Surety Name] for the year ended December 31, 1995, is hereby
incorporated by reference into this Prospectus Supplement and shall be deemed to
be a part hereof. Any statement contained in a document incorporated by
reference herein shall be modified or superseded for purposes of this Prospectus
Supplement to the extent that a statement contained herein or in any other
subsequently filed document which also is incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus Supplement.
The tables below present selected financial information of the
Certificate Insurer determined in accordance with statutory accounting practices
prescribed or permitted by insurance regulatory authorities ("SAP") and
generally accepted accounting principles ("GAAP"):
SAP
----------------------------------------------------
December 31, December 31, March 31,
1994 1995 1996
---- ---- ----
(Audited) (Audited) (Unaudited)
(In millions)
Admitted Assets
Liabilities
Capital and Surplus
GAAP
----------------------------------------------------
December 31, December 31, March 31,
1994 1995 1996
---- ---- ----
(Audited) (Audited) (Unaudited)
(In millions)
Assets
Liabilities
Shareholder's Equity
--------------------
Audited financial statements of the Certificate Insurer as of December
31, 1995 and 1994 and for each of the three years in the period ended December
31, 1995 are included herein as Appendix B. Unaudited financial statements of
the Certificate Insurer as of the three month period ended March 31, 1996 are
included herein as Appendix C. Such financial statements have been prepared on
the basis of generally accepted accounting principles. Copies of the Certificate
Insurer's 1995 year-end audited financial statements prepared in accordance with
statutory accounting practices are available from the Certificate Insurer. The
address of the Certificate Insurer is _______
_____________________________________________.
A copy of the Annual Report on Form 10-K of [Surety Name] is available
from the Certificate Insurer or the Securities and Exchange Commission. The
address of the Certificate Insurer is _______________
_______________________________.
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The Certificate Insurer does not accept any responsibility for the
accuracy or completeness of this Prospectus Supplement or any information or
disclosure contained herein, or omitted herefrom, other than with respect to the
accuracy of the information regarding the Certificate Insurance Policies and the
Certificate Insurer under the heading "THE CERTIFICATE INSURANCE POLICIES AND
THE CERTIFICATE INSURER" and in Appendix B and Appendix C.
Moody's rates the claims paying ability of the Certificate Insurer
"Aaa".
Standard & Poor's rates the claims paying ability of the Certificate
Insurer "AAA".
Fitch Investors Service, L.P. rates the claims paying ability of the
Certificate Insurer "AAA".
Each rating of the Certificate Insurer should be evaluated
independently. The ratings reflect the respective rating agency's current
assessment of the creditworthiness of the Certificate Insurer and its ability to
pay claims on its policies of insurance. Any further explanation as to the
significance of the above ratings may be obtained only from the applicable
rating agency.
The above ratings are not recommendations to buy, sell or hold the
Offered Certificates, and such ratings may be subject to revision or withdrawal
at any time by the rating agencies. Any downward revision or withdrawal of any
of the above ratings may have an adverse effect on the market price of the
Offered Certificates. The Certificate Insurer does not guaranty the market price
of the Offered Certificates nor does it guaranty that the ratings on the Offered
Certificates will not be reversed or withdrawn.
THE POOLING AND SERVICING AGREEMENT
In addition to the provisions of the Pooling and Servicing Agreement
summarized elsewhere in the Prospectus and this Prospectus Supplement, there is
set forth below a summary of certain other provisions of the Pooling and
Servicing Agreement.
Covenant of the Seller to Take Certain Actions with Respect to the Mortgage
Loans in Certain Situations
Pursuant to the Pooling and Servicing Agreement, upon the discovery by
the Depositor, Seller, a Servicer, the Certificate Insurer or the Trustee that
any representations and warranties contained in a Transfer Agreement with
respect to the Mortgage Loans that were assigned to the Trust were untrue in any
material respect as of the Closing Date with the result that the interests of
the Owners or of the Certificate Insurer are materially and adversely affected,
or the value of the related Mortgage Loan is materially and adversely affected,
the party discovering such breach is required to give prompt written notice to
certain other parties thereto.
Upon the earliest to occur of the Seller's discovery of or its receipt
of notice of a breach described above from any of the other parties pursuant to
the related Transfer Agreement, the related Originator will be required promptly
to (i) cure such breach in all material respects or, within the time period
specified in the related Transfer Agreement, to (ii) substitute in lieu of each
affected Mortgage Loan a Qualified Replacement Mortgage (as such term is defined
in the Pooling and Servicing Agreement) and deliver any Substitution Amount to
the related Servicer for deposit into its Principal and Interest Account on
behalf of the Trust as part of the Monthly Remittance remitted by such Servicer
on the related Monthly Remittance Date or (iii) purchase such Mortgage Loan from
the Trust at a purchase price equal to the Loan Purchase Price (as defined
below) thereof. Notwithstanding any provision of the Pooling and Servicing
Agreement to the contrary, with respect to any Mortgage Loan which is not in
default or as to which no default is imminent, no such repurchase or
substitution will be made unless the Originator obtains for the Trustee and the
Certificate Insurer an opinion of counsel experienced in federal income tax
matters and acceptable to the Certificate Insurer to the effect that such a
repurchase or substitution would not constitute a Prohibited Transaction for the
Trust or otherwise subject the Trust to tax and would not jeopardize the status
of the REMIC Pool as a REMIC (a "REMIC Opinion"), addressed to the Trustee and
the Certificate Insurer and acceptable to the Trustee and the Certificate
Insurer. Any Mortgage Loan as to which repurchase or substitution was delayed
pursuant to the Pooling and Servicing Agreement shall be repurchased or
substituted for (subject to compliance with the provisions of the Pooling and
Servicing Agreement) upon the earlier of (a) the occurrence of a default or
imminent default with respect to such Mortgage Loan and (b) receipt by the
Trustee and the Certificate Insurer of a REMIC Opinion. In connection with any
breach of a representation, warranty or covenant or defect in documentation
giving rise to such repurchase or substitution obligation, the Seller may
request the Originator, to cause to be delivered to the Trustee and the
Certificate Insurer a REMIC Opinion, if a favorable opinion can be
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rendered, as a result of any such repurchase or substitution. The obligation of
the Originator so to cure, substitute or purchase any such Mortgage Loan in
respect of a breach that has not been remedied constitutes the sole remedy
available to the Owners, the Seller, the Trustee and the Certificate Insurer.
"Loan Purchase Price" means generally the outstanding principal balance
of the related Mortgage Loan on the Cut-Off Date, less any principal amounts
previously distributed to the Owners relating to such Mortgage Loan (such
amount, the "Loan Balance" of such Mortgage Loan) as of the date of purchase
(assuming that the Monthly Remittance remitted by the Servicer on such Monthly
Remittance Date has already been remitted), plus one month's interest at the Net
Coupon Rate.
Assignment of Mortgage Loans
Pursuant to the Pooling and Servicing Agreement, the Seller on the
Closing Date will transfer, assign, set over and otherwise convey without
recourse to the Depositor and the Depositor will transfer, assign, set over and
otherwise convey without recourse to the Trustee in trust all of its respective
right, title and interest in and to each Mortgage Loan and all its respective
right, title and interest in and to principal and interest due on each such
Mortgage Loan on or after the Cut-Off Date; provided, however, that the
Depositor will reserve and retain all its right, title and interest in and to
principal (including Prepayments) and interest due on each Initial Mortgage Loan
on or prior to the Cut-Off Date (except with respect to Initial Mortgage Loans
that were delinquent on the Cut-Off Date, which payments are not being retained
by the Depositor). Purely as a protective measure and not to be construed as
contrary to the parties' intent that the transfer on the Closing Date is a sale,
the Seller has also been deemed to have granted to the Depositor and the
Depositor has also been deemed to have granted to the Trustee a security
interest in the Trust Estate in the event that the transfer of the Trust Estate
is deemed to be a loan and not a sale.
In connection with the transfer and assignment of the Initial Mortgage
Loans on the Closing Date and the Subsequent Mortgage Loans on each Subsequent
Transfer Date, the Depositor will be required to:
(i) deliver without recourse to the Trustee on the Closing
Date with respect to each Initial Mortgage Loan or on each Subsequent
Transfer Date with respect to each Subsequent Mortgage Loan identified
in the related schedule of Mortgage Loans (A) the original Notes,
endorsed in blank or to the order of the Trustee, (B) the original
title insurance policy or any one of an original title binder, an
original preliminary title report, or an original title commitment, or
a copy certified by the issuer of any of the foregoing, or the
attorney's opinion of title, (C) originals or certified copies of all
intervening recorded assignments, showing a complete chain of title
from origination to the Trustee, if any, including warehousing
assignments, with evidence of recording thereon, (D) originals of all
assumption, modification, written assurance or substitution agreements,
if any and (E) either: (1) the original Mortgage, with evidence of
recording thereon, (2) a certified copy if such original Mortgage has
not been received from the applicable recording office by the Seller
and returned to the custodian or (3) a copy of the Mortgage certified
by the public recording office in those instances where the original
recorded Mortgage has been lost;
(ii) cause the Originator (if the Originator is Long Beach)
or the Seller within 60 days following the Closing Date with respect to
the Initial Mortgage Loans, or the Subsequent Transfer Date with
respect to the Subsequent Mortgage Loans, to submit for recording in
the appropriate jurisdictions, assignments of the Mortgages to "Bankers
Trust Company, as Trustee of AMRESCO Residential Securities Corporation
Mortgage Loan Trust 199__-__ under the Pooling and Servicing Agreement
dated as of __________, 199__" provided, however, that the Depositor
shall not be required to cause to be recorded any assignment of
Mortgage for a Mortgage with respect to which the Mortgaged Property is
located in California or the original recording information is lacking;
(iii) if not delivered on the Closing Date, deliver the title
insurance policy or title searches, the original Mortgages and such
recorded assignments, together with originals or duly certified copies
of any and all prior assignments, to the Trustee within 15 days of
receipt thereof by the Depositor (but in any event, with respect to any
Mortgage as to which original recording information has been made
available to the Depositor within two years after the Closing Date with
respect to the Initial Mortgage Loans, or Subsequent Transfer Date with
respect to the Subsequent Mortgage Loans); and
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(iv) furnish to the Trustee and the Certificate Insurer, at
the Depositor's expense, a tax opinion and an opinion of counsel with
respect to the sale and perfection of all Subsequent Mortgage Loans
delivered to the Trust in form and substance satisfactory to the
Trustee and the Certificate Insurer.
The Trustee will agree, for the benefit of the Owners, to review the
documents contained in each Mortgage Loan File held by the Trustee ("File")
within 45 days after the Closing Date or Subsequent Transfer Date (or the date
of receipt of any documents delivered to the Trustee after such date) to
ascertain that all required documents (or certified copies of documents) have
been executed and received.
If the Trustee during such 45-day period finds any document
constituting a part of a File which is not properly executed, has not been
received, or is unrelated to the Mortgage Loans, or that any Mortgage Loan does
not conform in a material respect to the description thereof as set forth in the
Schedule of Mortgage Loans, the Trustee will be required to promptly notify the
Depositor, the Seller, the Owners and the Certificate Insurer. The Seller will
agree in the Pooling and Servicing Agreement to request that the related
Originator use reasonable efforts to remedy a material defect in a document
constituting part of a File of which it is so notified by the Trustee. If,
however, within the time period set forth in the related Transfer Agreement
after the Trustee's notice to it respecting such defect the related Originator
or other party to a Transfer Agreement shall not have remedied the defect and
the defect materially and adversely affects the interest in the related Mortgage
Loan of the Owners or of the Certificate Insurer, the Seller will request the
related Originator within the time period specified in the related Transfer
Agreement to (i) substitute in lieu of such Mortgage Loan another Mortgage Loan
of like kind (a "Qualified Replacement Mortgage," as such term is defined in the
Pooling and Servicing Agreement) and deliver any "Substitution Amount" (the
excess, if any, of the Loan Balance of a Mortgage Loan being replaced over the
outstanding principal balance of a replacement Mortgage Loan plus accrued and
unpaid interest) to the related Servicer for deposit into its Principal and
Interest Account on behalf of the Trust as part of the Monthly Remittance
remitted by the Servicer on such Monthly Remittance Date or (ii) purchase such
Mortgage Loan at a purchase price equal to the Loan Purchase Price thereof,
which purchase price shall be delivered to the related Servicer for deposit in
the related Principal and Interest Account along with the Monthly Remittance
remitted by such Servicer on such Monthly Remittance Date.
In addition to the foregoing, the Trustee has agreed to provide an
updated exception report during the 12th month after the Closing Date indicating
the current status of the exceptions previously noted by the Trustee (the "Final
Certification"). After delivery of the Final Certification, the Trustee shall
provide to the Certificate Insurer and the related Servicer no less frequently
than monthly updated certifications indicating the then current status of
exceptions, until all such exceptions have been eliminated.
Servicing
Each Servicer will be obligated under the Pooling and Servicing
Agreement to service and administer the Mortgage Loans identified as being
serviced by it as described therein and with reasonable care, and using that
degree of skill and attention that such Servicer exercises with respect to
comparable mortgage loans that it services for itself or others, and shall have
full power and authority, acting alone, to do or cause to be done any and all
things in connection with such servicing and administration which it may deem
necessary or desirable. Consistent with the foregoing, each Servicer will be
permitted to, in its discretion, (i) waive any assumption fees, late payment
charges, charges for checks returned for insufficient funds or other fees which
may be collected in the ordinary course of servicing the Mortgage Loans, (ii) if
a Mortgagor is in default or about to be in default because of a Mortgagor's
financial condition, arrange with the Mortgagor a schedule for the payment of
delinquent payments due on the related Mortgage Loan, or (iii) modify payments
of monthly principal and interest on any Mortgage Loan becoming subject to the
terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended, in
accordance with such Servicer's general policies with respect to comparable
mortgage loans subject to such Act.
Each Servicer will be paid a monthly fee from interest collected with
respect to each Mortgage Loan serviced by it (as well as from any Liquidation
Proceeds from a Liquidated Mortgage Loan ("Liquidation Proceeds") that are
applied to accrued and unpaid interest) equal to the Loan Balance thereof
multiplied by the applicable Servicing Fee Rate (such product, the "Servicing
Fee"). The "Servicing Fee Rate" for each Mortgage Loan will be the rate provided
in the Pooling and Servicing Agreement, not to exceed 0.50% per annum. The
amount of the monthly Servicing Fee is subject to adjustment with respect to
prepaid Mortgage Loans, as described below. Each Servicer is also entitled to
receive, as additional servicing compensation, amounts in respect of interest
paid on Prepayments received from the 2nd day through the 15th day of a month
("Prepayment Interest Excess"), all late
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payment fees, assumption fees and other similar charges and all reinvestment
income earned on amounts on deposit in the related Principal and Interest
Account. In addition, each Servicer will be entitled to retain additional
servicing compensation in the form of release fees, bad check charges,
assumption fees, late payment charges, or any other servicing-related fees, Net
Liquidation Proceeds not required to be deposited in the related Principal and
Interest Account pursuant to the Pooling and Servicing Agreement, and similar
items. Prepayment penalties may also be retained as additional servicing
compensation to the extent set forth in the Pooling and Servicing Agreement.
Each Servicer is required to establish, or cause to be established, in
the name of the Trustee at one or more depository institutions, a principal and
interest account maintained as a trust account in the trust department of such
institution (each, a "Principal and Interest Account"). All funds in the
Principal and Interest Accounts are required to be held (i) uninvested or (ii)
invested in Eligible Investments (as defined in the Pooling and Servicing
Agreement). Any investment of funds in the Principal and Interest Accounts must
mature on or prior to the immediately succeeding Monthly Remittance Date. Any
investment earnings on funds held in the Principal and Interest Accounts are for
the account of, and any losses therein are also for the account of and must be
promptly replenished by, the respective Servicer.
Each Servicer is required to deposit in the related Principal and
Interest Account, on a daily basis (but in no event later than the second
Business Day following receipt) all principal and interest due on the related
Mortgage Loans, other than "Balloon Payments" (i.e., the final payment of
principal due with respect to a Balloon Mortgage Loan), after the Cut-Off Date
and past due interest and principal on any Mortgage Loan, other than Balloon
Payments, that was delinquent as of the Cut-Off Date, including any Prepayments,
the proceeds of any liquidation of a Mortgage Loan (including any insurance
proceeds) net of expenses and unreimbursed Delinquency Advances and Servicing
Advances ("Net Liquidation Proceeds"), any income from REO Properties received
thereafter (net of unreimbursed Servicing Advances and Delinquency Advances),
but net of (i) the Servicing Fee with respect to each Mortgage Loan and other
servicing compensation, (ii) principal collected and interest accrued on any
Mortgage Loan prior to the Cut-Off Date if such Mortgage Loan was current as of
the Cut-Off Date, which amounts shall be delivered to the Seller, (iii) late
payments received on any Mortgage Loan in respect of unreimbursed Servicing
Advances and Delinquency Advances and (iv) reimbursements for past Delinquency
Advances which the Servicer has determined in its good faith business judgment
are not recoverable from the related Mortgagor or Mortgage Loan proceeds (all
such net amounts being referred to herein as the "Daily Collections").
Each Servicer may make withdrawals for its own account (or for the
account of the Seller in the case of clause (i) below) from the amounts on
deposit in the related Principal and Interest Account with respect to the
related Mortgage Loan Group, only for the following purposes:
(i) to withdraw interest paid with respect to any Mortgage
Loans that had accrued for periods on or prior to the Cut-Off Date and
principal due on all current Mortgage Loans on the Cut-Off Date, which
shall be paid to the Seller;
(ii) to withdraw investment earnings on amounts on deposit in
its respective Principal and Interest Account;
(iii) to reimburse itself for unrecovered Delinquency Advances
and Servicing Advances to the extent permitted in the Pooling and
Servicing Agreement;
(iv) to withdraw amounts that have been deposited to its
respective Principal and Interest Account in error; and
(v) to clear and terminate its respective Principal and
Interest Account following the termination of the Trust Estate.
Each Servicer will remit to the Trustee for deposit in the Certificate
Account the Monthly Remittance Amount not later than the related Monthly
Remittance Date.
Subject to the following limitations, each Servicer will be required to
advance on any Mortgage Loan serviced by it prior to each Payment Date its own
funds or other funds made available to it under the Pooling and Servicing
Agreement as set forth in the next paragraph, for such Payment Date, in an
amount equal to the aggregate of payments of principal and interest on the
Mortgage Loans serviced by it in the related Mortgage Loan Group (adjusted to
the applicable Net Coupon Rate) that became due during the related Remittance
Period and delinquent
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on the related Determination Date, together with an amount equivalent to
interest on the principal balance of the Mortgage Loan related to each Mortgaged
Property (each, an "REO Property") acquired by the Trust through liquidation
(any such advance, a "Delinquency Advance"). The Net Coupon Rate is the rate
equal to the excess of the Coupon Rate over the applicable Servicing Fee Rate.
Delinquency Advances are intended to maintain a regular flow of
scheduled interest and principal payments on the Certificates rather than to
guarantee or insure against losses. Each Servicer is obligated to make
Delinquency Advances with respect to delinquent payments of principal of or
interest on each Mortgage Loan, other than delinquent Balloon Payments on
"Balloon Mortgage Loans" (i.e., Mortgage Loans with respect to which the
principal balance, by its original terms, does not fully amortize at final
maturity), serviced by it (with such payments of interest adjusted to the
related Net Coupon Rate) to the extent that such Delinquency Advances are, in
its good faith business judgment, recoverable from future payments and
collections or insurance payments or proceeds of liquidation of the related
Mortgage Loan. With respect to a delinquent Balloon Payment, the Servicer is not
required to make a Delinquency Advance of such delinquent Balloon Payment. The
Servicer will, however, make monthly Delinquency Advances with respect to
Balloon Mortgage Loans with delinquent Balloon Payments, in each case in an
amount equal to the assumed monthly principal and interest payment that would
have been due on the related Due Date based on the original principal
amortization schedule for the applicable Balloon Mortgage Loan. Such Delinquency
Advances shall be required only to the extent that the Servicer, in its good
faith business judgment, determines that such Delinquency Advance will be
recoverable from future payments and collections or insurance payments or
proceeds of liquidation of the related Mortgage Loan. Each Servicer shall be
permitted to fund its payment of Delinquency Advances on any Business Day, or to
reimburse itself for any Delinquency Advances paid from such Servicer's own
funds, from collections on the related Mortgage Loan deposited to the related
Principal and Interest Account subsequent to the related Remittance Period
(including "Prepaid Installments" (i.e., early payments of scheduled principal
and interest intended by the borrower to be treated as such)) and shall deposit
into the related Principal and Interest Account with respect thereto (i)
collections from the Mortgagor whose delinquency gave rise to the shortfall
which resulted in such Delinquency Advance net of any such Delinquency Advance
and (ii) Net Liquidation Proceeds recovered on account of the related Mortgage
Loan to the extent of the amount of aggregate Delinquency Advances related
thereto. Previously unreimbursed Delinquency Advances that the Servicer
determines to be unrecoverable may be reimbursed to the Servicer out of any
Mortgagor payments prior to their deposit to the related Principal and Interest
Account or from funds on deposit in the related Principal and Interest Account.
All Delinquency Advances will be included with the distribution to Owners of the
Certificates of the related Group of Certificates on the related Payment Date.
Any failure by a Servicer to make a Delinquency Advance as required under the
Pooling and Servicing Agreement with respect to the Certificates will constitute
an event of default thereunder for such Servicer, in which case the Trustee, as
successor servicer, or the successor servicer will be obligated to make any such
Delinquency Advance, in accordance with the terms of the Pooling and Servicing
Agreement.
Each Servicer will be required to pay all customary, reasonable and
necessary "out of pocket" costs and expenses incurred in the performance of its
servicing obligations, including, but not limited to, (i) expenditures in
connection with a foreclosed Mortgage Loan prior to the liquidation thereof,
including, without limitation, expenditures for real estate property taxes,
hazard insurance premiums, property restoration or preservation ("Preservation
Expenses"), (ii) the cost of any enforcement or judicial proceedings, including
foreclosures and (iii) the cost of the management and liquidation of Property
acquired in satisfaction of the related Mortgage, to the extent such expenses
are, in its good faith business judgment, recoverable. Such costs will
constitute "Servicing Advances." Each Servicer may recover a Servicing Advance
(x) to the extent permitted by the Mortgage Loans or, if not theretofore
recovered from the Mortgagor on whose behalf such Servicing Advance was made,
from Liquidation Proceeds realized upon the liquidation of the related Mortgage
Loan or (y), to the extent that such Servicing Advance is determined by the
Servicer in its good faith business judgment to be non-recoverable from such
proceeds from Net Monthly Excess Cashflow and certain other Mortgage Loan
proceeds as specified in the Pooling and Servicing Agreement.
A full month's interest at the related Net Coupon Rate will be due to
the Trust on the outstanding Loan Balance of each Mortgage Loan as of the
beginning of each Remittance Period. If a Prepayment in full of a Mortgage Loan
occurs during any calendar month, any difference between the interest collected
from the Mortgagor in connection with such prepayment and the full month's
interest at the Net Coupon Rate ("Compensating Interest") (but not in excess of
the aggregate Servicing Fee, and any Prepayment Interest Excess for such period)
will be required to be deposited to the Principal and Interest Account on the
Monthly Remittance Date by the related
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Servicer and shall be included in the Monthly Remittance to be made available to
the Trustee on the next succeeding Monthly Remittance Date.
When a Mortgagor prepays all or a portion of a Mortgage Loan between
scheduled monthly payment dates ("Due Dates"), the Mortgagor pays interest on
the amount prepaid only to the date of prepayment. Prepayments received from the
2nd day through the 15th day of a month are included in the distribution on the
25th day of the same month, and accordingly no shortfall in interest distributed
to the Owners of the Certificates results. Conversely, Prepayments received from
the 16th day to the last day of a month are not distributed until the 25th day
of the following month, and accordingly an interest shortfall (a "Prepayment
Interest Shortfall") would result. In order to mitigate the effect of any such
shortfall in interest distributions to the Owners of the Certificates on any
Payment Date, the amount of the Servicing Fee otherwise payable to the related
Servicer for such month shall, to the extent of such shortfall, be deposited by
the Servicer in the Group I Certificate Account (as defined below) (if the
Prepayment Interest Shortfall occurred with respect to a Group I Mortgage Loan)
or in the Group II Certificate Account (as defined below) (if the Prepayment
Interest Shortfall occurred with respect to a Group II Mortgage Loan) for
distribution to the Owners of the Fixed Rate Group Certificates or Adjustable
Rate Group Certificates as applicable, on such Payment Date. However, any such
reduction in the Servicing Fee will be made only to the extent of the Servicing
Fee otherwise payable to such Servicer with respect to Scheduled Payments having
the Due Date to which such Payment Date relates. Any such deposit by the related
Servicer will be reflected in the distributions to the Owners of the
Certificates made on the Payment Date on which the Prepayment received would be
distributed. Subject to the availability thereof to fund Compensating Interest
requirements referred to in the previous paragraph, the Servicers will be
permitted to retain any Prepayment Interest Excess due to prepayments received
in the month in which they are distributed.
Each Servicer will have the right and the option, but not the
obligation, to purchase for its own account any Mortgage Loan serviced by it
which becomes delinquent, in whole or in part, as to four consecutive monthly
installments or any Mortgage Loan as to which enforcement proceedings have been
brought by such Servicer. The purchase price for any such Mortgage Loan is equal
to the Loan Purchase Price thereof, which purchase price shall be deposited in
the related Principal and Interest Account.
Each Servicer, with respect to Mortgage Loans serviced by it, shall
foreclose upon or otherwise comparably convert the ownership on behalf of the
Trust of Mortgaged Properties relating to defaulted Mortgage Loans as to which
no satisfactory arrangements can be made for collection of delinquent payments
and which the related Servicer has not purchased from the Trust. Each Servicer
will be required to sell any REO Property managed by it within 23 months of its
acquisition by the Trust, unless an appropriate extension is obtained, or an
opinion of counsel is obtained to the effect that the holding by the Trust of
such REO Property for any greater period will not result in the imposition of
taxes on "Prohibited Transactions" of the Trust as defined in Section 860F of
the Code or cause the Trust to fail to qualify as a REMIC under the REMIC
Provisions at any time that any Certificates are outstanding, in which case such
Servicer shall sell any REO Property by the end of any extended period specified
in any such opinion or such extension as applicable.
Notwithstanding the generality of the foregoing provisions, each
Servicer will be required to manage, conserve, protect and operate each REO
Property managed by it for the Owners solely for the purpose of its prompt
disposition and sale in a manner which does not cause such REO Property to fail
to qualify as "foreclosure property" within the meaning of Section 860G(a)(8) of
the Code or result in the receipt by the Trust of any "income from non-permitted
assets" within the meaning of Section 860F(a)(2)(B) of the Code or any "net
income from foreclosure property" which is subject to taxation under the REMIC
Provisions. Pursuant to its efforts to sell such REO Property, the related
Servicer will be required to either itself or through an agent selected by such
Servicer protect and conserve such REO Property in the same manner and to such
extent as is customary in the locality where such REO Property is located and
may, incident to its conservation and protection of the interests of the Owners
and after consultation with the holder of a majority in interest of the Class R
Certificates, rent the same, or any part thereof, as such Servicer deems to be
in the best interest of the Owners and the Certificate Insurer for the period
prior to the sale of such REO Property.
If so required by the terms of any Mortgage Loan, the related Servicer
will be required to cause hazard insurance to be maintained with respect to the
related Mortgaged Property and to advance sums (such Advances to be treated as
Servicing Advances) on account of the premiums therefor if not paid by the
Mortgagor if permitted by the terms of such Mortgage Loan.
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Each Servicer will have the right under the Pooling and Servicing
Agreement to accept applications of Mortgagors for consent to (i) partial
releases of Mortgages, (ii) alterations and (iii) removal, demolition or
division of Mortgaged Properties. No application for approval may be considered
by such Servicer unless: (i) the provisions of the related Note and Mortgage
have been complied with; (ii) the loan-to-value ratio and debt-to-income ratio
after any release does not exceed the maximum loan-to-value ratio and
debt-to-income ratio established in accordance with the Guidelines set forth
herein to be applicable to such Mortgage Loan; and (iii) the lien priority of
the related Mortgage is not affected.
Each Servicer will be permitted under the Pooling and Servicing
Agreement to enter into subservicing agreements for any servicing and
administration of Mortgage Loans with any institution which is acceptable to the
Certificate Insurer and a majority of Percentage Interests of the Class R Owners
and meeting the requirements of the Pooling and Servicing Agreement.
Notwithstanding any subservicing agreement, each Servicer will not be
relieved of its obligations under the Pooling and Servicing Agreement and such
Servicer will be obligated to the same extent and under the same terms and
conditions as if it alone were servicing and administering the Mortgage Loans.
Each Servicer shall be entitled to enter into any agreement with a subservicer
for indemnification of such Servicer by such subservicer and nothing contained
in such subservicing agreement shall be deemed to limit or modify the Pooling
and Servicing Agreement.
Each Servicer (except the Trustee if it is required to succeed any
Servicer under the Pooling and Servicing Agreement) will agree to indemnify and
hold the Trustee, the Certificate Insurer, the Seller and the Depositor harmless
against any and all claims, losses, penalties, fines, forfeitures, legal fees
and related costs, judgments, and any other costs, fees and expenses that the
Trustee, the Certificate Insurer, the Seller and the Depositor may sustain in
any way related to the failure of such Servicer to perform its duties and
service the Mortgage Loans in compliance with the terms of the Pooling and
Servicing Agreement. A party against whom any such claim is brought shall
immediately notify the other parties and the Rating Agencies if a claim is made
by a third party with respect to the Pooling and Servicing Agreement, and such
Servicer may assume the defense of any such claim and, upon a determination that
the claim results from the Servicer's failure to perform in accordance with the
Pooling and Servicing Agreement, pay all expenses in connection therewith,
including reasonable counsel fees, and promptly pay, discharge and satisfy any
judgment or decree which may be entered against such Servicer, the Trustee, the
Certificate Insurer, the Seller or the Depositor in respect of such claim.
Each Servicer will be required to deliver to the Trustee, the
Certificate Insurer, the Seller, the Depositor and the Rating Agencies: (1) on
or before April 15 of each year, commencing in 1997, an officers' certificate
stating, as to each signer thereof, that (i) a review of the activities of such
Servicer during such preceding calendar year and of performance under the
Pooling and Servicing Agreement has been made under such officers' supervision,
and (ii) to the best of such officers' knowledge, based on such review, such
Servicer has fulfilled all its obligations under the Pooling and Servicing
Agreement for such year, or, if there has been a default in the fulfillment of
all such obligation, specifying each such default known to such officers and the
nature and status thereof including the steps being taken by such Servicer to
remedy such default; and (2) on or before April 15 of any year commencing in
1997, a letter or letters of a firm of independent, nationally recognized
certified public accountants reasonably acceptable to the Certificate Insurer
dated as of the date of the Servicer's fiscal audit for each subsequent letter
stating that such firm has examined the Servicer's overall servicing operations
in accordance with the requirements of the Uniform Single Attestation Program
for Mortgage Bankers, and stating such firm's conclusions relating thereto.
Removal and Resignation of a Servicer
The Certificate Insurer or the Owners, the Trustee or the Seller (in
each case with the consent of the Certificate Insurer), will have the right
pursuant to the Pooling and Servicing Agreement, to remove any Servicer upon the
occurrence of, and in certain cases after notice and expiration of the related
cure period: (a) certain acts of bankruptcy or insolvency on the part of such
Servicer; (b) certain failures on the part of such Servicer to perform its
obligations under the Pooling and Servicing Agreement; (c) the failure to cure
material breaches of such Servicer's obligations in the Pooling and Servicing
Agreement; or (d) if the loss and/or delinquency levels of the related Mortgage
Loans are at certain specified levels.
No Servicer is permitted to resign from the obligations and duties
imposed on it under the Pooling and Servicing Agreement except (i) upon
determination that its duties thereunder are no longer permissible under
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applicable law or are in material conflict by reason of applicable law with any
other activities carried on by it, the other activities of such Servicer so
causing such conflict being of a type and nature carried on by such Servicer on
the date of the Pooling and Servicing Agreement or (ii) upon written consent of
the Certificate Insurer, the Seller and the Trustee and confirmation from the
Rating Agencies that the Class A Certificate ratings (absent the Certificate
Insurance Policies) are not reduced. Any such determination permitting the
resignation of such Servicer pursuant to clause (i) above is required to be
evidenced by an opinion of counsel to such effect which shall be delivered to
the Trustee and the Certificate Insurer.
Upon removal or resignation of a Servicer, the Trustee (x) shall
solicit bids for a successor Servicer and (y) pending the appointment of a
successor Servicer as a result of soliciting such bids, shall serve as Servicer.
The Trustee, if it is unable to obtain a qualifying bid and is prevented by law
from acting as servicer, will be required to appoint, or petition a court of
competent jurisdiction to appoint, any housing and home finance institution,
bank or mortgage servicing institution designated as an approved servicer
meeting the requirements of the Pooling and Servicing Agreement, and acceptable
to the Certificate Insurer and the Owners of the Class R Certificates (provided
that if the Certificate Insurer and such Owners cannot agree as to the
acceptability of such successor Servicer, the decision of the Certificate
Insurer shall control) as the successor to such Servicer in the assumption of
all or any part of the responsibilities, duties or liabilities of such Servicer.
No removal or resignation of a Servicer will become effective until the
Trustee or a successor Servicer shall have assumed a Servicer's responsibilities
and obligations in accordance with the Pooling and Servicing Agreement.
Reporting Requirements
On each Payment Date the Trustee is required to report in writing to
each Owner and the Certificate Insurer:
(i) the amount of the distribution with respect to the related
Class of the Class A Certificates and the Subordinate Certificates
(based on a Certificate in the original principal amount of $1000);
(ii) the amount of such distribution allocable to principal on
the Mortgage Loans in each Group, separately identifying the aggregate
amount of any Prepayments or other recoveries of principal included
therein, any Pre-Funded Amounts distributed as a Prepayment at the end
of the Funding Period (based on a Certificate in the original principal
amount of $1000) and any Subordination Increase Amount with respect to
each such Group;
(iii) the amount of such distribution allocable to interest on the
related Mortgage Loans in each Group (based on a Certificate in the
original principal amount of $1000);
(iv) if the distribution (net of any Insured Payment) to the
Owners of any Class of the Class A Certificates on such Payment Date
was less than the related Class A Distribution Amount on such Payment
Date, the Carry-Forward Amount and the allocation thereof to the
related Classes of the Class A Certificates resulting therefrom;
(v) the amount of any Insured Payment included in the amounts
distributed to the Owners of each Class of the Class A Certificates on
such Payment Date;
(vi) the principal amount of each Class of the Class A
Certificate (based on a Certificate in the original principal amount of
$1000) which will be outstanding after giving effect to any payment of
principal on such Payment Date;
(vii) the aggregate Loan Balance of all Mortgage Loans, the
aggregate Loan Balance of the Mortgage Loans in each Group and, the
aggregate Loan Balance of the Initial Mortgage Loans and the Subsequent
Mortgage Loans, in each case after giving effect to any payment of
principal on such Payment Date;
(viii) the Subordinated Amount and Subordination Deficit for each
Group, if any, remaining after giving effect to all distributions and
transfers on such Payment Date;
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(ix) based upon information furnished by the Depositor such
information as may be required by Section 6049(d)(7)(C) of the Code and
the regulations promulgated thereunder to assist the Owners in
computing their market discount;
(x) the total of any Substitution Amounts or Loan Purchase Price
amounts included in such distribution with respect to each Group;
(xi) the weighted average Coupon Rate of the Mortgage Loans with
respect to each Group;
(xii) such other information as the Certificate Insurer may
reasonably request with respect to delinquent Mortgage Loans;
(xiii) the largest Mortgage Loan balance outstanding;
(xiv) for Payment Dates during the Funding Period, the remaining
Pre-Funded Amount allocable to each Mortgage Loan Group; and
(xv) the Servicing Fees, Trustee Fees and Premium Amount
allocable to each Group.
Certain obligations of the Trustee to provide information to the Owners
are conditioned upon such information being received from the Servicers.
In addition, on each Payment Date the Trustee will be required to
distribute to the Depositor, the Underwriters, the Rating Agencies, each Owner
and the Certificate Insurer, together with the information described above, the
following information prepared by the related Servicer and furnished to the
Trustee for such purpose and with respect to each Mortgage Loan Group:
(a) the number and aggregate principal balances of Mortgage
Loans (i) 30-59 days delinquent, (ii) 60-89 days delinquent and (ii) 90
or more days delinquent, as of the close of business on the last day of
the Remittance Period (taking into account any payments received from
Mortgages on or prior to the related Determination Date) and the Class
A Certificate Principal Balance as of such Payment Date and the number
and aggregate Loan Balances of all Mortgage Loans and related data;
(b) the status and the number and dollar amounts of all
Mortgage Loans in foreclosure proceedings as of the related
Determination Date;
(c) the number of Mortgagors and the Loan Balances of the
related Mortgages involved in bankruptcy proceedings as of the related
Determination Date;
(d) the existence and status of any Mortgaged Properties as to
which title has been taken in the name of, or on behalf of the Trustee,
as of the related Determination Date;
(e) the book value of any real estate acquired through
foreclosure or grant of a deed-in-lieu of foreclosure as of the related
Determination Date; and
(f) the amount of cumulative Realized Losses.
Removal of Trustee for Cause
The Trustee may be removed upon the occurrence of any one of the
following events (whatever the reason for such event and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body) on the part of the Trustee: (1) failure to
make distributions of available amounts; (2) certain breaches of covenants and
representations by the Trustee; (3) certain acts of bankruptcy or insolvency on
the part of the Trustee; and (4) failure to meet the standards of Trustee
eligibility as set forth in the Pooling and Servicing Agreement.
If any such event occurs and is continuing, then and in every such case
(i) the Certificate Insurer or (ii) with the prior written consent of the
Certificate Insurer (which is required not to be unreasonably withheld) (x) the
Depositor or (y) the Owners of a majority of the Percentage Interests
represented by the Class A Certificates or,
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if there are no Class A Certificates then outstanding, by a majority of the
Percentage Interests represented by the Subordinate Certificates, may appoint a
successor trustee.
Governing Law
The Pooling and Servicing Agreement and each Certificate will be
construed in accordance with and governed by the laws of the State of New York
applicable to agreements made and to be performed therein.
Amendments
The Trustee, the Depositor, the Seller and the Servicers with the
consent of the Certificate Insurer may, at any time and from time to time and
without notice to or the consent of the Owners, amend the Pooling and Servicing
Agreement, and the Trustee will be required to consent to such amendment, for
the purposes of (i) if accompanied by a favorable opinion of counsel experienced
in federal income tax matters, removing the restriction against the transfer of
a Class R Certificate to a Disqualified Organization (as such term is defined in
the Code), (ii) complying with the requirements of the Code including any
amendments necessary to maintain REMIC status, (iii) curing any ambiguity, (iv)
correcting or supplementing any provisions therein which are inconsistent with
any other provisions therein or (v) for any other purpose, provided that in the
case of clause (v), (A) the Seller delivers an opinion of counsel acceptable to
the Trustee that such amendment will not adversely affect in any material
respect the interest of the Owners and (B) such amendment will not result in a
withdrawal or reduction of the rating of the Class A Certificates without regard
to the Certificate Insurance Policy. Notwithstanding anything to the contrary,
no such amendment shall (a) change in any manner the amount of, or delay the
timing of, payments which are required to be distributed to any Owner without
the consent of the Owner of such Certificate, (b) reduce the percentages of
Percentage Interest which are required to consent to any such amendments,
without the consent of the Owners of all Certificates of the Class or Classes
affected then outstanding or (c) which affects in any manner the terms or
provisions of the Certificate Insurance Policy.
The Trustee will be required to furnish written notification of the
substance of any such amendment to each Owner in the manner set forth in the
Pooling and Servicing Agreement.
Termination of the Trust
The Pooling and Servicing Agreement provides that the Trust will
terminate upon the payment to the Owners of all Certificates and the Certificate
Insurer from amounts other than those available under the Certificate Insurance
Policy of all amounts required to be paid to such Owners and the Certificate
Insurer upon the last to occur of (a) the final payment or other liquidation (or
any advance made with respect thereto) of the last Mortgage Loan, (b) the
disposition of all property acquired in respect of any Mortgage Loan remaining
in the Trust Estate and (c) at any time when a Qualified Liquidation of the
Trust Estate is effected as described below. To effect a termination pursuant to
clause (c) above, the Owners of all Certificates then outstanding will be
required (i) unanimously to direct the Trustee on behalf of the REMIC to adopt a
plan of complete liquidation, as contemplated by Section 860F(a)(4) of the Code
and (ii) to furnish to the Trustee an opinion of counsel experienced in federal
income tax matters acceptable to the Certificate Insurer and the Trustee to the
effect that such liquidation constitutes a Qualified Liquidation.
Optional Termination
By Owners of Class R Certificates. At their option, the Owners of a
majority of the Percentage Interest represented by the Class R Certificates then
outstanding or in certain limited circumstances the Certificate Insurer may, on
any Payment Date after the Clean-Up Call Date, purchase from the Trust all (but
not fewer than all) remaining Mortgage Loans, in whole only, and other property
acquired by foreclosure, deed-in-lieu of foreclosure, or otherwise then
constituting the Trust Estate by payment of an amount (i) agreed upon between
the Certificate Insurer and such Class R Certificate Owners, or (ii) in the
absence of such agreement at a price equal to 100% of the aggregate Loan Balance
of the related Mortgage Loans as of the day of purchase minus amounts remitted
from the Principal and Interest Account to the Certificate Account representing
collections of principal on the Mortgage Loans during the current Remittance
Period, plus one month's interest on such amount computed at the Adjusted
Pass-Through Rate (as defined in the Pooling and Servicing Agreement); provided,
that such amount shall in any event include all accrued and unpaid Servicing
Fees plus the aggregate amount of any unreimbursed Delinquency
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Advances and Servicing Advances and Delinquency Advances which any Servicer has
theretofore failed to remit together with Reimbursement Amounts then owed to the
Certificate Insurer.
By Servicers. If the Class R Certificate Owners do not exercise their
right to purchase all the Mortgage Loans after the Clean-Up Call Date, the
Servicers, or if the Servicers shall fail to, the Certificate Insurer, will also
have the right, collectively, to purchase all of the Mortgage Loans they are
servicing on any Remittance Date when the outstanding Certificate Principal
Balance has declined to 5% of the original Certificate Principal Balance.
Termination Upon Loss of REMIC Status. Following a final determination
by the Internal Revenue Service or by a court of competent jurisdiction, in
either case from which no appeal is taken within the permitted time for such
appeal, or if any appeal is taken, following a final determination of such
appeal from which no further appeal can be taken, to the effect that the REMIC
does not and will no longer qualify as a "REMIC" pursuant to Section 860D of the
Code (the "Final Determination"), at any time on or after the date which is 30
calendar days following such Final Determination the Certificate Insurer or the
Owners of a majority in Percentage Interests represented by the Class A
Certificates then outstanding with the consent of the Certificate Insurer may
direct the Trustee on behalf of the Trust to adopt a plan of complete
liquidation, as contemplated by Section 860F(a)(4) of the Code.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of certain of the material anticipated federal
income tax consequences of the purchase, ownership and disposition of the Class
A Certificates is to be considered only in connection with "Certain Federal
Income Tax Consequences" in the Prospectus. The discussion herein and in the
Prospectus is based upon laws, regulations, rulings and decisions now in effect,
all of which are subject to change. The discussion below and in the Prospectus
does not purport to deal with all federal tax consequences applicable to all
categories of investors, some of which may be subject to special rules.
Investors should consult their own tax advisors in determining the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the Class A Certificates.
REMIC Election
Pursuant to the Pooling and Servicing Agreement, the Trustee will elect
to treat the Trust Estate (other than the Pre-Funding Account and the
Capitalized Interest Account) as a REMIC for federal income tax purposes. The
REMIC will issue the Class A Certificates and the Subordinate Certificates
(other than the Class R Certificates) which will be designated as regular
interests in the REMIC and the Class R Certificates which will be designated as
the residual interest in the REMIC. See "Formation of the Trust and Trust
Property" herein.
Qualification as a REMIC requires ongoing compliance with certain
conditions. Arter & Hadden, special tax counsel, will advise that, in its
opinion, for federal income tax purposes, assuming (i) the REMIC election is
made and (ii) compliance with the Pooling and Servicing Agreement, the REMIC
will be treated as a REMIC, the Class A Certificates will be treated as "regular
interests" in the REMIC and the Class R Certificates will be the sole "residual
interest" in the REMIC. Except as indicated below and in the Prospectus, for
federal income tax purposes, regular interests in a REMIC are treated as debt
instruments issued by the REMIC on the date on which those interests are
created, and not as ownership interests in the REMIC or its assets. Owners of
the Class A Certificates that otherwise report income under a cash method of
accounting will be required to report income with respect to such Class A
Certificates under an accrual method.
The prepayment assumption for each Class of the Class A Certificates
for calculating original issue discount is 21% HEP for the Fixed Rate Group
Certificates and 21% HEP for the Adjustable Group Certificates. See "Prepayment
and Yield Considerations -- Projected Prepayment and Yield for Class A
Certificates" herein.
As a result of the qualification of certain specified assets of the
Trust as a REMIC, the Trust will not be subject to federal income tax except
with respect to (i) income from prohibited transactions, (ii) "net income from
foreclosure property" and (iii) certain contributions to the Trust after the
Closing Date (see "Certain Federal Income Tax Consequences" in the Prospectus).
The total income of the Trust (exclusive of any income that is taxed at the
REMIC level) will be taxable to the Beneficial Owners of the Certificates.
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Under the laws of New York State and New York City, an entity that is
treated for federal income tax purposes as a REMIC generally is exempt from
entity level taxes imposed by those jurisdictions. This exemption does not
apply, however, to the income on the Class A Certificates.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain requirements on those employee benefit plans and
individual retirement arrangements to which it applies ("Plan") and on those
persons who are fiduciaries with respect to such Plans. Any Plan fiduciary which
proposes to cause a Plan to acquire any of the Class A Certificates should
consult with counsel with respect to the consequences under ERISA and the Code
of the Plan's acquisition and ownership of such Certificates. See "ERISA
Considerations" in the Prospectus.
The Department of Labor has issued to the Underwriters individual
prohibited transaction exemptions PTE 89-88, 54 Fed. Reg. 42.582 (Oct. 17,
1989), PTE 89-89, 54 Fed. Reg. 42.589 (Oct. 17, 1989), and PTE 90-32, 55 Fed.
Reg. 23.147 (June 6, 1990) (the "Exemptions"); which generally exempt from the
application of the prohibited transaction provisions of Section 406(a), Section
406(b)(1) and Section 406(b)(2) of ERISA and the excise taxes imposed pursuant
to Sections 4975(a) and (b) of the Code, with respect to the initial purchase,
the holding and the subsequent resale by Plans of certificates in pass-through
trusts that consist of certain receivables, loans and other obligations that
meet the conditions and requirements of the Exemptions. The loans covered by the
Exemptions include mortgage loans such as the Mortgage Loans.
Among the conditions that must be satisfied for the Exemptions to apply
are the following:
(1) the acquisition of the Class A Certificates by a Plan is
on terms (including the price for the certificates) that are at least
as favorable to the Plan as they would be in an arm's-length
transaction with an unrelated party;
(2) the rights and interests evidenced by the Class A
Certificates acquired by the Plan are not subordinated to the rights
and interests evidenced by other Certificates of the Trust Estate;
(3) the Class A Certificates acquired by the Plan have
received a rating at the time of such acquisition that is one of the
three highest generic rating categories from either Standard & Poor's,
Moody's, Duff & Phelps Credit Rating Co. ("D&P") or Fitch;
(4) the Trustee must not be an affiliate of any other member
of the Restricted Group (as defined below);
(5) the sum of all payments made to and retained by any
Underwriter in connection with the distribution of the Class A
Certificates represents not more than reasonable compensation for
underwriting the Class A Certificates; the sum of all payments made to
and retained by the Seller pursuant to the assignment of the Mortgage
Loans to the Trust Estate represents not more than the fair market
value of such loans; the sum of all payments made to and retained by
any Servicer represents not more than reasonable compensation for such
person's services under the Agreement and reimbursement of such
person's reasonable expenses in connection therewith; and
(6) the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933.
The Trust Estate must also meet the following requirements:
(i) the corpus of the Trust Estate must consist solely of a
fixed pool of assets of the type that have been included in other
investment pools;
(ii) certificates in such other investment pools must have
been rated in one of the three highest rating categories of Standard &
Poor's, Moody's, Fitch or D&P for at least one year prior to the Plan's
acquisition of Class A Certificates; and
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(iii) certificates evidencing interests in such other
investment pools must have been purchased by investors other than Plans
for at least one year prior to the Plan's acquisition of the Class A
Certificates.
Moreover, the Exemptions provide relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire certificates in a trust in which the
fiduciary (or its affiliate) is a mortgagor on the receivables held in the
trust; provided that, among other requirements, (i) in the case of an
acquisition in connection with the initial issuance of certificates, at least
fifty percent of each class of certificates in which Plans have invested is
acquired by persons independent of the Restricted Group and at least fifty
percent of the aggregate interest in the trust is acquired by persons
independent of the Restricted Group; (ii) such fiduciary (or its affiliate) is a
mortgagor with respect to five percent or less of the fair market value of the
obligations contained in the trust; (iii) the Plan's investment in certificates
of any class does not exceed twenty-five percent of all of the certificates of
that class outstanding at the time of the acquisition; and (iv) immediately
after the acquisition, no more than twenty-five percent of the assets of the
Plan with respect to which such person is a fiduciary are invested in
certificates representing an interest in one or more trusts containing assets
sold or serviced by the same entity. The Exemptions do not apply to Plans
sponsored by the Depositor, the Certificate Insurer, the Underwriters, the
Trustee, the related Servicer, any mortgagor with respect to Mortgage Loans
included in the Trust Estate constituting more than five percent of the
aggregate unamortized principal balance of the assets in the Trust Estate, or
any affiliate of such parties (the "Restricted Group"). As of the date hereof,
there is no single Mortgage Loan included in the Trust Estate that constitutes
more than five percent of the aggregate unamortized principal balance of the
assets of the Trust Estate.
It is believed that the Exemptions will apply to the acquisition and
holding of Certificates by Plans and that all conditions of the Exemptions as
they relate to the acquisition and holding by Plans of the Certificates other
than those within the control of the investors will be met after such time.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the possible applicability of the
Exemptions, or other exemptive relief, and all of the potential consequences in
their specific circumstances, prior to making an investment in the Class A
Certificates. Each Plan fiduciary should determine whether under the general
fiduciary standards of investment procedure and diversification an investment in
the Class A Certificates is appropriate for the Plan, taking into account the
overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
RATINGS
It is a condition of the issuance of the Class A Certificates that the
Class A Certificates receive ratings of "AAA" by Standard & Poor's, "Aaa" by
Moody's and "AAA" by Fitch. The ratings assigned to the Class A Certificates
will be based primarily on the claims-paying ability of the Certificate Insurer.
Explanations of the significance of such ratings may be obtained from Moody's,
99 Church Street, New York, New York 10007, Standard & Poor's, 25 Broadway, New
York, New York 10004 and Fitch Investors Services, One State Street Plaza, 33rd
Floor, New York, New York 10004. Such ratings will be the views only of such
rating agencies. There is no assurance that any such ratings will continue for
any period of time or that such ratings will not be revised or withdrawn. Any
such revision or withdrawal of such ratings may have an adverse effect on the
market price of the Class A Certificates. A security rating is not a
recommendation to buy, sell or hold securities.
LEGAL INVESTMENT CONSIDERATIONS
The Class A Certificates will constitute "mortgage related securities"
for purposes of SMMEA for so long as they are rated in one of the two highest
rating categories by one or more nationally recognized statistical rating
organizations. As such, such Classes of Certificates will be legal investments
for certain entities to the extent provided in SMMEA, subject to state laws
overriding SMMEA. In addition, institutions whose investment activities are
subject to review by federal or state regulatory authorities may be or may
become subject to restrictions, which may be retroactively imposed by such
regulatory authorities, on the investment by such institutions in certain forms
of mortgage related securities. Furthermore, certain states have enacted
legislation overriding the legal investment provisions of SMMEA.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement relating to the Certificates (the "Underwriting Agreement"), the
Depositor has agreed to cause the Trust to sell to each of the Underwriters
named below (the "Underwriters"), and each of the Underwriters has severally
agreed to purchase, the principal amount or Percentage Interest of the Class A
Certificates set forth opposite its name below:
Class A-1 Certificates
Underwriters Percentage Interest
------------ -------------------
[Underwriter] _____%
[Underwriter] _____%
[Underwriter] _____%
Class A-2 Certificates
Underwriters Percentage Interest
------------ -------------------
[Underwriter] _____%
[Underwriter] _____%
[Underwriter] _____%
Class A-3 Certificates
Underwriters Percentage Interest
------------ -------------------
[Underwriter] _____%
[Underwriter] _____%
[Underwriter] _____%
Class A-4 Certificates
Underwriters Percentage Interest
------------ -------------------
[Underwriter] _____%
[Underwriter] _____%
[Underwriter] _____%
Class A-5 Certificates
Underwriters Percentage Interest
------------ -------------------
[Underwriter] _____%
[Underwriter] _____%
[Underwriter] _____%
Class A-6 Certificates
Underwriters Percentage Interest
------------ -------------------
[Underwriter] _____%
[Underwriter] _____%
[Underwriter] _____%
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Class A-7 Certificates
Underwriters Percentage Interest
------------ -------------------
[Underwriter] _____%
[Underwriter] _____%
[Underwriter] _____%
Class A-8 Certificates
Underwriters Percentage Interest
------------ -------------------
[Underwriter] _____%
[Underwriter] _____%
[Underwriter] _____%
The Underwriters are collectively committed to purchase all of the
Class A Certificates if any Class A Certificates are purchased. The Underwriters
intend to act as market makers in the Class A Certificates, subject to
applicable provisions of federal and state securities laws and other regulatory
requirements, but are under no obligation to do so. The Underwriters and any
dealers that participate with the Underwriters in the distribution of the Class
A Certificates may be deemed to be underwriters, and any discounts or
commissions received by them and any profit on the resale of the Class A
Certificates by them may be deemed to be underwriting discounts or commissions,
under the Securities Act.
The Depositor has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or contribute
to payments which the Underwriters may be required to make in respect thereof.
REPORT OF EXPERTS
The consolidated balance sheets of the Certificate Insurer, [Surety
Name] (formerly known as [Surety Name]) as of December 31, 1995 and 1994 and the
related consolidated statements of income, changes in shareholder's equity, and
cash flows for each of the three years in the period ended December 31, 1995,
appearing in Appendix B of this Prospectus Supplement, have been audited by
______________________________, independent accountants, as set forth in their
report included therein, and are included in reliance upon such report and upon
the authority of such firm as experts in accounting and auditing.
CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Seller by Arter & Hadden, Washington,
D.C. and by L. Keith Blackwell, Esquire, General Counsel for the Depositor.
Certain legal matters relating to insolvency issues and certain federal income
tax matters concerning the Certificates will be passed upon for the Depositor by
Arter & Hadden. Certain legal matters relating to the validity of the issuance
of the Certificates will be passed upon for the Underwriters by Arter & Hadden.
Legal matters relating to the Policy will be passed upon for the Certificate
Insurer by ______________________________.
S-86
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered AMRESCO
Residential Securities Corporation Mortgage Loan Trust 199__-__ Mortgage Loan
Pass-Through Certificates, Class A (the "Global Securities") will be available
only in book-entry form. Investors in the Global Securities may hold such Global
Securities through any of DTC, CEDEL or Euroclear. The Global Securities will be
tradeable 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 through CEDEL and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of CEDEL and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL 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, CEDEL and
Euroclear will hold positions on behalf of their Participants through their
Relevant Depositary which in turn will hold such positions in their accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practices. 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 CEDEL 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 generally applicable to
mortgage loan asset-backed certificates issues in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC, Seller and CEDEL or Euroclear Participants. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a CEDEL Participant or a Euroclear Participant, the purchaser
will send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear will instruct the Relevant Depositary, as the case
I-1
<PAGE>
may be, to receive the Global Securities against payment. Payment will include
interest accrued on the Global Securities from and including the last coupon
payment date to and excluding the settlement date, on the basis of the actual
number of days in such accrual period and a year assumed to consist of 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. Payment
will then be made by the Relevant Depositary to 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 CEDEL
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 CEDEL or Euroclear cash debt will be valued instead as of the actual
settlement date.
CEDEL Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
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 CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Global Securities are credited to their account one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit
to them, CEDEL Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of such overdraft charges, although the result will depend on each CEDEL
Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for crediting Global
Securities to the respective European Depositary for the benefit of CEDEL
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
Trading between CEDEL or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, CEDEL Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. In these cases CEDEL
or Euroclear will instruct the respective Depositary, as appropriate, to credit
the Global Securities to the DTC Participant's account against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment to and excluding the settlement date on the basis of the
actual number of days in such accrual period and a year assumed to consist to
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 CEDEL Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
CEDEL Participant's or Euroclear Participant's account would be back-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the CEDEL Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the 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 CEDEL Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase
Global Securities from DTC Participants for delivery to CEDEL Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
I-2
<PAGE>
(a) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their CEDEL or Euroclear account
in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the CEDEL Participant or Euroclear
Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
CEDEL or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), unless (i) each clearing system, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial Owners of Global
Securities that are Non-U.S. Persons (as defined below) can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status). If the information shown on Form W-8 changes, a new Form W-8
must be filed within 30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
Exemption or reduced rate for Non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form 1001 (Ownership, Exemption or
Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by Certificate Owners or their agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The 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
security (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof or (iii) an
estate or trust that is subject to U.S. federal income tax regardless of the
source of its income. The term "Non-U.S. Person" means any person who is not 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-3
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained in this Prospectus
Supplement or the Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the
Depositor or by the Underwriters. This Prospectus Supplement and the Prospectus
do not constitute an offer to sell, or a solicitation of an offer to buy any of
the securities offered hereby in any jurisdiction in which the person making
such offer or solicitation is not qualified to do so or to anyone to whom it is
unlawful to make such offer or solicitation. Neither the delivery of this
Prospectus Supplement or the Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that information herein (including
information incorporated by reference herein) or therein is correct as of any
time subsequent to the date of this Prospectus Supplement or the Prospectus.
----------
TABLE OF CONTENTS
Page
PROSPECTUS SUPPLEMENT
Summary of Terms..........................................................S-1
Risk Factors ............................................................S-15
The Portfolio of Mortgage Loans..........................................S-18
Use of Proceeds..........................................................S-35
The Depositor............................................................S-35
The Seller...............................................................S-35
The Mortgage Loan Pools..................................................S-35
Prepayment and Yield Considerations......................................S-47
The Originators..........................................................S-53
Formation of the Trust and Trust Property................................S-53
Additional Information...................................................S-54
Description of the Class A Certificates..................................S-54
The Certificate Insurance Policies and the Certificate
Insurer..................................................................S-64
The Pooling and Servicing Agreement......................................S-67
Certain Federal Income Tax Consequences..................................S-77
ERISA Considerations.....................................................S-78
Ratings..................................................................S-79
Legal Investment Considerations..........................................S-79
Underwriting.............................................................S-80
Report of Experts........................................................S-81
Certain Legal Matters....................................................S-81
Global Clearance, Settlement and Tax
Documentation Procedures.....................................Annex I
Index to Location of Principal Defined Terms..............................A-1
Audited Financial Statements for the
Certificate Insurer..............................................B-1
Unaudited Financial Statements for the
Certificate Insurer..............................................C-1
PROSPECTUS
Summary of Prospectus.......................................................1
Risk Factors................................................................7
Description of the Certificates............................................10
The Trusts.................................................................15
Credit Enhancement.........................................................18
Servicing of the Mortgage Loans and Contracts..............................22
Administration.............................................................28
Use of Proceeds............................................................35
The Depositor..............................................................35
Certain Legal Aspects of the Mortgage Assets...............................35
Legal Investment Matters...................................................44
ERISA Considerations.......................................................45
Certain Federal Income Tax Consequences....................................47
Plan of Distribution.......................................................71
Legal Matters..............................................................71
Financial Information......................................................71
Index to Location of Principal Defined Terms..............................A-1
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
AMRESCO Residential
Securities Corporation
Mortgage Loan Trust 199__-__
$____________
Mortgage Loan Pass-Through
Certificates, Series 199__-__
$____________
Class A-1 Certificates
$____________
Class A-2 Certificates
$____________
Class A-3 Certificates
$___________
Class A-4 Certificates
$___________
Class A-5 Certificates
$___________
Class A-6 Certificates
$___________
Class A-7 Certificates
$____________
Class A-8 Adjustable Rate Group
Certificates
-----------
PROSPECTUS SUPPLEMENT
-----------
[Underwriter]
[Underwriters]
___________, 199__
<PAGE>
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Page
2/28 Loans S-46
Accrual Period S-5
Actuarial Loans S-52
Adjustable Rate Certificates S-1
Adjustable Rate Group Available Funds Cap S-1
Advanta S-1
Advanta Parent S-29
Appraised Values S-41
Available Funds S-62
Balloon Mortgage Loans S-76
Balloon Payments S-75
Bank S-31
Beneficial Owners S-12
Book-Entry Certificates S-65
Business Day S-5
Capitalized Interest Account S-12
Carry Forward Amount S-6
Cede S-12
CEDEL S-12
CEDEL Participants S-67
Certificate Account S-59
Certificate Insurance Policy S-10
Certificate Insurer S-10
Certificate Principal Balance S-53
Certificates S-2
Citibank S-13
Class S-1
Class A Certificate Principal Balance S-53
Class A Certificates S-1
Class A Distribution Amount S-5
Class A-1 Certificates S-1
Class A-2 Certificates S-1
Class A-3 Certificates S-1
Class A-4 Certificates S-1
Class A-5 Certificates S-1
Class A-6 Certificates S-1
Class A-7 Certificates S-1
Class A-8 Certificates S-1
Class R Certificates S-2
Clean-Up Call Date S-1
Closing Date S-2
Code S-14
Compensating Interest S-76
Cooperative S-67
Coupon Rates S-3
Current Interest S-6
Cut-Off Date S-2
D&P S-83
Daily Collections S-75
Definitive Certificate S-65
Deleted Mortgage Loan S-29
Depositor S-1
DTC S-12
DTC Participants S-67
Due Dates S-77
ERISA S-83
Euroclear S-12
Euroclear Operator S-67
Euroclear Participants S-67
European Depositaries S-13
Excess Subordinated Amount S-63
Exemption S-83
FHA S-32
File S-74
Final Certification S-74
Final Scheduled Payment Dates S-53
Financial Intermediary S-66
Fiscal Agent S-69
Fitch S-83
Fixed Rate Certificates S-1
Fixed Rate Group Available Funds Cap S-1
Funding Period S-11
GAAP S-71
Initial Certificate Principal Balance S-53
Initial Mortgage Loans S-2
Insurance Policy S-10
Insured Payment S-10
Liquidated Mortgage Loan S-8
Liquidation Proceeds S-74
Loan Balance S-73
Loan Purchase Price S-29
Loan-to-Value Ratios S-43
Long Beach Loans S-20
Monthly Remittance Date S-8
Moody's S-13
Morgan S-13
Mortgage Loan Group 1
Mortgage Loans S-40
Mortgaged Properties S-2
Mortgages S-2
Net Coupon Rate S-29
Net Liquidation Proceeds S-75
Net Monthly Excess Cashflow S-61
New Century S-3
NIV S-31
Notes S-2
One-Month LIBOR S-1
Original Aggregate Loan Balance S-3
Original Pre-Funded Amount S-2
Originators S-58
Owners S-3
Participants S-65
Pass-Through Rate S-60
Payment Date S-5
Percentage Interest S-59
PHMC S-36
Plan S-83
Preference Amount S-9
Pre-Funded Amount S-11
Pre-Funding Account S-2
Premium Amount S-60
Prepaid Installments S-76
Prepayment Interest Excess S-74
Prepayment Interest Shortfall S-77
Prepayments S-16
Preservation Expenses S-76
Principal and Interest Account S-75
Principal Distribution Amount S-7
Qualified Replacement Mortgage S-29
Rating Agencies S-13
Realized Loss S-63
Record Date S-5
Reference Banks S-65
Register S-59
Registrar S-59
Relevant Depositary S-65
REMIC S-13
REMIC Opinion S-72
Remittance Period S-8
REO Property S-76
Restricted Group S-84
Rules S-66
SAP S-71
Seller S-1
sequential pay S-6
Servicer S-2
Servicers S-2
Servicing Advance S-76
Servicing Fee Rate S-74
Six-Month LIBOR Loan S-4
Six-Month LIBOR Loans S-46
Specified Subordinated Amount S-62
Standard & Poor's S-13
Subordinate Certificates S-2
Subordinated Amount S-62
Subordination Deficit S-8
Subordination Increase Amount S-62
Subordination Reduction Amount S-63
Subsequent Cut-Off Date S-17
Subsequent Mortgage Loans S-2
Subsequent Transfer Agreement S-17
Subsequent Transfer Date S-11
Substitution Amount S-74
Telerate Page 3750 S-65
Terms and Conditions S-67
Total Available Funds S-62
Total Monthly Excess Cashflow S-60
Transfer Agreement S-28
Trust S-58
Trust Estate S-58
Trustee S-2
Underwriters S-85
VA S-32
Weighted average life S-53
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
APPENDIX B
AUDITED FINANCIAL STATEMENTS FOR THE CERTIFICATE INSURER
[Surety Name]
CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1995 and 1994
and for the years ended
December 31, 1995, 1994 and 1993
B-1
<PAGE>
APPENDIX C
UNAUDITED FINANCIAL STATEMENTS FOR THE CERTIFICATE INSURER
C-1
<PAGE>
PROSPECTUS SUPPLEMENT
(To Prospectus Dated _______________, 1996)
AMRESCO Residential Securities Corporation Mortgage Loan Trust 199__-__
$_________________ _____% Notes
$___________________ _____% Class A Certificates
----------
[Advanta Mortgage Corp. USA
Long Beach Mortgage Company
Option One Mortgage Company]
Servicers
AMRESCO RESIDENTIAL SECURITIES CORPORATION
Depositor
----------
AMRESCO
AMRESCO Residential Credit Corporation
Seller
The AMRESCO Residential Securities Corporation Mortgage Loan 199_-__
Trust (the "Trust") was formed pursuant to a trust agreement dated as of
________ 1, 199__ (the "Trust Agreement"), among the Depositor, the Seller, the
Servicers and _______, as Owner Trustee (the "Owner Trustee"). The Trust is
issuing (i) its ____% Notes (the "Notes") pursuant to an indenture dated as of
________ 1, 199__, between the Trust and _________, as Indenture Trustee (the
"Indenture Trustee"), and (ii) its Class A Certificates (the "Class A
Certificates") and one or more classes of Subordinated Certificates (the
"Subordinated Certificates" and, together with the Class A Certificates, the
"Certificates") pursuant to the Trust Agreement. Only the Notes and the Class A
Certificates are offered hereby and are referred to collectively as the "Offered
Securities."
[Surety Name]
On or before the issuance of the Offered Securities, the Depositor will
obtain from _______________________ (the "Insurer") a financial guaranty
insurance policy relating to the Offered Securities (the "Insurance Policy") in
favor of the Trustee. The Insurance Policy will in accordance with its terms
provide for 100% coverage of the principal amount of, and scheduled interest due
on, the Offered Securities.
The assets of the Trust consist of fixed rate single family mortgage
loans (the "Initial Mortgage Loans") and all monies due after _____________,
199__ (the "Cut-Off Date"), security interests in the properties which secure
the Mortgage Loans (the "Mortgaged Properties"), an insurance policy, funds on
deposit in certain trust accounts, including a Pre-Funding Account providing for
the purchase of Subsequent Mortgage Loans, and certain other property. All the
Mortgage Loans are secured solely by first lien mortgages or deeds of trust. The
rights of the holders of the Class A Certificates will be subordinated to the
rights of the holders of the Notes.
For a discussion of significant matters affecting investment in the
Offered Securities, see "Risk Factors" beginning on page S-__ and "Prepayment
and Yield Considerations" beginning on page S-__ herein and "Risk Factors"
beginning on page 7 in the Prospectus.
(Cover continued on next page)
----------
THE NOTES REPRESENT OBLIGATIONS OF, AND CLASS A CERTIFICATES REPRESENT
BENEFICIAL INTERESTS IN, THE TRUST ONLY AND DO NOT REPRESENT INTERESTS
IN OR OBLIGATIONS OF THE DEPOSITOR, THE SELLER, THE SERVICERS, THE TRUSTEE
OR ANY OF THEIR AFFILIATES. NEITHER THE OFFERED SECURITIES NOR THE
MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
----------
The Offered Securities will be purchased by the Underwriters from the
Depositor and will be offered by the Underwriters from time to time to the
public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. Proceeds to the Depositor from the sale of the
Offered Securities will be approximately $___________, plus accrued interest,
to, but not including, the Closing Date, before deducting expenses payable by
the Depositor estimated to be approximately $_______.
The Offered Securities are offered subject to prior sale, when, as, and
if accepted by the Underwriters and subject to the Underwriters' right to reject
orders in whole or in part. It is expected that delivery of the Offered
Securities will be made in book-entry form through the facilities of The
Depository Trust Company ("DTC"), CEDEL S.A. and the Euroclear System on or
about __________, 199__. The Offered Securities will be offered in Europe and
the United States of America.
[UNDERWRITER]
[UNDERWRITER]
[UNDERWRITER]
The date of this Prospectus Supplement is ___________, 199__
<PAGE>
(Cover continued from previous page)
The Initial Mortgage Loans will be transferred to the Trust pursuant to a
Pooling and Servicing Agreement dated _________ 1, 199_, between the Trust, the
Depositor, the Servicers and the Seller. The Pooling and Servicing Agreement
provides that Mortgage Loans (the "Subsequent Mortgage Loans") may be purchased
by the Trust from the Depositor from time to time on or before __________, 1996,
from funds on deposit in the Pre-Funding Account. On the Closing Date an
aggregate cash amount of approximately $__________ will be deposited with the
Trustee in the Pre-Funding Account to be used to acquire Subsequent Mortgage
Loans.
It is a condition to issuance of the Offered Securities that the Offered
Securities be rated "Aaa" by Moody's and "AAA" by Standard and Poor's.
Interest on and principal of the Notes are required to be paid, and
distributions on the Class A Certificates are required to be made, on the 25th
day of each month (or, if such day is not a business day, the next business day)
beginning __________, 199__ (each, a "Payment Date"). On any Payment Date on or
prior to the Clean-Up Call Date (as defined herein), the Pass-Through Rate for
the Class A Certificates is _____% per annum, and, thereafter, will be
- -----%.
The yield to investors on the Offered Securities sold at prices other than
par may be sensitive to the rate and timing of principal payments (including
prepayments, repurchases, defaults and liquidations) on the Mortgage Loans which
may vary over time. See "Prepayment and Yield Considerations" herein and "Risk
Factors" and "Yield, Prepayment and Maturity Considerations" in the Prospectus.
For a description of certain tax consequences of owning the Notes and the
Class A Certificates, see "Certain Federal Income Tax Consequences" herein and
in the Prospectus.
----------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED SECURITIES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
This Prospectus Supplement does not contain complete information about the
Offered Securities. Additional information is contained in the Prospectus dated
__________, 1996, of which this Prospectus Supplement is a part and which
accompanies this Prospectus Supplement. The Prospectus contains important
information regarding this offering which is not contained herein, and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission a
Registration Statement under the Securities Act of 1933 with respect to the
Offered Securities. This Prospectus Supplement and the related Prospectus, which
form a part of the Registration Statement, omit certain information contained in
such Registration Statement pursuant to the Rules and Regulations of the
Commission. The Registration Statement can be inspected and copied at the Public
Reference Room of the Commission at 450 Fifth Street, N.W., Washington, D.C.,
and the Commission's regional offices at Seven World Trade Center, 13th Floor,
New York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials can be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549.
REPORTS TO OWNERS
Monthly and annual reports concerning the Offered Securities and the Trust
will be sent by the Trustee to the Owners of the Offered Securities. So long as
any of the Offered Securities is in book-entry form, such reports will be sent
to Cede & Co., as the nominee of DTC and as Owner of such Offered Securities.
DTC will supply such reports to Beneficial Owners of any such Offered Securities
in accordance with its procedures.
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
SUMMARY OF TERMS............................................................S-1
RISK FACTORS...............................................................S-13
THE PORTFOLIO OF MORTGAGE LOANS............................................S-15
General...............................................................S-15
Guidelines............................................................S-16
Prepayment Penalties..................................................S-24
Representations Relating to the Mortgage Loans........................S-24
The Servicers.........................................................S-25
General...............................................................S-35
USE OF PROCEEDS............................................................S-36
THE DEPOSITOR..............................................................S-36
THE SELLER.................................................................S-36
THE MORTGAGE LOAN POOL.....................................................S-36
General...............................................................S-36
Mortgage Loans........................................................S-37
Conveyance of Subsequent Mortgage Loans...............................S-41
PREPAYMENT AND YIELD CONSIDERATIONS........................................S-42
General...............................................................S-42
Mandatory Prepayment..................................................S-42
Projected Prepayment and Yield for Notes and Class A Certificates.....S-42
Payment Lag Feature of Class A Certificates...........................S-46
THE ORIGINATORS............................................................S-46
FORMATION OF THE TRUST AND TRUST PROPERTY..................................S-46
Capitalization of the Trust...........................................S-47
The Owner Trustee.....................................................S-47
ADDITIONAL INFORMATION.....................................................S-47
DESCRIPTION OF THE OFFERED SECURITIES......................................S-48
General...............................................................S-48
Payment Dates.........................................................S-48
Distributions.........................................................S-48
Optional Redemption of Notes; Optional Prepayment of Certificates.....S-49
Overcollateralization Provisions......................................S-50
Pre-Funding Account...................................................S-51
Capitalized Interest Account..........................................S-52
BOOK ENTRY REGISTRATION OF THE OFFERED SECURITIES..........................S-52
Assignment of Rights..................................................S-55
THE INSURANCE POLICY AND THE INSURER.......................................S-55
THE INDENTURE..............................................................S-56
Modification of Indenture Without Noteholder Consent..................S-56
Modification of Indenture With Noteholder Consent.....................S-56
Events of Default; Rights Upon Event of Default.......................S-57
Certain Covenants.....................................................S-58
Annual Compliance Statement...........................................S-58
Indenture Trustee's Annual Report.....................................S-58
Satisfaction and Discharge of Indenture...............................S-59
THE TRUST AGREEMENT........................................................S-59
Liability of the Depositor............................................S-59
Termination of Trust Agreement........................................S-60
Dissolution upon Bankruptcy of Depositor..............................S-60
Amendments Without Consent of the Owners of the Certificates
or Notes..........................................................S-60
Amendments With Consent of the Insurer and the Owners of
the Certificates..................................................S-61
No Petition Covenant..................................................S-61
THE POOLING AND SERVICING AGREEMENT........................................S-61
Covenant of the Seller to Take Certain Actions with Respect to
the Mortgage Loans in Certain Situations..........................S-61
Assignment of Mortgage Loans..........................................S-62
Servicing.............................................................S-63
Removal and Resignation of a Servicer.................................S-67
Reporting Requirements................................................S-68
Removal of Trustee for Cause..........................................S-69
Governing Law.........................................................S-69
Amendments............................................................S-69
Termination of the Trust..............................................S-70
Optional Termination..................................................S-70
CERTAIN FEDERAL INCOME TAX CONSEQUENCES....................................S-70
Taxation of the Notes.................................................S-71
Taxation of Class A Certificates......................................S-71
ERISA CONSIDERATIONS.......................................................S-71
RATINGS....................................................................S-73
LEGAL INVESTMENT CONSIDERATIONS............................................S-73
UNDERWRITING...............................................................S-73
REPORT OF EXPERTS..........................................................S-74
CERTAIN LEGAL MATTERS......................................................S-74
<PAGE>
Prospectus
SUMMARY OF PROSPECTUS........................................................1
RISK FACTORS.................................................................7
DESCRIPTION OF THE CERTIFICATES.............................................10
General .............................................................11
Classes of Certificates ...............................................11
Distributions of Principal and Interest ...............................13
Book Entry Registration ...............................................14
List of Owners of Certificates ........................................14
THE TRUSTS .................................................................15
Mortgage Loans ........................................................15
Contracts .............................................................17
Mortgage-Backed Securities ............................................17
Other Mortgage Securities .............................................17
CREDIT ENHANCEMENT .........................................................18
SERVICING OF MORTGAGE LOANS AND CONTRACTS ..................................22
Payments on Mortgage Loans.............................................23
Advances ..............................................................23
Collection and Other Servicing Procedures..............................23
Primary Mortgage Insurance.............................................25
Standard Hazard Insurance .............................................25
Title Insurance Policies ..............................................27
Claims Under Primary Mortgage Insurance Policies and Standard Hazard
Insurance Policies; Other Realization Upon Defaulted Loan .............27
Servicing Compensation and Payment of Expenses ........................27
Master Servicer .......................................................28
ADMINISTRATION .............................................................28
Assignment of Mortgage Assets .........................................28
Evidence as to Compliance .............................................31
The Trustee ...........................................................31
Administration of the Certificate Account..............................31
Reports ...............................................................32
Forward Commitments; Pre-Funding.......................................33
Servicer Events of Default ............................................33
Rights Upon Servicer Event of Default.......................................33
Amendment .............................................................34
Termination ...........................................................34
USE OF PROCEEDS ............................................................35
THE DEPOSITOR ..............................................................35
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS................................35
General ...............................................................35
Foreclosure ...........................................................36
Soldiers' and Sailors' Civil Relief Act ...............................41
The Contracts .........................................................41
The Title I Program ...................................................44
LEGAL INVESTMENT MATTERS ...................................................44
ERISA CONSIDERATIONS .......................................................45
CERTAIN FEDERAL INCOME TAX CONSEQUENCES ....................................47
Federal Income Tax Consequences For REMIC Certificates ................47
Taxation of Regular Certificates ......................................48
Taxation of Residual Certificates .....................................54
Treatment of Certain Items of REMIC Income and Expense ................56
Tax-Related Restrictions on Transfer of Residual Certificates .........58
Sale or Exchange of a Residual Certificate ............................60
Taxes That May Be Imposed on the REMIC Pool ...........................60
Liquidation of the REMIC Pool .........................................61
Administrative Matters ................................................61
Limitations on Deduction of Certain Expenses ..........................61
Taxation of Certain Foreign Investors .................................62
Backup Withholding ....................................................63
Reporting Requirements ................................................63
Federal Income Tax Consequences for Certificates as to Which No
REMIC Election Is Made ................................................63
Standard Certificates..................................................63
Premium and Discount ..................................................65
Stripped Certificates .................................................66
Reporting Requirements and Backup Withholding .........................69
Taxation of Certain Foreign Investors .................................69
Taxation of Securities Classified as Partnership Interests ............69
PLAN OF DISTRIBUTION .......................................................70
LEGAL MATTERS ..............................................................70
FINANCIAL INFORMATION ......................................................70
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS...............................A-1
<PAGE>
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Reference is made to the Index to Location of Principal
Defined Terms for the location of certain capitalized terms.
Issuer: AMRESCO Residential Securities Corporation
Mortgage Loan Trust 199__-__ (the "Trust")
formed pursuant to a Trust Agreement dated
as of _______, 199__ (the "Trust
Agreement"), between the Depositor and
_________, as trustee of the Trust (the
"Owner Trustee").
Offered Securities: ______% Notes due __________ 1, 20__ (the
"Notes") to be issued pursuant to an
indenture dated as of ________, 199__,
between the Trust and _______, as indenture
trustee (the "Indenture Trustee").
$__________ ____% Mortgage Loan Pass-Through
Certificates, Series 199__- __.(the "Class A
Certificate")(1). The Class A Certificates
and one or more classes of Subordinated
Certificates (the "Subordinated
Certificates") will be issued pursuant to
the Trust Agreement. Only the Class A
Certificates are offered hereby.
(1) The Pass-Through Rate with respect to
the Class A Certificates shall be _____% as
of any Payment Date after the Payment Date
on which the outstanding Class A Certificate
Principal Balance has declined to less than
10% of the original Class A Certificate
Principal Balance ("Clean-Up Call Date").
The Notes and the Class A Certificates are
collectively referred to as the "Offered
Securities".
Depositor: AMRESCO Residential Securities Corporation
(the "Depositor"), a Delaware corporation.
Seller: AMRESCO Residential Mortgage Corporation
(the "Seller"), a Delaware corporation.
Servicers: [Advanta Mortgage Corporation USA
("Advanta"), with principal executive
offices located at 16875 West Bernardo
Drive, San Diego, CA 92127, Long Beach
Mortgage Company ("Long Beach"), with
principal executive offices located at 1100
Town and County Road, Orange, CA 92668, and
Option One Mortgage Corporation ("Option
One") with principal executive offices
located at 2020 East First Street, Suite
100, Santa Ana, CA 92705 (each a "Servicer"
and collectively, the "Servicers").
Owner Trustee:
Indenture Trustee:
Cut-Off Date: As of the close of business on
_____________, 199__.
Closing Date: On or about __________, 199__.
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<PAGE>
Denominations: The Notes and the Class A Certificates are
issuable in book entry form in minimum
original principal amounts of $1,000 and
integral multiples thereof.
The Mortgage Loans: The mortgage loans to be conveyed to the
Trust by the Depositor on the Closing Date
(the "Initial Mortgage Loans") consist of
_____ fixed and adjustable rate conventional
mortgage loans evidenced by promissory notes
(the "Notes") secured by first lien deeds of
trust, security deeds or mortgages (the
"Mortgages"), which are located in _____
states and the District of Columbia. The
properties securing the Initial Mortgage
Loans (the "Mortgaged Properties") consist
primarily of single-family residences (which
may be attached, detached, part of a
two-to-four family dwelling, a condominium
unit or a unit in a planned unit
development). The Mortgaged Properties may
be owner-occupied and non-owner occupied
investment properties. No Loan-to- Value
Ratio (based upon appraisals made at the
time of origination) exceeded 90% as of the
Cut-Off Date. The Initial Mortgage Loans are
not insured by either primary or pool
mortgage insurance policies; however,
certain distributions due to the Owners of
the Offered Securities (the "Owners") are
insured by the Insurer pursuant to the
Insurance Policy. See "Credit Enhancement"
herein. The Mortgage Loans are not
guaranteed by the Seller or any affiliate
thereof.
Unless otherwise noted, all statistical
percentages in this Prospectus Supplement
are measured by the aggregate principal
balance of the Initial Mortgage Loans (the
"Original Aggregate Loan Balance") as of the
Cut-Off Date. The statistical
characteristics of the Mortgage Loans will
vary upon the transfer of Subsequent
Mortgage Loans.
As of the Cut-Off Date, the average Loan
Balance of the Mortgage Loans was
$___________; the interest rates (the
"Coupon Rates") of the Mortgage Loans ranged
from _____% to _____%; the weighted average
Loan-to-Value Ratio of such Mortgage Loans
was _____%; the weighted average Coupon Rate
of such Mortgage Loans was _____%; the
weighted average remaining term to maturity
of such Mortgage Loans was _____ months. The
remaining terms to maturity as of the
Cut-Off Date of the Mortgage Loans ranged
from _____ months to _____ months. The
maximum Loan Balance of the Mortgage Loans
as of the Cut-Off Date was $___________.
Mortgage Loans requiring "balloon" payments
represented not more than _____% of the
Original Aggregate Loan Balance of the
Mortgage Loans. No Mortgage Loan will mature
later than _____________, 20__. As a
percentage of the Original Aggregate Loan
Balance of the Mortgage Loans, _____% were
secured by mortgages on single-family
dwellings, _____% by mortgages on
two-to-four unit dwellings, _____% by
mortgages on condominiums, _____% by
mortgages on planned unit developments and
_____% by mobile homes.
Each of the Mortgage Loans bear interest at
a fixed rate for the life of such Mortgage
Loan. The Mortgage Loans were originated as
to ____% by Long Beach and as to ____% by
______. See "The Mortgage Loan Pool --
Mortgage Loans" herein.
On the Closing Date, an aggregate cash
amount of approximately $__________ (the
"Original Pre-Funded Amount") will be
deposited in a trust account in the
S-2
<PAGE>
name of the Indenture Trustee (the
"Pre-Funding Account"). It is intended that
additional Mortgage Loans satisfying the
criteria specified in the Pooling and
Servicing Agreement (the "Subsequent
Mortgage Loans") will be purchased by the
Trust from the Depositor from time to time
on or before ____ __, 199__, from funds on
deposit in the Pre-Funding Account. As a
result, the aggregate principal balance of
the Mortgage Loans will increase by an
amount equal to the aggregate principal
balance of the Subsequent Mortgage Loans so
purchased and the amount in the Pre-Funding
Account will decrease by the same amount.
As described below, on the Closing Date,
cash will be deposited in the Capitalized
Interest Account (as defined herein) held by
the Indenture Trustee. Funds in the
Capitalized Interest Account will be applied
by the Indenture Trustee to cover shortfalls
in interest during the Funding Period (as
described under "Pre-Funding Account")
attributable to the provisions allowing for
purchase of Subsequent Mortgage Loans.
The Notes
A. Maturity Date The Maturity Date of the Notes is
__________, 202__, although it is
anticipated that the actual final payment of
principal of the Notes may occur earlier
than the Maturity Date. See "Prepayment and
Yield Considerations" herein.
B. Payment of Principal
and Interest On the 25th day of each month, or if such
day is not a Business Day, then the next
succeeding Business Day, commencing
_________, 199__ (each such day being a
"Payment Date"), the Indenture Trustee is
required to pay, to the extent of available
funds, to the Owners of the Notes of record
as of the last day of the month immediately
preceding the month in which such Payment
Date occurs (each such date, a "Record
Date") the "Note Amount", which shall be the
sum of (x) Current Interest and (y) the Note
Principal Payment (each as defined below).
For each Payment Date, interest due with
respect to the Notes will be interest which
has accrued thereon during the period from
the preceding Payment Date (or from the
Closing Date in the case of the first
Payment Date) to and including the day prior
to the current Payment Date (the "Accrual
Period" for the Notes). All calculations of
interest will be made on the basis of a
360-day year assumed to consist of twelve
30-day months.
A "Business Day" is any day other than a
Saturday, Sunday or a day on which banking
institutions in California, Rhode Island or
New York City or in the city in which the
corporate trust office of the Trustee is
located are authorized or obligated by law
or executive order to close.
C. Optional Redemption The Notes are subject to redemption (i) in
whole, but not in part, on any Payment Date
on or after the Clean-up Call Date in each
case at a redemption price equal to the then
outstanding Note Principal Balance, plus
accrued and unpaid interest thereon.
The Certificates
A. Final Scheduled
Payment Date: The Final Scheduled Payment Date for Class A
Certificates is ________, 20__, although it
is anticipated that the actual final Payment
Date for each Class may
S-3
<PAGE>
occur earlier than the Final Scheduled
Payment Date. See "Prepayment and Yield
Considerations" herein.
B. Distributions of
Principal and
Interest: On each Payment Date, the Trustee will be
required to distribute, to the extent of
available funds, to the Owners of the
Certificates of record as of the last day of
the calendar month immediately preceding the
calendar month in which such Payment Date
occurs (the "Record Date") the "Class A
Distribution Amount" which shall be the sum
of (x) Current Interest and (y) the Class A
Principal Distribution Amount (each as
defined below).
For each Payment Date, interest due with
respect to the Class A Certificates will be
interest which has accrued thereon during
the calendar month immediately preceding the
month in which such Payment Date occurs (the
"Accrual Period" for the Class A
Certificates). All calculations of interest
on the Class A Certificates will be made on
the basis of a 360-day year assumed to
consist of twelve 30-day months.
C. Optional Prepayment: The Class A Certificates are subject to
optional repurchase in whole, but not in
part, on any Payment Date on or after the
Clean-up Call Date in each case at a
purchase price equal to the then outstanding
Certificate Principal Balance, plus accrued
and unpaid interest.
Certain Definitions: "Current Interest" with respect to the Notes
and the Class A Certificates means, with
respect to any Payment Date, (i) the
aggregate amount of interest accrued on the
Note Principal Balance or the Class A
Certificate Principal Balance during the
Accrual Period immediately prior to such
Payment Date plus (ii) the Preference Amount
(as defined below) as it relates to interest
previously paid on the Notes or the Class A
Certificates prior to such Payment Date plus
(iii) the Carry Forward Amount, if any, with
respect to the Notes or the Class A
Certificates.
The "Carry Forward Amount" with respect to
the Notes or the Class A Certificates for
any Payment Date is the sum of (x) the
amount, if any, by which (i) Note Amount or
the Class A Distribution Amount (as defined
herein) as of the immediately preceding
Payment Date exceeded (ii) the amount of the
actual distribution made to the Owners of
the Notes or Class A Certificates on such
immediately preceding Payment Date plus (y)
30 days' interest on the interest portion of
such amount, calculated at the interest rate
or Pass-Through Rate in effect with respect
to the Notes or Class A Certificates as of
such Payment Date.
The "Principal Distribution Amount" for each
Payment Date shall be the lesser of:
(a) the Total Available Funds (as
defined below) plus any related
Insured Payments actually made by
the Insurer minus the related
Current Interest; and
(b) the sum of:
S-4
<PAGE>
(A) the Preference Amount with
respect to principal owed
to the Owners of the Notes
and the Class A
Certificates that remains
unpaid as of such Payment
Date;
(B) all scheduled installments
of principal actually
collected or advanced by
the Servicers during the
related Remittance Period
and all unscheduled
collections of principal
(other than Prepaid
Installments) actually
collected by the Servicers
during the related
Prepayment Period;
(C) the principal portion of
the Loan Purchase Price
with respect to each
Mortgage Loan that was
repurchased on or prior to
the related Monthly
Remittance Date, to the
extent such amount is
actually received by the
Trustee on or prior to the
related Monthly Remittance
Date;
(D) any Substitution Amounts
(i.e., the excess, if any,
of the Loan Balance of a
Mortgage Loan being
replaced over the
outstanding principal
balance of a replacement
Mortgage Loan) delivered on
the related Monthly
Remittance Date in
connection with a
substitution of a Mortgage
Loan, to the extent such
Substitution Amounts are
actually received by the
Trustee on or prior to the
related Monthly Remittance
Date;
(E) all Net Liquidation
Proceeds actually collected
by the Servicers with
respect to the Mortgage
Loans during the related
Prepayment Period (to the
extent such Net Liquidation
Proceeds are related to
principal) to the extent
such Net Liquidation
Proceeds are actually
received by the Trustee on
or prior to the related
Monthly Remittance Date;
(F) any moneys released from
the Pre-Funding Account on
the Payment Date which
immediately follows the end
of the Funding Period; and
(G) the portion of the proceeds
received by the Trustee
upon termination of the
Trust (to the extent such
proceeds relate to
principal).
"Total Available Funds" as to any Payment
Date is (x) the amount on deposit in the
Certificate Account plus (y) any deposit to
the Certificate Account expected to be made
on that Payment Date from the Pre-Funding
Account and the Capitalized Interest
Account.
The "Note Principal Payment" for each
Payment Date is equal to (i) ____% of the
Principal Distribution Amount for such
Payment Date plus (ii) the amount of any
Subordination Increase Amount for such
Payment Date less (iii) the amount of any
Subordination Reduction Amount for such
Payment Date.
The "Class A Principal Distribution Amount"
for each Payment Date is equal to the
Principal Distribution Amount for such
Payment Date less the sum of (i)
S-5
<PAGE>
the Note Principal Payment for such Payment
Date and (ii) the amount of any
Subordination Reduction Amount for such
Payment Date.
The "Remittance Period" with respect to any
Monthly Remittance Date is the period
commencing on the second day of the month
preceding the month in which the Monthly
Remittance Date occurs and ending on the
first day of the month in which such Monthly
Remittance Date occurs. A "Monthly
Remittance Date" is any date on which funds
on deposit in the Principal and Interest
Account are required to be remitted by the
Servicers to the Certificate Account, which
is the 20th day of each month, or if such
day is not a Business Day, the next
succeeding Business Day, commencing in
__________, 199__. The Prepayment Period
with respect to any Monthly Remittance Date
is the period commencing on the 16th day of
the month preceding the month in which the
Monthly Remittance Date occurs and ending on
the 15th day of the month in which such
Monthly Remittance Date occurs (except that
the first Prepayment Period shall commence
on __________ 2, 199__ and end on __________
15, 199__).
"Preference Amount" means any amount
previously distributed to an Owner on a Note
or a Class A Certificate that is recoverable
and sought to be recovered as a voidable
preference by a trustee in bankruptcy under
the United States Bankruptcy Code as amended
from time to time, in accordance with a
final nonappealable order of a court having
competent jurisdiction.
A "Subordination Increase Amount" with
respect to a Payment Date is the amount
required to reduce the Subordination
Deficiency Amount (i.e., generally, the
excess, if any, of the Specified
Subordinated Amount over the Subordinated
Amount) to zero. A "Subordination Reduction
Amount" with respect to a Payment Date is
the amount required to reduce the Excess
Subordinated Amount (i.e., generally, the
excess, if any, of the Subordinated Amount
over the Specified Subordinated Amount) to
zero. Subordination Deficiency Amount,
Specified Subordinated Amount, Subordinated
Amount and Excess Subordinated Amount are
defined in "Description of the Offered
Securities--Overcollateralization Provisions
--Overcollateralization Resulting from
Cashflow Structure" herein.
Servicing: [Advanta, Long Beach and Option One] will
act as Servicers under the Pooling and
Servicing Agreement with respect to Mortgage
Loans and will be responsible for the
servicing of the Mortgage Loans and will
receive from interest collected on the
Mortgage Loans a monthly servicing fee on
each Mortgage Loan equal to the Loan Balance
as of the beginning of the related
Remittance Period multiplied by the
applicable Servicing Fee Rate (such product,
the "Servicing Fee"). See "The Pooling and
Servicing Agreement-- Servicing" herein.
Each Servicer is obligated to make cash
advances ("Advances") with respect to
delinquent payments of principal of and
interest on any Mortgage Loan serviced by it
to the extent described in "Servicing of
Mortgage Loans--Advances" herein. The
Trustee will be obligated as a successor
servicer to make any such Advance if a
Servicer fails in its obligation to do so,
to the extent provided in the Pooling and
Servicing Agreement.
S-6
<PAGE>
Credit Enhancement: The Credit Enhancement provided for the
benefit of the Owners of the Notes and the
Class A Certificates consists of (x) the
overcollateralization mechanics which
utilize the internal cash flows of the Trust
and (y) the Insurance Policy (as defined
below).
Overcollateralization. The credit
enhancement provisions of the Trust result
in a limited acceleration of the Notes
relative to the amortization of the related
Mortgage Loans until the required level of
overcollateralization is reached. The
accelerated amortization is achieved by the
application, in certain circumstances, of
excess interest and excess principal to the
payment of the Notes. This acceleration
feature creates overcollateralization (i.e.,
the excess of the aggregate outstanding Loan
Balance of the Mortgage Loans over the sum
of the Note Principal Balance and Class A
Certificate Principal Balance). Once the
required level of overcollateralization is
reached, and subject to the provisions
described in the next paragraph, the
acceleration feature will cease, until
necessary to maintain the required level of
overcollateralization.
The Indenture provides that, subject to
certain floors, caps and triggers, the
required level of overcollateralization may
increase or decrease over time. An increase
would result in a temporary period of
accelerated amortization of the Notes to
increase the actual level of
overcollateralization to its required level;
a decrease would result in a temporary
period of decelerated amortization to reduce
the actual level of overcollateralization to
its required level and may result in no
payments of principal being allocated to the
Notes or the Class A Certificates during
certain other periods. See "Description of
the Offered Securities--Overcollateraliza-
tion Provisions" herein. Such credit
enhancement provisions also have an effect
on the weighted average lives of the Notes
and the Class A Certificates. See
"Prepayment and Yield Considerations"
herein.
Insurance Policy. _______________________
(the "Insurer") will issue a Financial
Guaranty Insurance Policy (the "Insurance
Policy") pursuant to which it will
irrevocably and unconditionally guarantee
payment on each Payment Date to the
Indenture Trustee of an amount equal to the
Insured Distribution Amount for such Payment
Date. The amount of the actual payment, if
any, made by the Insurer under the Insurance
Policy on each Payment Date (the "Insured
Payment") is the sum of (i) any shortfall in
the amount required to pay the Subordination
Deficit for such Payment Date from a source
other than the Insurance Policy, (ii) any
shortfall in the amount required to pay
Current Interest for such Payment Date from
a source other than the Insurance Policy and
(iii) any shortfall in the amount required
to pay the Preference Amount for such
Payment Date from a source other than the
Insurance Policy. The effect of the
Insurance Policy is to guarantee the timely
payment of interest on, and the ultimate
payment of the principal amount of, the
Notes and Class A Certificates; however, so
long as the Notes are outstanding, Insured
Payments with respect to a Subordination
Deficit will be applied to pay the principal
of the Notes. No payments in respect of
principal will be made under the Insurance
Policy unless a Subordination Deficit
occurs.
A "Subordination Deficit" with respect to a
Payment Date is the amount, if any, by which
(x) the sum of (i) the Note Principal
Balance and (ii) the Class A Certificate
Principal Balance, after taking into account
all distributions to be made on such Payment
Date, exceeds (y) the sum of (i) the
aggregate Loan
S-7
<PAGE>
Balances of the Mortgage Loans as of the
close of business on the last day of the
related Prepayment Period and (ii) the
amount, if any, on deposit in the
Pre-Funding Account as of the close of
business on the last day of the related
Remittance Period.
Except upon the occurrence of a Insurer
Default, the Insurer shall have the right to
exercise certain rights of the Owners of the
Notes and the Class A Certificates, as
specified in the Indenture and the Trust
Agreement, without any consent of such
Owners; and such Owners may exercise such
rights only with the prior written consent
of the Insurer, except as provided in the
Indenture and Trust Agreement. In addition,
to the extent of unreimbursed payments under
the Insurance Policy, the Insurer will be
subrogated to the rights of the Owners of
the Notes and Class A Certificates on which
such Insured Payments were made. In
connection with each Insured Payment on a
Note or a Class A Certificate, the Indenture
Trustee, as attorney-in-fact for the Owner
thereof, will be required to assign to the
Insurer the rights of such Owner with
respect to the Note or the Class A
Certificate to the extent of such Insured
Payment.
The Insurance Policy does not guarantee any
specified rate of prepayments, nor does the
Insurance Policy provide funds to redeem the
Notes or the Certificates on any specified
date. The Insurer's obligation under the
Insurance Policy will be discharged to the
extent that funds are received by the
Indenture Trustee for distribution to the
Owners of the Notes or the Class A
Certificates. See "The Insurance Policy and
the Insurer" herein.
Pre-Funding Account: On the Closing Date, the Original Pre-Funded
Amount will be deposited in the Pre-Funding
Account which account will be in the name
of, and maintained by, the Indenture Trustee
on behalf of the Trust and used to acquire
Subsequent Mortgage Loans. During the period
(the "Funding Period") from and including
the Closing Date until the earlier of (i)
the date on which the amount on deposit in
the Pre-Funding Account is less than
$100,000 and (ii) _________ __, 199__, the
Pre-Funded Amount will be maintained in the
Pre-Funding Account. The Original Pre-Funded
Amount will be reduced during the Funding
Period by the amount thereof used to
purchase Subsequent Mortgage Loans in
accordance with the Pooling and Servicing
Agreement. The amount on deposit in the Pre-
Funding Account at any time is the
"Pre-Funded Amount". Subsequent Mortgage
Loans purchased on any date (each, a
"Subsequent Transfer Date") must satisfy the
criteria set forth in the Pooling and
Servicing Agreement. Any Pre-Funded Amount
remaining at the end of the Funding Period
will be applied to reduce the outstanding
principal amount of the Notes and the Class
A Certificates on the Payment Date that
immediately follows the end of the Funding
Period, thus resulting in a partial
principal prepayment of the Notes and the
Class A Certificates. All interest and other
investment earnings on amounts on deposit in
the Pre-Funding Account will be deposited in
the Capitalized Interest Account.
Although no assurance can be given, it is
intended that the principal amount of
Subsequent Mortgage Loans sold to the Trust
will require application of substantially
all the Original Pre-Funded Amount, and it
is not intended that there will be any
material amount of principal prepaid to the
Owners of the Notes and the Class A
Certificates from the Pre-Funding Account.
If the Depositor is unable to sell
Subsequent Mortgage Loans to the Trust in an
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amount equal to the Original Pre-Funded
Amount, principal prepayments to Owners of
the Notes and the Class A Certificates will
occur no later than the Payment Date in
__________, 199__, in an amount equal to the
Pre-Funded Amount remaining at the end of
the Funding Period.
Capitalized Interest Account: On the Closing Date, cash will be deposited
in a trust account (the "Capitalized
Interest Account") in the name of, and
maintained by, the Indenture Trustee on
behalf of the Trust. The amount on deposit
in the Capitalized Interest Account,
including reinvestment income thereon, will
be used by the Indenture Trustee to fund the
excess, if any, of (i) the amount of
interest accruing during the related Accrual
Period at the Class A Pass-Through Rate on
the amount by which the sum of (i) the Note
Principal Balance and (ii) the Class A
Certificate Principal Balance exceeds the
aggregate Loan Balance of the Mortgage Loans
plus the Trustee and Insurer fees accruing
during the related Accrual Period on such
excess balance over (ii) the amount of any
reinvestment income on monies on deposit in
the Pre-Funding Account; such amounts on
deposit will be so applied by the Trustee on
each Payment Date in the Funding Period to
fund such excess, if any. Any amounts
remaining in the Capitalized Interest
Account not needed for such purpose will be
paid to the Depositor at the end of the
Funding Period.
Optional Termination: The Owners of Subordinated Certificates will
have the right to purchase all the Mortgage
Loans on any Monthly Remittance Date after
the Clean-Up Call Date. If such Owners do
not exercise such right, the Servicers will
also have the right, collectively, to
purchase all the Mortgage Loans they are
servicing on any Remittance Date when the
outstanding Class A Certificate Principal
Balance has declined to 5% or less of the
original Class A Certificate Principal
Balance. Any such purchase by the Servicers
will be required to be made on the same
Remittance Date, so that the Trust would be
liquidated on the next succeeding Payment
Date. See "The Pooling and Servicing
Agreement--Optional Termination" herein.
Book-Entry Registration: The Notes and the Class A Certificates will
initially be issued in book-entry form.
Persons acquiring beneficial ownership
interests in Notes or Class A Certificates
("Beneficial Owners") may elect to hold
their interests through The Depository Trust
Company ("DTC"), in the United States, or
Centrale de Livraison de Valeurs Mobilieres,
S.A. ("CEDEL") or the Euroclear System
("Euroclear"), in Europe. Transfers within
DTC, CEDEL or Euroclear, as the case may be,
will be in accordance with the usual rules
and operating procedures of the relevant
system. So long as the Notes or Class A
Certificates are Book- Entry Certificates
(as defined herein), they will be evidenced
by one or more Notes or Certificates
registered in the name of Cede & Co.
("Cede"), as the nominee of DTC or one of
the European Depositories. Cross market
transfers between persons holding directly
or indirectly through DTC, on the one hand,
and counterparties holding directly or
indirectly through CEDEL or Euroclear, on
the other, will be effected by DTC through
Citibank N.A. ("Citibank") or Morgan
Guaranty Trust Company of New York
("Morgan", and together with Citibank, the
"European Depositories"), the relevant
depositaries of CEDEL and Euroclear,
respectively, and each a participating
member of DTC. The Notes and the Class A
Certificates will initially be registered in
the name of Cede. The interests of the
Owners thereof will be represented by
book-entries on the records of DTC and
participating members thereof. No Beneficial
Owner will
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be entitled to receive a definitive note or
certificate representing such person's
interest, except in the event that
Definitive Notes or Certificates are issued
under the limited circumstances described
herein. All references in this Prospectus
Supplement to the rights of Beneficial
Owners reflect only as such rights may be
exercised through DTC and its participating
organizations for so long as the Notes or
Class A Certificates are held by DTC. See
"Book-Entry Registration" herein, and Annex
I hereto, and "Description of the
Securities--Book-Entry Registration" in the
Prospectus.
Ratings: It is a condition of issuance of the Offered
Securities that the Offered Securities
receive ratings of "AAA" by Standard &
Poor's, a Division of The McGraw Hill
Companies, Inc. ("Standard & Poor's"), and
"Aaa" by Moody's Investors Service
("Moody's"). Standard & Poor's and Moody's
are referred to herein collectively as 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
entity. See "Prepayment and Yield
Considerations" and "Ratings" herein.
Risk Factors: Credit Considerations. For information with
regard to the Mortgage Loans and their
related risks, see "Risk Factors--Risk of
Higher Delinquencies Associated with
Guidelines" and "The Mortgage Loan Pool"
herein.
Prepayment Considerations. For information
regarding the consequences of prepayments of
the Mortgage Loans and of the failure of the
Depositor to convey to the Trust during the
Funding Period Subsequent Mortgage Loans in
an amount equal to the Original Pre-Funded
Amount, see "Prepayment and Yield
Considerations" and "Risk
Factors--Sensitivity to Prepayments" and
"--The Subsequent Mortgage Loans and the
Pre-Funding Account" herein.
Other Considerations. For a discussion of
other risk factors that should be considered
by prospective investors, see "Risk Factors"
herein and in the Prospectus.
Federal Tax Aspects: In the opinion of Arter & Hadden, (i) the
Trust will not be treated as an association
taxable as a corporation or as a "publicly
traded partnership" taxable as a corporation
and (ii) the Notes will be treated as debt.
The Depositors, the Seller and the Servicer
have agreed, and by the purchase of Notes
and the Class A Certificates, the Owners of
the Notes and the Class A Certificates will
agree, to treat the Trust as a partnership
for purposes of Federal and state income
taxes, with the partners of the partnership
being the Owners of Class A Certificate and
the Subordinated Certificates. See "Certain
Federal Income Tax Consequences" herein and
in the Prospectus.
The Notes may be considered to have been
issued with original issue discount or at a
premium. Any such original issue discount
will be includable in the income of the
Owner as it accrues under a method taking
into account the compounding of interest and
using the Prepayment Assumption. See
"Prepayment and Yield Considerations" and
"Certain Federal Income Tax Consequences"
herein. Premium may be deductible by the
Owner either as it accrues or when principal
is received. No representation is made as to
whether the Mortgage Loans will prepay in
accordance with the Prepayment Assumption,
or any other rate. The Notes will not be
treated as qualifying real property
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loans within the meaning of Code section
593(d)(1) or assets described in Code
section 7701(a)(19)(C), and probably will
not be treated as "real estate assets"
within the meaning of Code section
856(c)(6)(B). Income derived from the Notes
probably will not be treated as "interest on
obligations secured by mortgages on real
property or on interests in real property"
within the meaning of Code section
856(c)(3)(B).
For any Owner of Class A Certificates that
is a "real estate investment trust" within
the meaning of Code section 856, the Class A
Certificates will be treated as "real estate
assets" within the meaning of Code section
856(c)(6)(B). No comparable authority
exists, however, that would allow a thrift
institution that is an Owner of Class A
Certificates to treat the Class A
Certificates as qualifying real property
loans within the meaning of Code section
593(d)(1) or assets described in Code
section 7701(a)(19)(C). If the Class A
Certificates were treated as indebtedness,
the Class A Certificates would not be
treated as qualifying real property loans
within the meaning of Code section 593(d)(1)
and assets described in Code section
7701(a)(19)(C) and probably would not be
treated as "real estate assets" within the
meaning of Code section 856(c)(6)(B). In
addition, in that case, income derived from
the Class A Certificates probably would not
be treated as "interest on obligations
secured by mortgages on real property or on
interests in real property" within the
meaning of Code section 856(c)(3)(B). See
"Certain Federal Income Tax Consequences"
herein and in the Prospectus.
ERISA Considerations: A fiduciary of any employee benefit plan or
other retirement arrangement subject to the
Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or Section 4975
of the Code (a "Plan") should review
carefully with its legal advisors whether
the purchase or holding of the Offered
Securities could give rise to a transaction
that is prohibited or is not otherwise
permitted either under ERISA or Section 4975
of the Code or whether there exists any
statutory or administrative exemption
applicable to an investment therein.
The U.S. Department of Labor has issued to
the Underwriters individual prohibited
transaction exemptions which generally
exempt from the application of certain of
the prohibited transaction provisions of
Section 406 of ERISA and the excise taxes
imposed on such prohibited transactions by
Sections 4975(a) and (b) of the Code
transactions relating to the purchase, sale
and holding of pass-through certificates
underwritten by the Underwriters and the
servicing and operation of related asset
pools, provided that certain conditions are
satisfied.
A fiduciary of a Plan should review the
sections entitled "ERISA Considerations" in
the Prospectus and this Supplement and
consider the issues discussed therein, and
should consult with its legal advisors prior
to making an investment in the Class A
Certificates.
Legal Investment
Considerations: The Offered Securities will constitute
"mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA") for so long as they
are rated in one of the two highest rating
categories by one or more nationally
recognized statistical rating organizations.
As such, the Offered Securities will be
legal investments for certain entities to
the extent provided in SMMEA, subject to
state laws overriding SMMEA. In addition,
institutions
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whose investment activities are subject to
review by federal or state regulatory
authorities may be or may become subject to
restrictions, which may be retroactively
imposed by such regulatory authorities, on
the investment by such institutions in
certain forms of mortgage related
securities. Furthermore, certain states have
enacted legislation overriding the legal
investment provisions of SMMEA. In addition,
institutions whose activities are subject to
review by federal or state regulatory
authorities may be or may become subject to
restrictions, which may be retroactively
imposed by such regulatory authorities, on
the investment by such institutions in
certain forms of mortgage related
securities.
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RISK FACTORS
Prospective investors in the Offered Securities should consider the
following risk factors (as well as the risk factors set forth under "Risk
Factors" in the Prospectus).
Subordination of Class A Certificates. Distributions on the Class A
Certificates, which represent equity in the assets of the Trust, are
subordinated to payments on the Notes. If on any Payment Date, the credit
enhancement provided by the Insurance Policy is unavailable and the amount
available for payment to the Owners of Notes and Class A Certificates, is
insufficient to pay the Note Amount and the Class A Distribution Amount for such
Payment Date, the rights of the Owners of the Certificates to receive
distributions on account of the Class A Certificates are subordinated to the
rights of the Owners of the Notes to be paid the Note Amount in full.
Sensitivity to Prepayments. ____% of the Mortgage Loans may not be
prepaid in whole or, above a certain percentage, in part at any time without
penalty. See "The Portfolio of Mortgage Loans--Prepayment Penalties" for a
description of prepayment penalty provisions applicable to the Mortgage Loans.
In addition, all the Mortgage Loans contain due-on-sale provisions which, to the
extent enforced by the Servicer, will result in prepayment of such Mortgage
Loans. See "Prepayment and Yield Considerations" herein and "Certain Legal
Aspects of Mortgage Assets--Enforceability of Certain Provisions" in the
Prospectus. The rate of prepayments on fixed rate mortgage loans is sensitive to
prevailing interest rates. Generally, if prevailing interest rates fall
significantly below the interest rates on the Mortgage Loans, such loans are
likely to be subject to higher prepayment rates than if prevailing rates remain
at or above the interest rates on the Mortgage Loans. Conversely, if prevailing
interest rates rise significantly above the interest rates on the Mortgage
Loans, the rate of prepayments is likely to decrease. The average life of the
Notes and the Class A Certificates, and, if purchased at other than par, the
yields realized by Owners of the Notes and the Class A Certificates, will be
sensitive to levels of payment (including prepayments (the "Prepayments")) on
the Mortgage Loans. In general, the yield on a Notes or a Class A Certificate
that is purchased at a premium from the outstanding principal amount thereof
will be adversely affected by a higher than anticipated level of Prepayments of
the Mortgage Loans and enhanced by a lower than anticipated level. Conversely,
the yield on a Note or a Class A Certificate that is purchased at a discount
from the outstanding principal amount thereof will be enhanced by a higher than
anticipated level of Prepayments and adversely affected by a lower than
anticipated level. See "Prepayment and Yield Considerations" herein.
The Subsequent Mortgage Loans and the Pre-Funding Account. If the
principal amount of eligible Subsequent Mortgage Loans available during the
Funding Period and sold by the Depositor to the Trust is less than 100% of the
Original Pre-Funded Amount, a prepayment of principal to Owners of the Notes and
the Class A Certificates will occur as described herein. See "Social, Economic
and Other Factors" below. In addition, any conveyance of Subsequent Mortgage
Loans is subject to the following conditions, among others: (i) each such
Subsequent Mortgage Loan must satisfy the representations and warranties
specified in the agreement pursuant to which such Subsequent Mortgage Loans are
transferred to the Trust (each a "Subsequent Transfer Agreement") and in the
Pooling and Servicing Agreement; (ii) the Depositor will not select such
Subsequent Mortgage Loans in a manner that it believes is adverse to the
interest of the Owners of the Notes and the Class A Certificates or the Insurer;
(iii) the Depositor will deliver certain opinions of counsel with respect to the
validity of the conveyance of such Subsequent Mortgage Loans; and (iv) as of
each cut-off date (each, a "Subsequent Cut-Off Date") applicable thereto, the
Mortgage Loans, including the Subsequent Mortgage Loans to be conveyed by the
Depositor as of such Subsequent Cut-Off Date, will satisfy the criteria set
forth in the Pooling and Servicing Agreement, as described herein under "The
Mortgage Loan Pool--Conveyance of Subsequent Mortgage Loans."
To the extent that amounts on deposit in the Pre-Funding Account have
not been fully applied to the purchase of Subsequent Mortgage Loans by the Trust
by the end of the Funding Period, the Owners of the Notes and the Class A
Certificates will receive a prepayment of principal in an amount equal to the
Pre-Funded Amount remaining in the Pre-Funding Account on the first Payment Date
following the end of the Funding Period (in no event later than the ____________
Payment Date). Although no assurances can be given, the Depositor expects that
the principal amount of Subsequent Mortgage Loans sold to the Trust will require
the application of substantially all amounts on deposit in the Pre-Funding
Account and that there will be no material principal prepayment to the Owners of
Notes and the Class A Certificates from the Pre-Funding Account.
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<PAGE>
Each Subsequent Mortgage Loan must satisfy the eligibility criteria
referred to above at the time of its addition. Subsequent Mortgage Loans may,
however, have been originated or purchased by the Depositor using credit
criteria different from those which were applied to the Initial Mortgage Loans
and may be of a different credit quality. Therefore, following the transfer of
Subsequent Mortgage Loans, the aggregate characteristics of the Mortgage Loans
may vary from those of the Initial Mortgage Loans. See "The Mortgage Loan
Pool--Conveyance of Subsequent Mortgage Loans."
Social, Economic and Other Factors. The ability of the Trust to invest
in Subsequent Mortgage Loans is largely dependent upon the ability of the Seller
to purchase additional mortgage loans. _______________ has entered into a
forward commitment with the Seller to sell on or prior to __________, 199__
sufficient mortgage loans to satisfy the full Pre-Funded Amount. However, the
ability of ___________ to originate or purchase additional mortgage loans may be
affected as a result of a variety of social and economic factors. Economic
factors include interest rates, unemployment levels, the rate of inflation and
consumer perception of economic conditions generally. The Depositor is unable to
determine and has no basis to predict whether or to what extent economic or
social factors will affect the originator's origination ability and the
availability of Subsequent Mortgage Loans.
Risk of Higher Delinquencies Associated with Guidelines. The Servicer's
Guidelines (as described herein under "The Portfolio of Mortgage
Loans--Guidelines") are intended to assess the credit quality of a mortgagor and
the value of the mortgaged property and to evaluate the adequacy of such
property as collateral for the mortgage loan. The Originators provide loans
primarily to mortgagors who do not qualify for loans conforming to FNMA and
FHLMC guidelines but who also have substantial equity in their property.
Furthermore, the Originators' Guidelines do not prohibit a borrower from
obtaining secondary financing at the time of origination of the Originator's
first lien, which financing would reduce the equity the borrower would otherwise
have in the related mortgaged property that is indicated in the Originators'
loan-to-value determination.
As a result of the Guidelines, the Mortgage Loans are likely to
experience rates of delinquency, foreclosure and bankruptcy that are higher, and
that may be substantially higher, than those experienced by mortgage loans
underwritten to FNMA and FHLMC conforming guidelines. Furthermore, changes in
the values of Mortgaged Properties may have a greater effect on the delinquency,
foreclosure, bankruptcy and loss experience of the Mortgage Loans than on
mortgage loans originated in a more traditional manner. No assurance can be
given that the values of the Mortgaged Properties have remained or will remain
at the levels in effect on the dates of origination of the related Mortgage
Loans.
Other Legal Considerations. Applicable state laws generally regulate
interest rates and other charges, require certain disclosure, and require
licensing of the Originators. 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 related Originator will be
required to repurchase any Mortgage Loans which, at the time of origination, did
not comply with applicable federal and state laws and regulations. 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 Servicers to collect all or part of the principal of or interest
on the Mortgage Loans, may entitle the Mortgagor to a refund of amounts
previously paid and, in addition, could subject the Seller, the Servicers or the
related Originator to damages and administrative enforcement. See "Certain Legal
Aspects of Mortgage Assets" in the Prospectus.
The Mortgage Loans are also subject to federal laws, including:
(i) 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;
(ii) 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
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(iii) the Fair Credit Reporting Act, which regulates the use
and reporting of information related to the Mortgagor's credit
experience.
Violations of certain provisions of these federal laws may limit the ability of
the related Servicer to collect all or part of the principal of or interest on
the Mortgage Loans and in addition could subject the Originators, the Seller or
the Servicers to damages and administrative enforcement. The Originators will be
required to repurchase any Mortgage Loans which, at the time of origination, did
not comply with such federal laws or regulations. See "Certain Legal Aspects of
the Mortgage Assets" in the Prospectus.
The federal Soldiers' and Sailors' Civil Relief Act of 1940 may affect
the ability of the related Servicer to collect full amounts of interest on
certain Mortgage Loans and could interfere with the ability of the related
Servicer to foreclose on certain properties. See "Certain Legal Aspects of the
Mortgage Assets--Soldiers' and Sailors' Civil Relief Act of 1940" in the
Prospectus.
Risk of Seller Insolvency. The Seller believes that the transfer of the
Mortgage Loans to the Depositor and by the Depositor to the Trust constitutes a
sale by the Seller to the Depositor and by the Depositor to the Trust and,
accordingly, that such Mortgage Loans will not be part of the assets of the
Seller in the event of the insolvency of the Seller and will not be available to
the creditors of the Seller. In the event of an insolvency of the Seller,
however, it is possible that a bankruptcy trustee or a creditor of the Seller
may argue that the transaction between the Seller and the Depositor was a pledge
of such Mortgage Loans in connection with a borrowing by the Seller rather than
a true sale. Such an attempt, even if unsuccessful, could result in delays in
distributions on the Certificates.
On the Closing Date, the Trustee and the Seller will have received an
opinion of Arter & Hadden, counsel to the Seller, with respect to the true sale
of the Initial Mortgage Loans from the Seller to the Depositor and from the
Depositor to the Trustee, in form and substance satisfactory to the Trustee, the
Insurer and the Rating Agencies.
Risk of Higher Default Rates Associated with California Real Property.
Because _____% by principal amount of the Mortgaged Properties relating to
Initial Mortgage Loans are located in the State of California, an overall
decline in the related residential real estate markets could adversely affect
the values of the Mortgaged Properties securing such Mortgage Loans causing the
Loan Balances of the related Mortgage Loans to equal or exceed the value of such
Mortgaged Properties.
The standard hazard insurance policy required to be maintained under
the terms of each Mortgage Loan does not insure against physical damage arising
from earth movement (including earthquakes, landslides and mudflows). See
"Servicing of Mortgage Loans and Contracts--Standard Hazard Insurance" in the
Prospectus.
Risk Associated with the Insurer. If the protection afforded by
overcollateralization is insufficient and if, upon the occurrence of a
Subordination Deficit, the Insurer is unable to meet its obligations under the
Insurance Policy, then the Owners of the Notes and Class A Certificates could
experience a loss on their investment.
THE PORTFOLIO OF MORTGAGE LOANS
General
The Mortgage Loan Pool primarily includes newly originated loans which
were purchased by the Depositor from the Seller, which acquired such loans from
the related Originators or another party who purchased the loans directly from
the related Originator.
Each Originator and other party from whom the Seller purchased Mortgage
Loans has made certain representations and warranties with respect to Mortgage
Loans originated or sold by it, as specified below, and, upon a breach of such
representations and warranties occurring after sale of the related Mortgage Loan
to the Trust, may be required to repurchase such Mortgage Loan from the Trust.
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Guidelines
The information set forth below with regard to the Originators'
guidelines has been provided to the Depositor by the related Originator. Neither
the Depositor, the Seller, the Underwriters nor any of their respective
affiliates have made any independent investigation of such information, nor has
either Originator made any such investigation with respect to information about
the other Originator's guidelines.
Long Beach Originated Mortgage Loans
Mortgage Loans originated by Long Beach (the "Long Beach Loans") were
originated generally in accordance with guidelines (the "Long Beach Guidelines")
established by Long Beach's underwriting department (or that of Long Beach's
predecessor in interest, Long Beach Bank, F.S.B.) under Long Beach's "B-1st,"
"B-1st Fast Trac," "B-1st QuickCredit," "B-1st QuickCredit Fast Trac" or "B-1st
Stated Income" residential loan programs (the "Long Beach Programs"). Long
Beach's Guidelines are primarily intended to evaluate the value and adequacy of
the mortgaged property as collateral and are also intended to consider the
mortgagor's credit standing and repayment ability. On a case-by-case basis and
only with the approval of two or more senior lending officers, Long Beach 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-to-income ratio, good
credit history, stable employment and time in residence at the applicant's
current address. It is expected that a substantial number of the Mortgage Loans
to be included in the Mortgage Pool will represent such underwriting exceptions.
Under the Long Beach Programs, the underwriting department of Long
Beach or of the originator reviews and verifies the loan applicant's sources of
income (except under the B-1st Stated Income program), calculates the amount of
income from all such sources indicated on the loan application, reviews the
credit history of the applicant and calculates the debt-to-income ratio to
determine the applicant's ability to repay the loan, and reviews the mortgaged
property for compliance with the Long Beach Guidelines. The Long Beach
Guidelines are applied in accordance with a procedure which complies with
applicable federal and state laws and regulations and requires (i) an appraisal
of the mortgaged property which conforms to FHLMC and FNMA standards and (ii) a
review of such appraisal, which review may be conducted by a Long Beach staff
appraiser or representative and, depending upon the original principal balance
and loan-to-value ratio of the mortgaged property may include a desk review of
the original appraisal or a drive-by review appraisal of the mortgaged property.
The Long Beach Guidelines permit single-family loans with loan-to-value ratios
at origination of up to 90% (70% under the B-1st Stated Income program),
depending on the type and use of the property, the creditworthiness of the
mortgagor and the debt-to- income ratio. Under the B-1st program, the maximum
combined loan-to-value ratio for purchase money mortgage loans, including any
second deeds of trust subordinate to Long Beach's first deed of trust, is 90%.
All the Mortgage Loans originated in the Long Beach Programs are based
on loan application packages submitted through mortgage brokerage companies or
at Long Beach's retail branches or are purchased from approved originators
pursuant to the Long Beach Guidelines described herein. Loan application
packages submitted through mortgage brokerage companies, containing in each case
relevant credit, property and underwriting information on the loan request, are
compiled by the applicable mortgage brokerage company and submitted to Long
Beach for approval and funding. The mortgage brokerage companies receive a
portion of the loan origination fee charged to the mortgagor at the time the
loan is made. No single mortgage brokerage company accounts for more than 5%,
measured by outstanding principal balance, of the single-family mortgage loans
originated by Long Beach.
Each prospective mortgagor completes an application which includes
information with respect to the applicant's liabilities, income, credit history
and employment history, as well as certain other personal information. Long
Beach requires a credit report on each applicant from a credit reporting
company. The applicant must provide to Long Beach or the originator a letter
explaining all late payments on mortgage debt and, generally, consumer (i.e.,
non-mortgage) debt. The report typically contains information relating to such
matters as credit history with local and national merchants and lenders,
installment debt payments and any record of defaults, bankruptcy, repossession,
suits or judgments. Under the B-1st program, self-employed individuals are
generally required to submit their two most recent federal income tax returns.
As part of its quality control system, Long Beach
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reverifies information with respect to the foregoing matters that has been
provided by the mortgage brokerage company prior to funding a loan and
periodically audits files based on a random sample of closed loans. In the
course of its pre-funding audit, Long Beach reverifies the income of each
mortgagor or, for a self-employed individual, reviews the income documentation
obtained pursuant to the Long Beach Guidelines (except under the B-1st Stated
Income program). If the loan-to-value ratio is greater than 70%, Long Beach
generally verifies the source of funds for the down payment; Long Beach does not
verify the source of funds if the loan-to-value ratio is 70% or less.
Mortgaged properties that are to secure mortgage loans underwritten
under the Long Beach Programs are appraised by qualified independent appraisers
who are approved by Long Beach's internal chief appraiser. In most cases,
below-average properties (including properties requiring major deferred
maintenance) are not acceptable as security for Long Beach mortgage loans in the
Long Beach Programs. Each appraisal 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. Except with respect to purchase money mortgage loans, every independent
appraisal is reviewed by a Long Beach staff appraiser or representative before
the loan is funded, and a drive-by appraisal is generally performed in
connection with loan amounts over $200,000 for properties located in California
or in excess of other loan amounts established for each State. With respect to
purchase money mortgage loans, an independent appraisal may be reviewed by a
Long Beach staff appraiser or representative.
The Long Beach Guidelines are less stringent than the standards
generally acceptable to FNMA and FHLMC with regard to the mortgagor's credit
standing and repayment ability. Mortgagors who qualify under the Long Beach
Programs generally have payment histories and debt ratios which would not
satisfy FNMA and FHLMC underwriting guidelines and may have a record of major
derogatory credit items such as outstanding judgments or prior bankruptcies. The
Long Beach Guidelines establish the maximum permitted loan-to-value ratio for
each loan type based upon these and other risk factors.
The B-1st QuickCredit and B-1st QuickCredit Fast Trac residential loan
programs are alternative risk grading programs whereby the various risk
categories are assigned in a manner similar to that used for the B-1st and B-1st
Fast Trac loan programs except that consumer credit history is not used to
determine the appropriate risk grading. As in the B-1st and B-1st Fast Trac
residential loan programs, the B-1st QuickCredit and B-1st QuickCredit Fast Trac
residential loan programs use consumer credit to determine debt-to-income
ratios. Maximum loan-to-value ratios and maximum loan amounts are generally
lower under the B-1st QuickCredit and B-1st QuickCredit Fast Trac residential
loan programs than those permitted under the B-1st or B-1st Fast Trac
residential loan programs, respectively. In general, the B-1st QuickCredit
residential loan program is similar to the B-1st residential loan program except
that the B-1st QuickCredit residential loan program does not consider consumer
credit history, requires lower maximum loan-to-value ratios and requires lower
maximum loan amounts. In most other respects, the requirements of the B-1st
QuickCredit and the B-1st QuickCredit Fast Trac residential loan programs
correspond to the requirements of the B-1st and B-1st Fast Trac residential loan
programs, respectively.
Under the B-1st Stated Income residential loan program, the mortgagor's
employment and income sources must be stated on the mortgagor's application. The
mortgagor's income as stated must be reasonable for the related occupation and
such determination as to reasonableness is subject to the loan underwriter's
discretion. However, the mortgagor's income as stated on the application is not
independently verified. Verification of employment is required for salaried
mortgagors only. Maximum loan-to-value ratios are generally lower under the
B-1st Stated Income residential loan program than those permitted under the
B-1st residential loan program. Except as otherwise stated above, the same
mortgage credit, consumer credit and collateral property underwriting guidelines
apply to the B-1st Stated Income residential loan program as apply to the B-1st
residential loan program.
Long Beach requires title insurance on all mortgage loans in the Long
Beach Programs secured by liens on real property. Long Beach 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
single-family loan or the replacement cost of the property, whichever is less.
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Under the Long Beach Programs, various risk categories are used to
grade the likelihood that the mortgagor will satisfy the repayment conditions of
the mortgage 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 mortgagor'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, the Long Beach Programs
establish lower maximum loan-to-value ratios and maximum loan amounts for loans
graded in such categories.
The Long Beach Guidelines have the following categories and criteria
for grading the potential likelihood that an applicant will satisfy the
repayment obligations of a mortgage loan:
"Ambassador;" Credit Grade: "A." Under the "A" risk category,
the applicant must have generally repaid installment of revolving debt
according to its terms and demonstrated steady employment over the last
five years. A maximum of one 30-day late payment, and no 60-day late
payments, within the last 12 months is permitted on an existing
mortgage loan. No collection accounts or charge-offs may remain open
after the funding of the loan. No bankruptcy or notice of default
filings may have occurred during the preceding three years. The
mortgaged property must be in at least average condition. Mortgage
loans originated under the "Ambassador" program must be owner-occupied.
A maximum Loan-to-Value Ratio of 80% is permitted for a purchase and/or
refinance mortgage loan on a single family property, and a maximum
Loan-to-Value Ratio of 75% is permitted on a mortgaged property
consisting of two-to-four units and condominium properties. The debt
service-to-income ratio generally ranges from 45% or less to 55% or
less based on the mortgagor's net disposable income.
"Program I;" Credit Grade: "A-." Under the "A-" risk category,
the applicant generally must have repaid installment of revolving debt
according to its terms and have demonstrated steady employment over the
last two years. A maximum of one 30-day late payment, and no 60-day
late payments, within the last 12 months is permitted on an existing
mortgage loan. Minor derogatory items are permitted on a case-by-case
basis as to non-mortgage credit when the majority of the consumer
credit is deemed good. Mortgagors must provide a reasonable explanation
letter for all late payments within the last 12 months. No bankruptcy
or notice of default filings may have occurred during the preceding
three years. The mortgaged property must be in at least average
condition. A maximum Loan-to-Value Ratio of 80% is permitted for a
purchase money and/or refinance mortgage loan on a single family
property, and a maximum Loan-to-Value Ratio of 75% is permitted on a
mortgaged property consisting of two-to-four units and condominium
properties. A maximum Loan-to-Value Ratio of 70% is permitted for
non-owner occupied purchase money and refinance loans on single family
and condominium properties, and a maximum Loan-to-Value Ratio of 65% is
permitted for a mortgage loan on a mortgaged property consisting of two
units or second home properties. Generally, the debt service-to-income
ratio must be 47%, but this may be allowed to be increased to 55% based
on the mortgagor's net disposable income.
"Program II;" Credit Grade: "B+." Under the "B+" risk
category, the applicant must have generally repaid installment of
revolving debt according to its terms and have demonstrated steady
employment over the last two years. A maximum of two 30-day late
payments, and no 60-day late payments, within the last 12 months is
permitted on an existing mortgage loan. One to three minor derogatory
items that are 90 days or more late are permitted on a case-by-case
basis as to non-mortgage credit when the majority of the consumer
credit is deemed good. Mortgagors must provide a reasonable explanation
letter for all payments 60 days or more late within the last 12 months.
No bankruptcy or notice of default filings may have occurred during the
preceding three years. The mortgaged property must be in at least
average condition. A maximum Loan-to-Value Ratio of 80% is permitted
for a purchase money and/or refinance mortgage loan on a single family
property, and a maximum Loan-to-Value Ratio of 75% is permitted on a
mortgaged property consisting of two-to-four units and condominium
properties. A maximum Loan-to-Value Ratio of 70% is permitted for
non-owner occupied purchase money and refinance mortgage loans on
single family and condominium properties and a maximum Loan-to-Value
Ratio of 65% is permitted for purchase money and refinance mortgage
loans on mortgaged properties consisting of two
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units or second homes properties. Generally, the debt service-to-income
ratio must be 50% or less, but this may be increased to 55% based on
the mortgagor's net disposable income.
"Program III;" Credit Grade: "B." Under the "B" risk category,
the applicant must have generally repaid installment of revolving debt
according to its terms and have demonstrated steady employment over the
last two years. A maximum of four 30-day late payments within the last
12 months is acceptable on an existing mortgage loan. One to three
minor derogatory items that are late 90 days or more are permitted on a
case-by-case basis as to non-mortgage credit when the majority of the
consumer credit is deemed good. Any and all payments 60 days or more
late within the past 12 months may not represent more than 50% of the
credit reported during that period. Mortgagors must provide a
reasonable explanation letter for all payments 60 days or more late
within the last 12 months. No bankruptcy or notice of default filings
may have occurred during the preceding two years. The mortgaged
property must be in at least average condition. A maximum Loan-to-Value
Ratio of 80% is permitted for a purchase money and/or refinance
mortgage loan on a single family property, and a maximum Loan-to-Value
Ratio of 75% is permitted on mortgaged properties consisting of
two-to-four units and condominiums. For non-owner occupied purchase
money and refinance properties, the maximum Loan-to-Value Ratio is 70%
for single family and condominium properties, and 65% for mortgaged
properties consisting of two units or second homes. Generally, the debt
service-to-income ratio must be 50% or less but this may be increased
to 55% based on the mortgagor's net disposable income.
"Program IV;" Credit Grade: "B-." Under the "B-" risk
category, the applicant must have generally repaid installment and
revolving debt according to its terms and have demonstrated steady
employment over the last two years. A maximum of one 60-day late
payment within the last 12 months, and a maximum of at most 30 days
late at time of application is permitted on an existing mortgage loan.
An existing mortgage loan is not required to be current at the time the
application is submitted. Certain non-consumer credit, collections, or
judgments, may be disregarded on a case-by-case basis. Payments 60 days
or more late within the last 12 months may not represent more than 50%
of the credit items reported during that period. Mortgagors must
provide a reasonable explanation letter for all payments 60 days or
more late within the last 12 months. No bankruptcy or notice of default
filings may have occurred within the preceding two years. The mortgaged
property must be in at least average condition. A maximum Loan-to-Value
Ratio of 75% is permitted for a purchase money and/or refinance
mortgage loan on an owner-occupied single family property. For
non-owner occupied purchase and refinance properties, the maximum
Loan-to-Value Ratio is 65% for single family and second home
properties. Generally, the debt service-to-income ratio must not exceed
55%.
"Program V;" Credit Grade: "C." Under the "C" risk category,
the applicant may have experienced significant credit problems in the
past. A maximum of two 60-day and one 90-day late payments, or three
60-day late payments and no 90-day late payments within the last 12
months is permitted on an existing mortgage loan. An existing mortgage
loan is not required to be current at the time the application is
submitted. Consumer credit derogatory items will be considered on a
case-by-case basis. Mortgagors must provide a reasonable explanation
letter for all payments 60 days or more late within the last 12 months.
No bankruptcy or notice of default filings may have occurred during the
preceding twelve months. The mortgaged property must be in at least
average condition. A maximum Loan-to-Value Ratio of 75% is permitted
for a purchase money and refinance mortgage loan on an owner-occupied
single family property. For non-owner occupied purchase money and
refinance properties, the maximum Loan-to-Value Ratio is 60% for single
family and second home properties. Generally, the debt
service-to-income ratio must not exceed 55%; however, 55%-60% will be
considered on a case-by-case basis.
"Program VI;" Credit Grade: "C-." Under the "C-" risk
category, the applicant may have experienced significant credit
problems in the past. A maximum of two 60-day and one 90-day late
payments, or three 60-day late payments and no 90-day late payments
within the last 12 months is permitted on an existing mortgage loan. On
a case-by-case basis, the applicant may have a notice of
default/foreclosure within the last 24 months with a good explanation.
The applicant may not currently be in bankruptcy; however, the
applicant may have had a bankruptcy with a good explanation and proof
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of dismissal/discharge. Consumer derogatory items will be considered on
a case-by-case basis. Long Beach underwriters must be satisfied that
the problem that caused the "C-" credit no longer exists and that there
is a reasonable expectation that the applicant will repay the mortgage
loan according to the terms and conditions agreed upon. The mortgaged
property must be in at least average condition. A maximum Loan-
to-Value Ratio of 70% is permitted for a purchase money mortgage loan,
and a maximum Loan-to-Value Ratio of 65% is permitted for a refinance
of an owner-occupied single family property. On a case-by-case basis,
the maximum Loan-to-Value Ratio permitted for a non-owner occupied
purchase money and refinance mortgage loan is 50%. Generally, the debt
service-to-income ratio must not exceed 55%; however, 55%-60% will be
considered on a case-by-case basis.
Approximately _____%, _____%, _____% and _____% of the Long Beach Loans
in Group I and _____%, _____%, _____% and _____% of the Long Beach Loans in
Group II are in Seller's PAG II, Seller's PAG III, Seller's PAG IV and Seller's
PAG V risk categories, respectively.
Mortgage Loans Originated by Other Originators
The following discussion addresses Mortgage Loans originated by
Originators other than Long Beach. The Mortgage Loans have been originated by
the Originators in accordance with the Underwriting Guidelines established by
each of them and reviewed and approved by the Seller. The Underwriting
Guidelines are primarily intended to evaluate the value and adequacy of the
mortgaged property as collateral and are also intended to consider the
mortgagor's credit standing and repayment ability. On a case-by-case basis, the
Originator may determine that, based upon compensating factors, a prospective
mortgagor not strictly qualifying under the Underwriting Guidelines warrants an
underwriting exception. Compensating factors may include, but are not limited
to, low loan-to-value ratio, low debt-to-income ratio, good credit history,
stable employment, pride of ownership and time in residence at the applicant's
current address. It is expected that a substantial number of the Mortgage Loans
to be included in the Mortgage Pool will represent such underwriting exceptions.
Under the Underwriting Guidelines, the Originators review and verify
the loan applicant's sources of income (except under the stated income
programs), calculate the amount of income from all such sources indicated on the
loan application, review the credit history of the applicant and calculate the
debt-to-income ratio to determine the applicant's ability to repay the loan, and
review the mortgaged property for compliance with their Underwriting Guidelines.
The Underwriting Guidelines are applied in accordance with a procedure which
complies with applicable federal and state laws and regulations and requires (i)
an appraisal of the mortgaged property which conforms to FHLMC and FNMA
standards and (ii) a review of such appraisal, which review may be conducted by
the Originator's staff appraiser or representative and, depending upon the
original principal balance and loan-to-value ratio of the mortgaged property may
include a desk review of the original appraisal or a drive-by review appraisal
of the mortgaged property. The Underwriting Guidelines permit single-family
loans with loan-to-value ratios at origination of up to 90% for the highest
credit grading category (75% under the stated income programs), depending on the
type and use of the property, the creditworthiness of the mortgagor and the
debt-to-income ratio. Under the Underwriting Guidelines, the maximum combined
loan-to-value ratio for purchase money mortgage loans may differ from those
applicable to refinancings.
All of the Mortgage Loans are based on loan application packages
submitted through mortgage brokerage companies or at the related Originator's
retail branches or are purchased from originators approved by the Originators.
Loan application packages submitted through mortgage brokerage companies,
containing in each case relevant credit, property and underwriting information
on the loan request, are compiled by the applicable mortgage brokerage company
and submitted to the Originator for approval and funding. The mortgage brokerage
companies receive a portion of the loan origination fee charged to the mortgagor
at the time the loan is made.
Each prospective mortgagor completes an application which includes
information with respect to the applicant's liabilities, income, credit history
and employment history, as well as certain other personal information. Each
Originator requires a credit report on each applicant from a credit reporting
company. The applicant must provide to the related Originator or the originator
a letter explaining all late payments on mortgage debt and, generally, consumer
(i.e., non-mortgage) debt. The report typically contains information relating to
such matters
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as credit history with local and national merchants and lenders, installment
debt payments and any record of defaults, bankruptcy, repossession, suits or
judgments. Self-employed individuals are generally required to submit their two
most recent federal income tax returns. As part of their quality control
systems, each Originator generally reverifies information with respect to the
foregoing matters that has been provided by the mortgage brokerage company prior
to funding a loan and periodically audits files based on a random sample of
closed loans. In the course of their pre-funding audit, each Originator
generally reverifies the income of each mortgagor or, for a self-employed
individual, reviews the income documentation obtained pursuant to the
Underwriting Guidelines (except under stated income programs). If the
loan-to-value ratio is greater than a predetermined level, the Originators
generally verify the source of funds for the down payment; however, the related
Originator may not verify the source of funds if the loan-to-value ratio is less
than such level.
Mortgaged properties that are to secure mortgage loans are generally
appraised by qualified independent appraisers who are approved by the related
Originator. In most cases, below-average properties (including properties
requiring major deferred maintenance) are not acceptable as security for
mortgage loans under the Underwriting Guidelines. Each appraisal 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. Except with respect to purchase money mortgage
loans, every independent appraisal is generally reviewed by the related
Originators before the loan is funded, and a drive-by review or appraisal is
generally performed in connection with loan amounts over a certain predetermined
dollar amount established for each State. With respect to purchase money
mortgage loans, an independent appraisal may be reviewed the Originator.
The Underwriting Guidelines are less stringent than the standards
generally acceptable to FNMA and FHLMC with regard to the mortgagor's credit
standing and repayment ability. Mortgagors who qualify under the Underwriting
Guidelines generally have payment histories and debt ratios which would not
satisfy FNMA and FHLMC underwriting guidelines and may have a record of major
derogatory credit items such as outstanding judgments or prior bankruptcies. The
Underwriting Guidelines establish the maximum permitted loan-to-value ratio for
each loan type based upon these and other risk factors.
The Mortgage Loans originated by the Originators other than Long Beach
were originated consistent with and generally conform to "Full Documentation",
"Limited Documentation", or "Stated Income Documentation" residential loan
programs. Under each of the programs, the related Originator generally reviews
the applicant's source of income, calculates the amount of income from sources
indicated on the loan application or similar documentation, reviews the credit
history of the applicant, calculates the debt service-to-income ratio to
determine the applicant's ability to repay the loan, reviews the type and use of
the property being financed, and reviews the property. In determining the
ability of the applicant to repay the loan, a rate is established that generally
is equal to the lesser of the fully indexed interest rate on the loan being
applied for or one percent above the initial interest rate on such loan. The
Underwriting Guidelines require that mortgage loans be underwritten in a
standardized procedure which complies with applicable federal and state laws and
regulations and requires the Originator's underwriters to be satisfied that the
value of the property being financed, as indicated by an appraisal and a review
of the appraisal, currently supports the outstanding loan balance. In general,
the maximum loan amount for mortgage loans originated under the programs is
$3,500,000. Mortgage loans may, however, be originated generally up to $500,000,
provided the LTV is at least 5% below the applicable residential loan program
maximum that would otherwise apply. The Underwriting Guidelines permit
one-to-four-family loans to have LTV's at origination of generally up to 90%,
depending on, among other things, the purpose of the mortgage loan, a
mortgagor's credit history, repayment ability and debt service-to-income ratio,
as well as the type and use of the property. With respect to mortgage loans
secured by mortgaged properties acquired by a mortgagor under a "lease option
purchase," the LTV of the related mortgage loan is generally based on the
appraised value at the time of origination of such mortgage loan.
The Underwriting Guidelines require that income be verified for each
applicant and that the source of funds (if any) required to be deposited by the
applicant into escrow under its various programs as follows: Under the Full
Documentation programs, applicants generally are required to submit two written
forms of verification of stable income for 24 months (or, if the LTV is less
than or equal to 65%, for 12 months). Under the Limited Documentation programs,
generally one such form of verification is required for 12 months. Under the
Stated
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Income Documentation programs, generally an applicant may be qualified based
upon monthly income as stated on the mortgage loan application if the applicant
meets certain criteria. All the foregoing programs typically require that with
respect to each applicant, there be a telephone verification of the applicant's
employment. Verification of the source of funds (if any) required to be
deposited by the applicant into escrow in the case of a purchase money loan is
generally required under the Full Documentation program guidelines. No such
verification is required under the other programs.
The Underwriting Guidelines require title insurance on all mortgage
loans secured by liens on real property. The Underwriting Guidelines also
require 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 single-family loan or the replacement cost of the property, whichever is
less.
Under the Underwriting Guidelines, various risk categories are used to
grade the likelihood that the mortgagor will satisfy the repayment conditions of
the mortgage 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 mortgagor'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, the Underwriting
Guidelines establish lower maximum loan-to-value ratios and maximum loan amounts
for loans graded in such categories.
ARCC Performance Assumption Grouping
The Seller, through its manager AMRESCO Residential Credit Corporation
("ARCC"), performs due diligence on all mortgage loan portfolios which it
acquires, including the Mortgage Loans included in the Trust Estate. Part of
ARCC's review includes a review of the credit-grading process of the related
Originators. ARCC has developed Performance Assumption Groupings ("PAGs") which
are similar to a credit-grading criteria. ARCC determines which PAG the
originators' related credit grade most closely matches, and all loans which the
Originator has placed in that credit grade are placed in the related PAG
category. Because there are multiple factors in both the credit grades
identified by the originators and the PAG categories, it is unlikely that any
credit grade designation will match up exactly to any PAG category. ARCC uses
its best efforts to match the categories based upon its projection of asset
performance for the related credit grade and PAG. It should be noted that while
the Originators have specific criteria for credit grades, they have the
discretion to place a loan in a credit grade for which it does not meet all of
the criteria, based upon consideration of all relevant factors. It should
further be noted that ARCC does not make any attempt to determine how individual
loans would fall under the PAG criteria described below, but only associates the
existing credit grades of the Originator to the various PAG categories.
Seller's PAG I
--------------
The maximum LTV for all eligible properties, owner or
non-owner occupied, purchase money or refinance, should be 90% or less.
The maximum back-end debt ratio should not exceed 50%. The prospective
mortgagor should have approximately five (5) years of established
credit with five (5) trade lines. In the last 12 months, mortgage
credit should show no delinquencies in excess of 30 days, and in the
last 24 months, should show delinquencies only for 30 days or less. The
credit history should reveal no foreclosures. In the last 12 months,
installment and revolving accounts should indicate no delinquencies for
major credit, and a maximum of 30 days for minor credit. In the last 24
months, both major and minor credit should be a maximum of 30 days
delinquent. There should be no evidence of judgments, charge offs,
collections or bankruptcies affecting the mortgagor. In last 36 months,
the prospective mortgagor should have had only minor collection actions
totaling less than $500.
Seller's PAG II
---------------
The maximum LTV for all eligible properties, owner or
non-owner occupied, purchase money or refinance, should be 85% or less.
The maximum back end debt ratio should not exceed 50%. The customer
should have approximately three (3) years of established credit with
three (3) trade lines. In the
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last 12 months, mortgage credit should show no more than two 30-day
delinquencies and no 60-day delinquencies, and all credits should be
current at the time of origination; in the last 24 months, the credit
history should show a maximum of 30 day delinquencies. In the last 12
months, installment and revolving accounts should include no more than
two 30-day delinquencies for major credit and a maximum of 60 day
delinquency for minor credit. In the last 24 months, the maximum
delinquency should be 60 days for both major and minor credit. In the
last 12 months, there should be no collection action taken against the
prospective mortgagor. In the last 24 months, there should be no
judgments or charge offs against the prospective mortgagor, and
discharged bankruptcies should have reestablished credit with no
delinquencies. In the last 36 months, mortgagor should be subject to
only minor collection actions totaling less than $1,000.
Seller's PAG III
----------------
The maximum LTV for all eligible properties, owner or
non-owner occupied, purchase money or refinance, should be 80% or less.
The maximum back end debt ratio should not exceed 50%. The customer
should have approximately two (2) years of established credit with two
(2) trade lines. In the last 12 months, mortgage credit should show no
more than three 30-day delinquencies and one 60-day delinquency.
Mortgage credit should be a maximum 30 days delinquent at the time of
origination, and in the last 24 months, a maximum of 60 days
delinquent. In the last 12 months, installment and revolving accounts
should show no more than two 60-day delinquencies for major credit and
a maximum delinquency of 90 days for minor credit. In the last 24
months, installment and revolving accounts should be a maximum 90 days
delinquent for both major and minor credit. In the last 12 months,
there should be no judgments or charge offs, and only minor collection
actions totaling less than $500 against the prospective mortgagor. In
the last 24 months, the prospective mortgagor is permitted to have
judgments or charge offs totaling less than $500, and discharged
bankruptcies with a maximum 30-day delinquency on reestablished credit.
In the last 36 months, collection actions totaling less than $2,500 are
permitted.
Seller's PAG IV
---------------
The maximum LTV for all eligible properties, owner or
non-owner occupied, purchase money or refinance, should be 75% or less.
The maximum back-end debt ratio should not exceed 55%. There is no
requirement for an established credit history. In the last 12 months,
mortgage credit should include no more than four 30-day delinquencies
and two 60-day delinquencies, and mortgage credit should be a maximum
of 90 days delinquent at the time of origination. In the last 12
months, installment and revolving accounts should show no more than two
90-day delinquencies for major credit and a maximum of 90 day
delinquencies for minor credit. In the last 24 months, installment and
revolving accounts should be a maximum 90 days delinquent for both
major and minor credit. In the last 12 months, mortgagor may have
discharged bankruptcies with maximum 30 day delinquency on
reestablished credit, and collection actions totaling less than $2,500
are permitted. In the last 24 months, total judgments and charge offs
should be less than $2,500.
Seller's PAG V
--------------
The maximum LTV for all eligible properties, owner or
non-owner occupied, purchase money or refinance, should be 65% or less.
The maximum back-end debt ratio should not exceed 55%. There is no
requirement for an established credit history. In the last 12 months,
mortgage credit should be a maximum of 120 days delinquent, and no
foreclosure may be pending at the time of origination. In the last 24
months, mortgage credit should be a maximum of 120 days delinquent.
There are no stipulations regarding other derogatory information other
than that bankruptcies should have been discharged.
Approximately _____%, _____%, _____%, and _____% of the Initial Group I
Mortgage Loans (including Long Beach Loans) and _____%, _____%, _____%, and
_____% of the Initial Group II Mortgage Loans (including Long Beach Loans) are
in the Seller's PAG II, PAG III, PAG IV, and PAG V, categories, respectively.
S-23
<PAGE>
Approximately _____%, _____%, and _____% of the Initial Group I
Mortgage Loans that are not Long Beach Loans and _____%, _____%, and _____% of
the Initial Group II Mortgage Loans that are not Long Beach Loans are in the
Full Documentation, Limited Documentation and Stated Income Documentation
programs, respectively.
Prepayment Penalties
Any Mortgage Loan may be prepaid in full or in part at any time;
however, approximately _____% of the Mortgage Loans provide for the payment by
the Mortgagor of a prepayment charge in limited circumstances on certain full or
partial prepayments made within five years from the date of execution of the
related Note. The amount of the prepayment charge is as provided in the related
Note. In general, the Note provides that a prepayment charge will apply if, in
any twelve-month period generally during the first five years from the date of
origination of such Mortgage Loan, the Mortgagor prepays an aggregate amount
exceeding 20% of the original principal balance of such Mortgage Loan. The
amount of the prepayment charge will generally be equal to six months' advance
interest calculated on the basis of the rate in effect at the time of such
prepayment on the amount prepaid in excess of 20% of the original balance of
such Mortgage Loan.
The Seller plans to initiate a refinance policy with the Originators
who originated Mortgage Loans for the Trust and for other trusts in which the
Seller or an affiliate of the Seller owns a residual interest in an effort to
retain borrowers who the Seller or the Originators believe are likely to
refinance their loans due to interest rate changes or other reasons. Although
the policy is expected to permit the Originators to solicit such borrowers in
accordance with the Seller's policy, the Depositor believes that this practice
will not likely result in a material change in the prepayment experience of the
Trust because the solicited borrowers would have been expected to refinance
through other originators in any event.
Representations Relating to the Mortgage Loans
Each Originator will have made representations and warranties in
respect of the Mortgage Loans sold by such Originator to the Seller or another
party who sold Mortgage Loans to the Seller in a loan purchase and sale
agreement (each, a "Transfer Agreement"), which will be assigned to the Trust.
Such representations and warranties generally include, among other things, that:
(i) the information with respect to each Mortgage Loan set forth in the related
Schedule of Mortgage Loans is true and correct as of the specified date; (ii)
each Mortgaged Property is improved by a single (one-to-four) family residential
dwelling, which may include condominiums, townhouses and manufactured housing
permanently attached to foundations; (iii) each Mortgage Loan had, at the time
of origination, either an attorney's certification of title or a title search or
title policy; (iv) as of the Cut-Off Date each Mortgage Loan was secured by a
valid and subsisting first lien of record on the Mortgaged Property subject in
all cases only to the exceptions to title set forth in the title insurance
policy, if any, with respect to the related Mortgage Loan; (v) each Originator
or other party to a Transfer Agreement held good and indefeasible title to, and
was the sole owner of, each Mortgage Loan when conveyed by such Originator or
other party; and (vi) each Mortgage Loan was originated in accordance with
applicable law and is the valid, legal and binding obligation of the related
Mortgagor.
If an Originator or other party to a Transfer Agreement cannot cure a
breach of any representation or warranty made by it in respect of a Mortgage
Loan that materially and adversely affects the interests of the Owners or the
Insurer in such Mortgage Loan within a time period specified in the Transfer
Agreement, such Originator or other party will be obligated under the related
Transfer Agreement to purchase from the Trust such Mortgage Loan at a price (the
"Loan Purchase Price") set forth in the related Transfer Agreement which Loan
Purchase Price will be no less than the principal balance thereof as of the date
of purchase plus one month's interest at the Mortgage Rate (net of the
applicable Servicing Fee) (the "Net Coupon Rate").
As to any such Mortgage Loan required to be repurchased by an
Originator, as provided above, rather than repurchase the Mortgage Loan, such
Originator may, at its sole option, remove such Mortgage Loan (a "Deleted
Mortgage Loan") from the Trust and cause the substitution in its place of
another Mortgage Loan of like kind (a "Qualified Replacement Mortgage" as such
term is defined in the Agreement).
S-24
<PAGE>
Upon receipt of notice by a Servicer or upon a Servicer becoming aware
that a representation and warranty made by an Originator in the Transfer
Agreement has been breached, such Servicer will be required to promptly notify
the related Originator, the Insurer, the Trustee and the Seller of such breach
and request that such Originator cure such breach or honor its repurchase or
substitution obligations for the benefit of the Trust. The foregoing will
constitute the sole remedy available to the Trust for a breach of representation
by an Originator.
The Servicers
The information set forth below concerning the Servicers has been
provided to the Depositor by the related Servicer. Neither the Depositor, the
Seller, the Underwriters nor any of their respective affiliates have made any
independent investigation of such information, nor has either Servicer made any
such investigation with respect to information about the other Servicer.
Advanta
Advanta Mortgage Corp. USA ("Advanta") will act as one of the Servicers
of the Mortgage Loans pursuant to the Pooling and Servicing Agreement. Advanta
is an indirect subsidiary of Advanta Corp., a Delaware corporation ("Advanta
Parent"), a publicly traded company based in Horsham, Pennsylvania with assets
as of March 31, 1996 in excess of $5.0 billion.
Advanta Parent, through its subsidiaries (including Advanta) managed
assets (including mortgage loans) in excess of $16.1 billion as of March 31,
1996.
As of March 31, 1996, Advanta and its subsidiaries were servicing
approximately 34,000 mortgage loans in the Owned and Managed Servicing Portfolio
representing an aggregate outstanding principal balance of approximately $1.9
billion, and approximately 29,900 mortgage loans in the Third-Party Servicing
Portfolio representing an aggregate outstanding principal balance of
approximately $923 million.
Owned and Managed Servicing Portfolio. The following tables set forth
information relating to the delinquency, loan loss and foreclosure experience of
Advanta for its servicing portfolio, excluding certain loans serviced by Advanta
that were not originated or purchased and reunderwritten by affiliates of
Advanta (the "Owned and Managed Servicing Portfolio"), of fixed and variable
rate mortgage loans as of March 31, 1996, and for each of the four prior years.
In addition to the Owned and Managed Servicing Portfolio, Advanta serviced as of
March 31, 1996, approximately 29,900 mortgage loans with an aggregate principal
balance as of such date of approximately $923 million; such loans were not
originated by Advanta or affiliates of Advanta and are being serviced for third
parties on a contract servicing basis (the "Third Party Servicing Portfolio").
No loans in the Third Party Servicing Portfolio are included in the tables set
forth below.
S-25
<PAGE>
<TABLE>
<CAPTION>
DELINQUENCY AND FORECLOSURE EXPERIENCE OF
ADVANTA'S OWNED AND MANAGED SERVICING PORTFOLIO
OF MORTGAGE LOANS
Year Ending December 31,
------------------------------------------------------------------------------------------------
Three Months Ending
1992 1993 1994 1995 March 31, 1996
---------------------------------------------------------------------------------------------------------------------
By By By By By
By No. Dollar Dollar Dollar Dollar Dollar
of Amount By No. Amount By No. Amount By No. Amount By No. Amount
Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio 22,318 $908,541 25,460 $1,149,864 26,446 $1,346,100 32,592 $1,797,582 $34,422 $1,928,336
Delinquency
percentage(1)
30-59 days 2.71% 2.59% 2.43% 2.22% 2.01% 1.57% 2.67% 2.44% 1.97% 1.94%
60-89 days 0.64 0.64 0.77 0.63 0.57 0.45 0.72 0.71 0.65 0.65
90 days or 1.52 1.69% 2.19 2.12 1.85 1.51 1.69 1.23 1.58 1.25
---- ----- ---- ---- ---- ---- ---- ---- ---- ----
more
Total 4.87% 4.92% 5.39% 4.97% 4.43% 3.53% 5.08% 4.38% 4.20% 3.84%
Foreclosure 2.13% 2.78% 1.32% 1.62% 1.35% 1.38% 1.29% 1.53% 1.37% 1.62%
rate(2)
REO 0.35% -- 0.42% -- 0.47% -- 0.52% -- 0.49% --
properties(3)
- ------------------------
<FN>
(1) The period of delinquency is based on the number of days payments are
contractually past due. The delinquency statistics for the period exclude
loans in foreclosure.
(2) "Foreclosure Rate" is the number of mortgage loans or the dollar amount of
mortgage loans in foreclosure as a percentage of the total number of
mortgage loans or the dollar amount of mortgage loans, as the case may be,
as of the date indicated.
(3) REO Properties (i.e., "real estate owned" properties -- properties
relating to mortgages foreclosed or for which deeds in lieu of foreclosure
have been accepted, and held by Advanta pending disposition) percentages
are calculated using the number of loans, not the dollar amount.
</FN>
</TABLE>
LOAN LOSS EXPERIENCE
OF ADVANTA'S OWNED AND MANAGED SERVICING PORTFOLIO
OF MORTGAGE LOANS*
<TABLE>
<CAPTION>
Year Ending December 31,
-----------------------------------------------------------------------
1992 1993 1994 1995 March 31,
1996
--------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Average amount outstanding(1) $786,178 $1,049,447 $1,225,529 $1,540,238 $1,850,765
Gross losses(2) $6,069 $14,115 $20,886 $13,978 $3,341
Recoveries(3) $145 $123 $179 $148 $15
Net losses(4) $5,924 $13,992 $20,707 $13,830 $3,326
Net losses as a percentage of
average amount outstanding 0.75% 1.33% 1.69% 0.90% 0.72%(5)
- ------------------------
<FN>
(1) "Average Amount Outstanding" during the period is the arithmetic average
of the principal balances of the mortgage loans outstanding on the last
business day of each month during the period.
(2) "Gross Losses" are amounts which have been determined to be uncollectible
relating to mortgage loans for each respective period.
(3) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
(4) "Net Losses" represents "Gross Losses" minus "Recoveries".
(5) Annualized
* Managed portfolio statistics restated to exclude interest advances on serviced
portfolio to be consistent with presentation of owned portfolio.
</FN>
</TABLE>
Advanta experienced an increase in the net loss rate on its Owned and
Managed Servicing Portfolio during the period 1990 through 1994. It believes
that such increase was due to four primary factors; the seasoning of its
S-26
<PAGE>
portfolio, economic conditions, a decline in property values in certain regions
and the acceleration of charge-offs on loans in 1994. In addition, the level of
net losses during such period was negatively impacted by the performance on the
Non-Income Verification ("NIV") loan program. The net loss rates as a percentage
of the average amount outstanding on its Owned and Managed Servicing Portfolio,
excluding NIV loans, are 0.82%, 1.42%, 0.88% and 0.45% for the periods ending
December 31, 1995, December 31, 1994, December 31, 1993 and December 31, 1992
respectively.*
- -----------------
* Managed portfolio statistics restated to exclude interest advances on serviced
portfolio to be consistent with presentation of owned portfolio.
Long Beach Mortgage Company
Long Beach Mortgage Company (referred to herein as "Long Beach"), a
Delaware corporation, was incorporated in June 1994, and is approved as a
seller/servicer for FNMA and FHLMC and as a non-supervised mortgagee by the U.S.
Department of Housing and Urban Development. On October 7, 1994, Long Beach
succeeded to the mortgage banking business formerly conducted by Long Beach
Bank, F.S.B., a federally chartered savings bank (the "Bank"), including all
operating systems, computers, files and substantially all personnel maintained
and utilized by the Bank in its mortgage banking operations prior to its
reorganization.
The principal business of Long Beach is originating, purchasing,
selling and servicing residential real estate loans secured by one- to
four-family properties ("single-family") and multi-family properties containing
five or more units ("multi-family"). The initial working capital for Long
Beach's operations was provided by Long Beach Financial Services Company. Its
principal sources of funds are anticipated to be sales of loans and
mortgage-backed securities, bank lines of credit, term loans and other
borrowings. At December 31, 1995, Long Beach had 79 offices, consisting of 33
loan origination centers located in California and 46 loan origination centers
located in Arizona, Colorado, Georgia, Illinois, Indiana, Michigan, Minnesota,
Nevada, New Mexico, Oregon, Utah, Washington and Wisconsin.
Lending Activities and Loan Sales. Long Beach originates single-family
and multi-family real estate loans through referrals from mortgage brokerage
companies and through its network of offices and loan origination centers. Long
Beach also participates in secondary market activities by originating and
selling mortgage loans, participations in loans, or mortgage-backed securities
in the secondary market, generally retaining loan servicing; however, in some
cases Long Beach's whole loan sale agreements provide for the transfer of
servicing rights. In addition, Long Beach intends to retain mortgage loans in
its own portfolio to provide a stable source of interest income and to provide
collateral to secure borrowings.
Before Long Beach originates any mortgage loans which are based on
application packages submitted through a mortgage brokerage company that is new
to Long Beach, such mortgage brokerage company is examined by Long Beach through
license and reference checks and through a personal visit by a senior Long Beach
representative. If at any time Long Beach determines that a mortgage brokerage
company consistently submits applications for loans which do not meet Long
Beach's underwriting and quality control standards, Long Beach terminates its
relationship with that mortgage brokerage company.
Long Beach's primary lending activity is funding loans to enable
mortgagors to purchase or refinance residential real property, which loans are
secured by first or second liens on the related real property. Long Beach's loan
portfolio also includes loans for commercial and industrial properties. Long
Beach's single-family real estate loans are predominantly "conventional"
mortgage loans, meaning that they are not insured by the Federal Housing
Administration (the "FHA") or partially guaranteed by the U.S. Department of
Veterans Affairs (the "VA").
S-27
<PAGE>
The following table summarizes Long Beach's (including that of its
predecessor, in interest Long Beach Bank) one- to four-family residential
mortgage loan origination and sales activity for the periods shown below. Sales
activity may include sales of mortgage loans purchased by Long Beach from other
loan originators.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------
1992 1993 1994 1995
---------------------------------------------------------------------------------------
(Dollars in Thousands)
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Originations............................. $959,534 $786,374 $1,062,593 $1,112,890
Sales.................................... $1,081,001 $788,291 $1,081,841 $1,108,162
</TABLE>
Loan Servicing. Generally, Long Beach services all the mortgage loans
it originates whether those loans are sold or retained in its portfolio.
Servicing includes collecting and remitting loan payments, accounting for
principal and interest, contacting delinquent mortgagors, and supervising
foreclosure in the event of unremedied defaults. Long Beach's servicing
activities are audited regularly by its internal auditors and examined
periodically by applicable regulatory authorities. Certain financial records of
Long Beach relating to its loan servicing activities are reviewed annually as
part of the audit of Long Beach's financial statements conducted by its
independent accountants.
Collection Procedures; Delinquency and Loss Experience. When a
mortgagor fails to make a required payment on a residential mortgage loan, Long
Beach attempts to cause the deficiency to be cured by corresponding with the
mortgagor. In most cases deficiencies are cured promptly. Pursuant to Long
Beach's customary procedures for residential mortgage loans serviced by it for
its own account, Long Beach generally mails a notice of intent to foreclose to
the mortgagor after the loan has become 31 days past due (two payments due but
not received) and, within one month thereafter, if the loan remains delinquent,
typically institutes appropriate legal action to foreclose on the property
securing the loan. If foreclosed, the property is sold at public or private sale
and may be purchased by Long Beach. In California, real estate lenders are
generally unable as a practical matter to obtain a deficiency judgment against
the mortgagor on a loan secured by single-family real estate.
S-28
<PAGE>
Long Beach Programs -- Servicing Portfolio
The following table sets forth Long Beach's delinquency and loss
experience (including that of its predecessor in interest, Long Beach Bank,
F.S.B.) at the dates indicated on its servicing portfolio of mortgage loans
originated under the Long Beach Programs (the majority of such mortgage loans
reflected in the following table are adjustable rate mortgage loans):
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------
1991 1992 1993 1994 1995
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Outstanding Principal Balance......... $930,728 $1,561,256 $1,948,978 $2,422,604 $2,405,639
Number of Loans............................. 7,094 12,257 16,289 21,291 22,775
DELINQUENCY
Period of Delinquency:
31-60 Days
Principal Balance........................ $13,518 $12,630 $13,079 $16,816 $32,483
Number of Loans.......................... 97 91 106 131 286
Delinquency as a Percentage of Total
Outstanding Principal Balance.......... 1.45% 0.81% 0.67% 0.69% 1.35%
Delinquency as a Percentage of
Number of Loans........................ 1.37% 0.74% 0.65% 0.62% 1.26%
61-90 Days
Principal Balance........................ $7,949 $10,753 $13,144 $18,104 $21,249
Number of Loans.......................... 59 75 93 129 188
Delinquency as a Percentage of Total
Outstanding Principal Balance.......... 0.85% 0.69% 0.67% 0.75% 0.88%
Delinquency as a Percentage of
Number of Loans........................ 0.83% 0.61% 0.57% 0.61% 0.83%
91 Days or More
Principal Balance........................ $24,482 $48,643 $60,621 $70,034 $94,201
Number of Loans.......................... 154 334 418 509 765
Delinquency as a Percentage of Total
Outstanding Principal Balance.......... 2.63% 3.12% 3.11% 2.89% 3.92%
Delinquency as a Percentage of
Number of Loans........................ 2.17% 2.72% 2.57% 2.39% 3.36%
Total Delinquencies:
Principal Balance........................ $45,949 $72,026 $86,844 $104,953 $147,933
Number of Loans.......................... 310 500 617 769 1,239
Delinquency as a Percentage of Total
Outstanding Principal Balance.......... 4.94% 4.61% 4.46% 4.33% 6.15%
Delinquency as a Percentage of
Number of Loans........................ 4.37% 4.08% 3.79% 3.61% 5.44%
FORECLOSURES PENDING(1)
Principal Balance........................ $27,452 $50,104 $64,443 $77,960 $102,962
Number of Loans.......................... 184 342 449 583 859
Foreclosures Pending as a Percentage of
Total Outstanding Principal Balance.... 2.95% 3.21% 3.31% 3.22% 4.28%
Foreclosures Pending as a Percentage of
Number of Loans........................ 2.59% 2.79% 2.76% 2.74% 3.77%
NET LOAN GAINS (LOSSES) for the Period(2)...
$ (57) $ (3,198) $ (13,449) $ (24,617) $ (24,320)
NET LOAN GAINS (LOSSES) as a Percentage of Total
outstanding Principal Balance............ (0.01)% (0.20)% (0.69)% (1.02)% (1.01)%
- -------------
<FN>
(1) Mortgage loans which are in foreclosure but as to which title to the
mortgaged property has not been acquired, at the end of the period indicated.
Foreclosures pending are included in the delinquencies set forth above.
(2) Net Loan Gains (Losses) is calculated for loans conveyed to REMIC trust
funds as the aggregate of the net loan gain (loss) for all such loans
liquidated during the period indicated. The net loan gain (loss) for any such
loan is equal to the difference between (a) the principal balance plus
accrued interest through the date of liquidation plus all liquidation
expenses related to such loan and (b) all amounts received in connection with
the liquidation of such loan. The majority of Long Beach Program loans
serviced by Long Beach have been conveyed to REMIC trust funds.
</FN>
</TABLE>
S-29
<PAGE>
As of December 31, 1995, 363 one- to four-family residential properties
relating to loans in Long Beach's total servicing portfolio had been acquired
through foreclosure or deed-in-lieu of foreclosure and were not liquidated, 300
of which properties relate to the B 1st, B 1st Fast Trac, B 1st QuickCredit and
B 1st QuickCredit Fast Trac residential mortgage loan servicing portfolio.
There can be no assurance that the delinquency and loss experience of
the Long Beach Loans will correspond to the loss experience of Long Beach's
mortgage portfolio set forth in the foregoing table. The statistics shown above
represent the delinquency and loss experience for residential mortgages
originated under the Long Beach Programs and serviced by Long Beach only for the
years presented, whereas the aggregate delinquency and loss experience on the
Long Beach Loans will depend on the results obtained over the life of the Trust.
Long Beach's portfolio includes mortgage loans with payment and other
characteristics which are not representative of the payment and other
characteristics of the Long Beach Loans. A substantial number of the Long Beach
Loans may also have been originated based on Long Beach Guidelines that are less
stringent than those generally applicable to the servicing portfolio reflected
in the foregoing table. In addition, it should be noted that a portion of the
period covered by the foregoing table was one in which real estate values were
appreciating, particularly in the areas of California where properties securing
the related loans were located. However, over the last several years, the
residential real estate markets in many regions of the country, including
California, have experienced general deterioration, and should such decline in
property values continue such that the principal balances of the Long Beach
Loans and any secondary financing on the related Mortgaged Properties become
equal to or greater than the value of such Mortgaged Properties, the actual
rates of delinquencies, foreclosures and losses could be higher than those
previously experienced by Long Beach. In addition, 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 Long Beach
Loans and, accordingly, the actual rates of delinquencies, foreclosures and
losses with respect to the Long Beach Loans.
S-30
<PAGE>
Residential Loan Servicing Portfolio
The following table sets forth Long Beach's delinquency and loss
experience (including that of its predecessor in interest, Long Beach Bank,
F.S.B.) at the dates indicated on its entire servicing portfolio (inclusive of
loans originated under the Long Beach Programs) of residential (including
multi-family) mortgage loans:
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------------------
1991 1992 1993 1994 1995
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Outstanding Balance $1,749,232 $2,249,834 $2,434,615 $2,721,665 $2,790,704
Number of Loans 15,536 19,235 21,159 24,669 26,766
DELINQUENCY
Period of Delinquency:
31-60 Days
Principal Balance $26,077 $21,394 $21,834 $20,923 $35,503
Number of Loans 235 220 224 195 327
Delinquency as a Percentage of
Total Outstanding Principal Balance 1.49% 0.95% 0.90% 0.77% 1.27%
Delinquency as a Percentage of
Number of Loans 1.51% 1.14% 1.06% 0.79% 1.22%
61-90 Days
Principal Balance $13,600 $18,360 $19,321 $24,013 $25,237
Number of Loans 128 173 177 193 253
Delinquency as a Percentage of
Total Outstanding Principal Balance 0.78% 0.82% 0.79% 0.88% 0.90%
Delinquency as a Percentage of
Number of Loans 0.82% 0.90% 0.84% 0.78% 0.95%
91 Days or More
Principal Balance $47,910 $85,403 $92,100 $97,202 $109,703
Number of Loans 406 764 765 771 977
Delinquency as a Percentage of
Total Outstanding Principal Balance 2.74% 3.80% 3.78% 3.57% 3.93%
Delinquency as a Percentage of
Number of Loans 2.61% 3.97% 3.62% 3.13% 3.65%
Total Delinquencies:
Principal Balance $87,587 $125,157 $133,255 $142,138 $170,444
Number of Loans 769 1,157 1,166 1,159 1,557
Delinquency as a Percentage of
Total Outstanding Principal Balance 5.01% 5.56% 5.47% 5.22% 6.11%
Delinquency as a Percentage of
Number of Loans 4.95% 6.02% 5.51% 4.70% 5.82%
FORECLOSURES PENDING(1)
Principal Balance $45,987 $87,439 $96,810 $111,514 $132,679
Number of Loans 415 737 748 955 1,200
Foreclosures Pending as a Percentage
of Total Outstanding Principal
Balance 2.63% 3.89% 3.98% 4.10% 4.75%
Foreclosures Pending as a
Percentage of Number of Loans 2.67% 3.83% 3.54% 3.87% 4.48%
NET LOAN GAINS (LOSSES) for the
Period(2) $(728) $(10,796) $(35,474) $(51,296) $(37,914)
NET LOAN GAINS (LOSSES) as a
Percentage of Total Outstanding Principal
Balance (0.04)% (0.48)% (1.46)% (1.88)% (1.36)%
- --------------------------------
<FN>
(1) Mortgage loans which are in foreclosure but as to which title to the
mortgaged property has not been acquired, at the end of the period
indicated. Foreclosures pending are included in the delinquencies set
forth above.
(2) Net Loan Gains (Losses) is calculated for loans conveyed to REMIC trust
funds as the aggregate of the net loan gain (loss) for all such loans
liquidated during the period indicated. The net loan gain (loss) for any
such loan is equal to the difference between (a) the principal balance
plus accrued interest through the date of liquidation plus all liquidation
expenses related to such loan and (b) all amounts received in connection
with the liquidation of such loan. The majority of residential loans
serviced by Long Beach have been conveyed to REMIC trust funds.
</FN>
</TABLE>
S-31
<PAGE>
The delinquency and loss experience percentages set forth above in the
immediately preceding table are calculated on the basis of the total mortgage
loans serviced as of the end of the periods indicated. However, because the
total outstanding principal balance of residential loans serviced by Long Beach
has increased from $1,209,505,000 at December 31, 1990, to $2,790,704 at
December 31, 1995, the total outstanding principal balance of residential loans
serviced as of the end of any indicated period includes many loans that will not
have been outstanding long enough to give rise to some or all of the indicated
periods of delinquency. In the absence of such substantial and continual
additions of newly originated loans to the total amount of loans serviced, the
percentages indicated above would be higher and could be substantially higher.
The actual delinquency percentages with respect to the Long Beach Loans may be
expected to be substantially higher than the delinquency percentages indicated
above because the composition of the Long Beach Loans will not change.
In addition, over the last several years, there has been a general
deterioration of the real estate market and weakening of the economy in many
regions of the country, including California. The general deterioration of the
real estate market has been reflected in increases in delinquencies of loans
secured by real estate, slower absorption rates of real estate into the market
and lower sales prices for real estate. The general weakening of the economy has
been reflected in decreases in the financial strength of mortgagors and
decreases in the value of collateral serving as security for loans. If the real
estate market and economy continue to decline, Long Beach may experience an
increase in delinquencies on the loans it services and higher net losses on
liquidated loans.
In the opinion of Long Beach, the period to period changes in the
delinquency and loss experience set forth in the table above are attributable
primarily to the introduction and seasoning of higher credit risk mortgage
loans, as measured by credit risk category under Long Beach's underwriting
guidelines, and a general downturn in the California economy.
Option One Mortgage Corporation
Option One Mortgage Corporation ("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.
As of December 31, 1994, Option One was a wholly-owned subsidiary of
Plaza Home Mortgage Bank, which was in turn a wholly-owned subsidiary of Plaza
Home Mortgage Corporation ("PHMC"). On March 3, 1995, Fleet National Bank, Rhode
Island acquired 100% of the outstanding stock of PHMC. Following such
acquisition, Option One became a subsidiary of Fleet National Bank, Rhode
Island, which is in turn a subsidiary of Fleet Financial Group, Inc. As of
December 31, 1995, Option One had three loan origination centers in California
and one loan origination center in each of Florida, Georgia, Illinois, Ohio,
Texas and Virginia.
Option One operates as a stand-alone mortgage banking company with
functional reporting responsibility to Fleet Financial Group, Inc. Option One is
a FNMA approved servicer. Option One assumed full servicing responsibilities for
the non-conforming credit servicing portfolio of PHMC on May 4, 1995, all of
which portfolio had been originated by Option One. Prior to such acquisition,
Option One acted as subservicer on such portfolio performing the functions of
delinquency advancing, investor reporting, remitting cash collected, preparing
pertinent reports and making collections on delinquent mortgage loans,
foreclosures and real estate owned.
The following tables set forth, as of December 31, 1993, 1994 and 1995
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 servicing portfolio of
mortgage loans originated under the Option One Guidelines (which portfolio does
not include 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 is one month past due on a contractual
basis. Such tables restate PHMC's performance statistics relating only to the
non-conforming mortgage loans previously subserviced by Option One. Such
servicing was subsequently transferred to Option One.
S-32
<PAGE>
<TABLE>
<CAPTION>
Delinquencies and Foreclosures
(Dollars in Thousands)
At December 31, At December 31, At December 31,
1993 1994 1995
-------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent Percent
By No. By By No. by By No. By By No. by By No. By By No. by
of Dollar of Dollar of Dollar of Dollar of Dollar of Dollar
Loans Amount Loans Amount Loan Amount Loans Amount Loans Amount Loans Amount
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio................. 1,233 $146,352 N/A N/A 6,115 $615,488 N/A N/A 12,686 1,153,199 N/A N/A
Period of Delinquency:
31 - 59 days........... 2 251 .16 .17 32 3,247 .52 .53 126 11,364 .99 .99
60 - 89 days........... 3 265 .24 .18 17 1,637 .28 .27 87 8,138 .69 .71
90 days or more........ 2 282 .16 .19 28 3,556 .46 .58 294 28,982 2.32 2.51
- --- --- --- -- ----- --- --- --- ------ ---- ----
Total Delinquent Loans.......... 7 798 .56 .54 77 8,440 1.26 1.38 507 48,484 4.00 4.21
Loans in Foreclosure*........... 4 415 .32 .28 50 5,328 .82 .87 301 28,874 2.37 2.50
- --------------------
<FN>
* Loans in foreclosure are also included under the heading "Total Delinquent
Loans."
</FN>
</TABLE>
<TABLE>
<CAPTION>
Real Estate Owned
(Dollars in Thousands)
At December 31, At December 31, At December 31,
1993 1994 1995
-------------------------------------------------------------------------------------------
By Dollar By Dollar By Dollar
By No. Amount By No. Amount By No. Amount
of Loans of Loans of Loans of Loans of Loans of Loans
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio............ 1,233 $146,352 6,115 $615,488 12,686 1,153,199
Foreclosed Loans(1)........ 0 0 12 1,512 80 7,634
Foreclosed Ratio(2)........ 0 .00 .20 .25 .63 .66
- ------------------------
<FN>
(1) For the purposes of these tables, Foreclosed Loans means the principal
balance of mortgage loans secured by mortgaged properties the title to
which has been acquired by 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.
</FN>
</TABLE>
S-33
<PAGE>
Loan Loss Experience on
Option One's Servicing Portfolio
of Mortgage Loans
(Dollars in Thousands)
Year Ending December 31,
-----------------------------------------
1993 1994 1995
-----------------------------------------
Total Portfolio (1) $146,352 $615,488 $1,153,199
Gross Losses (2) $0 $17 $1,291
Recoveries (3) $0 $0 --
Net Losses (4) $0 $17 $1,291
Net Losses as a Percentage of Total
Portfolio 0.00% 0.00% .11%
- -----------------------------------
(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) "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.
(3) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
(4) "Net Losses" means "Gross Losses" minus "Recoveries."
The following tables set forth, as of December 31, 1993, 1994 and 1995
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 is one month past due on a contractual
basis. Such tables restate PHMC's performance statistics relating only to the
non-conforming mortgage loans previously subserviced by Option One. Such
servicing was subsequently transferred to Option One.
<TABLE>
<CAPTION>
Delinquencies and Foreclosures
(Dollars in Thousands)
At December 31, At December 31, At December 31,
1993 1994 1995
-------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent Percent
By No. By By No. by By No. By By No. by By No. By By No. by
of Dollar of Dollar of Dollar of Dollar of Dollar of Dollar
Loans Amount Loans Amount Loan Amount Loans Amount Loans Amount Loans Amount
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio................. 1,233 $146,352 N/A N/A 6,115 $615,488 N/A N/A 14,625 1,367,031 N/A N/A
Period of Delinquency:
31 - 59 days........... 2 251 .16 .17 32 3,247 .52 .53 161 16,501 1.10 1.21
60 - 89 days........... 3 265 .24 .18 17 1,637 .28 .27 104 10,117 .71 .74
90 days or more........ 2 282 .16 .19 28 3,556 .46 .58 388 40,275 2.65 2.95
- --- --- --- -- ----- --- --- --- ------ ---- ----
Total Delinquent Loans.......... 7 798 .56 .54 77 8,440 1.26 1.38 653 66,893 4.46 4.90
Loans in Foreclosure*........... 4 415 .32 .28 50 5,328 .82 .87 388 38,985 2.65 2.85
- --------------------
<FN>
* Loans in foreclosure are also included under the heading "Total Delinquent
Loans."
</FN>
</TABLE>
S-34
<PAGE>
<TABLE>
<CAPTION>
Real Estate Owned
(Dollars in Thousands)
At December 31, At December 31, At December 31,
1993 1994 1995
-------------------------------------------------------------------------------------------
By Dollar By Dollar By Dollar
By No. Amount By No. Amount By No. Amount
of Loans of Loans of Loans of Loans of Loans of Loans
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio............ 1,233 $146,352 6,115 $615,488 14,625 1,367,031
Foreclosed Loans(1)........ 0 0 12 1,512 100 9,632
Foreclosed Ratio(2)........ 0 .00 .20 .25 .68 .70
- ------------------------
<FN>
(1) For the purposes of these tables, Foreclosed Loans means the principal
balance of mortgage loans secured by mortgaged properties the title to
which has been acquired by 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.
</FN>
</TABLE>
Loan Loss Experience on
Option One's Servicing Portfolio
of Mortgage Loans
(Dollars in Thousands)
Year Ending December 31,
----------------------------------------
1993 1994 1995
----------------------------------------
Total Portfolio (1) $146,352 $615,488 $1,367,031
Gross Losses (2) $0 $17 $1,506
Recoveries (3) $0 $0 ---
Net Losses (4) $0 $17 $1,506
Net Losses as a Percentage of Total
Portfolio 0.00% 0.00% .11%
- -----------------------------------
(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) "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.
(3) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
(4) "Net Losses" means "Gross Losses" minus "Recoveries."
General
There can be no assurance that the delinquency experience of the Option
One Loans will correspond to the delinquency experience of Option One's mortgage
portfolio set forth in the foregoing tables. See "The Portfolio of Mortgage
Loans -- General" herein. The statistics shown above represent the delinquency
experience for Option One's residential mortgage servicing portfolio only for
the periods presented, whereas the delinquency experience on the Option One
Loans will depend on the results obtained over the life of such Option One
Loans. Option One's residential mortgage servicing portfolio includes mortgage
loans with a variety of payment, credit and other
S-35
<PAGE>
characteristics (including geographic location) which may not be representative
of the payment, credit and other characteristics of the Option One Loans. Option
One has limited default information with respect to the mortgage loans
originated under the Guidelines and is unable to predict the delinquency and
foreclosure that might be expected with respect to the Option One Loans. See
"Risk Factors -- Risk of Higher Delinquencies Associated with Guidelines"
herein. 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. In addition,
adverse economic conditions may affect the timely payment by Mortgagors of
scheduled payments of principal and interest on the Option One Loans and
accordingly, the actual rates of delinquencies and foreclosures with respect to
the Mortgage Loan Pool.
No industrywide data is available for mortgage loans for mortgagors
with less than FNMA credit quality. See "The Portfolio of Mortgage Loans --
Guidelines" herein.
USE OF PROCEEDS
The Depositor will sell the Initial Mortgage Loans to the Trust
concurrently with delivery of the Notes and the Certificates. Net proceeds from
the sale of the Notes and the Class A Certificates will be applied by the
Depositor to the purchase of the Initial Mortgage Loans from the Seller, to the
deposit of the Initial Pre-Funded Amount in the Pre-Funding Account and to the
deposit of certain amounts to the Capitalized Interest Account. Such net
proceeds less the Initial Pre-Funded Amount and the amount deposited in the
Capitalized Interest Account will (together with the Subordinated Certificates
retained by the Depositor or its affiliates) represent the purchase price to be
paid by the Trust to the Depositor for the Initial Mortgage Loans.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware on November 9,
1995, and is a wholly-owned subsidiary of AMRESCO, Inc. The Depositor maintains
its principal offices at 700 N. Pearl Street, Suite 2400, Dallas, Texas 75201.
Neither the Depositor nor any of its affiliates will insure or guarantee
distributions on the Certificates.
THE SELLER
The Seller was incorporated in the State of Delaware on October 13,
1995, and is a wholly-owned subsidiary of AMRESCO, Inc. The Seller maintains its
principal offices at 700 N. Pearl Street, Suite 2400, Dallas, Texas 75201.
Neither the Seller nor any of its affiliates will insure or guarantee
distributions on the Certificates.
THE MORTGAGE LOAN POOL
General
The statistical information presented in this Prospectus Supplement
concerning the pool of Mortgage Loans is based on the pool of Initial Mortgage
Loans as of the Cut-Off Date. Subsequent Mortgage Loans are intended to be
purchased by the Trust from the Depositor from time to time on or before
__________ ___, 199__, from funds on deposit in the Pre-Funding Account. The
Initial Mortgage Loans, any Qualified Replacement Mortgages and the Subsequent
Mortgage Loans are referred to herein collectively as the "Mortgage Loans." The
Subsequent Mortgage Loans, if available, to be purchased by the Trust will be
sold by the Originator to the Seller, by the Seller to the Depositor and then by
the Depositor to the Trust.
This subsection describes generally certain characteristics of the
Initial Mortgage Loans. Unless otherwise specified herein, references herein to
percentages of Initial Mortgage Loans refer in each case to the approximate
percentage of the aggregate principal balance of the Initial Mortgage Loans as
of the Cut-Off Date, based on the scheduled principal balances of the Initial
Mortgage Loans as of the Cut-Off Date, and giving effect to all payments due on
or prior to the Cut-Off Date. The Initial Mortgage Loan Pool consists of fixed
rate Mortgage Loans with remaining terms to maturity of not more than 360 months
(including both fully amortizing Mortgage Loans and
S-36
<PAGE>
Balloon Loans). The Initial Mortgage Loans have the characteristics set forth
below as of the Cut-Off Date. Percentages expressed herein based on Loan
Balances and number of Initial Mortgage Loans have been rounded, and in the
tables set forth herein the sum of the percentages may not equal the respective
totals due to such rounding.
The Loan-to-Value Ratios shown below were calculated based upon the
appraised values of the Mortgaged Properties at the time of origination (the
"Appraised Values"). No assurance can be given that values of the Mortgaged
Properties have remained or will remain at their levels on the dates of
origination of the related Mortgage Loans. If the residential real estate market
has experienced or should experience an overall decline in property values such
that the outstanding balance of any Mortgage Loan becomes equal to or greater
than the value of the Mortgaged Property, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry.
Mortgage Loans
The information set forth is based upon data provided to the Depositor
by the Servicers. Neither the Depositor, the Seller, the Underwriters,
Originators nor any of their respective affiliates have made or will have made
any representation as to the accuracy or completeness of such information.
As of the Cut-Off Date, the average Loan Balance of the Mortgage Loans
was $___________; the weighted average Loan-to-Value Ratio of the Mortgage Loans
was _____%; the weighted average remaining term to maturity was _____ months;
the weighted average original term to maturity was _____ months. The remaining
terms to maturity as of the Cut-Off Date of the Mortgage Loans ranged from _____
months to _____ months. The minimum and maximum Loan Balances of Mortgage Loans
as of the Cut-Off Date were $___________ and $___________, respectively.
Mortgage Loans containing "balloon" payments represented not more than _____% of
the Original Aggregate Loan Balance of Mortgage Loans. No Mortgage Loan will
mature later than _____________, 2026.
All the Mortgage Loans bear interest at a fixed rate for the life of
the related Mortgage Loans. The Mortgage Loans consist of _____ Mortgage Loans
aggregating $___________. The Coupon Rates of the Mortgage Loans ranged from
_____% to _____%. The weighted average Coupon Rate of the Initial Mortgage Loans
was
- -----%.
S-37
<PAGE>
Geographic Distribution of Mortgaged Properties
The geographic distribution of Mortgage Loans by state, as of the
Cut-Off Date, was as follows:
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
Geographic Area Mortgage Loans Loan Balance Loan Balance
- --------------- -------------- ------------ ------------
<S> <C> <C>
Arizona
California
Colorado
Delaware
Florida
Georgia
Illinois
Indiana
Kansas
Louisiana
Maryland
Michigan
Minnesota
Missouri
Nevada
New Mexico
North Carolina
Ohio
Oregon
Pennsylvania
Texas
Utah
Washington
Wisconsin
Wyoming
Total 100.00
======
%
=
</TABLE>
S-38
<PAGE>
Original Loan-to-Value Ratios
The original loan-to-value ratios as of the date of origination of the
Mortgage Loans (based upon appraisals made at the time of origination thereof)
(the "Loan-to-Value Ratios") as of the Cut-Off Date were distributed as follows:
<TABLE>
<CAPTION>
Range of Number of Aggregate % of Aggregate
Original LTVs Mortgage Loans Loan Balance Loan Balance
------------- -------------- ------------ ------------
<S> <C>
5.001 - 10.000%
10.001 - 15.000%
20.001 - 25.000%
25.001 - 30.000%
35.001 - 40.000%
40.001 - 45.000%
45.001 - 50.000%
50.001 - 55.000%
55.001 - 60.000%
60.001 - 65.000%
65.001 - 70.000%
70.001 - 75.000%
75.001 - 80.000%
80.001 - 85.000%
85.001 - 90.000%
Total: 100.00%
======
</TABLE>
Cut-Off Date Coupon Rates
The Coupon Rates borne by the Notes relating to the Mortgage Loans were
distributed as follows as of the Cut-Off Date:
<TABLE>
<CAPTION>
Range of Number of Aggregate % of Aggregate
Coupon Rates Mortgage Loans Loan Balance Loan Balance
------ ----- -------- ----- ---- ------- ---- -------
<S> <C>
8.01 - 8.50%
8.51 - 9.00%
9.01 - 9.50%
9.51 - 10.00%
10.01 - 10.50%
10.51 - 11.00%
11.01 - 11.50%
11.51 - 12.00%
12.01 - 12.50%
12.51 - 13.00%
13.01 - 13.50%
13.51 - 14.00%
Total: 100.00%
======
</TABLE>
S-39
<PAGE>
Cut-Off Date Loan Balances
The distribution of the outstanding principal amounts of the Mortgage
Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
Range of Loan Balances Mortgage Loans Loan Balance Loan Balance
- ---------------------- -------------- ------------ ------------
<S> <C>
$0.00 - $50,000
50,001 - $100,000
100,001 - $150,000
150,001 - $200,000
200,001 - $250,000
250,001 - $300,000
300,001 - $350,000
450,001 - $500,000
Total 100.00%
======
</TABLE>
Types of Mortgaged Properties
The Mortgaged Properties securing the Mortgage Loans as of the Cut-Off
Date were of the property types as follows:
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
Property Types Mortgage Loans Loan Balance Loan Balance
- -------------- -------------- ------------ ------------
<S> <C>
Single-family
PUD
Condominiums
2-4 Family
Mobile Home
Total 100.00%
======
</TABLE>
Distribution of Months Since First Payment Date
The distribution of the number of months since the date of origination
of the Mortgage Loans as of the CutOff Date was as follows:
<TABLE>
<CAPTION>
Months Elapsed Number of Aggregate % of Aggregate
Since Origination Mortgage Loans Loan Balance Loan Balance
- ----------------- -------------- ------------ ------------
<S> <C>
0 - 6
Total 100.00%
======
</TABLE>
S-40
<PAGE>
Distribution of Remaining Term to Maturity
The distribution of the number of months remaining to maturity of the
Mortgage Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
Months Remaining Number of Aggregate % of Aggregate
to Maturity Mortgage Loans Loan Balance Loan Balance
- ----------- -------------- ------------ ------------
<S> <C>
109 - 120
169 - 180
229 - 240
349 - 360
Total 100.00%
======
</TABLE>
Occupancy Status
The occupancy status of the Mortgaged Properties securing the Mortgage
Loans as of the Cut-Off Date was as follows
<TABLE>
<CAPTION>
Number of Aggregate % of Aggregate
Occupancy Status Mortgage Loans Loan Balance Loan Balance
- ---------------- -------------- ------------ ------------
<S> <C>
Owner Occupied
Non-Owner Occupied
Total 100.00%
======
</TABLE>
Conveyance of Subsequent Mortgage Loans
The Pooling and Servicing Agreement permits the Trust to acquire
approximately $__________ in aggregate principal balance of Subsequent Mortgage
Loans. Accordingly, the statistical characteristics of the Mortgage Loan Pool
will vary as of any Subsequent Cut-Off Date upon the acquisition of Subsequent
Mortgage Loans.
The obligation of the Trust to purchase Subsequent Mortgage Loans on a
Subsequent Transfer Date is subject to the following requirements, among others
(which may be waived or modified by the Insurer): (i) such Subsequent Mortgage
Loan may not be 30 or more days contractually delinquent as of the related
Subsequent CutOff Date; (ii) the remaining term to maturity of such Subsequent
Mortgage Loan may not exceed ___ months; (iii) no Subsequent Mortgage Loan will
have a Coupon Rate less than ____%; and (iv) following the purchase of such
Subsequent Mortgage Loans by the Trust, the Mortgage Loans (including the
Subsequent Mortgage Loans) (a) will have a weighted average Coupon Rate of at
least _____%; (b) will have a weighted average Loan-to-Value Ratio of not more
than ____%; (c) will not have any Balloon Loans; (d) will not have a weighted
average remaining term to stated maturity of more than ___ months; and (e) will
have no Mortgage Loan with a principal balance in excess of $_______.
All the Mortgage Loans are "Actuarial Loans", which provide that
interest is charged to the Mortgagors thereunder, and payments are due from such
Mortgagors, as of a scheduled day of each month which is fixed at the time of
origination. Scheduled monthly payments made by the Mortgagors on the Actuarial
Loans either earlier or later than the scheduled due dates thereof will not
affect the amortization schedule or the relative application of such payments to
principal and interest.
S-41
<PAGE>
PREPAYMENT AND YIELD CONSIDERATIONS
General
The weighted average life of, and, if purchased at other than par
(disregarding, for purposes of this discussion, the effect on an investor's
yield resulting from the timing of the settlement date and those considerations
discussed below under "Payment Lag Feature of Class A Certificates"), the yield
to maturity on the Notes and the Class A Certificates will be affected by the
rate of payment of principal of the Mortgage Loans, including for this purpose
Prepayments, liquidations due to defaults, casualties and condemnations, and
repurchases by the Originators of Mortgage Loans or other party to a Transfer
Agreement. The actual rate of principal prepayments on pools of mortgage loans
is influenced by a variety of economic, tax, geographic, demographic, social,
legal and other factors and has fluctuated considerably in recent years. In
addition, the rate of principal prepayments may differ among pools of mortgage
loans at any time because of specific factors relating to the mortgage loans in
the particular pool, including, among other things, the age of the mortgage
loans, the geographic locations of the properties securing the loans and the
extent of the mortgagors' equity in such properties, changes in the mortgagors'
housing needs, job transfers and unemployment.
As with fixed rate obligations generally, the rate of prepayment on a
pool of mortgage loans with fixed rates is affected by prevailing market rates
for mortgage loans of a comparable term and risk level. When the market interest
rate is below the mortgage coupon, mortgagors may have an increased incentive to
refinance their mortgage loans. Depending on prevailing market rates, the future
outlook for market rates and economic conditions generally, some mortgagors may
sell or refinance mortgaged properties in order to realize their equity in the
mortgaged properties, to meet cash flow needs or to make other investments.
In addition to the foregoing factors affecting the weighted average
life of the Notes and the Class A Certificates, the subordination provisions of
the Trust result in a limited acceleration of the Notes relative to the
amortization of the related Mortgage Loans until the related Specified
Subordination Amount is reached. The accelerated amortization is achieved by the
application of certain excess interest and principal to the payment of the
Notes. This acceleration feature creates overcollateralization equal to the
excess of the aggregate Loan Balances of the Mortgage Loans over the sum of the
Note Principal Balance and the Class A Certificate Principal Balance. Once the
required level of overcollateralization is reached, the acceleration feature
will cease, unless necessary to maintain the required level of
overcollateralization.
A majority of the Mortgage Loans contain prepayment penalty provisions.
For a discussion of such provisions, see "The Portfolio of Mortgage
Loans--Prepayment Penalties" herein.
Mandatory Prepayment
In the event that at the end of the Funding Period, not all the
Original Pre-Funded Amount has been used to acquire Subsequent Mortgage Loans,
then the Notes and the Class A Certificates will receive a partial prepayment on
the Payment Date in __________ 199__.
Although no assurances can be given, the Depositor expects that the
principal amount of Subsequent Mortgage Loans sold to the Trust will require the
application of substantially all the amount on deposit in the Pre- Funding
Account and that there should be no material principal prepaid to the Owners of
the Notes and the Class A Certificates.
Projected Prepayment and Yield for Notes and Class A Certificates
As indicated above, if purchased at other than par, the yield to
maturity on a Note or a Class A Certificate will be affected by the rate of the
payment of principal of the Mortgage Loans. If the actual rate of payments on
the Mortgage Loans is slower than the rate anticipated by an investor who
purchases a Note or a Class A Certificate at a discount, the actual yield to
such investor will be lower than such investor's anticipated yield. If the
actual rate of payments on the Mortgage Loans is faster than the rate
anticipated by an investor who purchases a Note or a Class A Certificate at a
premium, the actual yield to such investor will be lower than such investor's
anticipated yield.
The Maturity Date of the Notes is _______ and the "Final Scheduled
Payment Date" for the Class A Certificates is _______________. These dates are
the dates on which the "Initial Note Principal Balance" and the "Initial Class A
Certificate Principal Balance" would be reduced to zero assuming that no
Prepayments are received
S-42
<PAGE>
on the Mortgage Loans, that scheduled monthly payments of principal of and
interest on the related Mortgage Loans are timely received and Subordination
Increase Amounts will be paid to the Owners of the Notes. The Maturity Date for
the Notes and the Final Scheduled Payment Date for the Class A Certificates is
the thirteenth Payment Date following the calendar month in which the Loan
Balances of all Mortgage Loans which may be purchased at the end of the Funding
Period with an original term of 360 months will have been reduced to zero
assuming that the Mortgage Loans pay in accordance with their terms. The
weighted average life of the Notes and the Class A Certificates is likely to be
shorter than would be the case if payments actually made on the Mortgage Loans
conformed to the foregoing assumptions, and the final Payment Date with respect
to the Notes and the Class A Certificates could occur significantly earlier
because (i) Prepayments are likely to occur, (ii) the Owners of the Subordinated
Certificates may cause a termination of the Trust when the outstanding Class A
Certificate Principal Balance is less than 10% of the original Class A
Certificate Principal Balance and (iii) the Servicers may each purchase all
Mortgage Loans serviced by them, thereby causing a termination of the Trust when
the outstanding Class A Certificate Principal Balance is less than 5% of the
Original Class A Certificate Balance.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average life of the
Notes and the Class A Certificates will be influenced by the rate at which
principal of the Mortgage Loans is paid, which may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
Prepayments and liquidations due to default).
The tables at various Home Equity Prepayment ("HEP") assumptions. HEP
assumes that a pool of loans prepays in the first month of the life of such loan
at a constant prepayment rate that corresponds in CPR to one-tenth the given HEP
percentage and increases by an additional one-tenth each month thereafter until
the tenth month, where it remains at a CPR equal to the given HEP percentage.
The "Constant Prepayment Rate" or "CPR" represents an assumed annualized rate of
prepayment relative to the then outstanding principal balance on a pool of new
mortgage loans. The Prepayment Assumption does not purport to be a historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of mortgage loans, including the Mortgage Loans. The
Depositor believes that no existing statistics of which it is aware provide a
reliable basis for Owners of the Notes or Class A Certificates to predict the
amount or the timing of receipt of prepayments on the Mortgage Loans.
It is very unlikely that the Mortgage Loans will prepay at rates
consistent with the Prepayment Assumption until maturity or that all the
Mortgage Loans will prepay at the same rate. There will be discrepancies between
the actual characteristics of the Mortgage Loans included in the Trust and the
assumed characteristics used in preparing the following tables. Any discrepancy
may have an effect upon the percentages of Initial Certificate Principal Balance
outstanding set forth in the table and the weighted average lives of the Notes
and the Class A Certificates.
Because the tables were prepared on the basis of the assumptions in the
following paragraph, there will likely be discrepancies between the
characteristics of the actual Mortgage Loans and the characteristics of the
Mortgage Loans assumed in preparing the tables. Any such discrepancy will likely
have an effect upon the percentages of the Principal Balances outstanding and
weighted average lives of the Notes and the Class A Certificates set forth in
the tables. In addition, since the actual Mortgage Loans in the Trust have
characteristics which differ from those assumed in preparing the tables set
forth below, the distributions of principal on the Notes and the Class A
Certificates may be made earlier or later than as indicated in the tables.
For the purpose of the tables below, it is assumed that: (i) Mortgage
Loans have the characteristics set forth in the table below, (ii) the Closing
Date occurs on __________, 199__, (iii) distributions are made on the 25th day
of each month regardless of the day on which the Payment Date actually occurs,
commencing in _______ 199__ in accordance with the priorities described herein,
(iv) the difference between the Gross Coupon Rate and the Net Coupon Rate is
equal to the Servicing Fee and the Net Coupon Rate is further reduced by the
Premium Amount and the Trustee Fee, (v) prepayments include 30 day's interest
thereon, (vi) optional termination or mandatory termination is exercised on the
date on which the Outstanding Certificate Principal Balance has declined to less
than 10% of the original Principal Balance, (vii) the "Specified Subordinated
Amount" (as defined under "Description of the Offered
Securities--Overcollateralization Provisions") is set initially as specified in
the Indenture and thereafter decreases in accordance with the provisions of the
Indenture, (viii) all the Pre-Funded Amount is used to acquire Subsequent
Mortgage Loans on _________ 199__, and prior to such date, the Pre-Funded Amount
accrues interest at a rate of _____% per annum, (ix) all Mortgage Loans pay on
their respective due dates in accordance with their respective terms and (x) the
Initial Note Principal Balance and Initial Class A Certificate Principal Balance
is as set forth and under "Summary of Terms--Securities Offered" herein.
S-43
<PAGE>
<TABLE>
<CAPTION>
Initial Mortgage Loans
<S> <C> <C> <C> <C> <C>
Original Remaining
Term to Term to
Principal Gross Coupon Net Coupon Maturity Maturity
Balance Rate Rate (in months) (in months)
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Subsequent Mortgage Loans
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Original Remaining
Gross Net Periodic Monthly Rate Term to Term to
Principal Coupon Coupon Gross Net Rate to Next Change Maturity Maturity
Balance Rate Rate Margin Life Cap Cap Reset Frequency (in months) (in months) Index
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-44
<PAGE>
The following tables set forth the percentages of the initial principal
amount of the Notes and the Class A Certificates that would be outstanding after
each of the dates shown, based on a rate equal to 0%, 10%, 22%, 26% and 30% of
the Prepayment Assumption (as defined above).
PERCENTAGE OF INITIAL PRINCIPAL BALANCE
<TABLE>
<CAPTION>
Notes Class A Certificates
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Payment Date 0% 10% 22% 26% 30% 0% 10% 22% 26% 30%
-- --- --- --- --- -- --- --- --- ---
Initial Balance
__________, 1997
__________, 1998
__________, 1999
__________, 2000
__________, 2001
__________, 2002
__________, 2003
__________, 2004
__________, 2005
__________, 2006
__________, 2007
__________, 2008
__________, 2009
__________, 2010
__________, 2011
__________, 2012
__________, 2013
__________, 2014
__________, 2015
__________, 2016
__________, 2017
__________, 2018
__________, 2019
__________, 2020
__________, 2021
__________, 2022
__________, 2023
__________, 2024
__________, 2025
__________, 2026
__________, 2027
Weighted Avg Life(1)
- -----------------------------
<FN>
(1) The weighted average life of the Notes and the Class A Certificates is
determined by (i) multiplying the amount of each principal payment by
the number of years from the date of issuance to the related Payment
Date, (ii) adding the results and (iii) dividing the sum by the initial
respective Note Principal Balance and Class A Certificate Principal
Balance for such Class of Class A Certificate.
</FN>
</TABLE>
S-45
<PAGE>
Payment Lag Feature of Class A Certificates
An amount equal to Mortgagor payments with respect to each Mortgage
Loan (net of the Servicing Fee) received by the Servicer during each Remittance
Period is to be remitted to the Trustee on or prior to the related Monthly
Remittance Date; however, the Trustee will not be required to distribute any
such amounts to the Owners of Class A Certificates until the next succeeding
Payment Date. As a result, the monthly distributions to the Owners of the Class
A Certificates generally reflect an Accrual Period with respect to Mortgagor
payments during the prior calendar month, and the first Payment Date will not
occur until _________, 199__. Thus, the effective yield to the Owners of the
Class A Certificates will be below that otherwise produced by the related
Pass-Through Rate because the distribution of the related Class A Distribution
Amount in respect of any given month will not be made until on or about the 25th
day of the following month.
THE ORIGINATORS
The Mortgage Loan Pool consists of _____ Initial Mortgage Loans
purchased or originated by two originators (the "Originators") with aggregate
outstanding Loan Balances of $___________. The largest Originator of such loans
is ______________________________, which originated ____% of the Mortgage Loans
and has committed to the Seller to originate all Subsequent Mortgage Loans. The
other Originator is ______________ ________________, which originated _____% of
the Mortgage Loans.
FORMATION OF THE TRUST AND TRUST PROPERTY
AMRESCO Residential Securities Corporation Mortgage Loan Trust 199__-__
(the "Trust") will be created and established as a business trust under Delaware
law pursuant to the Trust Agreement. The Trust may not engage in any activity
other than (i) acquiring, holding and managing the Mortgage Loans and the other
assets of the Trust and the proceeds therefrom, (ii) issuing the Notes and the
Certificates, (iii) making payments on the Notes and the Certificates and (iv)
engaging in other activities incidental to the foregoing. The Depositor will
convey without recourse the Mortgage Loans to the Trust and the Trust will
issue: (i) the Notes pursuant to the Indenture; and (ii) the Class A
Certificates and the Subordinated Certificates pursuant to the Trust Agreement.
The property of the Trust will include (a) the Mortgage Loans (other
than payments due on the Mortgage Loans on or prior to the Cut-Off Date with
respect to those Mortgage Loans that were current as of the Cut-Off Date)
together with the related Mortgage Loan documents and the Seller's interest in
any Mortgaged Property which secures a Mortgage Loan and all payments thereon
and proceeds of the conversion, voluntary or involuntary, of the foregoing, (b)
such amounts as may be held by the Indenture Trustee in the Certificate Account,
the Pre-Funding Account, the Capitalized Interest Account and any other accounts
held by the Indenture Trustee for the Trust together with investment earnings on
such amounts and such amounts as may be held in the name of the Indenture
Trustee in the Principal and Interest Account, if any, exclusive of investment
earnings thereon (except as otherwise provided in the Pooling and Servicing
Agreement) whether in the form of cash, instruments, securities or other
properties, (c) the Insurance Policy, (d) proceeds of all the foregoing
(including, but not by way of limitation, all proceeds of any hazard insurance
and title insurance policy relating to the Mortgage Loans, cash proceeds,
accounts, accounts receivable, notes, drafts, acceptances, chattel paper,
checks, deposit accounts, rights to payment of any and every kind, and other
forms of obligations and receivables which at any time constitute all or part of
or are included in the proceeds of any of the foregoing) to pay the Certificates
as specified in the Pooling and Servicing Agreement and (e) certain rights of
the Seller under the Transfer Agreements (collectively, the "Trust Estate").
The Notes will be secured by a pledge of the property of the Trust to
the Indenture Trustee.
The Class A Certificates will not represent an interest in or an
obligation of, nor will the Mortgage Loans be guaranteed by, the Depositor, the
Seller, the Servicers or any of their affiliates.
S-46
<PAGE>
Prior to its formation the Trust will have had no assets or
obligations. Upon formation, the Trust will not engage in any business activity
other than acquiring, holding and collecting payments on the Mortgage Loans,
issuing the Notes and the Certificates and distributing payments thereon. The
Trust will not acquire any receivables or assets other than the Mortgage Loans
and the rights appurtenant thereto and will not have any need for additional
capital resources. To the extent that mortgagors make scheduled payments under
the Mortgage Loans, the Trust will have sufficient liquidity to pay the Notes
and to make distributions on the Certificates. As the Trust does not have any
operating history and will not engage in any business activity other than
issuing the Notes and the Certificates and making distributions thereon, there
has not been included any historical or pro forma ratio of earnings to fixed
charges with respect to the Trust..
Capitalization of the Trust
The following table illustrates the anticipated capitalization of the
Trust as of the Cut-off Date (based on the approximate original principal
amounts of Offered Securities set forth herein and without regard to the
Subordinated Certificates), as if the issuance and sale of the Offered
Securities had taken place on such date:
______% Notes $
Class A Certificates _____________
Total $
The Owner Trustee
______________ is the Owner Trustee under the Trust Agreement.
___________ is a _________ banking corporation and its principal offices are
located at ____________________________, ____________, _________. The Owner
Trustee's liability in connection with the issuance and sale of the Notes and
the Certificates is limited solely to the express obligations of the Owner
Trustee set forth in the Trust Agreement. The Owner Trustee may resign at any
time, in which event the Depositor or its successor will be obligated to appoint
a successor trustee. The Depositor may remove the Owner Trustee under certain
circumstances. Any resignation or removal of the Owner Trustee will not become
effective until acceptance of the appointment by a successor trustee.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Initial Mortgage
Loans and the Mortgaged Properties is based upon the pool as constituted at the
close of business on the Cut-Off Date, as adjusted (with respect to all Mortgage
Loans that were current as of the Cut-Off Date) for the scheduled principal
payments due on or before such date. Prior to the issuance of the Offered
Securities, Initial Mortgage Loans may be removed from the pool as a result of
incomplete documentation or non-compliance with representations and warranties
set forth in the Pooling and Servicing Agreement, if the Depositor deems such
removal necessary or appropriate. A limited number of other Initial Mortgage
Loans may be included in the pool prior to the issuance of the Offered
Securities.
A current report on Form 8-K will be available to purchasers of the
Offered Securities and will be filed with the Securities and Exchange Commission
and incorporated by reference into the Registration Statement together with the
forms of the Pooling and Servicing Agreement and the Indenture within fifteen
days after the initial issuance of the Offered Securities. In the event Initial
Mortgage Loans are removed from or added to the pool as set forth in the
preceding paragraph, such removal or addition will be noted in the current
report on Form 8-K. A current report on Form 8-K will also be filed within
fifteen days of the end of the Funding Period reflecting the additions to the
Mortgage Loans.
S-47
<PAGE>
DESCRIPTION OF THE OFFERED SECURITIES
General
The Notes will be issued pursuant to an Indenture to be dated as of
________ 1, 199__ (the "Indenture"), between the Issuer and
______________________ as Indenture Trustee (the "Indenture Trustee"). The Class
A Certificates, together with the Subordinated Certificates (the Class A
Certificates and the Subordinated Certificates are referred to as the
"Certificates"), will be issued pursuant to the Trust Agreement. Only the Notes
and the Class A Certificates (collectively, the "Offered Securities") are
offered hereby. The following summary describes certain terms of the Notes, the
Class A Certificates, the Indenture, the Trust Agreement and the Pooling and
Servicing Agreement. Reference is made to the accompanying Prospectus for
important additional information regarding the terms of the Offered Securities
and the underlying documents. Forms of the Indenture, the Trust Agreement and
the Pooling and Servicing Agreement have been filed a exhibits to the
Registration Statement of which the Prospectus forms a part. The summary does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, the provisions of the Notes, the Certificates, the Indenture,
the Trust Agreement and the Pooling and Servicing Agreement. Where particular
provisions or terms used in any of such documents are referred to, the actual
provisions (including definitions of terms) are incorporated by reference as
part of such summaries. The Certificates represent undivided fractional
ownership interests in the equity of the Trust subject to the limits and
priority of distribution described herein. The Notes and the Class A
Certificates will also have the benefit of an irrevocable financial guaranty
insurance policy (the "Insurance Policy") to be issued on or before the date of
issuance of the Offered Securities by _______________ (the "Insurer") in favor
of the Indenture Trustee.
Payment Dates
On each Payment Date, the Owners of the Notes and Class A Certificates
will be entitled to receive, from amounts then on deposit in the certificate
account established and maintained by the Indenture Trustee in accordance with
the Indenture (the "Certificate Account") and until the Note Principal Balance
and the Class A Certificate Principal Balance are reduced to zero, the Note
Amount and the Class A Distribution Amount, respectively, as of such Payment
Date, as described below. Distributions will be made in immediately available
funds by wire transfer or otherwise, to the account of Owners of Notes and Class
A Certificates at domestic banks or other entities having appropriate facilities
therefor, if the Owner has so notified the Trustee, or by check mailed to the
address of the person entitled thereto as it appears on the register (the
"Register") maintained by the Trustee as registrar (the "Registrar"). Beneficial
Owners may experience some delay in the receipt of their payments due to the
operations of DTC. See "Risk Factors--Book Entry Registration" in the
Prospectus,"Book Entry Registration of the Offered Securities" herein and
"Description of the Securities--Book Entry Registration" in the Prospectus.
An Owner will be required to send its Note or Class A Certificate to
the Trustee prior to receiving the final payment or distribution. In any event,
any Note or Class A Certificate as to which the final payment or distribution
has been made shall be deemed canceled for all purposes under or pursuant to the
Insurance Policy.
Each Owner of the Notes of the Class A Certificates will be entitled to
receive such Owner's Percentage Interest in the amounts due on such Payment
Date. The "Percentage Interest" of a Note or a Class A Certificate as of any
date of determination will be equal to the percentage obtained by dividing the
principal balance of such Note or Certificate as of the Cut-Off Date by the Note
Principal Balance or the Class A Certificate Principal Balance as of the Cut-Off
Date.
Distributions
Upon receipt, the Trustee will be required to deposit into the
Certificate Account, (i) the total of the principal and interest collections on
the Mortgage Loans, including any Net Liquidation Proceeds, required to be
remitted by the Servicers, together with any Substitution Amount and any Loan
Purchase Price, (ii) any Insured Payment, and (iii) the proceeds of any
liquidation of the Trust Estate. The Trustee will also be required to deposit
into the Certificate Account any Pre-Funded Amounts to be distributed as a
prepayment at the end of the Funding Period.
S-48
<PAGE>
The Pooling and Servicing Agreement establishes a pass-through rate on
the Class A Certificates (the "Pass- Through Rate") as set forth in the Summary
herein under "Offered Securities."
On each Payment Date, the Trustee is required to make the following
disbursements and transfers from moneys then on deposit in the Certificate
Account as specified below in the following order of priority of each such
transfer and disbursement:
(i) First, to the Insurer the Premium Amount for such
Payment Date;
(ii) Second, to the Trustee the Trustee Fees and
reimbursable expenses then due;
(iii) Third, to the Owners of the Notes on a pro rata basis
without any priority among the Notes:
(A) the Current Interest; and
(B) Note Principal Payment Amount until the Note
Principal Balance is reduced to zero;
(iv) Fourth, to the Owners of the Class A Certificates on
a pro rata basis without any priority among the Class
A Certificates:
(A) the Current Interest;
(B) the Class A Principal Distribution Amount
until the Class A Certificate Principal
Balance is reduced to zero; and
(v) Fifth, to the Owners of the Subordinated
Certificates, all remaining distributable amounts.
The Trustee or Paying Agent shall (i) receive as attorney-in-fact of
each Owner of Notes and Class A Certificates any Insured Payment from the
Insurer and (ii) disburse the same to each Owner of Notes and Class A
Certificates. The Indenture and Trust Agreement will provide that to the extent
the Insurer makes Insured Payments, either directly or indirectly (as by paying
through the Trustee or Paying Agent), to the Owners of Notes or Class A
Certificates, the Insurer will be subrogated to the rights of such Owners with
respect to such Insured Payments, and shall receive reimbursement for such
Insured Payments as provided in the Indenture and Trust Agreement; such
subrogation and reimbursement will have no effect on the Insurer's obligations
under the Insurance Policy.
The term "Available Funds" does not include Insured Payments and does
not include any amounts that cannot be distributed to the Owners of the Notes or
the Class A Certificates, if any, by the Trustee as a result of proceedings
under the United States Bankruptcy Code.
Each Owner of a Note or a Class A Certificate will be required promptly
to notify the Trustee in writing upon the receipt of a court order relating to a
Preference Amount and will be required to enclose a copy of such order with such
notice to the Trustee.
Optional Redemption of Notes; Optional Prepayment of Certificates
The Notes are subject to redemption in whole, but not in part, on any
Payment Date on or after the Cleanup Call Date in each case at a redemption
price equal to the then outstanding Note Principal Balance, plus accrued and
unpaid interest thereon.
S-49
<PAGE>
The Class A Certificates are subject to optional repurchase in whole,
but not in part, on any Payment Date on or after the Clean-up Call Date in each
case at a purchase price equal to the then outstanding Class A Certificate
Principal Balance, plus accrued and unpaid interest.
Overcollateralization Provisions
Overcollateralization Resulting from Cash Flow Structure. The Indenture
provides, on each Payment Date, for an accelerated payment of principal on the
Notes, but only to the limited extent hereafter described, which has the effect
of accelerating the amortization of the Notes relative to the amortization of
the related Mortgage Loans.
An accelerated payment of principal of the Notes is required until the
Subordinated Amount has increased to the level required. "Subordinated Amount"
means, with respect to each Payment Date, the excess, if any, of (x) the sum of
(i) the aggregate Loan Balances of the Mortgage Loans as of the close of
business on the last day of the preceding Remittance Period and (ii) any amount
on deposit in the Pre-Funding Account at such time exclusive of any Pre-Funding
Account Earnings (as defined in the Indenture) over (y) the sum of (i) the Note
Principal Balance and (ii) the Class A Certificate Principal Balance as of such
Payment Date (after taking into account the payment of the Note Principal
Payment (except for any Subordination Deficit or Subordination Increase Amount)
and Class A Principal Distribution Amount on such Payment Date). Any amount
actually applied as an accelerated payment of principal of the Notes is a
"Subordination Increase Amount." The required level of the Subordinated Amount
with respect to a Payment Date is the "Specified Subordinated Amount." The
Indenture generally provides that the Specified Subordinated Amount may, over
time, decrease, or increase, subject to certain floors, caps and triggers,
including triggers that allow the Specified Subordinated Amount to decrease or
"step down" based on the performance of the related Mortgage Loans with respect
to certain tests specified in the Indenture based on delinquency rates and
cumulative losses. If certain delinquency and/or loss levels set forth in the
Indenture are exceeded, the "Specified Subordinated Amount" may become unlimited
and accelerate payment in reduction of principal of the Notes during the period
that the Mortgage Loans are unable to meet certain tests specified in the
Indenture based on delinquency rates and cumulative losses.
If the Specified Subordinated Amount is permitted to decrease or "step
down" on a Payment Date in the future or in the event that an Excess
Subordinated Amount otherwise exists, the Indenture provides that some of or all
the principal which would otherwise be distributed to the Owners of the Notes on
such Payment Date shall be distributed to the Owners of the Subordinated
Certificates until the Excess Subordinated Amount is reduced to zero. This has
the effect of decelerating the amortization of the Notes and the Class A
Certificates relative to the amortization of the related Mortgage Loans and of
reducing the related Subordinated Amount. With respect to any Payment Date, the
excess, if any, of (x) the Subordinated Amount on such Payment Date after taking
into account all distributions to be made on such Payment Date (except for any
distributions of Subordination Reduction Amounts as described in the next
sentence) over (y) the Specified Subordinated Amount is the "Excess Subordinated
Amount" for such Payment Date. If, on any Payment Date, the Excess Subordinated
Amount is, or, after taking into account all other distributions to be made on
such Payment Date would be, greater than zero (i.e., the Subordinated Amount is
or would be greater than the Specified Subordinated Amount), then any amounts
relating to principal which would otherwise be distributed to the Owners of
Notes on such Payment Date shall instead be distributed to the Owners of the
Subordinated Certificates (to the extent available therefor) in an amount equal
to the lesser of (x) the related Excess Subordinated Amount and (y) the amount
available for distribution on account of principal on such Payment Date; such
amount being a "Subordination Reduction Amount." As a result of the cash flow
structure of the Trust, Subordination Reduction Amounts may result even prior to
the occurrence of any decrease or "step down" in the related Specified
Subordinated Amount. This is because the Owners of the Notes and the Class A
Certificates will generally be entitled to receive ___% of collected principal,
even though the sum of (i) the Note Principal Balance and (ii) the Class A
Certificate Principal Balance will, following any accelerated amortization,
represent less than ___% of the aggregate Loan Balance. Accordingly, in the
absence of the provisions relating to Subordination Reduction Amounts, the
Subordinated Amount would automatically increase above the Specified
Subordinated Amount requirements.
Generally, on any Payment Date, ____% of all amounts collected on
account of scheduled principal with respect to the related Remittance Period and
unscheduled principal with respect to the related Prepayment Period
S-50
<PAGE>
(other than any such amount applied to the payment of a Subordination Reduction
Amount) will be distributed to the Owners of the Notes and the Class A
Certificates on such Payment Date. If any Mortgage Loan became a Liquidated Loan
during such prior Remittance Period, the Net Liquidation Proceeds related
thereto and allocated to principal may be less than the principal balance of the
related Mortgage Loan; the amount of any such insufficiency is a "Realized
Loss." In addition, the principal balance of any Mortgage Loan which becomes a
Liquidated Loan shall thenceforth equal zero. There is not any requirement that
the amount of any Realized Loss be distributed to the Owners of the Notes and
the Class A Certificates on the Payment Date which immediately follows the event
of loss; i.e., current recovery of losses is not required. Nevertheless, the
occurrence of a Realized Loss will reduce the related Subordinated Amount (and
may result in a Subordination Deficit as described below under
"--Overcollateralization and the Insurance Policy"), which, to the extent that
such reduction causes such Subordinated Amount to be less than the related
Specified Subordinated Amount applicable to the related Payment Date, will
require the payment of a Subordination Increase Amount on such Payment Date (or,
if insufficient funds are available on such Payment Date, on subsequent Payment
Dates, until the Subordinated Amount equals the related Specified Subordinated
Amount). The effect of the foregoing is to allocate losses to the Owners of the
Subordinated Certificates by reducing, or eliminating entirely, payments which
such Owners would otherwise receive.
Overcollateralization and the Insurance Policy. A "Subordination
Deficit" with respect to a Payment Date is the amount, if any, by which (x) the
sum of (i) the Note Principal Balance and Class A Certificate Principal Balance
with respect to a Payment Date, after taking into account all distributions to
be made on such Payment Date (except for any Subordination Deficit and
Subordination Increase Amount), exceeds (y) the sum of (a) the aggregate Loan
Balances of the Mortgage Loans as of the close of business on the last day of
the related Prepayment Period and (b) the amount, if any, on deposit in the
Pre-Funding Account on such Payment Date exclusive of Pre-Funding Account
Earnings. The Trustee is required to make a claim for an Insured Payment under
the Insurance Policy not later than the second Business Day prior to any Payment
Date as to which the Trustee has determined that a Subordination Deficit will
occur for the purpose of applying the proceeds of such Insured Payment as a
payment of principal on such Payment Date. No payments in respect of principal
will be made under the Insurance Policy unless a Subordination Deficit occurs.
The Insurance Policy is thus similar to the subordination provisions described
above insofar as the Insurance Policy guarantees ultimate, rather than current,
payment of the amounts of any Realized Losses to the Owners of the Notes and the
Class A Certificates. Investors should realize that, under extreme loss or
delinquency scenarios that occur when no Subordination Deficit exists, they may
temporarily receive no distributions of principal when they would otherwise be
entitled thereto under the principal allocation provisions described herein.
Nevertheless, the exposure to risk of loss of principal to the Owners of the
Notes and the Class A Certificates depends in part on the ability of the Insurer
to satisfy its obligations under the Insurance Policy.
Pre-Funding Account
On the Closing Date, the Original Pre-Funded Amount will be deposited
in the Pre-Funding Account, which account shall be in the name of and maintained
by the Indenture Trustee and shall be part of the Trust Estate. During the
Funding Period, the Pre-Funded Amount will be maintained in the Pre-Funding
Account. The Original Pre-Funded Amount will be reduced during the Funding
Period by the amount thereof used to purchase Subsequent Mortgage Loans. Any
Pre-Funded Amount remaining at the end of the Funding Period will be distributed
to the Owners of the Notes and Class A Certificates on the Payment Date that
immediately follows the end of the Funding Period, thus resulting in a principal
prepayment of the Notes and the Class A Certificates.
Amounts on deposit in the Pre-Funding Account will be invested in the
investments permitted by the Pooling and Servicing Agreement (the "Eligible
Investments"). All interest and any other investment earnings on amounts on
deposit in the Pre-Funding Account will be deposited in the Capitalized Interest
Account prior to each Payment Date during the Funding Period.
S-51
<PAGE>
Capitalized Interest Account
On the Closing Date cash will be deposited in the Capitalized Interest
Account, which account shall be in the name of and maintained by the Trustee and
shall be part of the Trust. The amount on deposit in the Capitalized Interest
Account, including reinvestment income thereon and amounts deposited thereto
from the Pre-Funding Account, will be used by the Trustee to fund the excess, if
any, of (i) the sum of the amount of interest accruing at the Class A
Pass-Through Rate on the amount by which the sum of (i) the Note Principal
Balance and (ii) the Class A Certificate Principal Balance exceeds the aggregate
Loan Balance of the Mortgage Loans plus the Trustee Fees and Premium Amount
accruing on such excess balance over (ii) the amount of any reinvestment income
on monies on deposit in the Pre-Funding Account; such amounts on deposit will be
so applied by the Trustee on each Payment Date in the Funding Period to fund
such excess, if any. Any amounts remaining in the Capitalized Interest Account
at the end of the Funding Period and not needed for such purpose will be paid to
the Depositor and will not thereafter be available for distribution to the
Owners of the Notes or Class A Certificates.
Amounts on deposit in the Capitalized Interest Account will be invested
in Eligible Investments.
BOOK ENTRY REGISTRATION OF THE OFFERED SECURITIES
The Notes and the Class A Certificates will be book-entry Certificates
(the "Book-Entry Certificates"). Persons acquiring beneficial ownership
interests in such Book-Entry Certificates ("Beneficial Owners") may elect to
hold their Book-Entry Certificates directly through DTC in the United States, or
CEDEL or Euroclear (in Europe) if they are Participants of such systems
("Participants") , or indirectly through organizations which are Participants.
The Book-Entry Certificates will be issued in one or more certificates which in
the aggregate equal the principal balance of the Notes and Class A Certificates
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 will act as depositary for CEDEL and Morgan 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 representing
principal amounts of $1,000 and in integral multiples in excess thereof. Except
as described below, no Beneficial Owner will be entitled to receive a physical
certificate representing such Certificate (a "Definitive Certificate"). Unless
and until definitive Certificates are issued, it is anticipated that the only
"Owner" of such Book-Entry Certificates will be Cede & Co., as nominee of DTC.
Beneficial Owners will not be Owners as that term is used in the Pooling and
Servicing Agreement. Beneficial Owners are only permitted to exercise their
rights indirectly through Participants and DTC.
The Beneficial Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's Ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a DTC Participant and on
the records of CEDEL or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Book-Entry Certificates from the Trustee through DTC and DTC
Participants. While such Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to such Certificates and is required to receive and transmit
distributions of principal of, and interest on, such Certificates. Participants
and indirect Participants with whom Beneficial 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
Beneficial Owners. Accordingly, although Beneficial Owners will not
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possess certificates, the Rules provide a mechanism by which Beneficial Owners
will receive distributions and will be able to transfer their interest.
Beneficial Owners will not receive or be entitled to receive
certificates representing their respective interests except under the limited
circumstances described below. Unless and until Definitive Certificates are
issued, Beneficial Owners who are not Participants may transfer ownership of
Notes and Class A Certificates only through Participants and indirect
Participants by instructing such Participants and indirect Participants to
transfer such Notes and Class A Certificates, by book-entry transfer, through
DTC for the account of the purchasers of such Notes and Class A Certificates,
which account is maintained with their respective Participants. Under the Rules
and in accordance with DTC's normal procedures, transfers of ownership of such
Notes and Class A Certificates will be executed through DTC and the accounts of
the respective Participants at DTC will be debited and credited. Similarly, the
Participants and indirect Participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing Beneficial
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 below) or Euroclear Participant (as defined below) to a DTC
Participant will be received with value on the DTC settlement date but will be
available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlements in DTC. For information with respect to tax
documentation procedures relating to the Certificates, see "Certain Federal
Income Tax Consequences -- Taxation of Certain Foreign Investors" and "-- Backup
Withholding" in the Prospectus and "Global Clearance, Settlement and Tax
Documentation Procedures--Certain U.S. Federal Income Tax Documentation
Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between 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.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its Participants ("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, regulations and procedures governing DTC and DTC
Participants as in effect from time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participant 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.
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As a professional depository, CEDEL is subject to regulation by the Luxembourg
Monetary Institute. CEDEL Participants are recognized financial institutions
around the world, including underwriters, securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations. Indirect
access to CEDEL is also available to others, such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for Participants of
Euroclear ("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 now 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
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
Payment Date by the Trustee to DTC. DTC will be responsible for crediting the
amount of such payments to the accounts of the applicable DTC Participants in
accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing such payment to the Beneficial Owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the Beneficial Owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distributions with respect to
Certificates held through CEDEL or Euroclear will be credited to the cash
accounts of CEDEL Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. Because DTC can only act
on behalf of Financial Intermediaries, the ability of a Beneficial Owner to
pledge Book-Entry Certificates to persons or entities that do not participate in
the Depository system, or otherwise take actions in respect of such Book-Entry
Certificates, may be limited due to the lack of physical certificates for such
Book-Entry Certificates. In addition, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
market since certain potential investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates.
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Monthly and annual reports on the Trust provided by the Trustee to
Cede, as nominee of DTC, may be made available to Beneficial Owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such Beneficial Owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
Owners of the Book-Entry Certificates under the Pooling and Servicing Agreement
only at the direction of one or more Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates are credited, to the extent that such
actions are taken on behalf of Financial Intermediaries whose holdings include
such Book-Entry Certificates. CEDEL or the Euroclear Operator, as the case may
be, will take any action permitted to be taken by an Owner under the Pooling and
Servicing 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 Class A Certificates which conflict with actions taken with
respect to other Class A Certificates.
Definitive Certificates will be issued to Beneficial Owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as a 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, elects to terminate a book-entry system through DTC or (c) DTC, at
the direction of the Beneficial Owners representing a majority of the
outstanding Percentage Interests of the Notes and Class A Certificates, advises
the Trustee in writing that the continuation of a book-entry system through DTC
(or a successor thereto) is no longer in the best interests of Beneficial
Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Beneficial
Owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book- Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as Owners
under the Pooling and Servicing Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Notes and Class A Certificates
among Participants of DTC, CEDEL and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
Assignment of Rights
An Owner may pledge, encumber, hypothecate or assign all or any part of
its right to receive distributions under any Note or Class A Certificate, but
such pledge, encumbrance, hypothecation or assignment shall not constitute a
transfer of an ownership interest sufficient to render the transferee an Owner
of the Trust without compliance with the provisions of the Pooling and Servicing
Agreement described above. Notwithstanding the foregoing, the Pooling and
Servicing Agreement provides that the Insurer may, in connection with a
subrogation of the Insurer to the rights of the Owners of the Notes and the
Class A Certificates to an amount equal to Insured Payments for which the
Insurer has not received reimbursement, be considered to be an "Owner" to the
extent (but only to the extent) of such rights.
THE INSURANCE POLICY AND THE INSURER
The following information has been supplied by the Insurer for
inclusion in this Prospectus Supplement. No representation is made by the
Underwriters, the Seller, the Servicers, the Depositor or any of their
affiliates as to the accuracy or completeness of such information.
[To be supplied.]
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THE INDENTURE
In addition to the provisions of the Indenture summarized elsewhere in
this Prospectus Summary, there is set forth below a summary of certain other
provisions of the Indenture.
Modification of Indenture Without Noteholder Consent
The Trust and the Indenture Trustee may, without the consent of the
Owners of the Notes, but with the prior written consent of the Insurer, enter
into one or more supplemental indentures for any of the following purposes: (i)
to correct or amplify the description of the collateral or add additional
collateral; (ii) to provide for the assumption of the Notes and the Indenture
obligations by a permitted successor to the Trust; (iii) to add additional
covenants for the benefit of the Owners of the Notes, or to surrender any rights
or power conferred upon the Trust; (iv) to convey, transfer, assign, mortgage or
pledge any property to or with the Indenture Trustee; (v) to cure any ambiguity
or correct or supplement any provision in the Indenture or in any supplemental
indenture, which may be inconsistent with any other provision of the Indenture
or in any supplemental indenture; (vi) to provide for the appointment of a
successor Indenture Trustee or to add to or change any of the provisions of this
Indenture as shall be necessary and permitted to facilitate the administration
by more than one trustee; (vii) to modify, eliminate or add to the provisions of
the Indenture in order to comply with the Trust Indenture Act of 1939, as
amended; and (viii) to add any provisions to, change in any manner, or eliminate
any of the provisions of, the Indenture or modify in any manner the rights of
the Owners of the Notes under the Indenture; provided that any action specified
in this clause (viii) shall not, as evidenced by an opinion of counsel,
adversely affect in any material respect the interests of any Owner of the Notes
unless consent is obtained as described below.
Modification of Indenture With Noteholder Consent
With the consent of the Owners of a majority in aggregate Percentage
Interest (a "Majority in Voting Interest") of the Notes, and with the prior
written consent of the Insurer, the Trust and the Indenture Trustee may execute
a supplemental indenture to add provisions to, change in any manner or eliminate
any provisions of, the Indenture, or modify (except as provided below) in any
manner the rights of the Owners of the Notes.
Without the consent of the Owner of each outstanding Note affected
thereby and the written consent of the Insurer, however, no supplemental
indenture may: (i) change the due date of any installment of principal of or
interest on any Note or reduce the principal amount thereof, the interest rate
specified thereon or the redemption price with respect thereto or change any
place of payment where or the coin or currency in which any Note or any interest
thereon is payable; (ii) impair the right to institute suit for the enforcement
of certain provisions of the Indenture regarding payment; (iii) reduce the
percentage of the aggregate amount of the outstanding Notes the consent of the
Owners of which is required for any such supplemental indenture or the consent
of the Owners of which is required for any waiver of compliance with certain
provisions of the Indenture or of certain defaults thereunder and their
consequences as provided for in the Indenture; (iv) modify or alter the
provisions of the Indenture regarding the voting of Notes held by the Trust, any
other obligor on the Notes, the Depositor, the Seller, the Servicers or an
affiliate of any of them; (v) reduce the percentage of the aggregate outstanding
amount of the Notes the consent of the Owners of which is required to direct the
Indenture Trustee to sell or liquidate the assets of the Trust if the proceeds
of such sale would be insufficient to pay the principal amount and accrued but
unpaid interest on the outstanding Notes; (vi) decrease the percentage of the
aggregate principal amount of the Notes required to amend the sections of the
Indenture which specify the applicable percentage of aggregate principal amount
of the Notes necessary to amend the Indenture or certain other related
agreements; or (vii) permit the creation of any lien ranking prior to or on a
parity with the lien of the Indenture with respect to any of the collateral for
the Notes, or, except as otherwise permitted or contemplated in the Indenture,
terminate the lien of the Indenture on any such collateral or deprive the holder
of any Note of the security afforded by the lien of the Indenture.
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Events of Default; Rights Upon Event of Default
"Events of Default" under the Indenture will consist of: (i) any
failure to make any required payment of interest on the Notes, which failure
continues unremedied for five days; (ii) any failure (a) to make any required
payment of principal on the Notes or (b) to observe or perform in any material
respect any other covenants or agreements in the Indenture, which failure in the
case of a default described under (ii)(b) immediately above materially and
adversely affects the rights of the Owners of the Notes, and which failure in
either case continues unremedied or 30 days after the giving of written notice
of such failure to the Trust and the Depositor or the Servicers, as applicable,
by the Indenture Trustee or the Insurer or by the Owners of not less than 25% of
the principal amount of the Notes, with the consent of the Insurer; (iii)
failure to pay the unpaid principal balance of the Notes on the final scheduled
Payment Date; and (iv) certain events of insolvency, readjustment of debt,
marshaling of assets and liabilities or similar proceedings and certain actions
by the Trust indicating its insolvency, reorganization pursuant to bankruptcy
proceedings or inability to pay its obligations. Nevertheless, the amount of
principal required to be distributed to the Owners of the Notes under the
Indenture is generally limited to amounts available therefor in the Certificate
Account. Therefore, the failure to pay principal on the Notes will not result in
the occurrence of an Event of Default until the final scheduled Payment Date.
If any Event of Default should occur and be continuing with respect to
the Notes, the Insurer (so long as the Insurer has not failed to satisfy its
obligations under the Insurance Policy), or the Indenture Trustee or the
Majority in Voting Interest of the Notes then outstanding (in each case, with
the consent of the Insurer), may declare the principal of the Notes to be
immediately due and payable. Such declaration may, under certain circumstances,
be rescinded by the Insurer (so long as the Insurer has not failed to satisfy
its obligations under the Insurance Policy) or (with the Insurer's prior written
consent) the Majority in Voting Interest of the Notes then outstanding.
If the Notes have been declared to be due and payable following an
Event of Default with respect thereto, the Indenture Trustee shall, at the
direction of the Insurer (so long as the Insurer is not in default under the
Insurance Policy) and may, with the consent of the Insurer, either sell the
assets of the Trust or elect to have the Trust maintain possession of the assets
of the Trust and continue to apply distributions on the Mortgage Loans as if
there had been no declaration of acceleration. The Indenture Trustee, however,
is prohibited from selling the assets of the Trust following an Event of
Default, unless (a)(i) the Owners of all the outstanding Notes consent to such
sale, (ii) the proceeds of such sale are sufficient to pay in full the principal
of and the accrued interest on the outstanding Notes at the date of such sale,
or (iii) the Indenture Trustee determines that the proceeds of the Mortgage
Loans would not be sufficient on an ongoing basis to make all payments on the
Notes as such payments would have become due if the Notes had not been declared
due and payable, and (b) the Indenture Trustee obtains the consent of the
Insurer. Following a declaration upon an Event of Default that the Notes are
immediately due and payable, repayment in full of the accrued interest on and
unpaid principal balance of the Notes will be made prior to any further payment
of principal of or interest on the Class A Certificates
Subject to the provisions of the Indenture relating to the duties of
the Indenture Trustee, if an Event of Default occurs and is continuing with
respect to the Notes, the Indenture Trustee will be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the Owners of Notes, if the Indenture Trustee reasonably
believes it will not be adequately indemnified against the costs, expenses and
liabilities which might be incurred by it in complying with such request.
Subject to such provisions for indemnification and certain limitations contained
in the Indenture, the Insurer will have the right to direct the time, method and
place of conducting any proceeding or any remedy available to the Indenture
Trustee.
No holder of any Note will have the right to institute any proceeding
with respect to the Indenture, unless (i) such Owner previously has given to the
Indenture Trustee and the Insurer written notice of a continuing Event of
Default, (ii) the Owners of not less than 25% of the principal amount of the
Notes have made written request of the Indenture Trustee to institute such
proceeding in its own name as Indenture Trustee, (iii) such Owner or Owners have
offered the Indenture Trustee reasonable indemnity, (iv) the Indenture Trustee
has for 60 days failed to institute such proceeding, (v) no direction
inconsistent with such written request has been given to the Indenture Trustee
during such 60-day period by the Owners of a Majority in Voting Interest of the
Notes and (vi) such Owner has obtained the written consent of the Insurer.
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In addition, the Indenture Trustee and the Owners of the Notes will
covenant that they will not at any time institute against the Trust any
bankruptcy, reorganization or other proceeding under any federal or state
bankruptcy or similar law.
Neither the Indenture Trustee nor the Owner Trustee in its individual
capacity, nor any Owner of a Certificate representing an ownership interest in
the Trust including, without limitation, the Depositor, the Servicers or the
Seller nor any of their respective owners, beneficiaries, agents, officers,
directors, employees, affiliates, successors or assigns will, in the absence of
an express agreement to the contrary, be personally liable for the payment of
the principal of or interest on the Notes or for the agreements of the Trust
contained in the Indenture.
Certain Covenants
The Trust may not consolidate with or merge into any other entity,
unless (i) the entity formed by or surviving such consolidation or merger is
organized under the laws of the United States, any state or the District of
Columbia, (ii) such entity expressly assumes the Trust's obligation to make due
and punctual payments upon the Notes and the performance or observance of every
agreement and covenant of the Trust under the Indenture, (iii) no Event of
Default shall have occurred and be continuing immediately after such merger or
consolidation, (iv) the Insurer shall have consented to such transaction, (v)
the Trust has received an opinion of counsel to the effect that such
consolidation or merger would have no material adverse tax consequence to the
Trust or to any Owner of Notes or Certificates and (vi) such merger or
consolidation does not result in the rating of the Notes or the Class A
Certificates being downgraded.
The Trust will not, among other things (i) except as expressly
permitted by the Indenture, the Pooling and Servicing Agreement or certain
related documents (collectively, the "Related Documents"), sell, transfer,
exchange or otherwise dispose of any of the assets of the Trust, (ii) claim any
credit on or make any deduction from the principal and interest payable in
respect of the Notes (other than amounts withheld under the Code or applicable
state law) or assert any claim against any present or former Owner of Notes
because of the payment of taxes levied or assessed upon the Trust, (iii)
dissolve or liquidate in whole or in part, (iv) permit the validity or
effectiveness of the Indenture to be impaired or permit any person to be
released from any covenants or obligations with respect to the Notes under the
Indenture except as may be expressly permitted thereby or (v) permit any lien,
charge, excise, claim, security interest, mortgage or other encumbrance to be
created on or extend to or otherwise arise upon or burden the assets of the
Trust or any part thereof, or any interest therein or the proceeds thereof.
The Trust may not engage in any activity other than as specified under
"Formation of the Trust and Trust Property" herein. The Trust will not incur,
assume or guarantee any indebtedness other than indebtedness incurred pursuant
to the Notes and the Indenture or otherwise in accordance with the Related
Documents.
Annual Compliance Statement
The Trust will be required to file annually with the Indenture Trustee
a written statement as to the fulfillment of its obligations under the
Indenture.
Indenture Trustee's Annual Report
Pursuant to the Trust Indenture Act of 1939, the Indenture Trustee may
be required to mail each year to the Owners of Notes, a brief report relating to
its eligibility and qualification to continue as the Indenture Trustee under the
Indenture, any amounts advanced by it under the Indenture, the amount, interest
rate and maturity date of certain indebtedness owing by the Trust to the
Indenture Trustee in its individual capacity, the property and funds physically
held by the Indenture Trustee as such and any action taken by it that materially
affects the Notes and that has not been previously reported.
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Satisfaction and Discharge of Indenture
The Indenture will be discharged with respect to the collateral
securing the Notes upon the delivery to the Indenture Trustee for cancellation
of all the Notes or, with certain limitations, upon deposit with the Indenture
Trustee of funds sufficient for the payment in full of all the Notes.
Pursuant to the Indenture, the Indenture Trustee is required at all
times to be a banking corporation organized and doing business under the laws of
the United States of America or of any State, authorized under such laws to
exercise corporate trust powers, having a combined capital and surplus of at
least $50,000,000, whose long-term deposits, if any, are rated at least "____"
by S&P and "______" by Moody's, or such lower rating as may be approved in
writing by the Insurer, S&P and Moody's subject to supervision or examination by
federal or state authority and reasonably acceptable to the Insurer. If at any
time the Indenture Trustee shall cease to be eligible in accordance with the
provisions described in this paragraph, the Indenture Trustee shall give notice
of such ineligibility to the Insurer and shall resign, upon the request of the
Insurer or the Majority in Voting Interest of the Notes, in the manner and with
the effect specified in the Indenture.
Any resignation or removal of the Indenture Trustee and appointment of
a successor trustee shall become effective upon the acceptance of appointment by
such successor trustee.
The Indenture Trustee, or any successor trustee or trustees, may resign
at any time by giving written notice to Depositor, the Seller, the Servicers,
the Insurer and all Owners of Notes in the manner set forth in the Indenture.
Upon receiving notice of resignation, the Depositor, with the consent of the
Insurer, is required to promptly appoint a successor trustee or trustees meeting
the eligibility requirements set forth above in the manner set forth in the
Indenture. The Depositor will deliver a copy of the instrument used to appoint a
successor trustee to the Owners of Notes. If no successor trustee shall have
been appointed and have accepted appointment within 60 days after the giving of
such notice of resignation, the resigning trustee may petition any court of
competent jurisdiction for the appointment of a successor trustee. Such court
may thereupon, after such notice, if any, as it may deem proper and prescribe,
appoint a successor trustee.
The Majority in Voting Interest of the Notes or, if the Indenture
Trustee fails to perform in accordance with the terms of the Indenture, the
Insurer, may remove the Indenture Trustee under the conditions set forth in the
Indenture and appoint a successor trustee in the manner set forth therein.
At any time, for the purpose of meeting any legal requirements of any
jurisdiction in which any assets of the Trust or property securing the same may
at the time be located, the Depositor and the Indenture Trustee acting jointly
shall have the power and shall execute and deliver all instruments to appoint
one or more persons approved by the Indenture Trustee and the Insurer to act as
co-trustee or co-trustees, jointly with the Indenture Trustee, or separate
trustee or separate trustees, of all or any part of the assets of the Trust, and
to vest in such person or persons, in such capacity, such title to the assets of
the Trust, or any part thereof, and, subject to the provisions of the Indenture,
such powers, duties, obligations, rights and trusts as the Servicer and the
Trustee may consider necessary or desirable.
THE TRUST AGREEMENT
In addition to the provisions of the Trust Agreement summarized
elsewhere is this Prospectus Summary, there is set forth below a summary of
certain other provisions of the Trust Agreement.
Liability of the Depositor
Under the Trust Agreement, the Depositor agrees to be jointly and
severally liable directly to an injured party for all losses, claims, damages or
liabilities (other than certain tax liabilities and those losses incurred by an
Owner of Certificates in its capacity as an investor in the Certificates or by
an Owner of Notes in its capacity as
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an investor in the Notes) to the extent that the Depositor would be liable if
the Trust were a partnership under the Uniform Limited Partnership Act in which
the Depositor was a general partner.
Termination of Trust Agreement
The Trust Agreement and the Trust shall terminate and be in no further
force or effect on the earlier of: (i) the final distribution by the Owner
Trustee of all moneys or other property or proceeds of the assets of the Trust
in accordance with the terms of the Indenture, the Pooling and Servicing
Agreement and the Trust Agreement or (ii) at the time described below under
"--Dissolution upon Bankruptcy of Depositor".
Notice of any termination of the Trust, specifying the Payment Date
upon which the Owners of the Certificates are to surrender their Certificates
for payment of the final distribution and cancellation, is required to be given
by the Owner Trustee by letter to the Insurer and the Owners of the Certificates
mailed within five business days of receipt of notice of such termination from
the Servicers given pursuant to the Pooling and Servicing Agreement.
If all the Owners of the Certificates shall not surrender their
Certificates for cancellation within six months after the date specified in the
above mentioned written notice, the Owner Trustee is required to give a second
written notice to the remaining Owners of the Certificate to surrender their
Certificates for cancellation and receive the final distribution with respect
thereto. If within one year after the second notice all the Certificates shall
not have been surrendered for cancellation, the Owner Trustee may take
appropriate steps, or may appoint an agent to take appropriate steps, to contact
the remaining Owners of the Certificate concerning surrender of their
Certificates. Subject to applicable laws with respect to escheat of funds, any
funds remaining in the Trust after exhaustion of such remedies in the preceding
sentence shall be deemed property of the Depositor and distributed by the Owner
Trustee to the Depositor.
Dissolution upon Bankruptcy of Depositor
The Trust Agreement shall be terminated 90 days after the occurrence of
certain events of insolvency or reorganization or inability to pay its
obligations with respect to the Depositor, unless, before the end of such 90 day
period, the Owner Trustee shall have received written instructions from (a) each
Owner of the Certificates (other than the Depositor) and (b) each Owner of the
Notes, to the effect that each such party disapproves of the liquidation of the
Mortgage Loans and termination of the Trust. Promptly after the occurrence of
any such event with respect to either Depositor: (i) such Depositor shall give
the Insurer, the Indenture Trustee and the Owner Trustee written notice of such
event; (ii) the Owner Trustee shall, upon the receipt of such written notice
from the Depositor, give prompt written notice to the Owners of the Certificate
and the Indenture Trustee of the occurrence of such event; and (iii) the
Indenture Trustee shall, upon receipt of written notice of such event from the
Owner Trustee or the Depositor, give prompt written notice to the Owners of the
Note of the occurrence of such event; provided, however, that any failure to
give such notice shall not prevent or delay in any manner a termination of the
Trust. Upon such termination, the Owner Trustee shall direct the Indenture
Trustee promptly to sell the assets of the Trust in a commercially reasonable
manner and on commercially reasonable terms. The proceeds of any such sale,
disposition or liquidation of the assets of the Trust shall be treated as
collections on the Mortgage Loans and deposited in the Certificate Account
pursuant to the Indenture.
Amendments Without Consent of the Owners of the Certificates or Notes
The Trust Agreement may be amended by the Depositor and the Owner
Trustee without the consent of any of the Owners of the Notes or the
Certificates (but with the prior written consent of the Insurer), to (i) cure
any ambiguity, (ii) correct or supplement any provision in the Trust Agreement
that may be defective or inconsistent with any other provision in the Trust
Agreement, (iii) add or supplement any credit enhancement for the benefit of the
Owners of the Notes or the Certificates, (iv) add to the covenants, restrictions
or obligations of the Depositor or the Owner Trustee, (v) evidence and provide
for the acceptance of the appointment of a successor trustee with respect to the
assets of the Trust or add to or change any provisions as shall be necessary to
facilitate the administration of the trusts by more than one trustee, and (vi)
add, change or eliminate any other provision of the
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Trust Agreement in any manner that shall not, as evidenced by an opinion of
counsel, adversely affect in any material respect the interests of the Owners of
the Notes or the Certificates.
Amendments With Consent of the Insurer and the Owners of the Certificates
The Trust Agreement may be amended from time to time by the Depositor
and the Owner Trustee with the consent of a Majority in Voting Interest of Class
A Certificates and of the Subordinated Certificates, voting separately, and with
the consent of the Insurer, for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the Trust
Agreement, or of modifying in any manner the rights of the Certificates;
provided, however, that no such amendment shall (a) increase or reduce in any
manner the amount of, or accelerate or delay the timing of, collections of
payments on Mortgage Loans or distributions that shall be required to be made on
any Certificate or the Class A Pass-Through Rate or (b) reduce the aforesaid
percentage required to consent to any such amendment, without the consent of the
Owners of all the Certificates then outstanding.
No Petition Covenant
The Owner Trustee and the Owners of the Certificates will covenant that
they will not prior to the date which is one year and one day after termination
of the Trust Agreement institute at any time against the Trust or the Depositor
any bankruptcy, reorganization or other proceeding under any federal or state
bankruptcy or similar law.
THE POOLING AND SERVICING AGREEMENT
In addition to the provisions of the Pooling and Servicing Agreement
summarized elsewhere in the Prospectus and this Supplement, there is set forth
below a summary of certain other provisions of the Pooling and Servicing
Agreement.
Covenant of the Seller to Take Certain Actions with Respect to the Mortgage
Loans in Certain Situations
Pursuant to the Pooling and Servicing Agreement, upon the discovery by
the Depositor, Seller, a Servicer, the Insurer or the Trustee that any
representations and warranties contained in a Transfer Agreement with respect to
the Mortgage Loans that were assigned to the Trust were untrue in any material
respect as of the Closing Date with the result that the interests of the Owners
or of the Insurer are materially and adversely affected, or the value of the
related Mortgage Loan is materially and adversely affected, the party
discovering such breach is required to give prompt written notice to certain
other parties thereto.
Upon the earliest to occur of the Seller's discovery of or its receipt
of notice of a breach described above from any of the other parties pursuant to
the related Transfer Agreement, the Originator or other party to the related
Transfer Agreement will be required promptly to (i) cure such breach in all
material respects or, within the time period specified in the related Transfer
Agreement, to (ii) substitute in lieu of each affected Mortgage Loan a Qualified
Replacement Mortgage (as such term is defined in the Pooling and Servicing
Agreement) and deliver any Substitution Amount to the related Servicer for
deposit into its Principal and Interest Account on behalf of the Trust as part
of the Monthly Remittance remitted by such Servicer on the related Monthly
Remittance Date or (iii) purchase such Mortgage Loan from the Trust at a
purchase price equal to the Loan Purchase Price (as defined below) thereof.
"Loan Purchase Price" means generally the outstanding principal balance
of the related Mortgage Loan on the Cut-Off Date, less any principal amounts
previously distributed relating to such Mortgage Loan (such amount, the "Loan
Balance" of such Mortgage Loan) as of the date of purchase (assuming that the
Monthly Remittance remitted by the Servicer on such Monthly Remittance Date has
already been remitted), plus one month's interest at the Net Coupon Rate.
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Assignment of Mortgage Loans
Pursuant to the Pooling and Servicing Agreement, the Seller on the
Closing Date and on each Subsequent Transfer Date will transfer, assign, set
over and otherwise convey without recourse to the Depositor and the Depositor
will transfer, assign, set over and otherwise convey without recourse to the
Trustee in trust all its respective right, title and interest in and to each
Mortgage Loan and all its respective right, title and interest in and to
principal and interest due on each such Mortgage Loan on or after the applicable
Cut-Off Date; provided, however, that the Depositor will reserve and retain all
its right, title and interest in and to principal (including Prepayments) and
interest due on each Mortgage Loan on or prior to the Cut-Off Date (except with
respect to Mortgage Loans that were delinquent on such Cut-Off Date, which
payments are not being retained by the Depositor). Purely as a protective
measure and not to be construed as contrary to the parties' intent that such
transfers are sales, the Seller has also been deemed to have granted to the
Depositor and the Depositor has also been deemed to have granted to the Trustee
a security interest in the Trust Estate in the event that the transfer of the
Trust Estate is deemed to be a loan and not a sale.
In connection with the transfer and assignment of the Initial Mortgage
Loans on the Closing Date and the Subsequent Mortgage Loans on each Subsequent
Transfer Date, the Depositor will be required to:
(i) deliver without recourse to the Trustee on the Closing
Date with respect to each Initial Mortgage Loan or on each Subsequent
Transfer Date with respect to each Subsequent Mortgage Loan identified
in the related schedule of Mortgage Loans (A) the original Notes,
endorsed in blank or to the order of the Trustee, (B) the original
title insurance policy or any one of an original title binder, an
original preliminary title report, or an original title commitment, or
a copy certified by the issuer of any of the foregoing, or the
attorney's opinion of title, (C) originals or certified copies of all
intervening recorded assignments, showing a complete chain of title
from origination to the Trustee, if any, including warehousing
assignments, with evidence of recording thereon, (D) originals of all
assumption, modification, written assurance or substitution agreements,
if any and (E) either: (1) the original Mortgage, with evidence of
recording thereon (if such original Mortgage has been returned to the
custodian holding for the Seller from the applicable recording office)
or (2) a copy of the Mortgage certified by the public recording office
in those instances where the original recorded Mortgage has been lost;
(ii) cause the Servicer, within 60 days following the Closing
Date with respect to the Initial Mortgage Loans, or the Subsequent
Transfer Date with respect to the Subsequent Mortgage Loans, to submit
for recording in the appropriate jurisdictions, assignments of the
Mortgages to "_____________ ___________________________, as Trustee of
AMRESCO Residential Securities Corporation Mortgage Loan Trust 199__-__
under the Pooling and Servicing Agreement dated as of _____________,
199__"; provided, however, that the Depositor shall not be required to
prepare any assignment of Mortgage for a Mortgage with respect to which
the Mortgaged Property is located in California or the original
recording information is lacking;
(iii) if not delivered on the Closing Date or the Subsequent
Transfer Date, deliver the title insurance policy or title searches,
the original Mortgages and such recorded assignments, together with
originals or duly certified copies of any and all prior assignments, to
the Trustee within 15 days of receipt thereof by the Depositor (but in
any event, with respect to any Mortgage as to which original recording
information has been made available to the Depositor within two years
after the Closing Date with respect to the Initial Mortgage Loans, or
Subsequent Transfer Date with respect to the Subsequent Mortgage
Loans); and
(iv) furnish to the Trustee and the Insurer, at the
Depositor's expense, a tax opinion and an opinion of counsel with
respect to the sale and perfection of all Subsequent Mortgage Loans
delivered to the Trust in form and substance satisfactory to the
Trustee and the Insurer.
The Trustee will agree, for the benefit of the Owners, to review the
documents contained in each Mortgage Loan File held by the Trustee ("File")
within 45 days after the Closing Date or Subsequent Transfer Date (or the
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date of receipt of any documents delivered to the Trustee after such date) to
ascertain that all required documents (or certified copies of documents) have
been executed and received.
If the Trustee during such 45-day period finds any document
constituting a part of a File which is not properly executed, has not been
received, or is unrelated to the Mortgage Loans, or that any Mortgage Loan does
not conform in a material respect to the description thereof as set forth in the
Schedule of Mortgage Loans, the Trustee will be required to promptly notify the
Depositor, the Seller, the Owners and the Insurer. The Seller will agree in the
Pooling and Servicing Agreement to request that the related Originator or other
party to a Transfer Agreement use reasonable efforts to remedy a material defect
in a document constituting part of a File of which it is so notified by the
Trustee. If, however, within the time period set forth in the related Transfer
Agreement after the Trustee's notice to it respecting such defect the related
Originator or other party to a Transfer Agreement shall not have remedied the
defect and the defect materially and adversely affects the interest in the
related Mortgage Loan of the Owners or of the Insurer, the Seller will request
the related Originator or other party to a Transfer Agreement within the time
period specified in the related Transfer Agreement to (i) substitute in lieu of
such Mortgage Loan another Mortgage Loan of like kind (a "Qualified Replacement
Mortgage," as such term is defined in the Pooling and Servicing Agreement) and
deliver any "Substitution Amount" (the excess, if any, of the Loan Balance of a
Mortgage Loan being replaced over the outstanding principal balance of a
replacement Mortgage Loan plus accrued and unpaid interest) to the related
Servicer for deposit into its Principal and Interest Account on behalf of the
Trust as part of the Monthly Remittance remitted by the Servicer on such Monthly
Remittance Date or (ii) purchase such Mortgage Loan at a purchase price equal to
the Loan Purchase Price thereof, which purchase price shall be delivered to the
related Servicer for deposit in the related Principal and Interest Account along
with the Monthly Remittance remitted by such Servicer on such Monthly Remittance
Date.
In addition to the foregoing, the Trustee has agreed to provide an
updated exception report during the 12th month after the Closing Date indicating
the current status of the exceptions previously noted by the Trustee (the "Final
Certification"). After delivery of the Final Certification, the Trustee shall
provide to the Insurer and the related Servicer no less frequently than monthly
updated certifications indicating the then current status of exceptions, until
all such exceptions have been eliminated.
Servicing
Each Servicer will be obligated under the Pooling and Servicing
Agreement to service and administer the Mortgage Loans identified as being
serviced by it as described therein and with reasonable care, and using that
degree of skill and attention that such Servicer exercises with respect to
comparable mortgage loans that it services for itself or others, and shall have
full power and authority, acting alone, to do or cause to be done any and all
things in connection with such servicing and administration which it may deem
necessary or desirable. Consistent with the foregoing, each Servicer will be
permitted to, in its discretion, (i) waive any assumption fees, late payment
charges, charges for checks returned for insufficient funds or other fees which
may be collected in the ordinary course of servicing the Mortgage Loans, (ii) if
a Mortgagor is in default or about to be in default because of a Mortgagor's
financial condition, arrange with the Mortgagor a schedule for the payment of
delinquent payments due on the related Mortgage Loan, or (iii) modify payments
of monthly principal and interest on any Mortgage Loan becoming subject to the
terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended, in
accordance with such Servicer's general policies with respect to comparable
mortgage loans subject to such Act.
Each Servicer will be paid a monthly fee from interest collected with
respect to each Mortgage Loan serviced by it (as well as from any Liquidation
Proceeds from a Liquidated Mortgage Loan ("Liquidation Proceeds") that are
applied to accrued and unpaid interest) equal to the Loan Balance thereof
multiplied by the applicable Servicing Fee Rate (such product, the "Servicing
Fee"). The "Servicing Fee Rate" for each Mortgage Loan will be the rate provided
in the Pooling and Servicing Agreement, not to exceed 0.50% per annum. The
amount of the monthly Servicing Fee is subject to adjustment with respect to
prepaid Mortgage Loans, as described below. Each Servicer is also entitled to
receive, as additional servicing compensation, amounts in respect of interest
paid on Prepayments received from the 2nd day through the 15th day of a month
("Prepayment Interest Excess"), all late payment fees, assumption fees and other
similar charges and all reinvestment income earned on amounts on deposit in the
related Principal and Interest Account. In addition, each Servicer will be
entitled to retain additional servicing
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compensation in the form of release fees, bad check charges, assumption fees,
late payment charges, or any other servicing-related fees, Net Liquidation
Proceeds not required to be deposited in the related Principal and Interest
Account pursuant to the Pooling and Servicing Agreement, and similar items.
Prepayment penalties may also be retained as additional servicing compensation
to the extent set forth in the Pooling and Servicing Agreement.
Each Servicer is required to establish, or cause to be established, in
the name of the Trustee at one or more depository institutions, a principal and
interest account maintained as a trust account in the trust department of such
institution (each, a "Principal and Interest Account"). All funds in the
Principal and Interest Accounts are required to be held (i) uninvested or (ii)
invested in Eligible Investments (as defined in the Pooling and Servicing
Agreement). Any investment of funds in the Principal and Interest Accounts must
mature on or prior to the immediately succeeding Monthly Remittance Date. Any
investment earnings on funds held in the Principal and Interest Accounts are for
the account of, and any losses therein are also for the account of and must be
promptly replenished by, the respective Servicer.
Each Servicer is required to deposit in the related Principal and
Interest Account, on a daily basis (but in no event later than the second
Business Day following receipt) all principal and interest due on the related
Mortgage Loans after the Cut-Off Date and past due interest and principal on any
Mortgage Loan that was delinquent as of the Cut-Off Date, including any
Prepayments, the proceeds of any liquidation of a Mortgage Loan (including any
insurance proceeds) net of expenses and unreimbursed Delinquency Advances and
Servicing Advances ("Net Liquidation Proceeds"), any income from REO Properties
received thereafter (net of unreimbursed Servicing Advances and Delinquency
Advances), but net of (i) the Servicing Fee with respect to each Mortgage Loan
and other servicing compensation, (ii) principal collected and interest accrued
on any Mortgage Loan prior to the Cut-Off Date if such Mortgage Loan was current
as of the Cut-Off Date, which amounts shall be delivered to the Seller, (iii)
late payments received on any Mortgaged Loan in respect of unreimbursed
Servicing Advances and Delinquency Advances and (iv) reimbursements for past
Delinquency Advances which the Servicer has determined in its good faith
business judgment are not recoverable from the related Mortgagor or Mortgage
Loan proceeds (all such net amounts being referred to herein as the "Daily
Collections").
Each Servicer may make withdrawals for its own account (or for the
account of the Seller in the case of clause (i) below) from the amounts on
deposit in the related Principal and Interest Account only for the following
purposes:
(i) to withdraw interest paid with respect to any Mortgage
Loans that had accrued for periods on or prior to the Cut-Off Date and
principal due on all current Mortgage Loans on the Cut-Off Date, which
shall be paid to the Seller;
(ii) to withdraw investment earnings on amounts on deposit in
its respective Principal and Interest Account;
(iii) to reimburse itself for unrecovered Delinquency Advances
and Servicing Advances to the extent permitted in the Pooling and
Servicing Agreement;
(iv) to withdraw amounts that have been deposited to its
respective Principal and Interest Account in error; and
(v) to clear and terminate its respective Principal and
Interest Account following the termination of the Trust Estate.
Each Servicer will remit to the Trustee for deposit in the Certificate
Account the Monthly Remittance Amount not later than the related Monthly
Remittance Date.
Subject to the following limitations, each Servicer will be required to
advance on any Mortgage Loan serviced by it prior to each Payment Date its own
funds as set forth in the next paragraph, for such Payment Date, in an amount
equal to the aggregate of payments of principal and interest on the Mortgage
Loans serviced by it
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(adjusted to the applicable Net Coupon Rate) that became due during the related
Remittance Period and delinquent on the related Determination Date, together
with an amount equivalent to interest on the principal balance of the Mortgage
Loan related to each Mortgaged Property (each, an "REO Property") acquired by
the Trust through liquidation (any such advance, a "Delinquency Advance"). The
Net Coupon Rate is the rate equal to the excess of the Coupon Rate over the
applicable Servicing Fee Rate.
Delinquency Advances are intended to maintain a regular flow of
scheduled interest and principal payments on the Certificates rather than to
guarantee or insure against losses. Each Servicer is obligated to make
Delinquency Advances with respect to delinquent payments of principal of or
interest on each Mortgage Loan serviced by it (with such payments of interest
adjusted to the related Net Coupon Rate) to the extent that such Delinquency
Advances are, in its good faith business judgment, recoverable from future
payments and collections or insurance payments or proceeds of liquidation of the
related Mortgage Loan. Each Servicer shall be permitted to fund its payment of
Delinquency Advances on any Business Day, or to reimburse itself for any
Delinquency Advances paid from such Servicer's own funds, from collections on
the related Mortgage Loan deposited to the related Principal and Interest
Account subsequent to the related Remittance Period (including "Prepaid
Installments" (i.e., early payments of scheduled principal and interest intended
by the borrower to be treated as such)) and shall deposit into the related
Principal and Interest Account with respect thereto (i) collections from the
Mortgagor whose delinquency gave rise to the shortfall which resulted in such
Delinquency Advance net of any such Delinquency Advance and (ii) Net Liquidation
Proceeds recovered on account of the related Mortgage Loan to the extent of the
amount of aggregate Delinquency Advances related thereto. Previously
unreimbursed Delinquency Advances that the Servicer determines to be
unrecoverable may be reimbursed to the Servicer out of any Mortgagor payments
prior to their deposit to the related Principal and Interest Account or from
funds on deposit in the related Principal and Interest Account. All Delinquency
Advances will be included with the distribution on the related Payment Date. Any
failure by a Servicer to make a Delinquency Advance as required under the
Pooling and Servicing Agreement will constitute an event of default thereunder
for such Servicer, in which case the Trustee, as successor servicer, or the
successor servicer will be obligated to make any such Delinquency Advance, in
accordance with the terms of the Pooling and Servicing Agreement.
Each Servicer will be required to pay all customary, reasonable and
necessary "out of pocket" costs and expenses incurred in the performance of its
servicing obligations, including, but not limited to, (i) expenditures in
connection with a foreclosed Mortgage Loan prior to the liquidation thereof,
including, without limitation, expenditures for real estate property taxes,
hazard insurance premiums, property restoration or preservation ("Preservation
Expenses"), (ii) the cost of any enforcement or judicial proceedings, including
foreclosures and (iii) the cost of the management and liquidation of Property
acquired in satisfaction of the related Mortgage, to the extent such expenses
are, in its good faith business judgment, recoverable. Such costs will
constitute "Servicing Advances." Each Servicer may recover a Servicing Advance
(x) to the extent permitted by the Mortgage Loans or, if not theretofore
recovered from the Mortgagor on whose behalf such Servicing Advance was made,
from Liquidation Proceeds realized upon the liquidation of the related Mortgage
Loan or (y), to the extent that such Advance is determined by the Servicer in
its good faith business judgment to be non-recoverable from such proceeds from
Net Monthly Excess Cashflow and certain other Mortgage Loan proceeds as
specified in the Pooling and Servicing Agreement.
A full month's interest at the related Net Coupon Rate will be due to
the Trust on the outstanding Loan Balance of each Mortgage Loan as of the
beginning of each Remittance Period. If a Prepayment of a Mortgage Loan occurs
during any calendar month, any difference between the interest collected from
the Mortgagor in connection with such prepayment and the full month's interest
at the Net Coupon Rate ("Compensating Interest") (but not in excess of the
aggregate Servicing Fee, and any Prepayment Interest Excess) will be required to
be deposited to the Principal and Interest Account on the Monthly Remittance
Date by the Servicer and shall be included in the Monthly Remittance to be made
available to the Trustee on the next succeeding Monthly Remittance Date.
When a Mortgagor prepays all or a portion of a Mortgage Loan between
scheduled monthly payment dates ("Due Dates"), the Mortgagor pays interest on
the amount prepaid only to the date of prepayment. Prepayments received from the
2nd day through the 15th day of a month are included in the distribution on the
25th day of the
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same month, and accordingly no shortfall in interest results. Conversely,
Prepayments received from the 16th day to the last day of a month are not
distributed until the 25th day of the following month, and accordingly an
interest shortfall (a "Prepayment Interest Shortfall") would result. In order to
mitigate the effect of any such shortfall in interest distributions on any
Payment Date, the amount of the Servicing Fee otherwise payable to the related
Servicer for such month shall, to the extent of such shortfall, be deposited by
the Servicer in the Certificate Account Any such reduction in the Servicing Fee
will be made only to the extent of the Servicing Fee otherwise payable to such
Servicer with respect to Scheduled Payments having the Due Date to which such
Payment Date relates. Any such deposit by the related Servicer will be reflected
in the distributions made on the Payment Date on which the Prepayment received
would be distributed. Subject to the availability thereof to fund Compensating
Interest requirements referred to in the previous paragraph, the Servicers will
be permitted to retain any Prepayment Interest Excess due to prepayments
received in the month in which they are distributed.
Each Servicer will have the right and the option, but not the
obligation, to purchase for its own account any Mortgage Loan serviced by it
which becomes delinquent, in whole or in part, as to four consecutive monthly
installments or any Mortgage Loan as to which enforcement proceedings have been
brought by such Servicer. The purchase price for any such Mortgage Loan is equal
to the Loan Purchase Price thereof, which purchase price shall be deposited in
the related Principal and Interest Account.
Each Servicer, with respect to Mortgage Loans serviced by it, shall
foreclose upon or otherwise comparably convert the ownership on behalf of the
Trust of Mortgaged Properties relating to defaulted Mortgage Loans as to which
no satisfactory arrangements can be made for collection of delinquent payments
and which the related Servicer has not purchased from the Trust.
If so required by the terms of any Mortgage Loan, the related Servicer
will be required to cause hazard insurance to be maintained with respect to the
related Mortgaged Property and to advance sums (such Advances to be treated as
Servicing Advances) on account of the premiums therefor if not paid by the
Mortgagor if permitted by the terms of such Mortgage Loan.
Each Servicer will have the right under the Pooling and Servicing
Agreement to accept applications of Mortgagors for consent to (i) partial
releases of Mortgages, (ii) alterations and (iii) removal, demolition or
division of Mortgaged Properties. No application for approval may be considered
by such Servicer unless: (i) the provisions of the related Note and Mortgage
have been complied with; (ii) the loan-to-value ratio and debt-to-income ratio
after any release does not exceed the maximum loan-to-value ratio and
debt-to-income ratio established in accordance with the Guidelines set forth
herein to be applicable to such Mortgage Loan; and (iii) the lien priority of
the related Mortgage is not affected.
Each Servicer will be permitted under the Pooling and Servicing
Agreement to enter into subservicing agreements for any servicing and
administration of Mortgage Loans with any institution which is acceptable to the
Insurer and a majority of Percentage Interests of the Owners of the Subordinated
Certificates and meeting the requirements of the Pooling and Servicing
Agreement.
Notwithstanding any subservicing agreement, each Servicer will not be
relieved of its obligations under the Pooling and Servicing Agreement and such
Servicer will be obligated to the same extent and under the same terms and
conditions as if it alone were servicing and administering the Mortgage Loans.
Each Servicer shall be entitled to enter into any agreement with a subservicer
for indemnification of such Servicer by such subservicer and nothing contained
in such subservicing agreement shall be deemed to limit or modify the Pooling
and Servicing Agreement.
Each Servicer (except the Trustee if it is required to succeed any
Servicer under the Pooling and Servicing Agreement) will agree to indemnify and
hold the Trustee, the Insurer, the Seller, the Depositor, each other Servicer
and each Owner harmless against any and all claims, losses, penalties, fines,
forfeitures, legal fees and related costs, judgments, and any other costs, fees
and expenses that the Trustee, the Insurer, the Seller, the Depositor, each
other Servicer and any Owner may sustain in any way related to the failure of
such Servicer to perform its duties and service the Mortgage Loans in compliance
with the terms of the Pooling and Servicing Agreement. A party against whom any
such claim is brought shall immediately notify the other parties and the Rating
Agencies and each Owner
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if a claim is made by a third party with respect to the Pooling and Servicing
Agreement, and such Servicer may assume (with the consent of the Trustee) the
defense of any such claim and, upon a determination that the claim results from
the Servicer's failure to perform in accordance with the Pooling and Servicing
Agreement, pay all expenses in connection therewith, including reasonable
counsel fees, and promptly pay, discharge and satisfy any judgment or decree
which may be entered against such Servicer, the Trustee, the Insurer and/or
Owner in respect of such claim.
Each Servicer will be required to deliver to the Trustee, the Insurer,
the Seller, the Depositor and the Rating Agencies: (1) on or before April 15 of
each year, commencing in 1997, an officers' certificate stating, as to each
signer thereof, that (i) a review of the activities of such Servicer during such
preceding calendar year and of performance under the Pooling and Servicing
Agreement has been made under such officers' supervision, and (ii) to the best
of such officers' knowledge, based on such review, such Servicer has fulfilled
all its obligations under the Pooling and Servicing Agreement for such year, or,
if there has been a default in the fulfillment of all such obligations,
specifying each such default known to such officers and the nature and status
thereof including the steps being taken by such Servicer to remedy such default;
and (2) on or before April 15 of any year commencing in 199__, a letter or
letters of a firm of independent, nationally recognized certified public
accountants reasonably acceptable to the Insurer dated as of the date of the
Servicer's fiscal audit for each subsequent letter stating that such firm has
examined the Servicer's overall servicing operations in accordance with the
requirements of the Uniform Single Attestation Program for Mortgage Bankers, and
stating such firm's conclusions relating thereto.
Removal and Resignation of a Servicer
The Insurer or the Owners, the Trustee or the Seller (in each case with
the consent of the Insurer), will have the right pursuant to the Pooling and
Servicing Agreement, to remove any Servicer upon the occurrence of, and in
certain cases after notice and expiration of the related cure period: (a)
certain acts of bankruptcy or insolvency on the part of such Servicer; (b)
certain failures on the part of such Servicer to perform its obligations under
the Pooling and Servicing Agreement; (c) the failure to cure material breaches
of such Servicer's obligations in the Pooling and Servicing Agreement; or (d) if
the loss and/or delinquency levels of the related Mortgage Loans are at certain
specified levels.
No Servicer is permitted to resign from the obligations and duties
imposed on it under the Pooling and Servicing Agreement except (i) upon
determination that its duties thereunder are no longer permissible under
applicable law or are in material conflict by reason of applicable law with any
other activities carried on by it, the other activities of such Servicer so
causing such conflict being of a type and nature carried on by such Servicer on
the date of the Pooling and Servicing Agreement or (ii) upon written consent of
the Insurer, the Seller and the Trustee and confirmation from the Rating
Agencies that the Class A Certificate ratings (absent the Insurance Policy) are
not reduced. Any such determination permitting the resignation of such Servicer
pursuant to clause (i) above is required to be evidenced by an opinion of
counsel to such effect which shall be delivered to the Trustee and the Insurer.
Upon removal or resignation of a Servicer, the Trustee (x) shall
solicit bids for a successor servicer and (y) pending the appointment of a
successor Servicer as a result of soliciting such bids, shall serve as Servicer.
The Trustee, if it is unable to obtain a qualifying bid and is prevented by law
from acting as servicer, will be required to appoint, or petition a court of
competent jurisdiction to appoint, any housing and home finance institution,
bank or mortgage servicing institution designated as an approved servicer
meeting the requirements of the Pooling and Servicing Agreement, and acceptable
to the Insurer and the Owners of the Subordinated Certificates (provided that if
the Insurer and such Owners cannot agree as to the acceptability of such
successor Servicer, the decision of the Insurer shall control) as the successor
to such Servicer in the assumption of all or any part of the responsibilities,
duties or liabilities of such Servicer.
No removal or resignation of a Servicer will become effective until the
Trustee or a successor servicer shall have assumed a Servicer's responsibilities
and obligations in accordance with the Pooling and Servicing Agreement.
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Reporting Requirements
On each Payment Date the Trustee is required to report in writing to
each Owner and the Insurer:
(i) the amount of the distribution with respect to the Notes,
the Class A Certificates and the Subordinated Certificates (based on an
original principal amount of $1,000);
(ii) the amount of such distribution allocable to principal on
the Mortgage Loans, separately identifying the aggregate amount of any
Prepayments or other recoveries of principal included therein, any
Pre-Funded Amounts distributed as a Prepayment at the end of the
Funding Period (based on an original principal amount of $1,000) and
any Subordination Increase Amount;
(iii) the amount of such distribution allocable to interest on
Mortgage Loans (based on an original principal amount of $1,000);
(iv) if the distribution (net of any Insured Payment) to the
Owners of the Notes or the Class A Certificates on such Payment Date
was less than the related Distribution Amount on such Payment Date, the
Carry-Forward Amount and the allocation thereof;
(v) the amount of any Insured Payment included in the amounts
distributed to the Owners of the Notes and the Class A Certificates on
such Payment Date;
(vi) the principal amount of the Notes and the Class A
Certificate (based on an original principal amount of $1,000) which
will be outstanding after giving effect to any payment of principal on
such Payment Date;
(vii) the aggregate Loan Balance of all Mortgage Loans, the
aggregate Loan Balance of the Initial Mortgage Loans and the Subsequent
Mortgage Loans, in each case after giving effect to any payment of
principal on such Payment Date;
(viii) the Subordinated Amount and Subordination Deficit, if
any, remaining after giving effect to all distributions and transfers
on such Payment Date;
(ix) based upon information furnished by the Depositor such
information as may be required by Section 6049(d)(7)(C) of the Code and
the regulations promulgated thereunder to assist the Owners in
computing their market discount;
(x) the total of any Substitution Amounts or Loan Purchase
Price amounts included in such distribution;
(xi) the weighted average Coupon Rate of the Mortgage Loans;
(xii) such other information as the Insurer may reasonably
request with respect to delinquent Mortgage Loans;
(xiii) the largest Mortgage Loan balance outstanding;
(xiv) for Payment Dates during the Funding Period, the
remaining Pre-Funded Amount; and
(xv) the Servicing Fees, Trustee Fees and Premium Amount.
Certain obligations of the Trustee to provide information to the Owners
are conditioned upon such information being received from the Servicers.
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In addition, on each Payment Date the Trustee will be required to
distribute to the Depositor, the Underwriters, the Rating Agencies, each Owner
and the Insurer, together with the information described above, the following
information prepared by the related Servicer and furnished to the Trustee for
such purpose:
(p) the number and aggregate principal balances of Mortgage
Loans (i) 30-59 days delinquent, (ii) 60-89 days delinquent and (ii) 90
or more days delinquent, as of the close of business on the last
business day of the calendar month next preceding the Payment Date and
the number and aggregate Loan Balances of all Mortgage Loans and
related data;
(q) the status and the number and dollar amounts of all
Mortgage Loans in foreclosure proceedings as of the close of business
on the last business day of the calendar month next preceding such
Payment Date;
(r) the number of Mortgagors and the Loan Balances of the
related Mortgages involved in bankruptcy proceedings as of the close of
business on the last business day of the calendar month next preceding
such Payment Date;
(s) the existence and status of any Mortgaged Properties as to
which title has been taken in the name of, or on behalf of the Trustee,
as of the close of business of the last business day of the month next
preceding the Payment Date;
(t) the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure as of the close
of business on the last business day of the calendar month next
preceding the Payment Date; and
(f) the amount of cumulative Realized Losses.
Removal of Trustee for Cause
The Trustee may be removed upon the occurrence of any one of the
following events (whatever the reason for such event and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body) on the part of the Trustee: (1) failure to
make distributions of available amounts; (2) certain breaches of covenants and
representations by the Trustee; (3) certain acts of bankruptcy or insolvency on
the part of the Trustee; and (4) failure to meet the standards of Trustee
eligibility as set forth in the Pooling and Servicing Agreement.
If the Insurer or (ii) with the prior written consent of the Insurer
(which is required not to be unreasonably withheld) (x) the Depositor or (y) the
Owners of a majority of the Percentage Interests represented by the Class A
Certificates or, if there are no Class A Certificates then outstanding, by a
majority of the Percentage Interests represented by the Subordinated
Certificates, may appoint a successor trustee.
Governing Law
The Pooling and Servicing Agreement and each Certificate will be
construed in accordance with and governed by the laws of the State of New York
applicable to agreements made and to be performed therein.
Amendments
The Trustee, the Depositor, the Seller and the Servicers with the
consent of the Insurer may, at any time and from time to time and without notice
to or the consent of the Owners, amend the Pooling and Servicing Agreement, and
the Trustee will be required to consent to such amendment, for the purposes of
(i) curing any ambiguity, (ii) correcting or supplementing any provisions
therein which are inconsistent with any other provisions therein or (iii) for
any other purpose, provided that in the case of clause (iv), (A) the Seller
delivers an opinion of counsel acceptable to the Trustee that such amendment
will not adversely affect in any material respect the interest
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of the Owners and (B) such amendment will not result in a withdrawal or
reduction of the ratings of the Class A Certificates without regard to the
Insurance Policy. Notwithstanding anything to the contrary, no such amendment
shall (a) change in any manner the amount of, or delay the timing of, payments
which are required to be distributed to any Owner without the consent of the
Owner of such Certificate, (b) reduce the percentages of Percentage Interest
which are required to consent to any such amendments, without the consent of the
Owners of all Certificates of the Class or Classes affected then outstanding or
(c) which affects in any manner the terms or provisions of the Insurance Policy.
The Trustee will be required to furnish written notification of the
substance of any such amendment to each Owner in the manner set forth in the
Pooling and Servicing Agreement.
Termination of the Trust
The Pooling and Servicing Agreement provides that the Trust will
terminate upon the payment to the Owners of all Certificates and the Insurer
from amounts other than those available under the Insurance Policy of all
amounts required to be paid to such Owners and the Insurer upon the last to
occur of (a) the final payment or other liquidation (or any advance made with
respect thereto) of the last Mortgage Loan, (b) the disposition of all property
acquired in respect of any Mortgage Loan remaining in the Trust Estate.
Optional Termination
By Owners of Subordinated Certificates or the Insurer. At their option,
the Owners of a majority of the Percentage Interest represented by the
Certificates then outstanding or in certain limited circumstances the Insurer
may, on any Payment Date after the Clean-Up Call Date, purchase from the Trust
all (but not fewer than all) remaining Mortgage Loans, in whole only, and other
property acquired by foreclosure, deed in lieu of foreclosure, or otherwise then
constituting the Trust Estate by payment of an amount (i) agreed upon between
the Insurer and such Subordinated Certificate Owners, or (ii) in the absence of
such agreement at a price equal to 100% of the aggregate Loan Balance of the
related Mortgage Loans as of the day of purchase minus amounts remitted from the
Principal and Interest Account to the Certificate Account representing
collections of principal on the Mortgage Loans during the current Remittance
Period, plus one month's interest on such amount computed at the Adjusted
Pass-Through Rate (as defined in the Pooling and Servicing Agreement); provided,
that such amount shall in any event include all accrued and unpaid Servicing
Fees plus the aggregate amount of any unreimbursed Delinquency Advances and
Servicing Advances and Delinquency Advances which any Servicer has theretofore
failed to remit together with Reimbursement Amounts then owed to the Insurer.
By Servicers. If the Subordinated Certificate Owners do not exercise
their right to purchase all the Mortgage Loans after the Clean-Up Call Date, the
Servicers will also have the right, collectively, to purchase all the Mortgage
Loans they are servicing on any Remittance Date when the outstanding Class A
Certificate Principal Balance has declined to 5% of the original Class A
Certificate Principal Balance.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of certain of the material anticipated federal
income tax consequences of the purchase, ownership and disposition of the Notes
and Class A Certificates is to be considered only in connection with "Certain
Federal Income Tax Consequences" in the Prospectus. The discussion herein and in
the Prospectus is based upon laws, regulations, rulings and decisions now in
effect, all of which are subject to change. The discussion below and in the
Prospectus does not purport to deal with all federal tax consequences applicable
to all categories of investors, some of which may be subject to special rules.
Investors should consult their own tax advisors in determining the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the Notes and the Class A Certificates.
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Taxation of the Notes
See "Certain Federal Income Tax Consequences--Federal Income Tax
Consequences for Certificates as to Which No REMIC Election Is Made" in the
Prospectus.
Taxation of Class A Certificates
In the opinion of Arter & Hadden, (i) the Trust will not be treated as
an association taxable as a corporation or as a "publicly traded partnership"
taxable as a corporation and (ii) the Notes will be treated as debt. The
Depositors, the Seller and the Servicer have agreed, and by the purchase of
Notes and the Class A Certificates, the Owners of the Notes and the Class A
Certificates will agree, to treat the Trust as a partnership for purposes of
Federal and state income taxes, with the partners of the partnership being the
Owners of Class A Certificate and the Subordinated Certificates. See "Certain
Federal Income Tax Consequences" herein and in the Prospectus.
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 provides
that any deductions attributable to the amortization of premium on the Mortgage
Loans and certain amounts payable to the Indenture Trustee, the Owner Trustee,
the Servicer or the Representative will be specially allocated to the Owners of
the Subordinated Certificates in proportion to their holding of such
Certificates. A portion of the net income of the Trust for each month, computed
without taking into account the specially allocated deductions described above,
equal to the sum of (i) the excess of (x) the Class A Pass-Through Rate on the
Class A Certificate Principal Balance for such month and all preceding months
over (y) all amounts allocated to the Owners of the Class A Certificates
pursuant to this clause for all preceding months; and (ii) any Trust income
corresponding to the portions of any excess of the principal amount of the
Certificates over their initial issue price that accrues for such month
(determined in a manner as if the Class A Certificates were indebtedness and
such excess were original issue discount) shall be allocated to the Owners of
the Class A Certificates in proportion to their holdings of Class A
Certificates. Any remaining net income and any net loss (computed without taking
into account the deductions otherwise specially allocated as described above) of
the Trust will be allocable to the Owners of the Subordinated Certificates in
proportion to their holding of Subordinated Certificates.
Treasury regulations govern whether partnership allocations will be
respected by the IRS. It is believed that these allocations will be valid under
these Regulations. No assurance can be given that the IRS would not require a
greater amount of income to be allocated to the Owners of any Class of
Certificates. Moreover, even under the foregoing method of allocation, Owners
may be allocated income equal to the amounts described above even though the
Trust might not have sufficient cash to make current cash distributions of such
amount. Thus, cash basis Owners will in effect be required to report income from
the Class A Certificates on the accrual basis. In addition, because tax
allocations and tax reporting will be done on a uniform basis for all Owners of
Certificates, while Owners of Certificates may be purchasing Certificates at
different times and at different prices, Certificates 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. See generally, "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for Certificates as the Which No
REMIC Election Is Made--Taxation of Securities Classified as Partnership
Interests" in the Prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain requirements on those employee benefit plans and
individual retirement arrangements to which it applies ("Plan") and on those
persons who are fiduciaries with respect to such Plans. Any Plan fiduciary which
proposes to cause a Plan to acquire any of the Class A Certificates should
consult with counsel with respect to the consequences under ERISA and the Code
of the Plan's acquisition and ownership of such Certificates. See "ERISA
Considerations" in the Prospectus.
The Department of Labor has issued to the Underwriters individual
prohibited transaction exemptions PTE 89-88, 54 Fed. Reg. 42.582 (Oct. 17,
1989), PTE 89-89, 54 Fed. Reg. 42.589 (Oct. 17, 1989), and PTE 90-32,
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55 Fed. Reg. 23.147 (June 6, 1990) (the "Exemptions"); which generally exempt
from the application of the prohibited transaction provisions of Section 406(a),
Section 406(b)(1) and Section 406(b)(2) of ERISA and the excise taxes imposed
pursuant to Sections 4975(a) and (b) of the Code, with respect to the initial
purchase, the holding and the subsequent resale by Plans of certificates in
pass-through trusts that consist of certain receivables, loans and other
obligations that meet the conditions and requirements of the Exemptions. The
loans covered by the Exemptions include mortgage loans such as the Mortgage
Loans.
Among the conditions that must be satisfied for the Exemptions to apply
are the following:
(1) the acquisition of the Offered Securities by a Plan is on
terms (including the price for the certificates) that are at least as
favorable to the Plan as they would be in an arm's-length transaction
with an unrelated party;
(2) the rights and interests evidenced by the Offered
Securities acquired by the Plan are not subordinated to the rights and
interests evidenced by other Certificates of the Trust Estate;
(3) the Offered Securities acquired by the Plan have received
a rating at the time of such acquisition that is one of the three
highest generic rating categories from either Standard & Poor's,
Moody's, Duff & Phelps Credit Rating Co. ("D&P") or Fitch Investors
Service, Inc. ("Fitch");
(4) the Trustee must not be an affiliate of any other member
of the Restricted Group (as defined below);
(5) the sum of all payments made to and retained by any
Underwriter in connection with the distribution of the Offered
Securities represents not more than reasonable compensation for
underwriting the Offered Securities; the sum of all payments made to
and retained by the Seller pursuant to the assignment of the Mortgage
Loans to the Trust Estate represents not more than the fair market
value of such loans; the sum of all payments made to and retained by
any Servicer represents not more than reasonable compensation for such
person's services under the Agreement and reimbursement of such
person's reasonable expenses in connection therewith; and
(6) the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933.
The Trust Estate must also meet the following requirements:
(i) the corpus of the Trust Estate must consist
solely of a fixed pool of assets of the type that have been
included in other investment pools;
(ii) certificates in such other investment pools must
have been rated in one of the three highest rating categories
of Standard & Poor's, Moody's, Fitch or D&P for at least one
year prior to the Plan's acquisition of Class A Certificates;
and
(iii) certificates evidencing interests in such other
investment pools must have been purchased by investors other
than Plans for at least one year prior to the Plan's
acquisition of the Class A Certificates.
Moreover, the Exemptions provide relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire certificates in a trust in which the
fiduciary (or its affiliate) is a mortgagor on the receivables held in the
trust; provided that, among other requirements, (i) in the case of an
acquisition in connection with the initial issuance of certificates, at least
fifty percent of each class of certificates in which Plans have invested is
acquired by persons independent of the Restricted Group and at least fifty
percent of the aggregate interest in the trust is acquired by persons
independent of the Restricted Group; (ii) such fiduciary (or its affiliate) is a
mortgagor with respect to five percent or less of the fair market value of the
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obligations contained in the trust; (iii) the Plan's investment in certificates
of any class does not exceed twenty-five percent of all of the certificates of
that class outstanding at the time of the acquisition; and (iv) immediately
after the acquisition, no more than twenty-five percent of the assets of the
Plan with respect to which such person is a fiduciary are invested in
certificates representing an interest in one or more trusts containing assets
sold or serviced by the same entity. The Exemptions do not apply to Plans
sponsored by the Depositor, the Insurer, the Underwriters, the Trustee, the
related Servicer, any mortgagor with respect to Mortgage Loans included in the
Trust Estate constituting more than five percent of the aggregate unamortized
principal balance of the assets in the Trust Estate, or any affiliate of such
parties (the "Restricted Group"). As of the date hereof, there is no single
Mortgage Loan included in the Trust Estate that constitutes more than five
percent of the aggregate unamortized principal balance of the assets of the
Trust Estate.
It is believed that the Exemptions will apply to the acquisition and
holding of Offered Securities by Plans and that all conditions of the Exemptions
as they relate to the acquisition and holding by Plans of the Class A-1
Certificates other than those within the control of the investors will be met.
It is further believed that the Exemptions will apply to the acquisition and
holding of Offered Securities by Plans following the expiration of the Funding
Period and that all conditions of the Exemptions as they relate to the
acquisition and holding by Plans of the Offered Securities other than those
within the control of the investors will be met after such time.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the possible applicability of the
Exemptions, or other exemptive relief, and all of the potential consequences in
their specific circumstances, prior to making an investment in the Offered
Securities. Each Plan fiduciary should determine whether under the general
fiduciary standards of investment procedure and diversification an investment in
the Offered 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.
RATINGS
It is a condition of the issuance of the Offered Securities that the
Offered Securities receive ratings of "AAA" by Standard & Poor's and "Aaa" by
Moody's. The ratings will be based primarily on the claims-paying ability of the
Insurer. Explanations of the significance of such ratings may be obtained from
Moody's, 99 Church Street, New York, New York 10007 and Standard & Poor's, 25
Broadway, New York, New York 10004. Such ratings will be the views only of such
rating agencies. There is no assurance that any such ratings will continue for
any period of time or that such ratings will not be revised or withdrawn. Any
such revision or withdrawal of such ratings may have an adverse effect on the
market price of the Offered Securities. A security rating is not a
recommendation to buy, sell or hold securities.
LEGAL INVESTMENT CONSIDERATIONS
The Offered Securities will constitute "mortgage related securities"
for purposes of SMMEA for so long as they are rated in one of the two highest
rating categories by one or more nationally recognized statistical rating
organizations. As such, the Offered Securities will be legal investments for
certain entities to the extent provided in SMMEA, subject to state laws
overriding SMMEA. In addition, institutions whose investment activities are
subject to review by federal or state regulatory authorities may be or may
become subject to restrictions, which may be retroactively imposed by such
regulatory authorities, on the investment by such institutions in certain forms
of mortgage related securities. Furthermore, certain states have enacted
legislation overriding the legal investment provisions of SMMEA.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement relating to the Certificates (the "Underwriting Agreement"), the
Depositor has agreed to cause the Trust to sell to each of the Underwriters
named below (the "Underwriters"), and each of the Underwriters has severally
agreed to purchase, the principal amount or Percentage Interest of the Class A
Certificates set forth opposite its name below:
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Notes
Underwriters Percentage Interest
------------ -------------------
Class A Certificates
Underwriters Percentage Interest
------------ -------------------
The Underwriters are collectively committed to purchase all the Offered
Securities if any Offered Securities are purchased. The Underwriters intend to
act as market makers in the Offered Securities, subject to applicable provisions
of federal and state securities laws and other regulatory requirements, but are
under no obligation to do so. The Underwriters and any dealers that participate
with the Underwriters in the distribution of the Offered Securities may be
deemed to be underwriters, and any discounts or commissions received by them and
any profit on the resale of the Offered Securities by them may be deemed to be
underwriting discounts or commissions, under the Securities Act.
The Depositor has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or contribute
to payments which the Underwriters may be required to make in respect thereof.
REPORT OF EXPERTS
The consolidated balance sheets of the Insurer, _______________________
as of December 31, 199__ and 199__, and the related consolidated statements of
income, changes in shareholder's equity, and cash flows for each of the three
years in the period ended December 31, 199__, appearing in Appendix B of this
Prospectus Supplement, have been audited by ________________________,
independent accountants, as set forth in their report included therein, and are
included in reliance upon such report and upon the authority of such firm as
experts in accounting and auditing.
CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Offered Securities will be passed upon for the Seller by Arter & Hadden,
Washington, D.C. and by L. Keith Blackwell, Esquire, General Counsel for the
Depositor. Certain legal matters relating to insolvency issues and certain
federal income tax matters concerning the Offered Securities will be passed upon
for the Depositor by Arter & Hadden. Certain legal matters relating to the
validity of the issuance of the Offered Securities will be passed upon for the
Underwriters by ______________. Legal matters relating to the Policy will be
passed upon for the Insurer by _______________, ____________.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered AMRESCO
Residential Securities Corporation Mortgage Loan Trust 199__-__ Notes and
Mortgage Loan Pass-Through Certificates, Class A (the "Global Securities") will
be available only in book-entry form. Investors in the Global Securities may
hold such Global Securities through any of DTC, CEDEL or Euroclear. The Global
Securities will be tradeable 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 through CEDEL and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of CEDEL and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL 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, CEDEL and
Euroclear will hold positions on behalf of their Participants through their
Relevant Depositary which in turn will hold such positions in their accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practices. 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 CEDEL 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 generally applicable to
mortgage loan asset-backed certificates issues in same-day funds.
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Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC, Seller and CEDEL or Euroclear Participants. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a CEDEL Participant or a Euroclear Participant, the purchaser
will send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear will instruct the Relevant Depositary, as the case may be, to receive
the Global Securities against payment. Payment will include interest accrued on
the Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
Relevant Depositary to 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 CEDEL 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 CEDEL or Euroclear cash debt
will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
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 CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Global Securities are credited to their account one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit
to them, CEDEL Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of such overdraft charges, although the result will depend on each CEDEL
Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for crediting Global
Securities to the respective European Depositary for the benefit of CEDEL
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
Trading between CEDEL or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, CEDEL Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. In these cases CEDEL
or Euroclear will instruct the respective Depositary, as appropriate, to credit
the Global Securities to the DTC Participant's account against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment to and excluding the settlement date on the basis of the
actual number of days in such accrual period and a year assumed to consist to
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 CEDEL Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
CEDEL Participant's or Euroclear Participant's account would be back-valued to
the value date (which would be
I-2
<PAGE>
the preceding day, when settlement occurred in New York). Should the CEDEL
Participant or Euroclear Participant have a line of credit with its respective
clearing system and elect to be in debt in anticipation of receipt of the sale
proceeds in its account, the 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
CEDEL Participant's or Euroclear Participant's account would instead be valued
as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase
Global Securities from DTC Participants for delivery to CEDEL Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the trade is reflected in their CEDEL or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their CEDEL or Euroclear account
in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the CEDEL Participant or Euroclear
Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
CEDEL or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), unless (i) each clearing system, bank
or other financial institution that holds customers' securities in the ordinary
course of its trade or business in the chain of intermediaries between such
beneficial owner and the U.S. entity required to withhold tax complies with
applicable certification requirements and (ii) such beneficial owner takes one
of the following steps to obtain an exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial Owners of Global
Securities that are Non-U.S. Persons (as defined below) can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status). If the information shown on Form W-8 changes, a new Form W-8
must be filed within 30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
Exemption or reduced rate for Non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form 1001 (Ownership, Exemption or
Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by Certificate Owners or their agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The 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
I-3
<PAGE>
the security (the clearing agency, in the case of persons holding directly on
the books of the clearing agency). Form W-8 and Form 1001 are effective for
three calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof or (iii) an
estate or trust that is subject to U.S. federal income tax regardless of the
source of its income. The term "Non-U.S. Person" means any person who is not 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>
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained in this Prospectus
Supplement or the Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the
Depositor or by the Underwriters. This Prospectus Supplement and the Prospectus
do not constitute an offer to sell, or a solicitation of an offer to buy any of
the securities offered hereby in any jurisdiction in which the person making
such offer or solicitation is not qualified to do so or to anyone to whom it is
unlawful to make such offer or solicitation. Neither the delivery of this
Prospectus Supplement or the Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that information herein (including
information incorporated by reference herein) or therein is correct as of any
time subsequent to the date of this Prospectus Supplement or the Prospectus.
----------
TABLE OF CONTENTS
Page
PROSPECTUS SUPPLEMENT
Summary of Terms...........................................S-1
Risk Factors .............................................S-15
The Portfolio of Mortgage Loans...........................S-18
Use of Proceeds...........................................S-34
The Depositor.............................................S-35
The Seller................................................S-35
The Mortgage Loan Pools...................................S-35
Prepayment and Yield Considerations.......................S-50
The Originators...........................................S-56
Formation of the Trust and Trust Property.................S-56
Additional Information....................................S-56
Description of the Class A Certificates...................S-57
The Insurer...............................................S-66
Credit Enhancement........................................S-69
The Pooling and Servicing Agreement.......................S-71
Certain Federal Income Tax Consequences...................S-80
ERISA Considerations......................................S-81
Ratings...................................................S-83
Legal Investment Considerations...........................S-83
Underwriting..............................................S-83
Report of Experts.........................................S-84
Certain Legal Matters.....................................S-84
Global Clearance, Settlement and Tax
Documentation Procedures...............................Annex I
Index to Location of Principal Defined Terms...............A-1
Audited Financial Statements for the
Certificate Insurer........................................B-1
PROSPECTUS
Summary of Prospectus........................................1
Risk Factors.................................................7
Description of the Certificates.............................10
The Trusts..................................................15
Credit Enhancement..........................................18
Servicing of the Mortgage Loans and Contracts...............22
Administration..............................................28
Use of Proceeds.............................................35
The Depositor...............................................35
Certain Legal Aspects of the Mortgage Assets................35
Legal Investment Matters....................................44
ERISA Considerations........................................45
Certain Federal Income Tax Consequences.....................47
Plan of Distribution........................................71
Legal Matters...............................................71
Financial Information.......................................71
Index to Location of Principal Defined Terms...............A-1
================================================================================
I-1
<PAGE>
AMRESCO Residential Securities
Corporation Mortgage Loan Trust
199__-__
-----------
PROSPECTUS SUPPLEMENT
-----------
[UNDERWRITERS]
_______________, 1996
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This preliminary prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.
SUBJECT TO COMPLETION, DATED __________ ___, 199__
PROSPECTUS SUPPLEMENT
(To Prospectus Dated ______________ __, 199___)
- -------------------------------------------------------------------------------
AMRESCO Residential Securities Corporation Multifamily Mortgage
Loan Trust 199__-__
$__________________ Class A-1 Certificates
$__________________ Class S-A Interest-only Certificates
$___________ Class B Certificates
Multifamily Mortgage Pass-Through Certificates
SERIES 199__-__
AMRESCO RESIDENTIAL SECURITIES CORPORATION
Depositor
-----------------------
Servicer
- --------------------------------------------------------------------------------
The AMRESCO Residential Securities Corporation Multifamily Mortgage
Pass-Through Certificates, Series 199__-__ (the "Certificates") will consist of
the Class A-1 senior certificates (the "Class A-1 Certificates"), the Class S-A
senior certificates (the "Class S-A Certificates" and, together with the Class
A-1 Certificates (the "Senior Certificates")), the Class B subordinate
certificates (the "Class B Certificates"), the Class C subordinate Certificates
(the "Class C Certificates") and the Class R residual certificates (the "Class R
Certificates"); (together with the Class B Certificates, and the Class C
Certificates, the "Subordinate Certificates"). Only the Senior Certificates and
Class B Certificates (collectively, the "Offered Certificates") are being
offered hereby.
As more fully described herein, interest distributions on the Offered
Certificates will be based on the Certificate Principal Balance of the related
Class or the aggregate principal balance of the Mortgage Loans or another
specified Class of Certificates (the "Notional Principal Balance") and the then
applicable Pass-Through Rate.
The Pass-Through Rate for the Class A-1 Certificates will be _____% per
annum, for the Class B Certificates will be ___% per annum and for the S-A
Certificates will be ___% per annum. The Class S-A Certificates are
interest-only Certificates. The yield to investors on the Class S-A Certificates
will be extremely sensitive to the rate and timing of principal payments
(including prepayments, repurchases, defaults and liquidations) on the Mortgage
Loans, which may vary over time. A rapid rate of such principal payments on the
Mortgage Loans could result in the failure of investors in the Class S-A
Certificates to recover their initial investments.
See "Risk Factors" beginning on Page S-10 herein and beginning on Page
6 in the related Prospectus for a discussion of significant risk factors.
(Cover continued on next page)
- -------------------------------------------------------------------------------
THE OFFERED CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY AND DO
NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF AMRESCO RESIDENTIAL CREDIT
CORPORATION, ANY ORIGINATORS OR ANY OF THEIR AFFILIATES. NEITHER THE
OFFERED CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED
OR GUARANTEED BY ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. 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.]
- --------------------------------------------------------------------------------
The Offered Certificates will be purchased by the Underwriters from the
Depositor and will be offered by the Underwriters from time to time to the
public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale.
Proceeds to the Depositor from the sale of the Offered Certificates
will be approximately $____________, before deducting expenses payable by the
Depositor estimated to be approximately $_______ in the aggregate. See "Plan of
Distribution" in this Prospectus Supplement.
The Offered Certificates are offered subject to prior sale, when, as,
and if accepted by the Underwriters and subject to the approval of certain legal
matters. It is expected that delivery of the Senior Certificates in book-entry
form will be made on or about ____________, 199___ only through the Same Day
Funds Settlement System of The Depository Trust Company and that delivery of the
Class B Certificates will be made at the offices of ____________, on or about
__, 199_ against payment therefor in immediately available funds.
[UNDERWRITERS]
The date of this Prospectus Supplement is __________, 199__.
<PAGE>
(Cover continued from previous page)
The Certificates will evidence, in the aggregate, 100% of the
beneficial ownership interest in one of two trust funds established pursuant to
a Pooling and Servicing Agreement dated as of _____________, 199_ (the
"Agreement"), among the Depositor, in its capacity as sponsor of the Trust (the
"Depositor"), as seller (the "Seller"), ____________ as the servicer (the
"Servicer"), and __________, as trustee (the "Trustee"). One trust fund (the
"Trust Fund") will consist of the "regular interests" (and all the proceeds
thereof) in a separate trust fund (the "Mortgage Trust" and, together with the
Trust Fund, the "Trusts") that will consist primarily of a pool of mortgage
loans (the "Mortgage Loans") secured by first [and junior] liens on
[multi-family residential (including multi-family/retail mixed-use)/commercial]
properties located in ___ states (the "Mortgaged Properties"). Each of the
Mortgage Loans bear [fixed/adjustable] rates of interest and contain level pay
amortization schedules extending beyond such Mortgage Loans, scheduled maturity
date, with a "balloon" payment on the maturity date equal to the remaining
principal balance of such Mortgage Loans and any accrued and unpaid interest
thereon ending no later than the Final Scheduled Distribution Date.
The Class A-1 and Class S-A Certificates represent the senior interests
in the Trust Fund. As described herein, the rights of the holders of the Class B
Certificates and Class C Certificates to receive distributions from the Trust
Fund will be subordinate to the rights of the holders of the Class A
Certificates and the rights of the holders of the Class C Certificates will also
be subordinated to the rights of the holders of the Class B Certificates,
respectively, to receive distributions from the Trust Fund.
Principal of and interest on the Offered Certificates are payable on
the ___th day of each month or, if such day is not a business day, on the next
succeeding business day (each, a "Distribution Date"), commencing in __________,
199__. See "Description of the Offered Certificates--Distributions on the
Certificates" herein.
The last scheduled Distribution Date for the Class A-1 Certificates is
_____________ ___, ____. It is expected that the actual last Distribution Date
for each Class of Certificates will occur significantly earlier than such
scheduled Distribution Dates. The yield to maturity on the Offered Certificates
will depend on, among other things, the price at which the Certificates are
acquired and the rate and timing of principal payments (including prepayments,
repurchases, defaults and liquidations) on the Mortgage Loans, which rate may
vary significantly over time.
See "Yield, Prepayment and Maturity Considerations" in this Prospectus
Supplement.
It is a condition to the issuance of the Offered Certificates that the
Senior Certificates be rated "___" and "___," and the Class B Certificates be
rated "___" and "___," by Moody's Investor Service and Standard & Poor's.
As described herein, the Trustee will cause elections to be made to
treat the Mortgage Trust and Trust Fund as "real estate mortgage investment
conduits" ("REMICs" or, in the alternative, the "Lower Tier REMIC" and the
"Upper Tier REMIC," respectively) for federal income tax purposes. Each class of
the Offered Certificates will be designated as a "regular interest" in the Upper
Tier REMIC and the Class R Certificates and the Class RL Certificates will be
designated as the sole class of "residual interest" in the Upper Tier REMIC and
the Lower Tier REMIC, respectively. See "Certain Federal Income Tax
Considerations" herein and in the Prospectus.
Prior to their issuance there has been no market for the Offered
Certificates nor can there be any assurance that one will develop, or if it does
develop, that it will provide the Owners of the Offered Certificates with
liquidity or will continue for the life of the Offered Certificates. The
Underwriters intend, but are not obligated, to make a market in the Offered
Certificates.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE OFFERED
CERTIFICATES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
UNTIL _________, 199_ ALL DEALERS EFFECTING TRANSACTIONS IN THE OFFERED
CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT
AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
--------------------
The Certificates offered by this Prospectus Supplement will be part of
a separate series of Certificates being offered by the Depositor pursuant to its
Prospectus dated ____________, 199__ of which this Prospectus Supplement is a
part and which accompanies this Prospectus Supplement. The Prospectus contains
important information regarding this offering which is not contained herein, and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission a
Registration Statement under the Securities Act of 1933, as amended, with
respect to the Certificates. This Prospectus Supplement and the related
Prospectus, which form a part of the Registration Statement, omit certain
information contained in such Registration Statement pursuant to the Rules and
Regulations of the Commission. The Registration Statement can be inspected and
copied at the Public Reference Room of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and the Commission's regional offices at Seven World
Trade Center, 13th Floor, New York, New York 10048, and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such materials can be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
REPORTS TO CERTIFICATEHOLDERS
Monthly and annual reports concerning the Certificates and the Trust
will be sent by the Trustee to the Owners of Class A Certificates. So long as
any Class A Certificate is in book-entry form, such reports will be sent to Cede
& Co., as the nominee of DTC and as Owner of such Class A Certificates pursuant
to the Pooling and Servicing Agreement. DTC will supply such reports to Owners
of any such Class A Certificates in accordance with its procedures.
<PAGE>
TABLE OF CONTENTS
-----------------
Page
AVAILABLE INFORMATION................................................. 2
REPORTS TO CERTIFICATEHOLDERS......................................... 2
SUMMARY...............................................................S-1
RISK FACTORS.........................................................S-10
THE MORTGAGE TRUST...................................................S-15
ADDITIONAL INFORMATION...............................................S-22
THE DEPOSITOR........................................................S-22
THE SELLER...........................................................S-22
THE SERVICER.........................................................S-22
MASTER SERVICER......................................................S-22
SPECIAL SERVICER.....................................................S-22
DESCRIPTION OF THE OFFERED CERTIFICATE...............................S-22
YIELD, PREPAYMENT AND MATURITY
CONSIDERATIONS..................................................S-28
DESCRIPTION OF THE POOLING AND SERVICING
AGREEMENT.......................................................S-33
CERTAIN FEDERAL INCOME TAX CONSEQUENCES..............................S-40
ERISA CONSIDERATIONS.................................................S-41
LEGAL INVESTMENT CONSIDERATIONS......................................S-43
RATINGS..............................................................S-43
UNDERWRITING.........................................................S-44
LEGAL MATTERS........................................................S-45
APPENDIX A INDEX TO LOCATION OF PRINCIPAL
DEFINED TERMS
EXHIBIT A MORTGAGE LOAN SCHEDULE
<PAGE>
SUMMARY
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Reference is made to the Index of Principal Defined
Terms for the location in the Prospectus of the definitions of certain
capitalized terms.
Issuer.......................... AMRESCO Residential Securities Corporation
Multifamily Mortgage Loan Trust, 199__-_
(the "Trust").
Certificates Offered............ The Class A-1 Certificates and the Class S-A
Certificates (collectively, the "Senior
Certificates") and the Class B Certificates
(collectively with the Senior Certificates,
the "Offered Certificates") evidence
undivided beneficial ownership interests in
the Trust Fund. The Class A-1 Certificates
have an original aggregate principal balance
(the "Original Class A-1 Principal Balance")
of $_________. The Class S-A Certificates
are interest-only Certificates and have no
principal balance. The Class S-A
Certificates will accrue interest on the
Notional Principal Balance, as described
herein. The Class B Certificates have an
original aggregate principal balance of
$________.
Depositor....................... AMRESCO Residential Securities Corporation,
a Delaware corporation, having its principal
executive office at 1845 Woodall Rodgers
Freeway, Dallas, Texas 75201 (the
"Depositor").
Servicer........................ _________________, a _________ corporation
(the "Servicer"). The Servicer's principal
executive offices are located at ________.
Trustee......................... ____________________, a __________ banking
association, the ("Trustee"). The Trustee's
principal executive offices are located at
___________.
Master Servicer................. _____________________, a ________________
corporation (the "Master Servicer"). The
Master Servicer's principal executive
offices are located at ----------------.
[Special Servicer............... ___________________ a ___________
corporation (the "Special Servicer"). The
Special Servicer's principal executives
offices are located at ----------------.]
Cut-Off Date.................... _____________, 199___.
Closing Date.................... ________________, 199__.
Description of the
Certificates.................... The AMRESCO Residential Securities
Corporation Multifamily Mortgage Pass-
Through Certificates, Series 199__-__ (the
"Certificates") will consist of the Offered
Certificates, the Class C Certificates,
which have an original aggregate principal
balance of $________, the Class R residual
certificates (the "Class R Certificates"),
which represent the residual interest in the
Trust Fund, the Class RL residual
certificates (the "Class RL Certificates")
which represent the residual interest in the
Mortgage Trust (the "Class R Certificates"
and the "Class RL Certificates" are referred
to collectively as the "Residual
Certificates"). The Class C Certificates and
the Residual Certificates are not offered
hereby, and may be offered for sale in
privately negotiated transactions.
S-1
<PAGE>
The Certificates represent in the aggregate
the entire beneficial ownership interest in
two trust funds established pursuant to the
Agreement. One trust fund (the "Trust Fund")
will consist of all the "regular interests"
(and all proceeds thereof) in a separate
trust fund (the "Mortgage Trust" and,
together with the Trust Fund, the "Trusts")
that will consist primarily of a pool of
loans (the "Mortgage Loans") secured by
[first] liens on multi-family residential
(including family/retail mixed-use)
properties located in ___states (the
"Mortgaged Properties").
Denominations................... The Class A-1 Certificates will be issued in
book-entry form in denominations of original
principal amounts of $_____ and integral
multiples of $_____ in excess thereof. The
Class S-A Certificates will be issued in
[book entry/fully registered, definitive
form] in percentage interests of ownership
of such class of not less than ___%. The
Class B Certificates will be issuable in
fully registered, certificated form in
denominations of $_______ and integral
multiples in excess thereof and one Class B
Certificate evidencing an additional amount
equal to the remainder of the Original
Certificate Principal Balance of such Class.
See "Description of the Offered
Certificates-- General" and "Description of
the Offered Certificates-- Book-Entry
Registration of the Senior Certificates"
herein.
The Mortgage Loans.............. The Mortgage Loans will have a Cut-Off Date
aggregate principal balance outstanding,
after the deduction of payments of principal
due on such date, of approximately $ ______.
The Mortgage Loans were originated by in
---------- accordance with the Seller's
Underwriting Guidelines, as described
herein. See "The Mortgage Trust-Underwriting
Standards" herein. As of the date of
origination, the weighted average Mortgage
Rate of the Mortgage Loans (weighted by the
aggregate principal balance thereof) was
approximately ___%. All the Mortgage Loans
were originated on or after __________,
199__. As of the Cut-Off Date, the Mortgage
Loans had an average remaining term to
maturity (weighted by aggregate principal
balance thereof) of approximately _______.
As of their date of origination, the
Mortgage Loans had an average principal
balance of approximately $_________.
Each Mortgage Loan is secured by a mortgage
creating a [first/junior] lien on the
related Mortgaged Property. The Mortgaged
Properties will consist of a total of ___
multi-family (including ___
multi-family/retail mixed-use) apartment
complexes. Each of the Mortgage Loans bears
interest at a [fixed/adjustable] rate of
interest and had an original term to
maturity of 3, 5 or 7 years, and all of the
Mortgage Loans require monthly payments of
principal based on a ___- year amortization
schedule. The Maturity Dates of the Mortgage
Loans will fall between ___________ and
__________, inclusive. None of the Mortgage
Loans are insured or guaranteed by any
governmental entity or private insurer. [All
of the Mortgage Loans are non-recourse
loans.] See "The Mortgage Trust-- Mortgage
Loan Characteristics" herein.
Originators..................... Each of the Mortgage Loans to be acquired by
the Trust from the Depositor were acquired
by the Depositor from seller (the "Seller"),
which previously originated or acquired the
Mortgage Loans from the related originator
(each an "Originator").
S-2
<PAGE>
Class A-1 Pass-Through
Rate.......................... ____% per annum.
Class S-A Pass-Through
Rate.......................... ___% per annum on the Notional Principal
Balance.
Class B Pass-Through
Rate.......................... ___% per annum.
Distributions on the
Certificates.................. Distributions of interest and principal, if
any, on the Class A-1, Class S-A
Certificates and the Class B Certificates
will be made by the Trustee on each
Distribution Date (i.e., the __th day of
each month or if such __th day is not a
business day, then the business day next
following such __th day), commencing in
199__, to the Owners of Certificates of
record as of the close of ------- business
on the last business day of the month
preceding such Distribution Date (each, a
"Record Date").
Amount of Distributions......... On each Distribution Date, the Trustee will
apply the aggregate of amounts distributed
[in respect of the Lower Tier Interest] on
such Distribution Date in the following
order of priority:
(i) first, concurrently, to the
Owners of the Class A-1 Certificates, the
Class A-1 Monthly Interest (as defined
below); and to the Owners of the Class S-A
Certificates, Class S-A Monthly Interest,
any shortfall being allocated among the
Class A-1 Certificates and the Class S-A
Certificates in proportion to their
respective amounts of Class A-1 Monthly
Interest and Class S-A Monthly Interest;
(ii) second, to the Owners of the
Class A-1 Certificates, the Class A-1
Principal Distribution Amount (as defined
below) until the Class A-1 Principal Balance
has been reduced to zero;
(iii) third, to the Owners of the
Class B Certificates, the Class B Monthly
Interest;
(iv) fourth, to the Owners of the
Class A-1 Certificates, any Unpaid
Delinquent Maturity Amount (as defined
below) until the Class A-1 Principal Balance
has been reduced to zero;
(v) fifth, to the Owners of the
Class B Certificates, the Class B Principal
Distribution Amount until the Class B
Principal Balance has been reduced to zero;
(vi) sixth, to the Owners of the
Class C Certificates, the Class C Monthly
Interest;
(vii) seventh, to the Owners of the
Class C Certificates, the Class C Principal
Distribution Amount until the Class C
Principal Balance has been reduced to zero;
and
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<PAGE>
(viii) eighth, to the Owners of the
Class R Certificates, all remaining
Available Funds, if any.
The "Class A-1 Principal Distribution
Amount," as to any Distribution Date, will
equal the sum of the items set forth below
and, if Available Funds should be less than
such sum, any partial distribution shall be
with respect to such items in the order of
priority set forth below:
(i) the product of (x) the Class A
Percentage and (y-1) prior to the
Subordination Termination Date, the sum of
(A) the aggregate of the Unpaid Principal
Balance of all Mortgage Loans which ceased
to be Outstanding Mortgage Loans as of such
Distribution Date other than Mortgage Loans
that were subject to a Principal Prepayment
In Full prior to the end of the preceding
calendar month and (B) all scheduled
principal payments on the Mortgage Loans due
on the related Due Date; or (y-2) on and
after the Subordination Termination Date,
the sum of the amounts described in (y-1)(A)
and (y-1)(B) above, but only to the extent
such amounts are actually received by the
Trustee prior to the Distribution Date;
(ii) all Principal Prepayments made on or
before the related Determination Date; and
(iii) any Unpaid Principal Shortfall
allocable to the Class A-1 Certificates.
The "Class B Principal Distribution Amount"
as to any Distribution Date, will equal the
sum of the items set forth below and, if
Available Funds should be less than such
sum, any partial distribution shall be with
respect to such items in the order of
priority set forth below:
(i) the product of (x) the Class B
Percentage and the sum of (A) the aggregate
of the Unpaid Principal Balance of all
Mortgage Loans which ceased to be
Outstanding Mortgage Loans as of such
Distribution Date other than Mortgage Loans
that were subject to a Principal Prepayment
In Full prior to the end of the preceding
calendar month and (B) all scheduled
principal payments on the Mortgage Loans due
on the related Due Date;
(ii) after the Class A-1 Termination Date,
all Principal Prepayments made on or before
the related Determination Date; and
(iii) any Unpaid Principal Shortfall
allocable to the Class B Certificates.
[In addition, on each Distribution Date, the
Trustee will withdraw from the Prepayment
Premium Account (as defined herein) an
amount equal to the aggregate of all
Prepayment Premiums deposited therein during
the previous calendar month and will
distribute such amount (i) on each
Distribution Date prior to the Class A
Termination Date, (a) if prior to
__________, to the Owners of Class A
Certificates, allocated ___% to the Class
A-1 Certificates and ___% to the Class S-A
Certificates, and (b) if after __________,
solely to the Owners of Class A-1
Certificates, (ii) on the Class A-1
Termination Date, to the Owners of Class A
Certificates (in accordance with the
allocations described in subclauses (a) and
(b) (as the case may be) of clause (i)
above, only if the Class A-1 Termination
Date is prior to __________) and Class B
S-4
<PAGE>
Certificates in proportion to the
distributions of principal made in respect
of the Class A-1 and Class B Certificates,
respectively, (iii) on each Distribution
Date thereafter, to the Owners of Class B
Certificates.]
Interest for the Class A and Class B
Certificates for any given Distribution Date
is equal to one month's interest accrued at
the applicable Pass-Through Rate, on the
Class A-1 or Class B Principal Balance, as
the case may be, immediately prior to such
Distribution Date. See "Description of the
Offered Certificates-- Amounts of
Distribution" herein.
Monthly Advances................ In the event that a monthly payment on a
Mortgage Loan has not been received by the
Servicer as of the close of business on the
Determination Date immediately preceding the
related Distribution Date, the Servicer will
be obligated to advance, for deposit in the
Certificate Account, the aggregate of
payments of principal (other than any
Balloon Payment) and interest on the
Mortgage Loans that were due on the related
Due Date and that is allocable to the Class
A Certificates, less the aggregate amount of
any such delinquent payments that the
Servicer has determined in its sole,
reasonable judgment would constitute a
nonrecoverable advance if made (a "Monthly
Advance"). The Servicer will be entitled to
be reimbursed from the Certificate Account
for all such Monthly Advances.
The obligation to make Monthly Advances with
respect to any Mortgage Loan shall continue
until the earliest to occur of (i) payment
thereof in full, (ii) liquidation of the
related Mortgaged Property and (iii) the
purchase or repurchase thereof from the
Mortgage Trust pursuant to any applicable
provision of the Agreement. If the rights
and obligations of the Servicer under the
Agreement are terminated upon the occurrence
of an event of default that remains uncured,
the [Trustee/Master Servicer] will be the
successor in all respects (with certain
exceptions relating to the repurchase of
Mortgage Loans under certain circumstances)
to the Servicer in its capacity as servicer
under the Agreement, including the
obligation to make all required Monthly
Advances.
Subordination of the
Subordinate Certificates...... The rights of the Owners of the Class B
Certificates and the Class C Certificates to
receive distributions with respect to the
Mortgage Loans will be subordinated to such
rights of the holders of the Class A
Certificates to the extent described below.
The subordination provided to the Class A
Certificates by the Class B Certificates and
the Class C Certificates is intended to
enhance the likelihood of timely receipt by
the Owners of the Class A Certificates of
the full amount of their scheduled monthly
payments and to afford such Owners
protection against losses resulting form
Liquidated Mortgage Loans.
The rights of the Owners of the Class C
Certificates to receive distributions with
respect to the Loans will be subordinated to
such rights of the Owners of the Class B
Certificates to the extent described below.
The subordination provided to the Class B
Certificates by the Class C Certificates is
intended to enhance the likelihood of timely
receipt by the Owners of the Class B
Certificates of the full amount of their
scheduled monthly payments and to afford
such Owners protection against losses
resulting form Liquidated Mortgage Loans.
S-5
<PAGE>
The protection afforded to the Owners of
Class A Certificates by means of the
subordination of the Class B Certificates
and the Class C Certificates will be
accomplished by the preferential right of
such Owners to receive, prior to any
distribution being made on a Distribution
Date in respect of the Class B Certificates
and the Class C Certificates, the Class A-1
Monthly Interest and the Class S-A Monthly
Interest, respectively, and to the Owners of
the Class A Certificates the Class A-1
Principal Distribution Amount. The Class B
Certificates will, however, receive the
Class B Monthly Interest before the Owners
of the Class A Certificates receive any
Unpaid Delinquent Maturity Amount. There
will be no other form of Credit Enhancement
available for the benefit of the Offered
Certificates. See "Description of the
Offered Certificates -- Subordination of the
Subordinate Certificates" herein.
Allocation of Losses............ Subject to the limitations described herein,
losses of principal and interest realized on
the Mortgage Loans ("Realized Losses") will
be allocated, first, to the Class R
Certificates and, then to the Class C
Certificates and, then to the Class B
Certificates, as described herein, prior to
allocation thereof to the Senior
Certificates. See "Description Of The
Offered Certificates -- Subordination of
Subordinate Certificates" herein.
Servicing Fee................... With respect to each Distribution Date, the
Servicer shall be entitled to withhold from
deposit into the Certificate Account, with
respect to each Mortgage Loan (for which a
Monthly Payment was received) that was an
Outstanding Mortgage Loan as of such
Distribution Date, an amount equal to
one-twelfth of the product of (i) the rate
set forth in the Mortgage Loan Schedule (the
"Servicing Fee Rate") and (ii) the Unpaid
Principal Balance of such Mortgage Loan as
of such Distribution Date. The Servicer will
be entitled to retain additional servicing
compensation in the form of assumption fees,
late payment charges or extension and other
administrative charges to the extent
collected.
Optional Termination............ At its option the Depositor may repurchase
all the Mortgage Loans at any time when the
Pool Principal Balance is less than 10% of
the Cut-Off Date Pool Principal Balance. The
payment of such purchase price will be
applied to the early retirement of the Class
A-1, Class S-A, Class B and Class C
Certificates. See "Description of the
Pooling and Servicing Agreement--
Termination; Retirement of the Certificates"
herein.
Final Scheduled Distribution
Date.......................... Scheduled Payments on the Mortgage Loans
will be sufficient to distribute interest on
the Offered Certificates at the applicable
Pass-Through Rate and to reduce the
principal amount of the Offered Certificates
to zero not later than the "Final Scheduled
Distribution Date" set forth on the cover
page hereof, determined as described herein.
Because the rate of distributions of
principal on the Offered Certificates will
depend on the rate of payment (including
prepayments) of the principal of the
Mortgage Loans and on the timing of receipt
of Liquidation Proceeds and Insurance
Proceeds with respect to the Mortgage Loans,
the actual final Distribution Date for each
Class of the Offered Certificates may be
earlier, and could be substantially earlier,
or may be later, than the Final Scheduled
Distribution Date. See "Description Of The
Offered Certificates -- Final Scheduled
Distribution Date" and "Yield, Prepayment
and Maturity Considerations" herein.
S-6
<PAGE>
Nature of Class S-A
Certificates.................. General Character as an Interest-Only
Security. The owners of the Class S-A
Certificates will be entitled to receive
monthly distributions equal to one-month's
interest at the Class S-A Pass-Through Rate
on the Notional Principal Balance then
outstanding. The Class S-A
Certificateholders will not be entitled to
receive any distributions of principal
collected on the Mortgage Loans. Because
they will not receive any distributions of
principal, the Class S-A Certificateholders
will be affected by prepayments,
liquidations and other dispositions of the
Mortgage Loans to a greater degree than will
the Class A Certificateholders. As an
extreme illustration, in the event that the
entire Mortgage Pool prepays in full during
the first month, then on the initial
Distribution Date the Owners of the Class A
Certificates will receive the full par value
of their Certificates while the Owners of
the Class S-A Certificates will suffer
nearly a complete loss (except for one
month's interest) on their investment.
In general, liquidations due to losses,
repurchases by the Seller and other
dispositions of Mortgage Loans from the
Trust Fund will have the same effect on
Class S-A Certificateholders as do
prepayments of principal, liquidations due
to losses, repurchases by the Seller and
other dispositions of Mortgage Loans from
the Trust, and are collectively referred to
as "Prepayments."
Because the yield to the Class S-A
Certificateholders is sensitive to certain
constant rates of prepayment, it is
advisable for potential investors in the
Class S-A Certificates to consider
carefully, and to make their own evaluation
of, the effect of any particular assumption
regarding the rates and the timing of
prepayments. In general, when interest rates
decline, prepayments in a pool of
receivables such as the Mortgage Loans will
increase as borrowers seek to refinance at
lower rates. This will have the effect of
reducing the future stream of payments
available to an owner of an interest-only
security based on such receivables pool,
thus adversely affecting such investor's
yield. Conversely, when interest rates
increase prepayments will tend to decrease
(since attractive refinancing opportunities
are not available) and the future stream of
payments available to such an owner of an
interest-only security may increase, thus
positively affecting such investor's yield.
Accrual of "Original Issue Discount." The
Class S-A Certificates may be issued with
"original issue discount" within the meaning
of the Code. As a result, in certain rapid
prepayment environments the effect of the
rules governing the accrual of original
issue discount may require such
Certificateholders to accrue original issue
discount at a rate in excess of the rate at
which distributions are received by such
Certificateholders. See "Certain Federal
Income Tax Consequences" herein and in the
Prospectus.
Ratings......................... It is a condition to the issuance of the
Offered Certificates that the Class A-1 and
Class S-A Certificates each be rated no
lower than "AAA" and that the Class B
Certificates be rated no lower than "___" by
Standard and Poor's Ratings Group, a
division of McGraw Hill ("S&P") and Moody's
Investors Service, Inc. ("Moody's")
(collectively, the "Rating Agencies"). The
Class C Certificates will not be rated. 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 agency. See
"Ratings" herein.
S-7
<PAGE>
Ratings of the Class S-A Certificates. The
Class S-A Certificates will, upon initial
issuance, receive ratings of "___" by ___
and of "___" by __________. Ratings which
are assigned to securities such as the Class
S-A Certificates generally evaluate the
ability of the issuer (i.e., the Trust) to
make timely payments when such payments are
due, as required by such securities. As
described above, such amounts with respect
to the Class S-A Certificates consist only
of interest. In general, the ratings thus
address credit risk and not prepayment risk.
See "Ratings" herein.
The "r" symbol is appended to the rating by
Standard & Poor's of the Class S-A
Certificates because they are interest-only
Certificates that Standard & Poor's believes
may experience high volatility or high
variability in expected returns due to
non-credit risks created by the terms of
such Certificates. The absence of an "r"
symbol in the ratings of the other Class A
Certificates should not be taken as an
indication that such Certificates will
experience no volatility or variability in
total returns. See "Ratings" herein.
Certain Federal Income
Tax Consequences.............. The Trustee will cause elections to be made
to treat the Mortgage Trust (also referred
to herein as "Lower Tier REMIC") and the
Trust Fund as "real estate mortgage
investment conduits" (each, a "REMIC") for
federal income tax purposes. The Lower Tier
A Interest and the Lower Tier B Interest
will be the "regular interests" in the Lower
Tier REMIC and the Class RL Certificates
will constitute the sole class of "residual
interests" in the Lower Tier REMIC. The
Class A-1, Class S-A and Class B
Certificates will be "regular interests" in
the Trust Fund and the Class R Certificates
will be the sole class of "residual
interests" in the Trust Fund. See "Certain
Federal Income Tax Consequences" herein.
ERISA Considerations............ Any fiduciary of any employee benefit plan
(a "Plan") subject to the Employee
Retirement Income Security Act of 1974, as
amended ("ERISA"), who proposes to cause a
Plan to acquire any of the Offered
Certificates should consult with its own
counsel with respect to the applicability of
ERISA and the Internal Revenue Code of 1986,
as amended (the "Code"), to such investment.
Under current law the purchase and holding
of the Class B Certificates by or on behalf
of any Plan subject to the fiduciary
responsibility provisions of ERISA may
result in "prohibited transactions" within
the meaning of ERISA and the Code. [No
transfer of a Class B Certificate or any
interest therein may be made to any Plan or
other retirement arrangement, including
individual retirement accounts and
annuities, Keogh plans and collective
investment and separate accounts in which
such plans, accounts or arrangements are
invested that is subject to ERISA or the
Code unless the prospective transferee of
the Class B Certificate provides the Trustee
with a representation letter and an opinion
of counsel, each in the form required under
the Agreement. See "ERISA Considerations"
herein and in the Prospectus.]
Risk Factors.................... Credit Considerations. For information with
regard to the Mortgage Loans and their
related risks, see "The Portfolio of
Mortgage Loans" herein.
S-8
<PAGE>
Prepayment Considerations. For information
regarding the consequences of prepayments of
the Mortgage Loans, particularly Owners of
Class S-A Certificates, see "Prepayment and
Yield Considerations" herein.
Other. For a discussion of other risk
factors that should be considered by
prospective investors in the Offered
Certificates, see "Risk Factors" herein and
in the Prospectus.
Legal Investment
Considerations................ The Senior Certificates will [not]
constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") [for so
long as they are rated in one of the two
highest rating categories by one or more
nationally recognized statistical rating
organizations. As such, the Senior
Certificates will be legal investments for
certain entities to the extent provided in
SMMEA, subject to state laws overriding
SMMEA. In addition, institutions whose
investment activities are subject to review
by federal or state regulatory authorities
may be or may become subject to
restrictions, which may be retroactively
imposed by such regulatory authorities, on
the investment by such institutions in
certain forms of mortgage related
securities. Furthermore, certain states have
enacted legislation overriding the legal
investment provisions of SMMEA.]
The Class B Certificates will not constitute
"mortgage related securities" for purposes
of SMMEA. As a result, the appropriate
characterization of the Class B Certificates
under various legal investment restrictions,
and thus the ability of investors subject to
these restrictions to purchase the Class B
Certificates, maybe subject to significant
interpretative uncertainties.
Prospective investors are advised to consult
their counsel as to qualification of the
Offered Certificates as legal investments
under any such laws, regulations, rules and
orders. See "Legal Investment Consideration"
herein and in the Prospectus.
S-9
<PAGE>
RISK FACTORS
Prospective investors in the Offered Certificates should consider the
following risk factors (as well as the risk factors set forth under "Risk
Factors" in the Prospectus) in connection with the purchase of the Offered
Certificates.
The Mortgage Loans
General. The Mortgage Loans were originated by the between _____ and
_______, inclusive. The Mortgage Loans are all secured by multi-family (or, in
some cases, multi-family/retail mixed-use) apartment buildings, each containing
five or more residential units. Owners of multi-family apartment buildings rely
on monthly lease payments from tenants to pay for maintenance and other
operating expenses of the building, to fund capital improvements and to service
the related Mortgage Loan and any other debt that may be secured by such
property. Various factors, many of which are beyond the control of the owner or
operator of an apartment building, may affect the economic viability of the
building.
Adverse economic conditions, either local or national, may limit the
amount of rent that can be charged and may result in a reduction in timely lease
payments or a reduction in occupancy levels. Occupancy and rent levels may also
be affected by construction of additional housing units and local politics,
including rent stabilization or rent control laws and policies. In addition, a
low level of mortgage rates may encourage tenants to purchase single-family
housing.
Changes in payment patterns by tenants may result from a variety of
social, legal and economic factors. Economic factors including the rate of
inflation, unemployment levels and relative rents offered for various types of
housing may be reflected in changes in payment patterns, including increased
risks of defaults by tenants and higher vacancy rates. The Depositor is unable
to determine and has no basis to predict whether, or to what extent, economic,
legal or social factors will affect future rental or payment patterns.
Environmental Risks. Under the laws of certain states where Mortgaged
Properties are located, violation of applicable environmental laws may give may
rise to a "superlien" on the Mortgaged Property (i.e., a lien prior to the lien
of the related mortgage) to assure the payment of the costs of cleanup. In
addition, under the laws of several states and under the federal Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") a lender may
be liable, as an "owner" or "operator", for cleanup costs on mortgaged property
containing hazardous wastes if agents or employees of the lender have become
involved in the operations of the borrower, regardless of whether a previous
owner caused the environmental damage. If the lender actually takes possession
of the property, it may, more clearly, be liable for cleanup costs pursuant to
CERCLA. Under certain recent court decisions, even very little involvement by
the lender has led to liability for cleanup costs and efforts by the Federal
Environmental Protection Agency to clarify questions relating to lender
liability through rulemaking have been rejected. The Depositor will generally
require the preparation of environmental assessments; however, there can be no
assurance as to the ultimate level of protection, if any, afforded by any such
assessment. Although the lender can bring an action for contribution against the
owner who created the environmental hazard, any amounts awarded to the lender
under such an action may not be collectible if the owner is bankrupt or
otherwise judgment-proof. See "Risk Factors -- Environmental Risks" and "Certain
Legal Aspects of the Mortgage Loans--Environmental Risks" in the Prospectus.
The Agreement provides that the Servicer may not, on behalf of the
Trustee, obtain title to (as a result of foreclosure or in lieu of foreclosure
or otherwise), or take possession of or other actions with respect to, a
Mortgaged Property unless the Servicer has previously determined, based on a
report prepared by a person who regularly conducts environmental audits, that
(i) the Mortgaged Property is in compliance with applicable environmental laws
or, if it is not, that it would be in the best economic interest of the holders
of the Certificates to take the actions necessary to bring the Mortgaged
Property into compliance with such laws and (ii) circumstances relating to the
use, management or disposal of certain hazardous materials either are not
present at the Mortgaged
S-10
<PAGE>
Property or should be addressed if to do so would be in the best economic
interest of the holders of the Certificates. See "Description of the Pooling and
Servicing Agreement -- Realization upon Defaulted Mortgage Loans" herein.
Environmental studies were commissioned by the Seller or its
correspondent originators prior to the origination of each Mortgage Loan. The
reports indicated that no material environmental conditions existed with respect
to any of the Mortgaged Properties. [Identified environmental conditions which
may result in liability to the issuer will be disclosed in a separate risk
factor.]
In addition, each Mortgagor has represented in the related Mortgage
that, the related Mortgaged Property was in compliance with all applicable
federal, state and local environmental laws and regulations on the date of
origination of the related Mortgage Loan.
Mortgagor Default. The Mortgage Loans are not insured or guaranteed
against Mortgagor default by any governmental entity or by any private mortgage
insurer.
The amount recoverable upon the occurrence of a default may be affected
by, among other things, a decline in real estate values or a change in mortgage
market interest rates. If the multifamily residential real estate market should
experience an overall decline in property values such that the outstanding
balances of the Mortgage Loans exceed the value of the related Mortgaged
Properties, the actual rates of delinquencies, foreclosures and losses could be
higher than those anticipated by investors.
The Agreement also contains limitations on the ability of the Servicer
to foreclose on a Mortgaged Property, to modify the terms of the related
Mortgage Loan as an alternative to foreclosure, and to rehabilitate a Mortgaged
Property acquired by the Mortgage Trust upon foreclosure. These limitations may
delay or otherwise adversely affect recoveries in respect of a defaulted
Mortgage Loan. See "Description of the Pooling and Servicing Agreement--
Realization Upon Defaulted Mortgage Loans".
Nonrecourse Mortgage Loans. All the Mortgage Loans are nonrecourse
loans, as to which, in the event of a Mortgagor default, recourse will be
available solely against the related Mortgaged Property, and not against any
other assets of the Mortgagor, to pay amounts due under the related Mortgage
Loan. In the case of a nonrecourse Mortgage Loan, a decrease in the value of the
related Mortgaged Property will directly reduce the amount of gross liquidation
proceeds that may be realized in respect thereof and, after the deduction of
liquidation expenses, applied to payment of such Mortgage Loan. [In addition,
the laws of some states prohibit obtaining a personal judgment against a
mortgagor for any deficiency in the net liquidation proceeds following a
foreclosure of a defaulted mortgage loan.]
Liquidation Risks. Even assuming that the Mortgaged Properties provide
adequate security for the Mortgage Loans, substantial delay could be encountered
in connection with the liquidation of defaulted Mortgage Loans and corresponding
delays in the receipt of related proceeds by Owners of the Offered Certificates
could occur. Further, liquidation expenses (such as legal fees, real estate
taxes, and maintenance and preservation expenses) will reduce the proceeds
payable to holders of the Offered Certificates and thereby reduce the security
for the Mortgage Loans. In the event any Mortgaged Properties fail to provide
adequate security for the related Mortgage Loans and the protection provided by
the subordination described herein is exhausted or unavailable, holders of
Offered Certificates could experience a loss on their investment.
Other Risks of Multifamily Residential Lending. Multifamily residential
lending is generally viewed as exposing the lender to a greater risk of loss
than one-to-four-family residential lending. Multifamily residential lending
typically involves a larger loan to a single obligor than a residential one- to
four- family mortgage loan. Furthermore, the repayment of loans secured by
income producing properties is typically dependent upon the successful operation
of the related real estate project. If the net operating income from the project
is reduced (for example, if tenant leases are not obtained or renewed), the
obligor's ability to repay the loan may be impaired. Multifamily residential
real estate can be affected significantly by supply and demand in the market for
the type of property securing the loan and, therefore, may be subject to adverse
economic conditions. Market values may vary as a result of economic events or
governmental regulations outside the control of the borrower or lender, such as
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<PAGE>
the imposition of rent control or changes in the laws which impact the future
cash flow of the property. Market values may also be influenced by the relative
affordability of single-family housing in the area in which the multifamily
residential housing is located.
The successful operation of a multifamily project is also dependent
upon the management of such project. The project manager, in conjunction with
the owner of the project, is responsible for responding to changes in the local
rental market, planning and implementing the rental market, planning and
implementing the rental structure, including establishing levels of rental
rates, and insuring that maintenance and capital improvements are carried out in
a timely fashion. Management errors may adversely affect the long-term viability
of a project. There can be no assurance that such errors by the property manager
will not ultimately cause a default on the related Mortgage Loan. See "Security
for the Certificates -- The Mortgage Loans" herein.
Mortgage Loan Concentration. The ______ largest Mortgage Loans, with an
aggregate Scheduled Principal Balance as of the Cut-Off Date of approximately
$__________, comprise approximately ___% of the aggregate Scheduled Principal
Balance of the Mortgage Loans on such date. The largest of such Mortgage Loans
has a Scheduled Principal Balance of approximately $__________, or approximately
___% of the aggregate Scheduled Principal Balance of the Mortgage Loans as of
the Cut-Off Date. As a result of this relative concentration of the Mortgage
Loans, Losses, prepayments or modifications (including an extension of the final
Due Date) on any such Mortgage Loans are likely to have a greater effect on the
yield to Holders of the Offered Certificates or the anticipated weighted average
lives of the Offered Certificates than if such concentration had not existed. In
addition (i) approximately ___% of the Mortgage Loans by aggregate Scheduled
Principal Balance are secured by Mortgaged Premises located in ________, (ii)
approximately __% by Mortgaged Premises located in _____, (iii) approximately
___% by Mortgaged Premises located in _____ and (iv) approximately ___% by
Mortgage Premises located in
- ---------.
As a result of this relative geographic concentration of the Mortgage
Loans, the performance of the Offered Certificates may be more dependent upon
the economic conditions in the noted states.
The Mortgage Loans are all secured by Mortgaged Premises that are
either newly constructed or have been recently substantially rehabilitated. As
such, each Mortgaged Premises has limited operating history on which the
calculation of the Debt Service Coverage Ratio was based. There can be no
assurance that the future operating history will be consistent with the limited
recent operating history. To the extent future Net Operating Income is less than
the Net Operating Income used in underwriting a Mortgage Loan, the likelihood of
a default on such Mortgage Loan increases, which may result in a Realized Loss.
Balloon Mortgage Loans and Extension Risk. Because all the Mortgage
Loans have amortization schedules extending significantly beyond their original
terms to maturity, substantial payments (that is "Balloon Payments") will be due
on the Mortgage Loans at their respective stated maturity dates. Such loans
involve a greater risk to lenders because a Mortgagor's ability to make a
Balloon Payment typically will depend upon its ability either to refinance such
Mortgage Loan or to sell the related Mortgaged Property. A mortgagor's ability
to accomplish either of these goals will be affected by the factors described
above under "The Mortgage Loans--General" and by other factors including the
level of available mortgage rates at the time of sale or refinancing, the
Mortgagor's equity in the Mortgaged Property, the financial condition of the
Mortgagor, the operating history and physical condition of the Mortgaged
Property, tax laws and prevailing general economic conditions. A high interest
rate environment may make it more difficult for the Mortgagor to accomplish a
refinancing or sale and may result in delinquencies or defaults which, in turn,
could cause delays in distributions to holders of Offered Certificates.
There is no assurance that the values of the Mortgaged Properties at
maturity of the Mortgage Loans will be equal to or will exceed their values at
the date of origination of the Mortgage Loans. Since the Mortgage Loans require
Balloon Payments at maturity, holders of Offered Certificates will be assuming
the risk that the Mortgage Loans may not be paid off when the Balloon Payments
are due.
In addition, if certain conditions are satisfied, such as the absence
of any deferred maintenance, the satisfaction of a minimum debt service coverage
ratio, the absence of delinquencies and the good faith effort to
S-12
<PAGE>
secure refinancing, the Servicer may extend a Mortgagor's Balloon Payment due
date by as much as ____ months if the Mortgagor needs more time to refinance.
Such extension of the scheduled maturity date of the loan may cause the weighted
average lives of the Offered Certificates to be longer than if the loan had been
paid under its original terms. See "Yield, Maturity and Prepayment
Considerations" herein.
Credit Risk of Subordinate Certificates
As described herein, the rights of the Subordinate Certificateholders
to receive payments of interest and principal will be subordinated to those of
the Holders of the Senior Certificates, and the rights of the Class C
Certificateholders to receive payments of interest and principal will be
subordinated to those of the Holders of the Class B Certificates.
Losses on the Mortgage Loans will first be charged to the Class C
Certificates. If as a consequence of such Losses the Class C Certificate
Principal Balance has been reduced to zero, any additional Losses will be
allocated first to reduce the principal balance of the Class B Certificates to
zero. Further, if as a consequence of such Losses the aggregate outstanding
principal balance of the Class B Certificates and Class C Certificates has been
reduced to zero, any additional Losses will reduce the outstanding principal
balance of the Class A-1 Certificates. See "Description of the Offered
Certificates -- Subordination of Subordinate Certificates" herein.
Certain Bankruptcy Issues
Each Borrower is a limited partnership, which limited partnership is a
special purpose entity with limited liability and limited capitalization. Under
certain circumstances, the bankruptcy of a general partner of a limited
partnership may result in the dissolution of such limited partnership. The
dissolution of a limited partnership, the winding-up of its affairs and the
distribution of its assets could result in an acceleration of its payment
obligations under the related Mortgage Loan, reducing the yield to the
Certificateholders in the same manner as a principal prepayment.
In addition, in the event of the bankruptcy of the general partner of a
Borrower, a trustee in bankruptcy for such general partner, such general partner
as a debtor-in-possession, or a creditor of such general partner could attempt
to seek an order from a court consolidating the assets and liabilities of the
related Borrower with those of the general partner. [Counsel for each Borrower
has delivered an opinion in respect of each Borrower concluding that a court
applying state partnership law should not issue an order, in some cases on the
basis of a reasoned analysis and subject to certain facts, assumptions and
qualifications specified therein. However, notwithstanding such opinion, if such
consolidation were to be permitted, the respective Mortgage, for example, would
likely become property of the estate of such bankrupt general partner. In such a
case, not only would the Mortgaged Property be available to satisfy the claims
of creditors of such general partner, but an automatic stay would apply to any
attempt by the Servicer on behalf of the Trustee to exercise remedies with
respect to such Mortgage. However, such an occurrence should not affect a
properly perfected security interest in the Mortgaged Property or the Trustee's
status as the holder of such security interest.]
[Certain limited liability general partners are affiliated with two or
more Borrowers. The two largest groups of affiliated general partner of the
Borrowers each represent between ___% and ___% of the aggregate principal
balance of the Mortgage Loans. In the event that one of such general partners or
any of its affiliates becomes the subject of a bankruptcy proceeding, the
trustee in bankruptcy for such entity, such entity as debtor-in- possession or a
creditor of such entity, could attempt to seek an order from a court
consolidating the assets and liabilities of one or more of those affiliated
parties that are not part of the bankruptcy proceeding with the assets and
liabilities of such entity. If successful, the number of Borrowers potentially
affected by the concerns addressed in the preceding two paragraphs could be
increased significantly. See also "Certain Legal Aspects of The Mortgage Loans"
in the Prospectus.
S-13
<PAGE>
[Geographic Concentration]
Commercial Lending. The Mortgage Loans are secured by commercial
properties. Commercial lending is generally viewed as exposing the lender to a
greater risk of loss than residential one-to-four-family lending. Commercial
lending typically involves larger loans to a single obligor than residential
lending.
Commercial property values are subject to volatility. The repayment of
loans secured by income producing properties is typically dependent upon the
successful operation of the related real estate project rather than upon the
liquidation value of the underlying real estate. If the cash flow from the
related project is reduced (for example, in the case of Shopping Center
Properties, leases are not obtained or renewed or, in the case of Hotel
Properties, room rates decline or occupancy levels are reduced), the obligor's
ability to repay the loan may be impaired. Real estate projects can be affected
significantly by supply and demand in the market for the type of property
securing the loan and, therefore, may be subject to adverse economic conditions.
The liquidation value of commercial properties may be adversely
affected by risks generally incident to interests in real property, including:
changes or continued weakness in general or local economic conditions and/or
specific industry segments; declines in real estate values; declines in rental,
room or occupancy rates; increases in interest rates, real estate and personal
property tax rates and other operating expenses (including energy costs); the
availability of refinancing; changes in governmental rules, regulations and
fiscal policies, including rent control ordinances and environmental
legislation; and other factors beyond the control of the borrower or the lender.
The successful operation of a real estate project is also dependent on
the performance of the property manager of such project. The property manager is
responsible for responding to changes in the local market, planning and
implementing the rental structure, including establishing levels of rent
payments or room rates, and advising the borrowers so that maintenance and
capital improvements can be carried out in a timely fashion. Each of the
Mortgaged Properties will be managed by an affiliate of the respective borrower.
One Action Considerations. Several states have laws that prohibit more
than one "judicial action" to enforce a mortgage obligation, and some courts
have construed the term "judicial action" broadly. Accordingly, the Pooling &
Servicing Agreement will require the Servicer to obtain advice of counsel prior
to enforcing any of the lender's rights under any of the lender's rights under
nay of the Mortgage Loans that include properties where the rule can be
applicable. In addition, the Servicer may be required to foreclose first on
properties located in states where such "one action" rule apply (and where
non-judicial foreclosure is permitted) before foreclosing on properties located
in states where judicial foreclosure is the only permitted method of
foreclosure. See "Certain Legal Aspects of Mortgage Loan -- Foreclosure" in the
Prospectus.
[Group Leases]
[Zoning]
Limited Liquidity. There is currently no secondary market for the
Offered Certificates. While the Underwriter has advised that it currently
intends to make a secondary market in the Offered Certificates, it is under no
obligation to do so. Accordingly, there can be no assurance that a secondary
market for the Offered Certificates will develop. Moreover, if a secondary
market does develop, there can be no assurance that it will provide holders of
Offered Certificates with liquidity of investment or that it will continue for
the life of the Offered Certificates.
The Offered Certificates will not be listed on any securities exchange.
Other Financing. Certain of the Mortgage Loans permit the borrower to
incur additional indebtedness, including subordinated indebtedness secured by
the related Mortgaged Properties, if certain financial tests are met and such
financing will not result in the downgrading of the ratings then assigned to any
class Certificates. The existence of additional indebtedness could adversely
affect the financial viability of the related borrowers.
[Costs of Compliance with Americans with Disabilities Act]
S-14
<PAGE>
THE MORTGAGE TRUST
General
The mortgage assets in the Mortgage Trust will consist primarily of
Mortgage Loans with a Cut-Off Date aggregate principal balance outstanding,
after the deduction of payments of principal due on such date, of approximately
$_______. Each Mortgage Loan is secured by a mortgage creating a [first/junior]
lien on the related Mortgaged Property. The Mortgaged Properties consist of a
total of ___ multifamily (including ___ multifamily/retail mixed-use) apartment
complexes. The Mortgage Loans had an original term to maturity of ____, ____ or
____ years, but all the Mortgage Loans require monthly payments of principal
based on a ___ or ___ year amortization schedule. Thus, Balloon Payments will be
due on each Mortgage Loan at its stated maturity date. The Maturity Dates of the
Mortgage Loans will fall between ________ and _________ inclusive. None of the
Mortgage Loans are insured or guaranteed by any governmental entity or private
insurer. All the Mortgage Loans are non-recourse loans. The Mortgage Loans to be
included in the Mortgage Trust will be acquired by the Trust from Depositor,
which will have acquired the Mortgage Loans from the Seller. [All the Mortgage
Loans were underwritten in accordance with the Seller's Underwriting standards,
as described under "Underwriting Standards" below.]
[The Mortgage Loans permit voluntary prepayment prior to maturity only
upon the payment by the Mortgagor of a prepayment penalty based on a [yield
maintenance formula/predetermined schedule reducing over time]. See "Certain
Yield, Prepayment and Maturity Considerations" herein.]
The Mortgaged Properties
The Mortgaged Properties consist of __ multifamily (including ____
multifamily/retail mixed-use) apartment complexes comprising a total of
approximately ___ rental units. The mortgage amount, name of Mortgagor, property
type and property address for each Mortgaged Property are set forth in the
schedule (the "Mortgage Loan Schedule") attached hereto as Exhibit A.
The Mortgage Loan Schedule also sets forth the appraised values for
each of the Mortgaged Properties and the resultant loan-to-value ratios based on
the principal balance of the Mortgage Loans attributable to each such Mortgaged
Property as of the Cut-Off Date.
The original loan-to-value ratio of a Mortgage Loan is the ratio of the
original principal balance of such Mortgage Loan (assuming disbursement of all
funds required or conditionally required to be disbursed thereunder) to the
appraised value of the related Mortgaged Property. The Mortgage Loans had a
weighted average original loan-to-value ratio of approximately _____%, with a
range from _____% of _____%.
Delinquencies
Owned and Managed Servicing Portfolio. The following tables set forth
information relating to the delinquency, loan loss and foreclosure experience of
the Servicer for its servicing portfolio of fixed rate multifamily mortgage
loans for , 199 , , 199 and for each of the three prior years.
S-15
<PAGE>
Delinquency and Foreclosure Experience of the
Servicer's Owned and Managed Servicing Portfolio of Multifamily Mortgage Loans
<TABLE>
<CAPTION>
As of [ ] Year End [ ],
199 199 199 199 198
---- ---- ---- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Number Dollar Number Dollar Number Dollar Number Dollar Number Dollar
of Amount of Amount of Amount of Amount of Amount
Loans (000) Loans (000) Loans (000) Loans (000) Loans (000)
Portfolio...........
Delinquent Loans(1).
31-60 (2).........
61-90.............
91 days or more...
Total......
Total Delinquency
Percentage........
REO Properties (3)..
- --------------------
<FN>
(1) The period of delinquency is based on the number of days payments are
contractually past due and includes all loans in foreclosure.
(2) Generally all Mortgage Loans 31 to 60 days or more delinquent are in
foreclosure.
(3) REO Properties (i.e., "real estate owned" properties--properties relating
to mortgages foreclosed or for which deeds in lieu of foreclosure have
been accepted and held by the Servicer pending disposition).
</FN>
</TABLE>
Loan Loss Experience of the
Servicer's Owned and Managed Servicing Portfolio of Multifamily Mortgage Loans
[ ] Months
Ending
[ ], Year End [ ],
199 199 199 199 198
---- ---- ---- ---- ---
(Dollars in Thousands)
Average Portfolio Balance (1)
Net Losses (2)(3)..........
As a percentage of Average
Portfolio Balance........
- --------------------
(1) Average Portfolio Balance equals the average of the portfolio balance of
the current period and the portfolio balance of the prior period.
(2) "Net Losses" means actual net profits realized with respect to the
disposition of REO property less net losses incurred with respect to the
liquidation or charge-off of mortgage loans. Net Losses are presented only
if a net loss has occurred or, as $0 if net profit has occurred.
(3) Annualized for , 199 information.
Mortgage Loan Characteristics
The Mortgage Loans had the following characteristics:
The weighted average Mortgage Rate of the Mortgage Loans was
approximately per annum at origination. _____ of the Mortgage Loans have
Mortgage Rates of ___ per annum (the lowest such rate). The highest Mortgage
Rate of the other Mortgage Loans is ____ per annum.
The weighted average remaining term to maturity of the Mortgage Loans
was approximately four years and two months as of the Cut-Off Date. All of the
Mortgage Loans were originated on or after _______ and before _________. All of
the Mortgage Loans had original terms to maturity of five, seven or ten years.
The Mortgage Loans had principal balances ranging from $______ to $________ at
origination and from $_____ to $______ as of the Cut-Off Date. The average
principal balance of the Mortgage Loans was $______ at origination and
approximately $ ______ as of the Cut-Off Date.
S-16
<PAGE>
The original amortization of all the Mortgage Loans was either 20 or
either 30 years, with a weighted average remaining amortization term of ____.
The debt service coverage ratios of the Mortgage Loans at origination
ranged from ___% to ___% (after the enhancements described in the next
sentence), with a weighted average of ___. Mortgage Loans with debt service
coverage ratios ranging from ___ to ___ (prior to any enhancement) have posted
letters of credit or cash reserve deposits in amounts sufficient to raise such
ratios to a range of ___ to ___.
The Mortgaged Properties contain between ___ and ___ units, the average
being ___. The Mortgage Loan balance per unit at origination was ___ on average,
with a range from $ ____ to _______.
The Mortgage Loan Schedule sets forth a description of certain other
characteristics of the Mortgage Loans as of the dates of origination of the
Mortgage Loans or as of the Cut-Off Date, as indicated.
DISTRIBUTION OF LTV'S
% of Aggregate
Aggregate Unpaid
Number of Unpaid Principal
Range of LTV's Mortgage Loans Principal Balance Balance
- -------------- -------------- ----------------- -------
Total
The LTV's shown above were calculated based upon the appraised values
of the Mortgaged Properties at the time of origination (the "Appraised Values").
No assurance can be given that such appraised values of the Mortgaged Properties
have remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If property values decline such that the outstanding
balances of the Mortgage Loans, [together with the outstanding balances of any
Senior Mortgage Loans,] become equal to or greater than the value of the
Mortgaged Properties, the actual rates of delinquencies, foreclosures and losses
could be higher than those heretofore experienced by the Servicer, as set forth
above under "The Portfolio of Mortgage Loans," and by the mortgage lending
industry in general.
S-17
<PAGE>
DISTRIBUTION OF MORTGAGE RATES
% of Aggregate
Aggregate Unpaid
Range of Number of Unpaid Principal
Mortgage Rates Mortgage Loans Principal Balance Balance
- -------------- -------------- ----------------- -------
Total
DISTRIBUTION OF REMAINING TERMS TO MATURITY
% of Aggregate
Aggregate Unpaid
Number of Unpaid Principal
Range of Months Mortgage Loans Principal Balance Balance
- --------------- -------------- ----------------- -------
S-18
<PAGE>
DISTRIBUTION OF PRINCIPAL BALANCES
% of Aggregate
Aggregate Unpaid
Range of Number of Unpaid Principal
Principal Balances Mortgage Loans Principal Balance Balance
- ------------------ -------------- ----------------- -------
Total
DEBT SERVICE COVERAGE RATIOS
% of Aggregate
Aggregate Unpaid
Range of Debt Service Number of Unpaid Principal
Coverage Ratios Mortgage Loans Principal Balance Balance
- --------------- -------------- ----------------- -------
Total
GEOGRAPHIC DISTRIBUTION
% of Aggregate
Aggregate Unpaid
Number of Unpaid Principal
State Mortgage Loans Principal Balance Balance
- ----- -------------- ----------------- -------
Total
[If the Mortgage Assets securing the Certificates of a Series include a
multifamily Mortgage Loan or Mortgage-Backed Security or a group of Mortgage
Loans or Mortgage-Backed Securities of a single obligor or affiliated obligors
representing: (a) 20% or more of the principal amount of such Certificates, the
financial statements of such obligor(s) will be included in accordance with Rule
3-14(a) of Regulation S-X; and (b) 10% or more but less than 20% of the
principal amount of such Certificates, information, including financial
information, sufficient for investors to assess the credit quality of the
obligor(s) will be included.
If the Mortgage Assets securing the Certificates of a Series include a
concentration of properties within regions, counties, or other subdivisions of a
state whose adverse economic conditions are greater than those of the state as a
whole, address such concentration in the prospectus supplement.
S-19
<PAGE>
If the Mortgage Assets securing the Certificates of a Series include a
concentration of multifamily residential properties with brief or financially
troubled operating histories, such concentration will be discussed in the
prospectus supplement.]
Underwriting Standards
[The Seller originates multifamily mortgage loans through a network of
approved correspondents; each correspondent is responsible for applying the
Seller's standard loan underwriting guidelines and forwarding loan applications
to ___________________ only when guideline requirements concerning the borrower
and property are met. ___________________ verifies all data gathered by the
correspondent to ensure that guidelines are being applied in a consistent
manner.
The Seller's underwriting guidelines (which were in effect at the time
of origination of the Mortgage Loans and were applied with respect to each of
them) are presented in detail in the ___________________ Approved Correspondent
Manual. In addition to listing the various documents that must be submitted to
___________________ by the correspondent, the guidelines focus on four major
components of the underwriting process:
1. Net Operating Income/Debt Service Coverage: ___________________
requires that each property's net operating income exceed its debt service by a
factor of not less than _____. Net operating income is equal to gross income
(calculated using a current rent roll) less: (i) a vacancy factor of not less
than, generally, __%--or greater if the actual vacancy is greater or if the
appraisal (see below) uses a larger factor; and (ii) operating expenses,
including ___% management fee and a replacement reserve (____% of adjusted gross
income).
2. Appraisal/Loan-to-Value: ___________________ requires an appraisal
performed by an appraiser with a designation of the Society of Real Estate
Appraisers ("SREA"), Senior Real Property Appraiser ("SRPA") or Member of
Appraisal Institute ("MAI"); the appraiser must be independent and approved by
___________________. The appraisal must use the three traditional approaches to
value and establish a current value for the property such that the loan-to-value
ratio does not exceed ____%. The appraisal must also contain the following:
location maps for the subject and for the comparables, photographs of the
subject and comparables, area and neighborhood analysis, market analysis, site
description and information on current zoning and tax assessments.
3. Property Condition: The correspondent must inspect each property to
ensure that it is in acceptable physical condition. The inspection focuses on:
ongoing maintenance programs, common area upkeep, laundry facility condition,
mechanical systems and grounds maintenance.
4. Borrower Credit: ___________________ requires that a credit
investigation be completed for all prospective borrowers; the file must include
a credit report not more than 60 days old, three years of Federal income tax
returns and current financial statements.
Other important aspects of the Seller's underwriting guidelines
include: (i) a requirement for a complete Phase I environmental report for each
property, (ii) a general prohibition against subordinate financing and (iii) a
review of the property's occupancy history.]
[Describe any bulk acquisitions of Mortgage Loans not underwritten in
connection with the Seller's program.]
Prepayment Provisions
The principal balance of any Mortgage Loan may be prepaid in whole or
in part upon the payment by the Mortgagor of: (a) interest accrued and unpaid on
the outstanding principal balance of the related note (the "Mortgage Note); (b)
all other sums due under the Mortgage Note and the Mortgage Loan; and (c) a
prepayment consideration [describe yield maintenance or prepayment charges].
S-20
<PAGE>
In addition, if following the occurrence of any Event of Default (as
hereinafter defined) the Mortgagor shall tender payment of an amount sufficient
to satisfy the remaining sums due on the Mortgage Loan in whole or in part prior
to a foreclosure sale of the Mortgaged Property, such tender shall be deemed to
be a voluntary prepayment of the principal balance of the Mortgage Notes and the
Mortgagor shall, in addition to all sums due on the Mortgage Loan, be required
to pay the prepayment consideration.
Default Provisions
Each of the Mortgage Loans provides for certain events of default by
the Mortgagor ("Events of Default"). Upon the occurrence of any Event of Default
the remaining sums under the Mortgage Loan shall immediately become due and
payable and the Mortgagor will pay, from the date of such Event of Default,
interest on the unpaid principal balance of the Mortgage Note at the rate of
interest (the "Default Rate") equal to the greater of (i) __ above the
applicable interest rate on the Mortgage Note, or (ii) __% above the prime rate
charged on corporate loans or large U.S. money center banks and (b) the
mortgagee shall have the right to exercise any and all rights and remedies
available at law and in equity. If the Default Rate as calculated above is
greater than the maximum rate permitted by applicable law, then the Default Rate
shall then be deemed to equal to the maximum rate permitted by such applicable
law.
Due-on-Sale and Due-on-Encumbrance Provisions
All the Mortgage Loans contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related Mortgaged Property with
the criteria for granting consent set forth in the related Mortgage Loan
documents and due-on-sale clauses entitling the mortgagee to accelerate payment
of a Mortgage upon any sale or other transfer of the related Mortgaged Property
without the consent of the Mortgagor. Furthermore, the Mortgage Loans contain
certain restrictions regarding further encumbrances on the Mortgaged Properties,
requiring the consent of the mortgagee to the creation of any other lien or
encumbrance on such Mortgaged Property and entitling the mortgagee to accelerate
payment of a Mortgage upon the imposition of any such additional lien or
encumbrance on such Mortgaged Property.
The Servicer, on behalf of the Owners of the Certificates, will be
required to exercise any right the Trustee may have as mortgagee of record of
any such Mortgage Loan to withhold its consent to any transfer or further
encumbrance in accordance with the general servicing standards described in the
Agreement.
Hazard, Liability and Other Insurance
Each Mortgage requires the Mortgagor to keep the Mortgaged Property
insured against loss or damage by fire, flood and such other hazards, risks and
matters, including, without limitation, business interruption and/or rental
loss, public habituating and boiler damage and liability, as the mortgagee may
from time to time require in amounts required by the mortgagee, and shall pay
the premiums for such insurance as they become due and payable. All policies of
insurance (the "Policies") shall be issued by an insurer acceptable to the
mortgagee and be rated [A:V] by Best's Key Rating Guide and shall contain the
standard New York mortgagee non-contribution clause naming the mortgagee as the
person to which all payments made by such insurance company shall be paid. The
Mortgagor will assign and deliver the Policies to the mortgagee. Not later than
thirty (30) days prior to the expiration date of each of the Policies, the
Mortgagor will deliver evidence satisfactory to the mortgagee of the renewal of
each of the Policies.
The Servicer will be obligated to cause to be maintained for each
Mortgage Loan fire insurance with extended coverage (and, if applicable, federal
flood insurance) in an amount at least equal to the lesser of the current
principal balance of such Mortgage Loan and the replacement cost of the
improvements which are part of such property or, in lieu thereof, to maintain a
blanket policy insuring against hazard losses on the Mortgaged Properties, with
a deductible clause not in excess of a customary amount.
S-21
<PAGE>
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the mortgage pool and
the Mortgaged Properties is based upon the mortgage pool as constituted at the
close of business on the Cut-Off Date, as adjusted for the scheduled principal
payments due on or before such date. Prior to the issuance of the Offered
Certificates, Mortgage Loans may be removed from the mortgage pool as a result
of incomplete documentation or non-compliance with representations and
warranties set forth in the Agreement, if the Depositor deems such removal
necessary or appropriate. A limited number of other mortgage loans may be
included in the mortgage pool prior to the issuance of the Offered Certificates.
A current report on Form 8-K will be available to purchasers of the
Offered Certificates and will be filed and incorporated by reference to the
Registration Statement together with the Agreement with the Securities and
Exchange Commission within fifteen days after the initial issuance of the
Offered Certificates. In the event Mortgage Loans are removed from or added to
the mortgage pool as set forth in the preceding paragraph, such removal or
addition will be noted in the current report on Form 8-K.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware on November 9,
1995 and is affiliated with the Seller. The Depositor maintains its principal
executive offices at 1845 Woodall Rodgers Freeway, Dallas, Texas 75201. Neither
the Depositor, the Seller nor any of their affiliates will insure or guarantee
distributions on the Certificates.
THE SELLER
[To be provided]
THE SERVICER
[To be provided]
MASTER SERVICER
[To be provided]
SPECIAL SERVICER
[To be provided]
DESCRIPTION OF THE OFFERED CERTIFICATES
General
The Class A-1 will be available in minimum denominations of
$___________ and integral multiples of $1,000 in excess thereof, except that one
Certificate of each class may be issued in any amount. The Class S-A
Certificates will not have a stated principal balance. The Class S-A
Certificates will be issuable in minimum Percentage Interests of ___% and
integral multiples of ___% in excess thereof. The Senior Certificates will be
issued, maintained and transferred on the book-entry records of DTC and its
Participants as described below. The Class B Certificates will be issuable in
fully registered, certificated form in denominations of $__________ and
S-22
<PAGE>
integral multiples in excess thereof and one Class B Certificate evidencing an
additional amount equal to the remainder of the Original Certificate Principal
Balance of such Class.
[Until Definitive Senior Certificates are issued, interest in such
Classes will be transferred on the book-entry records of DTC and its
Participants. The Class B Certificates may be transferred or exchanged, subject
to certain restrictions on the transfer of such Certificates to Plans (see
"ERISA Considerations" herein), at the offices of __________________ located at
_________________________________, without the payment of any service charges,
other than any tax or other governmental charge payable in connection therewith.
________________ will initially serve as registrar (in such capacity, the
"Certificate Registrar") for purposes of recording and otherwise providing for
the registration of the Offered Certificates and of transfers and exchanges of
the Class B and, if issued, the Definitive Senior Certificates.
Distributions on the Certificates
Distributions on the Certificates will be made on the ___ day of each
calendar month, or if such day is not a business day, the next succeeding
business day (each, a "Payment Date") commencing in __________ __, 199__, to
holders of record of the Certificates (the "Owners") as of the last day of the
calendar month immediately preceding the calendar month in which such Payment
Date occurs, whether or not such day is a business day (each, a "Record Date")
in an amount equal to the product of such Owner's Percentage Interest and the
amount distributed in respect of such Certificateholder's Class of such
Certificates on such Payment Date. The "Percentage Interest" represented by any
Offered Certificate will be equal to the percentage obtained by dividing the
Original Certificate Principal Balance of such Offered Certificate by the
Original Certificate Principal Balance of all Certificates of the same Class.
Book Entry Registration of the Senior Certificates
Each Class of the Senior Certificates will be represented by a single
certificate registered in the name of the nominee of The Depository Trust
Company (the "Clearing Agency"), [except that one Certificate of each Class of
the Class A Certificates may be issued in an amount of less than $1,000 and held
in fully registered definitive form directly by the applicable investor]. The
Clearing Agency will maintain book entry records of ownership, transfers and
pledges of such Certificates only in the names of its participants and indirect
participants (the "Clearing Agency Participants"), which include securities
brokers and dealers, banks and trust companies and clearing corporations and may
include certain other organizations. Prior to Book Entry Termination (as defined
below), Beneficial Owners who are not Clearing Agency Participants may transfer
and pledge their interests in the Offered Certificates, and exercise any other
rights and remedies of Certificateholders, only through Clearing Agency
Participants or other entities that maintain relationships with Clearing Agency
Participants. The Clearing Agency may charge its customary fee to Clearing
Agency Participants in connection with any such transfers and pledges. In
addition, prior to Book Entry Termination, distributions on the Offered
Certificates will be made to Beneficial Owners only through the Clearing Agency
and its Clearing Agency Participants. Consequently, Beneficial Owners may
experience some delay in the receipt of their payments. See "Risk Factors--Book
Entry Registration" and "Description of the Certificates - Book Entry
Registration" in the Prospectus.
The Senior Certificates will be issued in definitive, registered form
to Beneficial Owners or their nominees, and thereupon such Beneficial Owners
will become Certificateholders if, and only if, one of the following events
shall occur (any such event being referred to as "Book Entry Termination"): (i)
the Clearing Agency or the Depositor advises the Trustee in writing that the
Clearing Agency is no longer willing or able properly to discharge its
responsibilities as a clearing corporation with respect to the Senior
Certificates and the Depositor and the Trustee are unable to engage a qualified
successor to serve as the Clearing Agency, or (ii) the Clearing Agency, at the
direction of Beneficial Owners representing a majority of the outstanding
principal amount of the Senior Certificates, advise the Trustee in writing that
the continuation of a book entry system is no longer in the best interests of
Beneficial Owners, or (iii) the Depositor, at its option, advises the Trustee
that it elects to terminate the book entry system. Upon Book Entry Termination,
Beneficial Owners will become registered Certificateholders and will deal
directly with the Trustee with respect to transfers, notices and payments.
S-23
<PAGE>
The Clearing Agency has advised the Depositor and the Trustee that,
prior to Book Entry Termination, the Clearing Agency will take any action
permitted to be taken by a Certificateholder under the Agreement only at the
direction of one or more Clearing Agency Participants to whom the Senior
Certificates are credited in an account maintained by the Clearing Agency. The
Clearing Agency has advised that it will take such action with respect to any
principal amount of the Senior Certificates only at the direction of and on
behalf of Clearing Agency Participants with respect to those principal amounts
of such Senior Certificates.
Issuance of the Senior Certificates in book entry form rather than as
physical Certificates may adversely affect the liquidity of such Senior
Certificates in the secondary market and the ability of Senior
Certificateholders to pledge them. In addition, because distributions on the
Senior Certificates will be made by the Trustee to the Clearing Agency and the
Clearing Agency will credit such distributions to the accounts of its
Participants, which will further credit them to the accounts of indirect
participants of the Senior Certificateholders such beneficial owners of the
Senior Certificates may experience delays in the receipt of such distributions.
Amounts of Distribution
On each Distribution Date, the Trustee will apply the aggregate of
amounts distributed in respect of the Lower Tier Interests on such Distribution
Date in the following order of priority:
(i) concurrently to the Owners of the Class A-1 Certificates,
Class A-1 Monthly Interest (as defined below) and to the Owners of the
Class S-A Certificates, Class S-A Monthly Interest, any shortfall being
allocated among the Class A-1 Certificates and the Class S-A
Certificates in proportion to their respective amounts of Class A-1
Monthly Interest and Class S-A Monthly Interest;
(ii) to the Owners of the Class A-1 Certificates, the Class A
Principal Distribution Amount until the Class A-1 Principal Balance has
been reduced to zero;
(iii) to the Owners of the Class B Certificates, the Class B
Monthly Interest;
(iv) to the Owners of the Class A-1 Certificates, any Unpaid
Delinquent Maturity Amount (as defined below) until the Class A-1
Principal Balance has been reduced to zero;
(v) to the Owners of the Class B Certificates, the Class B
Principal Distribution Amount until the Class B Principal Balance has
been reduced to zero; and
(vi) sixth, to the Owners of the Class C Certificates, the
Class C Monthly Interest;
(vii) seventh, to the Owners of the Class C Certificates, the
Class C Principal Distribution Amount until the Class C Principal
Balance has been reduced to zero; and
(viii) eighth, to the Owners of the Class R Certificates, all
remaining Available Funds, if any.
In addition, on each Distribution Date, the Trustee shall withdraw from
the Prepayment Premium Account (as defined herein) an amount equal to the
aggregate of all Prepayment Premiums deposited therein during the previous
calendar month and shall distribute such amount (i) on each Distribution Date
prior to the Class A-1 Termination Date, (A) if such Distribution Date is prior
to , to the Owners of Class A Certificates, allocated ___% to the Class A-1
Certificates and __% to the Class S-A Certificates, and (B) if such Distribution
Date is after , solely to the Owners of Class A-1 Certificates, (ii) on the
Class A-1 Termination Date, to the Holders of Class A-1 Certificates and the
Class S-A Certificates (in accordance with the allocations described in
subclauses (a) and (b) (as the case may be) of clause (i) above) and the Owners
of [Class B] Certificates in proportion to the distributions of principal made
in respect of the Class A-1 and Class B Certificates, respectively, on the Class
A-1 Termination Date, to the Owners of Class [B Certificates].
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"Monthly Interest" for the Class A-1, Class B and Class C Certificates
for any given Distribution Date is equal to one month's interest accrued at the
applicable Pass-Through Rate on the Certificate Principal Balance immediately
prior to such Distribution Date. Monthly Interest for the Class S-A Certificates
for any given Distribution Date is equal to the sum of (i) one month's interest
accrued at the Class S-A Pass-Through Rate on the Notional Principal Balance
immediately prior to such Distribution Date and (ii) any Unpaid Class S-A
Interest Shortfall (as defined herein).
The "Class Principal Balance" as to any Class of certificates other
than the Class S-A Certificates and the Residual Certificates, and as to any
Distribution Date, is the sum of (i) the applicable initial Class Principal
Balance thereof and (ii) the aggregate of all Interest Shortfalls for such Class
for previous Distribution Date, less all amounts distributed as principal of
such Class on previous Distribution Dates. The Class S-A Certificates and the
Residual Certificates have no Class Principal Balance.
An "Outstanding Mortgage Loan" is, as to any Distribution Date, a
Mortgage Loan which was not the subject of prepayment in full prior to the end
of the preceding calendar month, which did not become a Liquidated Mortgage Loan
prior to the end of such preceding calendar month, which was not repurchased by
the Seller as a Defective Mortgage Loan on or prior to such Distribution Date or
which was not paid in full through the receipt of a Balloon Payment on or before
the related Determination Date.
The "Unpaid Principal Balance" is, as to any Mortgage Loan as of any
Distribution Date, the Cut-Off Date Principal Balance thereof, less (i) all
unscheduled payments by or on behalf of the Mortgagor allocable to principal
which were received prior to the end of the preceding calendar month; (ii) any
Balloon Payment or portion thereof received on or before the Determination Date
next preceding such Distribution Date; (iii) any Insurance Proceeds (other than
Liquidation Proceeds) applied in reduction of the principal balance of such
Mortgage Loan prior to the end of such preceding calendar month; (iv) the
principal component of any Monthly Payment which was due on the related Due Date
and received on or before the related Determination Date or, if delinquent on
such Determination Date, was included in a Monthly Advance made by the Servicer
in respect of such Distribution Date; (v) the aggregate of all REO Principal
Amortization Amounts prior to the end of such preceding calendar month; and (vi)
all amounts deemed to have been distributed to Holders of Class A-1 Certificates
on previous Distribution Dates with respect to such Mortgage Loans pursuant to
the definition of Unpaid Delinquent Maturity Amount.
The "Unpaid Delinquent Maturity Amount" is, with respect to any
Distribution Date, the aggregate of the Unpaid Principal Balances of all
Outstanding Mortgage Loans which had Maturity Dates on or before the preceding
Due Date and were delinquent as of the close of business on the related
Determination Date. For purposes of clause (vi) of the definition of "Unpaid
Principal Balance" any amounts distributed to Class A-1 Certificateholders on
account of an Unpaid Delinquent Maturity Amount will be allocated to particular
delinquent Outstanding Mortgage Loans in the chronological order of their
Maturity Dates, beginning with all such Outstanding Mortgage Loans with Maturity
Dates in the twenty-third preceding calendar month with any excess over the
Unpaid Principal Balances of such Outstanding Mortgage Loans being applied to
all such Outstanding Mortgage Loans with Maturity Dates in the __________
preceding calendar month and so forth.
An "Unpaid Principal Shortfall" is, as to any Distribution Date, the
amount, if any, by which the aggregate of the Principal Shortfalls for prior
Distribution Dates is in excess of the aggregate of the amounts distributed on
prior Distribution Dates pursuant to clause (iv) of the definition of Formula
Distribution Amount.
A Mortgage Loan becomes a "Liquidated Mortgage Loan" when the Servicer
determines that all amounts which it expects to recover from or on account of
such Mortgage Loan have been recovered.
Monthly Advances
In the event that a monthly payment on a Mortgage Loan has not been
received by the Servicer as of the close of business on the Determination Date
immediately preceding the related Distribution Date, the Servicer will be
obligated to advance, for deposit in the Certificate Account, the aggregate of
payments of principal (other than any Balloon Payment) and interest at the Loan
Rate (less the Servicing Fee Rate) on the Mortgage Loans that were
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due on the related Due Date, less the aggregate amount of any such delinquent
payments that the Servicer has determined would constitute a nonrecoverable
advance if made (a "Monthly Advance"). If the Servicer determines that it is not
obligated to make the entire Monthly Advance because all or a lesser portion of
such Monthly Advance would not be recoverable from Insurance Proceeds,
Liquidation Proceeds or otherwise, the Servicer will deliver to the Trustee for
the benefit of the Certificateholders an officer's certificate setting forth the
reasons for the Servicer's determination. The Servicer will be entitled to be
reimbursed from the Certificate Account for all such Monthly Advances.
The obligation to make Monthly Advances with respect to any Mortgage
Loan shall continue until the earliest to occur of (i) payment thereof in full,
(ii) liquidation of the related Mortgaged Property and (iii) the purchase or
repurchase thereof from the Mortgage Trust pursuant to any applicable provision
of the Agreement.
If the rights and obligations of the Servicer under the Agreement are
terminated upon the occurrence of an event of default that remains uncured, the
Trustee will be the successor in all respects (with certain exceptions relating
to the repurchase of Mortgage Loans under certain circumstances) to the Servicer
in its capacity as servicer under the Agreement, including the obligation to
make all required Monthly Advances.
Subordination of the Subordinated Certificates
The rights of the Owners of the Subordinate Certificates to receive
distributions with respect to the Mortgage Loans will be subordinated to such
rights of the Owners of the Senior Certificates, in the case of the Class B
Certificates, and to the Owners of the Offered Certificates in the case of the
Class C Certificates. The subordination provided to the Senior Certificates by
the Class B Certificates and to the Class B Certificates by the Class C
Certificates is intended to enhance the likelihood of timely receipt by the
Owners of the respective Class of Certificates of the full amount of their
scheduled monthly payments and to afford such Owners protection against losses
resulting from Liquidated Mortgage Loans.
The protection afforded to the Owners of Senior Certificates by means
of the subordination of the Subordinate Certificates will be accomplished by the
preferential rights of such Owners to receive, prior to any distribution being
made on a Distribution Date in respect of the Subordinate Certificates, the
Class A-1 Monthly Interest and the Class S-A Monthly Interest, respectively, and
to the Class A-1 Certificateholders, the Class A Principal Distribution Amount.
The Class B Certificates will, however, receive the Class B Monthly Interest
before the Class A-1 Certificateholders receive any Unpaid Delinquent Maturity
Amount. The Class B Certificates will be entitled to the Class B Principal
Distribution Amount only after such time as the Class A-1 Principal Balance has
been reduced to zero through payment to the Class A-1 Certificateholders of the
Formula Principal Distribution Amount and then any Unpaid Delinquent Maturity
Amount.
Loss realized on the Mortgage Loans will not be allocated to the Owners
of the Class A-1 Certificates until the principal balances of the Class C
Certificates and then the Class B Certificates have both been reduced to zero.
Any losses allocated to the Class A-1 Certificates will be allocated pro rata to
all Owners of the Class A-1 Certificates. Any losses allocated to the Class B
Certificates will be allocated pro rata to all Owners of the Class B
Certificates.
Reports to Holders of the Certificates
The Trustee is required to prepare and mail to the Servicer, to each
Owner of a Class A-1, Class S-A and Class B Certificate a statement (a "Monthly
Report") setting forth:
(i) the Available Funds for such Distribution Date, including,
stated separately, any Monthly Advance component thereof;
(ii) the aggregate of all Principal Prepayments received
during the previous calendar month together with, stated separately,
the aggregate of all REO Principal Amortization Amounts for such
preceding calendar month;
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(iii) all previously undistributed Balloon Payments or
portions thereof received on or before the preceding Determination
Date;
(iv) the aggregate Unpaid Principal Balances of all Mortgage
Loans and Foreclosed Mortgage Loans which became Liquidated Mortgage
Loans during the previous calendar month;
(v) the aggregate Unpaid Principal Balances of all Mortgage
Loans which are required to be purchased by the Seller prior to the
related Distribution Date pursuant to the Agreement;
(vi) the amount of all Prepayment Premiums received during the
previous calendar month;
(vii) the Formula Principal Distribution Amount for such
Distribution Date;
(viii) the Class A-1 Monthly Interest for such Distribution
Date;
(ix) the Class S-A Monthly Interest for such Distribution
Date;
(x) the Class B Monthly Interest for such Distribution Date;
(xi) the Class C Monthly Interest for such Distribution Date;
(xii) the Unpaid Delinquent Maturity Amount for such
Distribution Date;
(xiii) the Class A-1 Distribution Amount (exclusive of any
distribution from the Prepayment Premium Account) for such Distribution
Date;
(xiv) the Class B Distribution Amount for such Distribution
Date;
(xv) the Class S-A Distribution Amount for such Distribution
Date;
(xvi) the Class C Distribution Amount for such Distribution
Date;
(xvii) any Interest Shortfall for the Class A-1 or Class B
Certificates, dated separately;
(xviii) any Unpaid Class S-A Interest Shortfall immediately
following such Distribution Date together with the amount of any Class
S-A Interest Shortfall for such Distribution Date;
(xix) the Class A-1 Principal Balance immediately following
such Distribution Date;
(xx) the Class B Principal Balance immediately following such
Distribution Date;
(xxi) the Class C Principal Balance immediately following such
Distribution Date;
(xxii) any Unpaid Principal Shortfall for such Distribution
Date and any remaining Unpaid Principal Shortfall after giving effect
to such distribution;
(xxiii) the amount and allocation of any distribution from the
Prepayment Premium Account on such Distribution Date; and
(xxiv) the Pool Principal Balance for the following
Distribution Date;
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<PAGE>
(xxv) the number, percentage and aggregate unpaid principal
balances of Mortgage Loans delinquent (a) 30 to 59 days and (b) 60 days
or more (including Foreclosed Mortgage Loans), respectively, as of the
end of the preceding calendar month (separately stating the aggregate
unpaid principal balances of Foreclosed Mortgage Loans);
(xxvi) with respect to any Mortgage Loan included in (xxv)
above, the number of each such Mortgage Loan as set forth in the
Agreement and the Unpaid Principal Balance of each such Mortgage Loan;
(xxvii) the number and aggregate principal balances of any REO
Properties;
(xxviii) with respect to each Mortgage Loan that has become an
REO Property included in (xxvii) above, the number of such Mortgage
Loan as set forth in the Agreement and the Unpaid Principal Balance of
each such REO Property;
(xxix) with respect to each Mortgage Loan that became a
Liquidated Mortgage Loan during the prior calendar month, the number of
such Mortgage Loan, as set forth in Exhibit [G] to the Agreement, the
Net Liquidation Proceeds with respect to each such Mortgage Loan and
the Unpaid Principal Balance of each such Mortgage Loan; and
(xxx) such other information as is required by the Code and
regulations thereunder to be made available to Owners of the Class A-1,
Class S-A, Class B Certificates and Class C Certificates.
The Trustee shall be under no duty to recalculate or verify the
information (set forth above in subclauses (i) through (vi) and (xxiv) through
(xxiii)) provided to it by the Servicer in each Servicing Certificate and shall
be protected in relying upon such information in connection with the calculation
of all amounts and preparation of all reports and statements required to be
prepared by it pursuant to this Agreement. The Servicer shall indemnify the
Trustee for any loss, expense or cost incurred by it as a result of any such
reliance which is caused by the Servicer's gross negligence, willful misconduct
or bad faith.
In the case of information furnished pursuant to subclauses (viii),
(x), (xiii), (xiv), (xii), (xxv) and (xxvi) above, the amounts shall be
expressed as a dollar amount per Class A-1 Certificate and Class B Certificate,
as applicable, with a $1,000 denomination. In the case of the information
furnished pursuant to subclauses (ix), (xv) and (xix) above, the amount shall be
expressed as a dollar amount per Class S-A Certificate with a 100 Percentage
Interest. Any such statement furnished to an Owner of a Class A-1 Certificate,
Class S-A Certificate or Class B Certificate may, if requested by the Trustee,
omit information pertinent only to Certificates of Classes not held by such
Owner.
Within 90 days after the end of each calendar year, the Trustee shall
prepare and mail to each Person who at any time during the calendar year was the
Owner of a Class A-1 Certificate, Class S-A Certificate, Class B Certificate or
Class C Certificate, a statement containing the information set forth in the
subclauses mentioned in the preceding paragraph, as applicable, aggregated for
such calendar year or, in the case of each Person who was an Owner of a
Certificate for a portion of such calendar year, setting forth such information
for each month thereof for the portion of the year during which such Person was
an Owner of a Certificate of such Class. Such obligation of the Trustee shall be
deemed to have been satisfied to the extend that substantially comparable
information shall be provided by the Trustee pursuant to any requirements of the
Code.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The yield to maturity on the Offered Certificates will be affected by
the rate of principal payments on the Mortgage Loans including, for this
purpose, prepayments, which may include amounts received by virtue of
repurchase, condemnation, insurance or foreclosure. The rate of principal
payments on the Offered Certificates will correspond to the rate of principal
payments (including prepayments) on the Mortgage Loans. Principal
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prepayments may be influenced by a variety of economic, geographic, demographic,
social, tax, legal and other factors. In general, if prevailing interest rates
fall significantly below the interest rates on the Mortgage Loans, the Mortgage
Loans are likely to be subject to higher prepayments than if prevailing rates
remain at or above the interest rates on such Mortgage Loans. Conversely, if
prevailing interest rates rise above the interest rates on such Mortgage Loans,
the rate of prepayment would be expected to decrease. Other factors affecting
prepayment of the Mortgage Loans include the availability of mortgage financing,
changes in tax laws (including depreciation benefits), changes in Mortgagors'
net equity in the Mortgaged Properties, servicing decisions and prevailing
general economic conditions. The Mortgage Loans may be prepaid at any time
subject to the payment of a prepayment penalty. See "The Mortgage
Trust--Prepayment Provisions" herein.
The effective yield to holders of the Offered Certificates will differ
from the yield otherwise produced by the applicable Pass-Through Rate and
purchase prices of such Offered Certificates because principal and interest
distributions will not be payable to such holders until at least the ___th day
of the month following the month of accrual (without any additional distribution
of interest or earnings thereon in respect of such delay).
If the purchaser of an Offered Certificate offered at a discount from
its initial principal amount calculates its anticipated yield to maturity based
on an assumed rate of payment of principal that is faster than that actually
experienced on the Mortgage Loans, the actual yield to maturity will be lower
than that so calculated. Conversely, if the purchaser of an Offered Certificate
offered at a premium calculates its anticipated yield to maturity based on an
assumed rate of payment of principal that is slower than that actually
experienced on the Mortgage Loans, the actual yield to maturity will be lower
than that so calculated.
The timing of changes in the rate of prepayments on the Mortgage Loans
may affect an investor's actual yield to maturity, even if the average rate of
principal payments is consistent with an investor's expectation. In general, the
earlier a prepayment of principal of the Mortgage Loans, the greater the effect
on an investor's yield to maturity. The effect on an investor's yield of
principal payments 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 payments. An investor must make an
independent decision as to the appropriate prepayment scenario to be used in
deciding whether to purchase the Offered Certificates.
Voluntary prepayments of a Mortgage Loan can be made only upon the
payment by the Mortgagor of a prepayment penalty based on a [yield maintenance
formula/predetermined schedule]. See "The Mortgage Trust--Prepayment Provision"
for a description of such formula. The payment of such prepayment penalties by
Mortgagors should have the effect of reducing the risk of rapid rates of
voluntary prepayments. If, however, such penalties were to be uncollectible for
any reason, investors would have to bear the risk that prepayments on the
Mortgage Loans, and therefore of principal payments on the Offered Certificates,
could coincide with periods of low prevailing interest rates. In that event, the
effective interest rates on securities in which an investor might choose to
reinvest amounts received as principal payments on such investor's Certificate
might be lower than the applicable Pass-Through Rate.
Conversely, slow rates of prepayments on the Mortgage Loans, and
therefore of principal payments on the Offered Certificates, may coincide with
periods of high prevailing interest rates. During such periods, the amount of
principal payments available to an investor for reinvestment at such high
prevailing interest rates may be relatively low.
Many of the Mortgage Loans contain "due-on-sale" provisions, and the
Agreement obligates the Servicer, with certain exceptions, to enforce such
"due-on-sale" provisions.
Because amounts distributable to Owners of the Class S-A Certificates
consist of interest payable on the Mortgage Loans, the yield to maturity of the
Class S-A Certificates will be sensitive to the repurchase and default
experience of the Mortgage Loans, and prospective investors should fully
consider the associated risks, including the risk that such investors may not
fully recover their initial investment. In particular, investors in the Class
S-A Certificates should be aware that the Mortgage Loans may be required to be
repurchased in the event of certain
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breaches of representations and warranties relating to certain events. [Other
calamity calls] [With respect to voluntary prepayments, however, Class S-A
Certificateholders will be allocated a percentage of the prepayment penalties
discussed above. See also "Description of the Certificates--Amounts of
Distribution."]
Weighted Average Life of the Class A-1 and Class B Certificates
The following information is given solely to illustrate the effect of
prepayments of the Mortgage Loans on the weighted average lives of the Class A-1
and Class B Certificates under the stated assumptions and is not a prediction of
the prepayment rate that might actually be experienced by the Mortgage Loans.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average life of the
Class A-1 and Class B Certificates will be influenced by the rate at which
principal payments on the Mortgage Loans are paid, which may be in the form of
scheduled amortization or prepayments (for this purpose, the term "prepayment"
includes prepayments, condemnation, insurance and liquidations due to default).
Prepayments on mortgage loans are commonly measured relative to a prepayment
standard or model. In the model used in this Prospectus Supplement, the
"constant prepayment rate" ("CPR") represents an assumed annualized rate of
prepayment relative to the then outstanding principal balance of a pool of new
mortgage loans.
Based on the foregoing assumptions, the tables below indicate the
weighted average life of the Class A-1 and Class B Certificates, assuming that
the Mortgage Loans prepay according to the following CPR prepayment scenarios:
[CPR PREPAYMENT SCENARIOS
Scenario I Scenario II Scenario III Scenario IV Scenario V
Neither the CPR nor any other prepayment model or assumption purports
to be an historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Loans included in the Trust. Variations in the actual prepayment
experience and the balance of the Mortgage Loans that prepay may increase or
decrease each weighted average life shown in the following tables. Such
variations may occur even if the average prepayment experience of all such
Mortgage Loans equals any of the specified percentages of the CPR.]
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<PAGE>
WEIGHTED AVERAGE LIVES
Class A-1
Weighted
CPR Average Life Earliest Retirement
Prepayment (years) Date(1)
- ---------- ------- -------
Class B
Weighted
CPR Average Life Earliest Retirement
Prepayment (years) Date(1)
- ---------- ------- -------
- --------------------
(1) Assuming early termination or the Mortgage Loan Groups when the aggregate
Loan Balances decline to a level equal to 10% of the aggregate principal
balance of the Mortgage Loans as of the Cut-Off Date.
There is no assurance that prepayments will occur, or, if they do
occur, that they will occur at any constant percentage of CPR or in accordance
with any of the aforementioned scenarios.
Payment Delay Feature of Class A-1 and Class B Certificates
The effective yield to the Owners of the Class A-1 and Class B
Certificates will be lower than the yield otherwise produced by the respective
Pass-Through Rate and the purchase price of such Certificates because principal
and interest distributions will not be payable to such Certificateholders until
at least the twenty-fifth day of the month following the month of accrual
(without any additional distributions of interest or earnings thereon in respect
of such delay).
Yield Sensitivity of the Class S-A Certificates
Because amounts distributable to Class S-A Certificateholders consist
entirely of interest, the yield to maturity of the Class S-A Certificates will
be extremely sensitive to the repurchase, prepayment and default experience of
the Mortgage Loans, and prospective investors should fully consider the
associated risks, including the risk that such investors may not fully recover
their initial investment. In particular, investors in the Class S-A Certificates
should be aware that Depositor may cause a termination of the Trust when the
aggregate outstanding principal balance of the Mortgage Loans has declined to
___% or less of the aggregate principal balance of the Mortgage Loans as of the
Cut-Off Date.
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The following table indicates certain relationships between the assumed
purchase price and the yield to maturity on the Class S-A Certificates, stated
on a corporate bond equivalent basis. Such table also indicates such
relationships on the assumption that (a) the Trust is not terminated by the
Depositor pursuant to its __% a "clean-up call", and (b) the Trust is so
terminated.
Sensitivity of the Class S-A Certificates to Prepayments
Pre-Tax Yield to Maturity
Prepayment 0% 22 47 50 55
Scenario CPR CPR CPR CPR CPR
- -------- --- --- --- --- ---
I
II
III
IV
V
On the basis of approximately __% CPR, and a purchase price of ____%,
no termination of the Trust by the Depositor pursuant to its __% "clean-up call"
and the other assumptions described above, the pre-tax yield to maturity of the
Class S-A Certificates would be approximately __%. If the actual prepayment rate
were to exceed approximately __% CPR based on such assumptions, an investor in
the Class S-A Certificates as to which such percentage of CPR was exceeded would
not fully recover the initial purchase price thereof.
On the basis of approximately ___% CPR, a purchase price of _______%,
termination of the Trust by the Depositor pursuant to its ___% "clean-up call"
and the other assumptions described above, the pre-tax yield to maturity of the
Class S-A Certificates would be approximately ___%. If the actual prepayment
rate were to exceed approximately ___% CPR, on such assumptions, an investor in
the Class S-A Certificates as to which such percentage of CPR was exceeded would
not fully recover the initial purchase price thereof.
It is highly unlikely that the Mortgage Loans will prepay at a constant
rate until maturity or that all of the Mortgage Loans will prepay at the same
rate. In fact, Mortgage Loans are expected to prepay at different rates.
The yields set forth in the preceding tables were calculated by
determining the monthly discount rates which, when applied to the assumed stream
of cash flow to be paid on the Class S-A Certificates, would cause the
discounted present value of such assumed cash flows to equal the assumed
purchase price of such Class S-A Certificates and by converting such monthly
rates to corporate bond equivalent rates. Such calculations do not take into
account variations that may occur in the interest rates at which investors may
be able to reinvest funds received by them as distributions on the Class S-A
Certificates and consequently do not purport to reflect the return on any
investment in the Class S-A Certificates when such reinvestment rates are
considered.
The Mortgage Loans will not necessarily have the characteristics
assumed above, and there can be no assurance the (i) the Mortgage Loans will
prepay at any of the rates shown in the table or at any other particular rate or
will prepay proportionately, (ii) the pre-tax yield on the Class S-A
Certificates will correspond to any of the pre-tax yields shown above or (iii)
the aggregate purchase price of the Class S-A Certificates will be equal to the
purchase price assumed.
Scheduled Final Distribution Date. The Scheduled Final Distribution
Date for the Class S-A Certificates is ___________ __, 200_.
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DESCRIPTION OF THE POOLING AND SERVICING AGREEMENT
The Certificates will issued pursuant to the Pooling and Servicing
Agreement to be dated as of the Closing Date (the "Agreement"). The following
summaries describe certain provisions of the Agreement which are not otherwise
described elsewhere in this Prospectus Supplement. The summaries do not purport
to be complete and are subject to and qualified in their entirety by reference
to, the provisions of the Agreement. Wherever particular defined terms used in
the Agreement are referred to in this Prospectus Supplement, such defined terms
are hereby incorporated herein by reference.
The Mortgage Trust will consist of, to the extent provided in the
Agreement, (i) the Mortgage Loans that from time to time are subject to the
Agreement, and the Additional Collateral (as defined below), (ii) such assets as
shall from time to time be identified as deposited in the Certificate Account or
Prepayment Premium Account, in accordance with the Agreement, (iii) property
which secured a Mortgage Loan and which has been acquired by foreclosure or
deed-in-lieu of foreclosure.
Assignment of the Mortgage Loans
At the time of the initial issuance of the Certificates, the Depositor
will assign all its right, title and interest in and to the Mortgage Trust
(including the Mortgage Loans, [letters of credit with respect to certain
Mortgage Loans] and a collateral deposit account with respect to a certain
Mortgage Loan (such letters of credit and collateral deposit account are
referred to hereafter as the "Additional Collateral") to the Trustee, including
all principal and interest received by the Depositor on or with respect to the
Mortgage Loans after the Cut-Off Date (other than payments of interest and
principal due on the Mortgage Loans on or before the Cut-Off Date), together
with all its right, title and interest in and to the proceeds of any related
insurance policies. The Trustee, concurrently with such assignment, will declare
that it holds and will hold such rights and interest for the exclusive use and
benefit of the present and future Owners of the Certificates, other than the
Class RL Certificates. Each Mortgage Loan will be identified in the Mortgage
Loan Schedule to the Agreement. The Mortgage Loan Schedule includes information
as to the Cut-Off Date principal balance of each Mortgage Loan, the Loan Rate,
the stated maturity date of the Mortgage Loan and the name of the Mortgagor and
address of the Mortgaged Property.
The Depositor is obligated to deliver and assign to the Trustee at the
Closing Date, the Mortgage Notes, the Mortgages and certain other documents in
respect of the Mortgage Loans (collectively, the "Mortgage Files") and the
Additional Collateral. By the Closing Date, the Trustee will review the Mortgage
Files (or copies thereof) in accordance with the Agreement and if any document
required to be included in any Mortgage File is found to be defective in any
material respect and such defect is not corrected or cured by the Closing Date,
the affected Mortgage Loan will not be included in the Mortgage Trust.
If (i) a document constituting a part of any Mortgage File is
defective, (ii) an Assignment of Mortgage is not recorded as required or (iii)
any representation, warranty or covenant to a Mortgage Loan as made by the
Seller to the Depositor in connection with the sale of the Mortgage Loans to the
Depositor is breached, thereby materially and adversely affecting the interests
of the Owners of the Certificates in such Mortgage Loan (any such Mortgage Loan
being a "Defective Mortgage Loan"), the Seller will be required to repurchase
the related Mortgage Loan (including any property acquired in respect thereof
and any insurance policy or insurance proceeds with respect thereto) from the
Trustee at a price equal to the Unpaid Principal Balance of the Mortgage Loan as
of the Distribution Date upon which the proceeds of the repurchase would be
distributed to Certificateholders, together with accrued and unpaid interest at
the Mortgage Loan's Loan Rate (less the Servicing Fee Rate) for the calendar
month preceding the date of repurchase (the "Purchase Price"). Upon receipt by
the Trustee of written notification of any such repurchase, the Trustee will
execute and deliver an instrument of transfer or assignment necessary to vest in
the legal and beneficial ownership of such Mortgage Loan (including any property
acquired in respect thereof or proceeds of any insurance policy with respect
thereto). The obligation of the Seller to repurchase any such Mortgage Loan
shall be the sole remedy available to the Owners of the Certificates or the
Trustee, on behalf of the Owners, against the Seller under the Agreement.
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Notwithstanding the foregoing, in the case of any repurchase of a
Mortgage Loan that would result in the realization of a gain by the Mortgage
Trust or Trust Fund, the Seller will not be required to repurchase such Mortgage
Loan unless the Trustee has received an opinion of counsel to the effect that
such repurchase will not be subject to tax as a result of being deemed a
"prohibited transaction" under Section 860F(a)(2) of the Code and a certificate
from the Seller to the effect that such repurchase will not give rise to net
income taxable under Section 860F(a)(1) of the Code. The Seller will use its
reasonable best efforts to obtain such opinion and deliver such certificate. In
the absence of such opinion or certificate, the Seller will not be required to
so repurchase any Mortgage Loan unless there is an actual or imminent default
with respect thereto or unless such breach adversely affects the enforceability
of such Mortgage Loan.
Collection and Other Servicing Procedures
The Servicer is required to service the Mortgage Loans, subject to the
terms of the Mortgage Loans themselves, pursuant to the Agreement and the
requirements of applicable law, in the same manner in which it services mortgage
loans for its own portfolio that are comparable to the Mortgage Loans, giving
due consideration to customary and usual standards of practice of prudent
institutional multifamily mortgage lenders and loan services utilized with
respect to comparable mortgage loans (the "Servicing Standard"). The Servicer
will make reasonable efforts to collect all payments called for under the
Mortgage Loans and will, consistent with the Agreement, follow such collection
procedures as are customary to the servicing of mortgage loans in its servicing
portfolio which are comparable to the Mortgage Loans. Consistent with the above,
the Servicer may, in its discretion, waive any late payment charge in respect of
a late Mortgage Loan payment or any other administrative fee.
The Servicer may extend the Maturity Date of any Mortgage Loan without
the consent of the Trustee or the Owners of the Certificates, subject to the
following conditions: (i) a determination must be made that a Balloon Payment
default is imminent and that the extension of the Maturity date is reasonably
likely to produce a greater recovery than liquidation of the related Mortgage
Loan; (ii) any such extension will be for a period of not greater than [36]
months; and (iii) prior to granting such extension, the Servicer must determine:
(a) that no deferred maintenance exists; (b) the ratio of the net income from
the operation of the Mortgaged Property to debt service on the Mortgage Loan is
not less than to ; (c) no Mortgage Loan payment due during the preceding 12
months had been more than 30 days delinquent; and (d) the related mortgagor has
made a reasonable effort to obtain new financing in an amount sufficient to
enable payment of the Balloon Payment.
The Servicer will not permit the placement of a subsequent senior
mortgage on any Mortgaged Property.
In any case in which a Mortgaged Property has been or is about to be
conveyed by the Mortgagor, the Servicer may not permit an assumption of the
related Mortgage Loan. If the Servicer, however, is prevented from enforcing any
such clause or any such clause, by its terms, is not operable, the Servicer is
authorized to take or enter into an assumption and modification agreement with
the person to whom such Mortgaged Property has been or is about to be conveyed,
pursuant to which such person becomes liable under the Mortgage Note and the
Mortgagor remains liable thereon or, if the Servicer finds it appropriate, is
released from liability thereon. In respect of transfers or proposed transfers
not covered by the above guideline, the Servicer will exercise its right to
accelerate the maturity of the related Mortgage Loan and require that the
principal balance thereof be paid in full. Any fee collected by the Servicer for
entering into any such agreement will be retained by the Servicer as additional
servicing compensation.
In addition, if Mortgage Loans contain due-on-encumbrance clauses or
require the consent of the holder of the Mortgage Loan to the creation of any
subordinate lien or encumbrance on the Mortgaged Property, the Servicer, on
behalf of the Trustee, will exercise any right it may have to accelerate the
payment of such Mortgage Loans upon, or to withhold its consent to, the creation
of such liens or encumbrances.
[The Servicer is not required to establish any escrow account into
which it will deposit escrow payments from Mortgagors under the Mortgages for
the payment of taxes, insurance premiums, assessments or similar items.]
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Payments on Mortgage Loans; Deposits to Certificate Account and Prepayment
Premium Account
The Trustee will establish and maintain in the name of the Trustee a
separate account (the "Certificate Account") for the benefit of the Owners of
the Certificates. The Certificate Account will be required to be an Eligible
Account (described below). The Servicer shall be required to remit to the
Trustee for deposit into the Certificate Account, daily, within one Business Day
of receipt thereof:
(i) all payments of interest on the Mortgage Loans (net of the
related Monthly Servicing Fee with respect to each such Mortgage Loan
which was an Outstanding Mortgage Loan as of the preceding Distribution
Date);
(ii) all payments of principal received in respect of the
Mortgage Loans;
(iii) the aggregate of all purchase prices paid by the Seller
for the purchase of any Defective Mortgage Loan:
(iv) all cash ("Liquidation Proceeds") received in connection
with the liquidation of a Liquidated Mortgage Loan net of expenses
("Liquidation Expenses") of the Servicer in connection with such
liquidation (such net liquidation proceeds being referred to herein as
"Net Liquidation Proceeds");
(v) the aggregate of any insurance proceeds received in
respect of a Mortgaged Property (net of amounts covering the related
reasonable expenses of the Servicer) that are not Liquidation Proceeds
and are applied to principal or interest on the related Mortgage Loan;
(vi) any amounts required to be deposited pursuant to the
Agreement in connection with any property ("REO Property") acquired by
the Mortgage Trust through foreclosure or deed in lieu of foreclosure;
(vii) any amounts required to be deposited pursuant to the
Agreement in connection with the application of co-insurance clauses,
flood damage to REO Properties and blanket policy deductibles; and
(viii) all advances made by the Servicer with respect to
payments of principal (other than Balloon Payments) and interest on the
Mortgage Loans that were due on the related Due Date and not received
as of the close of business on the Determination Date preceding the
related Distribution Date, less the aggregate amount of any such
delinquent payments that would constitute a Monthly Advance.
Payments and collections that do not constitute Available Funds (e.g.,
assumption fees, late fees or other administrative charges) will not be
deposited in the Certificate Account and will be retained by [the Servicer as
additional servicing compensation]. The Servicer may, from time to time, direct
the Trustee to make withdrawals from the Certificate Account referred to above,
to make reimbursement of certain expenses to the Servicer.
The Trustee will establish and maintain, on behalf of the
Certificateholders, a trust account (the "Prepayment Premium Account") in which
shall be deposited any premium or yield maintenance payment by a Mortgagor with
respect to a related Mortgage Loan in connection with a Principal Prepayment (a
"Prepayment Premium"). The Servicer shall remit to the Trustee for deposit into
the Prepayment Premium Account, daily, within one Business Day of receipt
thereof from subservicers, all Prepayment Premiums received by it.
Any funds on deposit in the Certificate Account and Prepayment Premium
Account may be invested in Permitted Investments. Permitted Investments are
specified in the Agreement as including certain federal government obligations
and other highly rated obligations. Any net investment income from such
Permitted Investments will be for the benefit of [the Servicer as part of its
servicing compensation].
S-35
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Hazard Insurance
The Servicer is required to cause to be maintained for each Mortgaged
Property a fire insurance policy with extended perils coverage which contains a
standard mortgagee's clause in an amount at least equal to the lesser of (a) the
replacement cost of the improvements on such Mortgaged Property or (b) the
current principal balance of such Mortgage Loan. As set forth above, all amounts
collected by the Servicer under any hazard policy (except for amounts to be
applied to the restoration or repair of the Mortgaged Property or released to
the borrower in accordance with the Servicer's normal servicing procedures or
the terms of the Mortgage Loan), to the extent they constitute Net Liquidation
Proceeds or insurance proceeds, will ultimately be deposited in the Certificate
Account. The ability of the Servicer to assure that hazard insurance proceeds
are appropriately applied may be dependent on its being named as an additional
insured under any hazard insurance policy, or upon the extend to which
information in this regard is furnished to the Servicer by a borrower. The
Agreement provides that the Servicer may satisfy its obligation to cause hazard
policies to be maintained by maintaining a blanket policy issued by an insurer
acceptable to the Rating Agency and fire insurance with extended perils coverage
on the Mortgage Loans. If such blanket policy contains a deductible clause, the
Servicer is obligated to deposit in the Certificate Account the sums which would
have been deposited therein but for such clause.
If the properties securing the Mortgage Loans have appreciated in value
and if the amount of hazard insurance maintained on the improvements securing
the Mortgage Loans were to decline as the principal balances owing thereon
decreased, hazard insurance proceeds could be insufficient to restore fully the
damaged property in the event of a partial loss. See "Description of the Offered
Certificates -- Subordination of the Subordinate Certificates" above for a
description of the protection afforded to holders of the Class A Certificates
and, to a lesser extent, the Class B Certificates against losses occasioned by
hazards which are otherwise uninsured against (including losses caused by the
application of the co-insurance clause described in the preceding paragraph).
If the protection afforded the Owners of the Class B Certificates by
the subordination of the Class C Certificates is exhausted, and if a borrower
defaults on his obligations to make payments on a Mortgage Loan, the Owners of
the Class B Certificates will bear all risk of loss resulting from hazard losses
not covered by hazard insurance. Once the Class Principal Balance is reduced to
zero, all such remaining losses will be by the Owners of the Class A
Certificates.
Realization Upon Defaulted Mortgage Loans
The Servicer will foreclose upon or otherwise comparably convert the
ownership of Mortgaged Properties securing such of the Mortgage Loans as come
into default when, in accordance with applicable servicing procedures under the
Agreement, no satisfactory arrangements can be made for the collection of
delinquent payments and the Servicer determines that such action is in the best
economic interest of the Certificateholders. In connection with such foreclosure
or other conversion, the Servicer will follow such practices as it deems
necessary or advisable and as are in keeping with the Servicer's multifamily
mortgage loan servicing activities and with the Servicing Standard, provided the
Servicer will not expend its own funds in connection foreclosure or other
conversion, correction of a default on a senior mortgage or restoration of any
property unless such foreclosure, correction or restoration is determined to be
in the best economic interest of the Trust. Any Mortgaged Property so acquired
by the Mortgage Trust is required to be disposed of in accordance with
applicable federal income tax law and regulations and consistent with the status
of the Trust Fund and the Mortgage Trust as REMICs, which regulations currently
require that such disposition occur within two years of the acquisition. The
Agreement will provide that the Servicer, acting on behalf of the Trust, may not
acquire title to a Mortgaged Property or take over its operation unless the
Servicer has previously determined, based on a report prepared by an independent
person who regularly conducts environmental audits, that the Mortgaged Property
is in compliance with applicable environmental laws or that it would be in the
best economic interest of the Trusts to take the actions necessary to comply
with such laws. [Special Servicer requirements.]
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<PAGE>
Servicing and Other Compensation and Payment of Expenses
The principal servicing compensation (the "Servicing Fee") to be paid
to the Servicer in respect of its servicing activities relating to the
Certificates will be paid to it with respect to each Distribution Date by
withholding from funds to be deposited into the Certificate Account out of
collections on the Mortgage Loans in an amount equal to, as to each Mortgage
Loan, one-twelfth of the product of (i) the rate set forth in the Mortgage Loan
Schedule (the "Servicing Fee Rate") and (ii) the Unpaid Principal Balance of
such Mortgage Loan as of such Distribution Date. All assumption fees, late
payment charges and extension and other administrative charges, to the extent
collected from borrowers, will be [retained by the Servicer]. The amounts of
late charges are limited by state law and range from __% to __% of the late
monthly payment. [Assumption fees range from __% to __% of the outstanding
amount of the Mortgage Loan.]
The Servicer will pay certain ongoing expenses associated with the
Trust and incurred by it in connection with its responsibilities under the
Agreement, including, without limitation, payment of the fees and disbursements
of the Trustee, any custodian appointed by the Trustee and any paying agent. In
addition, as indicated in the preceding section, the Servicer will be entitled
to reimbursement for certain expenses incurred by it in connection with
defaulted Mortgage Loans and in connection with the restoration of Mortgaged
Properties, such right of reimbursement being prior to the rights of
Certificateholders to receive any related insurance proceeds or Liquidation
Proceeds.
Evidence as to Compliance
On or before __________ in each year, beginning with __________, 199__,
the Servicer at its expense is required to cause a firm of independent public
accountants to furnish a statement to the Trustee to the effect that such firm
has examined, for the preceding calendar year, certain documents and records
related to the servicing of mortgage loans under pooling and servicing
agreements (including the Agreement) substantially similar to the Agreement and
such examination, which as been conducted substantially in compliance with the
Uniform Single Audit Program for Mortgage Bankers, has disclosed no items of
noncompliance with the provisions of the Agreement which, in the opinion of the
firm, are material, except for such items as will be referred to in the report.
The Agreement will also provide for delivery (on or before __________
in each year, commencing with __________, 199__) to the Trustee of an annual
statement signed by an officer of the Servicer to the effect that the Servicer
has fulfilled its material obligations under the Agreement throughout the
preceding year.
Certain Matters Regarding the Servicer
The Agreement will provide that the Servicer may not resign from its
obligations and duties thereunder unless (i) its duties thereunder are no longer
permissible under applicable law or (ii) the Servicer no longer wishes to be
Servicer and has proposed a successor Servicer that (a) is reasonably acceptable
to the Trustee (b) whose appointment will not result in a reduction of the
rating assigned to the Offered Certificates or the Class C Certificates and (c)
is approved in writing by Owners of Percentages Interest aggregating not less
than 50% of each Class of Certificate then Outstanding.
The Agreement will also provide that neither the Servicer, nor any
director, officer, employee or agent of the Servicer will be under any liability
to the Trust Fund or the Owners of the Certificates 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
Servicer nor any such person will be protected against any liability which would
otherwise be imposed by reason of misfeasance, bad faith or negligence in the
performance of duties or by reason of reckless disregard of obligations and
duties thereunder. The Agreement will further provide that the Servicer and any
director, officer, employee or agent of the Servicer is entitled to
indemnification by the Trust Fund and will be held harmless against any loss,
liability or expense incurred in connection with any legal action relating to
the Agreement or the Owners of the Certificates, other than any loss, liability
or expense related to any specific Mortgage Loan or Mortgage Loans (except any
such loss, liability or expense otherwise reimbursable pursuant to the
Agreement) and any loss, liability or expense incurred by reason of reckless
disregard of obligations and duties
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<PAGE>
thereunder. In addition, the Agreement will provide that the Servicer will not
be under any obligation to appear in, prosecute or defend any legal action which
is not incidental to its duties under the Agreement and which in its opinion may
involve it in any expense or liability. The Servicer 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 Owners of the Certificates 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
Servicer will be entitled to be reimbursed therefor from time to time on one or
more Distribution Dates, only out of the Available Funds for such Distribution
Date that remain after the distributions to the Certificateholders for such
Distribution Date have been made. The Servicer's right to such indemnity or
reimbursement will survive any resignation or termination of the Servicer (and
will survive any termination of the Agreement if the Servicer is still serving
as the servicer at such termination) with respect to any losses, expenses, costs
or liabilities arising prior to such resignation or termination (or arising from
events that occurred prior to such resignation or termination). Any such claims
by or on behalf of the Certificateholders or the Trust Fund will be made only
against the Servicer, who will be liable with respect to its own acts and
omissions as well as the acts and omissions of its directors, officers,
employees and agents.
Any corporation into which the Servicer may be merged or consolidated,
or any corporation resulting from any merger, conversion or consolidation to
which the Servicer will be a party, or any corporation succeeding to the
business of the Servicer, which executes an agreement of assumption to perform
every obligation of the Servicer under the Agreement, will be the successor of
the Servicer thereunder, without the execution or filing of any other paper or
any further act on the part of any of the parties thereto, anything therein to
the contrary notwithstanding.
Events of Default
Events of Default under the Agreement will consist of (i) a failure by
the Servicer to deposit in the Certificate Account any deposit required to be
made under the Agreement, which failure continues unremedied for five business
days after the giving of written notice of such failure to the Servicer by the
Trustee, or to the Servicer and the Trustee by holders of the Certificates of
any class evidencing, as to such Class, Percentage Interests aggregating not
less than 25%; (ii) any failure by the Servicer duly to observe or perform in
any material respect any of its other covenants or agreements in the Agreement
which materially affects the Certificateholders and continues, unremedied for 60
days after the giving of written notice of such failure to the Servicer by the
Trustee, or to the Servicer and the Trustee by holders of the Certificates of
any class evidencing, as to such Class, Percentage Interests aggregating not
less than 25%; and (iii) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings regarding the
Servicer and certain actions by the Servicer indicating its insolvency or
inability to pay its obligations.
Rights Upon Event of Default
So long as an Event of Default remains unremedied by the Servicer, the
Depositor or the Trustee may, or at the written direction of the Owners of
Certificates evidencing not less than 51% of the Ownership Interests in the
Trust Fund (for the purposes of this percentage, the Class B, Class R and Class
RL Certificateholders shall be deemed to hold 0% of the Ownership Interests in
the Trust Fund) shall, terminate all the rights and obligations of the Servicer
under the Agreement in and to the Mortgage Loans, whereupon the Trustee will
succeed to all the responsibilities, duties and liabilities of the Servicer
under the Agreement and will be entitled to similar compensation arrangements;
provided, however, that the Trustee may waive any default by the Servicer in the
performance of its obligations under the Agreement and its consequences, except
that a default in the making of any required distribution on any of the
Certificates may only be waived with the consent of the Owners of Certificates
of each Class affected thereby, voting as a Class, evidencing, as to each such
Class, Percentage Interests aggregating not less than 66%]. Upon any such waiver
of a past default, such default shall cease to exist, and any Event of Default
arising therefrom shall be deemed to have been remedied for every purpose of the
Agreement. No such waiver shall extend to any subsequent or other default or
impair any right contingent thereon except to the extent expressly so waived.
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In the event that the Trustee would be obligated to succeed the
Servicer but is unwilling or unable so to act, it may appoint, or petition a
court of competent jurisdiction for the appointment of, any established housing
and home finance institution that is then servicing a multi-family mortgage loan
portfolio and with a net worth of at least $__________ to act as successor to
the Servicer under the Agreement. Pending such appointment, the Trustee is
obligated to act in such capacity, unless the Trustee is prohibited by law from
so acting. The Trustee and such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
to the initial Servicer under the Agreement.
No Certificateholder will have any right under the Agreement to
institute any proceeding with respect to the Agreement unless such holder
previously has given to the Trustee written notice of default and unless holders
of Certificates of any Class evidencing, as to such Class, Percentage Interests
aggregating not less than 25% 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 after the
receipt of such request and after the indemnity has neglected or refused to
institute any such proceeding. The Trustee will be under no obligation to
exercise any of the trusts or powers vested in it by the Agreement or to make
any investigation of matters arising thereunder or to institute, conduct or
defend any litigation thereunder or in relation thereto at the request, order or
direction of any of the Owners of the Certificates covered by the Agreement,
unless such Owners of the Certificates have offered to the Trustee reasonable
security or indemnity against the costs, expenses and liabilities which may be
incurred therein or thereby.
Amendment
The Agreement may be amended from time to time by the Servicer, the
Depositor, the Seller and the Trustee without the consent of any of the Owners
of the Certificates (a) to cure any error or any ambiguity or to correct or
supplement any provisions therein which may be inconsistent with any other
provisions therein, (b) to add to the duties or obligations of the Servicer
thereunder, (c) to maintain or improve the rating of the Class A Certificates or
the Class B Certificates then given by a Rating Agency (it being understood that
after obtaining the initial ratings of the Class A and Class B Certificates,
none of the Depositor, the Servicer or the Trustee is obligated to maintain or
improve such ratings), or (d) to add any other provisions with respect to
matters or questions arising under the Agreement; provided, however, that such
action will not, as evidenced by an Opinion of Counsel, adversely affect in any
material respect the interests of any Owner of a Certificate. The Agreement may
also be amended from time to time by the Servicer, the Depositor, and the
Trustee, with the consent of the Owners of Certificates of each Class affected
thereby evidencing, as to such Class, Percentage Interests aggregating not less
than 51% for the purpose of adding any provisions to or changing in any manner
or eliminating any of the provisions of the Agreement or of modifying in any
manner the rights of Owners of the Certificates; provided, however, that no such
amendment will (a) reduce in any manner the amount of, or delay the timing of,
collections of payments on Mortgage Loans or distributions which are required to
be made on any Certificate without the consent of the Owner of such Certificate
or (b) reduce the aforesaid percentage required to consent to any such
amendment, without the consent of the Owners of all Certificates then
outstanding. The Agreement may also be amended from time to time, without the
consent of the Owners of the Certificates, with regard to certain REMIC matters.
Termination; Retirement of the Certificates
The obligations created by the Agreement will terminate upon the
payment to Owners of the Certificates of all amounts held in the Certificate
Account or by the Servicer and required to be paid to them pursuant to the
Agreement following the earlier of (i) the final payment or other liquidation of
the last Mortgage Loan subject thereto or the disposition of all property
acquired upon foreclosure of any such Mortgage Loan and (ii) the repurchase by
the Servicer from the Mortgage Trust of all remaining Mortgage Loans and all
property acquired in respect of such Mortgage Loans, as described below. In no
event, however, will the trust created by the Agreement continue beyond the
expiration of 21 years from the death of the last to survive of certain persons
described in the Agreement. Written notice of termination of the Agreement will
be given to each Certificateholder, and the final distribution will be made only
upon surrender and cancellation of the Certificates at an office or agency
appointed by the Trustee which will be specified in the notice of termination.
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At its option, the Depositor may repurchase from the Mortgage Trust all
remaining Mortgage Loans held by the Mortgage Trust at a price equal to the
greater of (a) the sum of (x) 100% of the Unpaid Principal Balance of each
Mortgage Loan (other than any Foreclosed Mortgage Loan represented by REO
Property whose fair market value is included pursuant to clause (y) below) as of
the Distribution Date upon which the proceeds of any repurchase are to be
distributed and (y) the fair market value of all Foreclosed Mortgage Loans
represented by REO Property. The right of the Depositor to make any such
purchase is conditioned upon the Pool Principal Balance being less than 10% of
the Cut-Off Date Pool Principal Balance. The termination of the Trusts is
required to be effected in a manner consistent with applicable federal income
tax regulations and their status as REMIC's.
The Trustee
____________________, a __________ banking association organized under
the laws of the United States, is the Trustee. Its Corporate Trust Office is
located at _________________________. The Depositor may also remove the Trustee
under certain circumstances, including, among others, failure of the Trustee to
continue to satisfy the eligibility requirements described in the Agreement or
adjudication of the Trustee as bankrupt or insolvent. Upon becoming aware of
such circumstances, the Depositor will be obligated to appoint a successor
Trustee. The Trustee may resign from its duties as Trustee under the Agreement.
Any resignation or removal of the Trustee and appointment of a successor Trustee
will not become effective until acceptance of the appointment by the successor
Trustee.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of certain of the material
anticipated federal income tax consequences of the purchase, ownership and
disposition of the Offered Certificates is to be considered only in connection
with "Certain Federal Income Tax Consequences" in the Prospectus. The discussion
herein and in the Prospectus is based upon laws, regulations, rulings and
decisions now in effect, all of which are subject to change. The discussion
below and in the Prospectus does not purport to deal with all federal tax
consequences applicable to all categories of investors, some of which may be
subject to special rules. Investors should consult their own tax advisors in
determining the federal, state, local and any other tax consequences to them of
the purchase, ownership and disposition of the Offered Certificates.
REMIC Elections
The Trustee will cause an election to be made to treat the Trust as a
"real estate mortgage investment conduit" ("REMIC") for federal income tax
purposes. Arter & Hadden, special tax counsel, will deliver its opinion to the
Depositor that for federal income tax purposes, assuming (i) the REMIC election
is made and (ii) compliance with the Agreement, the Trust will be treated as a
REMIC, each Class of Offered Certificates will be treated as "regular interests"
in the REMIC and the Class R Certificates will be treated as the sole class of
"residual interests" in the REMIC. For federal income tax purposes, regular
interests in a REMIC are treated as debt instruments issued by the REMIC on the
date on which those interests are created, and not as ownership interests in the
REMIC or its assets. Owners of Offered Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to such Offered Certificates under an accrual method. The Offered Certificates
may be issued with "original issue discount" for federal income tax purposes.
The prepayment assumption to be used in determining whether any Class of Offered
Certificates is issued with original issue discount and the rate of accrual of
original issue discount is ___%. No representation is made that any of the
Mortgage Loans will prepay at this rate or any other rate. See "Certain Federal
Income Tax Consequences--REMICS--Taxation of Holders of REMIC Regular
Securities--Original Issue Discount" in the Prospectus.
Although not free from doubt, it is anticipated that the Class S-A
Certificates will be treated as issued with original issue discount in an amount
equal to the excess of all payments thereon over their issue price (including
accrued interest), and the Trustee intends to report income in respect of such
Class of Certificates in this manner. Under this method, any "negative" amounts
of original issue discount attributable to rapid prepayments would not be
deductible currently, but would be offset against future positive accruals of
original issue discount, if any.
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<PAGE>
Finally, a Class S-A Certificateholder may be entitled to a loss deduction to
the extent it becomes certain that such holder will not recover a portion of its
remaining basis in the Class S-A Certificate, assuming no further prepayments.
ERISA CONSIDERATIONS
Any Plan fiduciary which proposes to cause a Plan to acquire any of the
Offered Certificates should consult with its counsel with respect to the
potential consequences under the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and the Code, of the Plan's acquisition and
ownership of such Certificates.
General
ERISA imposes certain restrictions on employee benefit plans subject to
ERISA ("Plans") and on persons who are parties in interest or disqualified
persons ("parties in interest") with respect to such Plans. Certain employee
benefit plans, such as governmental plans and church plans (if no election has
been made under section 410(d) of the Code), are not subject to the restrictions
of ERISA, and assets of such plans may be invested in the Class A-1 and Class B
Certificates without regard to the ERISA considerations described below, subject
to other applicable federal and state law. However, any such governmental or
church plan which is qualified under Section 401(a) of the Code and exempt from
taxation under Section 501(a) of the Code is subject to the prohibited
transaction rules set forth in Section 503 of the Code.
Investments by Plans are subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
Prohibited Transactions
General. Section 406 of ERISA prohibits parties in interest with
respect to a Plan from engaging in certain transactions involving a Plan and its
assets unless a statutory or administrative exemption applies to the
transaction. Section 4975 of the Code (or, in some cases, Section 502(i) of
ERISA) imposes certain excise taxes on parties in interest which engage in
non-exempt prohibited transactions.
The United States Department of Labor ("DOL") has issued a final
regulation (29 C.F.R. Section 2510.3-101) containing rules for determining what
constitutes the assets of a Plan. This regulation provides that, as a general
rule, the underlying assets and properties of corporations, partnerships, trusts
and certain other entities in which a Plan makes an "equity investment" will be
deemed for purposes of ERISA to be assets of the Plan unless certain exceptions
apply. One such exception provides that if less than 25% of the value of the
Certificates outstanding is held by Plans, the assets of the Trusts would not be
deemed to include assets of Plans that are Certificateholders. However, there
can be no assurance that the 25% exception described in the regulations would be
satisfied with respect to the Trusts.
Under the terms of the regulation, the Trusts may be deemed to hold
plan assets by reason of a Plan's investment in a Certificate; such plan assets
would include an undivided interest in the Mortgage Loans and any other assets
held by the Trusts. In such an event, the Depositor, the Servicer, the Trustee
and other persons, in providing services with respect to the Mortgage Loans, may
be parties in interest, subject to the fiduciary responsibility provisions of
Title I of ERISA, including the prohibited transaction provisions of Section 406
of ERISA (and of Section 4975 of the Code), with respect to transactions
involving the Mortgage Loans unless such transactions are subject to a statutory
or administrative exemption.
[Availability of Administrative Exemption for Class A-1 and Class S-A
Certificates. The U.S. Department of Labor has granted to
___________________________ an administrative exemption (Prohibited Transaction
Exemption _______, ________________________________________ from certain of the
prohibited transaction rules of ERISA with respect to the initial purchase, the
holding and the subsequent resale by Plans of certificates
S-41
<PAGE>
representing interests in asset-backed pass-through trusts that consist of
certain receivables, loans and other obligations that meet the conditions and
requirements of PTE ______. The receivables covered by the exemption include
mortgage loans such as the Mortgage Loans. The exemption will apply to the
acquisition, holding and resale of the Class A-1 and Class S-A Certificates by a
Plan, provided that certain conditions (certain of which are described below)
are met.
Among the conditions which must be satisfied for PTE ______ to apply to
the Class A-1 and Class S-A Certificates are the following:
(1) The acquisition of the Class A-1 and Class S-A Certificates by a
Plan is on terms (including the price for the Class A-1 and Class S-A
Certificates) that are at least as favorable to the Plan as they would be in an
arm's-length transaction with an unrelated party;
(2) The rights and interests evidenced by the Class A-1 and Class S-A
Certificates acquired by the Plan are not subordinated to the rights and
interests evidenced by other certificates of the Trust Fund;
(3) The Class A-1 and Class S-A Certificates acquired by the Plan have
received a rating at the time of such acquisition that is in one of the three
highest generic rating categories from any of S&P, Moody's, Duff & Phelps Credit
Rating Co. or Fitch Investors Service, Inc.;
(4) The Trustee is not an affiliate of any member of the Restricted
Group (as defined below);
(5) The sum of all payments made in connection with the resale of the
Class A-1 and Class S-A Certificates represents not more than reasonable
compensation for reselling the Class A-1 and Class S-A Certificates. The sum of
all payments made to and retained by the Depositor pursuant to the sale of the
Mortgage Loans to the Mortgage Trust represents not more than the fair market
value of such Mortgage Loans. The sum of all payments made to and retained by
the Servicer represents not more than reasonable compensation for the Servicer's
services under the Agreement and reimbursement of the Servicer's reasonable
expenses in connection therewith; and
(6) The Plan investing in the Class A-1 and Class S-A Certificates is
an "accredited investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the 1933 Act.
Moreover, PTE _______ would provide relief from certain
self-dealing/conflict of interest prohibited transactions only if, among other
requirements, (i) in the case of the acquisition of Class A-1 and Class S-A
Certificates in connection with the initial issuance, at least fifty percent
(50%) of the Class A-1 and Class S-A Certificates are acquired by persons
independent of the Restricted Group (as defined below), (ii) the Plan's
investment in Class A-1 or Class S-A Certificates does not exceed twenty-five
percent (25%) of all of the Class A-1 and Class S-A Certificates outstanding at
the time of the acquisition and (iii) immediately after acquisition, no more
than twenty-five percent (25%) of the assets of the Plan are invested in
certificates representing an interest in one or more trusts containing assets
sold or serviced by the same entity. PTE ____ does not apply to Plans sponsored
by the Servicer, the Depositor, the Trustee, any obligor with respect to
Mortgage Loans included in the Mortgage Trust constituting more than five
percent of the aggregate unamortized principal balance of the assets in the
Mortgage Trust, or any affiliate of such parties (the "Restricted Group")
____ believes that the exemption will apply to the acquisition and
holding of the Class A-1 and Class S-A Certificates by Plans and that all
conditions of the exemption other than those within the control of the investors
have been met. [In addition, as of the date hereof, there is no single obligor
with respect to Mortgage Loans included in the Mortgage Trust that constitutes
more than five percent of the aggregate unamortized principal balance of the
assets of the Mortgage Trust.]
Under current law the purchase and holding of the Class B Certificates
by or on behalf of any Plan subject to the fiduciary responsibility provisions
of ERISA may result in "prohibited transactions" within the meaning of ERISA and
the Code. [No transfer of a Class B Certificate or any interest therein may be
made to any Plan or other retirement arrangement, including individual
retirement accounts and annuities, Keogh plans and collective
S-42
<PAGE>
investment and separate accounts in which such plans, accounts or arrangements
are invested that is subject to ERISA or the Code unless the prospective
transferee of the Class B Certificate provides the Trustee with a representation
letter and an opinion of counsel, each in the form required under the Agreement.
See "ERISA Considerations" herein and in the Prospectus.]
Review By Plan Fiduciaries. Due to the complexity of these rules and
the penalties imposed upon persons involved in prohibited transactions, it is
especially important that any Plan fiduciary who proposes to cause a Plan to
purchase Class A-1 or Class S-A Certificates should consult with its own counsel
with respect to the potential consequences under ERISA and the Code of the
Plan's acquisition and ownership of Class A-1 or Class S-A Certificates. Assets
of a Plan or individual retirement account should not be invested in the Class
A-1 and Class S-A Certificates unless it is clear that the assets of the Trusts
will not be plan assets or unless it is clear that the PTE ______ or a
prohibited transaction class exemption will apply and exempt all potential
prohibited transactions.
LEGAL INVESTMENT CONSIDERATIONS
[As long as the Class A Certificates are rated in one of the two
highest rating categories by at least one nationally recognized statistical
rating organization, the Class A Certificates will constitute "mortgage related
securities" within the meaning of SMMEA and as such 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 whose authorized investments are subject to
state regulation to the same extent that, under applicable law, obligations
issued by or guaranteed as to principal and interest by the United States or any
agency or instrumentality thereof constitute legal investments for such
entities. Under SMMEA, however, if a State enacted legislation on or prior to
October 3, 1991 specifically limiting the legal investment authority of any such
entities with respect to "mortgage related securities," such securities will
constitute legal investments for entities subject to such legislation only to
the extent provided therein. Certain States have enacted legislation which
overrides the preemption provisions of SMMEA.
SMMEA has 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 with "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities 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 regulatory authority may prescribe.]
The [Class B] Certificates will not be "mortgage securities" for
purposes of SMMEA. As a result, the appropriate characterization of the [Class
B] Certificates under various legal investment restrictions, and thus the
ability of investors subject to these restrictions to purchase the [Class B]
Certificates, is subject to significant interpretive uncertainties.
The Depositor makes no representation as to the ability of particular
investors to purchase the Offered Certificates under applicable legal investment
or restrictions. All institutions whose investment activities are subject to
legal investments and regulations, regulatory requirements or review by
regulatory authorities should consult with their own advisors in determining
whether and to what extent the Offered Certificates constitute legal investments
for or are subject to investment, capital or other restrictions.
RATINGS
It is a condition to the issuance of the Offered Certificates that the
Class A-1 and Class S-A Certificates each be rated no lower than "AAA" by S&P
and "Aaa" by Moody's and that the Class B Certificates be rated no lower than
"____" by _____. A security rating is not a recommendation to buy, sell or hold
securities and may
S-43
<PAGE>
be subject to revision or withdrawal at any time by the assigning rating agency.
Each security rating should be evaluated independently of any other security
rating.
The ratings assigned by the Rating Agencies to mortgage pass-through
certificates address the likelihood of the receipt by certificateholders of all
distributions to which such certificateholders are entitled. The ratings
assigned to mortgage pass-through certificates do not constitute a statement
regarding the frequency or extent of principal prepayments. The ratings do not
address the possibility that certificateholders might receive a lower than
anticipated yield on their investment.
Ratings which are assigned to securities such as the Class S-A
Certificates generally evaluate the ability of the seller (i.e., the Trust) and
any guarantor (i.e., the Certificate Insurer) to make payments, as required by
such securities. The amounts distributable on the Class S-A Certificates consist
only of interest. In general, the ratings address credit risk and not prepayment
risk. If all of the Home Equity Loans were to prepay in the initial month, with
the result that investors in the Class S-A Certificates receive only a single
month's interest and thus suffer a nearly complete loss of their investment, all
amounts "due" to such Owners will nevertheless have been paid, and such result
is consistent with the "AAAr/Aaa" ratings received on the Class S-A
Certificates.
The "r" symbol is appended to the rating by Standard & Poor's of the
Class S-A Certificates because they are interest-only Certificates that Standard
& Poor's believes may experience high volatility or high variability in expected
returns due to non-credit risks created by the terms of such Certificates. The
absence of an "r" symbol in the rating of the other Classes of Class A
Certificates should not be taken as an indication that such Certificates will
experience no volatility or variability in total return.
UNDERWRITING
Under the terms and subject to the conditions set forth in the
Underwriting Agreement for the sale of the Offered Certificates, the Depositor
has agreed to cause the Trust to sell and ___________________ (the
"Underwriters") have agreed to purchase the Offered Certificates.
In the Underwriting Agreement, the Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase, the entire principal
amount of each Class of Offered Certificates.
The Underwriters have advised the Depositor that they propose to offer
the Offered Certificates for sale from time to time in one or more registered
transactions or otherwise, at market prices prevailing at the time of sale, at
prices related to such market prices or at negotiated prices. The Underwriters
may effect such transactions by selling such Certificates to or through dealers,
and such dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriters or purchasers of the Offered
Certificates for whom they may act as agent. Any dealers that participate with
the Underwriters in the distribution of the Offered Certificates purchased by
the Underwriters may be deemed to be underwriters, and any discounts or
commissions received by them or the Underwriters and any profit on the resale of
Offered Certificates by them or the Underwriters may be deemed to be
underwriting discounts or commissions under the Securities Act.
The Seller has agreed to indemnify the Underwriters against certain
liabilities including liabilities under the Securities Act of 1933.
The Depositor has been advised by the Underwriters that the
Underwriters presently intends to make a market in each Class of Offered
Certificates, as permitted by applicable laws and regulations. The Underwriters
are not obligated, however, to make a market in either Class of Offered
Certificates and such market-making may be discontinued at any time at the sole
discretion of the Underwriters. Accordingly, no assurance can be given as to the
liquidity of, or trading markets for, the Offered Certificates.
S-44
<PAGE>
LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Depositor by Arter & Hadden,
Washington, D.C. and by L. Keith Blackwell, General Counsel to the Depositor.
Certain legal matters relating to insolvency issues and certain federal income
tax matters concerning the Certificates will be passed upon for the Depositor by
Arter & Hadden. Certain legal matters relating to the validity of the
Certificates will be passed upon for the Underwriter by
________________________.
S-45
<PAGE>
EXHIBIT A
MORTGAGE LOAN SCHEDULE
A-1
<PAGE>
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Page
accredited investor.....................................................S-42
Additional Collateral...................................................S-33
Agreement...............................................................S-33
Appraised Values........................................................S-17
Balloon Payments........................................................S-12
Book Entry Termination..................................................S-23
CERCLA..................................................................S-10
Certificate Account.....................................................S-35
Certificate Registrar...................................................S-23
Certificates.............................................................S-1
Class A-1 Certificates...................................................S-1
Class A-1 Pass-Through Rate..............................................S-3
Class B Certificates.....................................................S-1
Class B Pass-Through Rate................................................S-3
Class B Principal Distribution Amount....................................S-4
Class C Certificates.....................................................S-1
Class Principal Balance.................................................S-25
Class R Certificates.....................................................S-1
Class RL Certificates....................................................S-1
Class S-A Certificates...................................................S-1
Class S-A Pass-Through Rate..............................................S-3
Class A-1 Principal Distribution Amount..................................S-4
Clearing Agency.........................................................S-23
Clearing Agency Participants............................................S-23
Closing Date.............................................................S-1
Code.....................................................................S-8
CPR.....................................................................S-30
Cut-Off Date.............................................................S-1
Default Rate............................................................S-21
Defective Mortgage Loan.................................................S-33
Depositor................................................................S-1
DOL.....................................................................S-41
equity investment.......................................................S-41
ERISA....................................................................S-8
Events of Default.......................................................S-21
Final Scheduled Distribution Date........................................S-6
Liquidated Mortgage Loan................................................S-25
Liquidation Expenses....................................................S-35
Liquidation Proceeds....................................................S-35
Lower Tier REMIC.........................................................S-8
MAI.....................................................................S-20
Master Servicer..........................................................S-1
Monthly Advance..........................................................S-5
Monthly Interest........................................................S-25
Monthly Report..........................................................S-26
Moody's..................................................................S-7
Mortgage Files..........................................................S-33
Mortgage Loan Schedule..................................................S-15
Mortgage Loans...........................................................S-2
Mortgage Note...........................................................S-20
mortgage related securities..............................................S-9
Mortgage Trust...........................................................S-2
Mortgaged Properties.....................................................S-2
Net Liquidation Proceeds................................................S-35
Net Losses..............................................................S-16
Notional Principal Balance.................................................1
Offered Certificates.....................................................S-1
Original Class A-1 Principal Balance.....................................S-1
Originator...............................................................S-2
Outstanding Mortgage Loan...............................................S-25
Owners..................................................................S-23
parties in interest.....................................................S-41
Payment Date............................................................S-23
Percentage Interest.....................................................S-23
Plan.....................................................................S-8
Plans...................................................................S-41
Policies................................................................S-21
Prepayment Premium......................................................S-35
Prepayment Premium Account..............................................S-35
Prepayments..............................................................S-7
Purchase Price..........................................................S-33
Rating Agencies..........................................................S-7
Realized Losses..........................................................S-6
Record Date..............................................................S-3
REMIC....................................................................S-8
REO Property............................................................S-35
Residual Certificates....................................................S-1
Restricted Group........................................................S-42
S&P......................................................................S-7
Scheduled Final Distribution Date.......................................S-32
Seller...................................................................S-2
Senior Certificates......................................................S-1
Servicer.................................................................S-1
Servicing Fee...........................................................S-37
Servicing Fee Rate.......................................................S-6
Servicing Standard......................................................S-34
SMMEA....................................................................S-9
Special Servicer.........................................................S-1
SREA....................................................................S-20
SRPA....................................................................S-20
superlien...............................................................S-10
The Mortgage Trust-Underwriting Standards................................S-2
Trust....................................................................S-1
Trust Fund...............................................................S-2
Trustee..................................................................S-1
Trusts...................................................................S-2
Underwriter.............................................................S-44
Unpaid Delinquent Maturity Amount.......................................S-25
Unpaid Principal Balance................................................S-25
Weighted average life...................................................S-30
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This preliminary prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.
Preliminary Prospectus Dated ___________, 1996
PROSPECTUS
- --------------------------------------------------------------------------------
Mortgage Loan Asset Backed Securities
(Issuable in Series)
AMRESCO Residential Securities Corporation
(Depositor)
This Prospectus relates to Mortgage Loan Asset Backed Securities to be
issued from time to time in one or more series (and one or more classes within a
series), certain classes of which may be offered on terms determined at the time
of sale and described in this Prospectus and the related Prospectus Supplement.
Each series of Securities will be issued by a separate trust (each, a "Trust")
and will evidence a beneficial ownership interest in such Trust. The assets of a
Trust will include one or more of the following: (i) single family residential
mortgage loans, including mortgage loans secured by junior liens on the related
mortgaged properties and Title I loans and other types of home improvement
retail installment contracts and timeshare mortgages, (ii) conditional sales
contracts and installment sales or loan agreements or participation interests
therein secured by manufactured housing, (iii) mortgage-backed securities, (iv)
other mortgage-related assets and securities and (v) reinvestment income,
reserve funds, cash accounts, insurance policies (including financial guaranty
insurance policies and surety bonds), guaranties, letters of credit or similar
types of credit support or enhancement as more particularly described in the
related Prospectus Supplement.
One or more classes of Securities of a series may be (i) entitled to
receive distributions allocable to principal, principal prepayments, interest or
any combination thereof prior to one or more other classes of Securities of such
series or after the occurrence of certain events or (ii) subordinated in the
right to receive such distributions to one or more senior classes of Securities
of such series, in each case as specified in the related Prospectus Supplement.
Interest on each class of Securities entitled to distributions allocable to
interest may accrue at a fixed rate or at a rate that is subject to change from
time to time as specified in the related Prospectus Supplement. The Depositor or
its affiliates may retain or hold for sale from time to time one or more classes
of a series of Securities.
Distributions on the Securities will be made at the intervals and on the
dates specified in the related Prospectus Supplement from the assets of the
related Trust and any other assets pledged for the benefit of the Securities. An
affiliate of the Depositor may make or obtain for the benefit of the Securities
limited representations and warranties with respect to mortgage assets assigned
to the related Trust. Neither the Depositor nor any affiliates will have any
other obligation with respect to the Securities.
The yield on Securities will be affected by the rate of payment of
principal (including prepayments) of mortgage assets in the related Trust. Each
series of Securities will be subject to early termination under the
circumstances described herein and in the related Prospectus Supplement.
If specified in a Prospectus Supplement, an election may be made to treat
the Trust for the related series or specified portions thereof as a "real estate
mortgage investment conduit" ("REMIC") for federal income tax purposes. See
"Certain Federal Income Tax Consequences".
It is a condition to the issuance of the Securities that the Securities be
rated in not less than the fourth highest rating category by a nationally
recognized rating organization.
See "Risk Factors" beginning on Page 7 herein and in the section entitled
"Risk Factors" in the related Prospectus Supplement for a discussion of
significant risk factors.
See "ERISA Considerations" herein and in the related Prospectus Supplement
for a discussion of restrictions on the acquisition of Securities by "plan
fiduciaries."
An investor should carefully review the information in the related
Prospectus Supplement concerning the risks associated with the different types
and classes of Securities.
THE ASSETS OF A TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE RELATED
SECURITIES. THE SECURITIES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
DEPOSITOR, ANY SERVICER, ANY MASTER SERVICER, ANY ORIGINATOR, ANY TRUSTEE OR ANY
OF THEIR AFFILIATES, EXCEPT AS SET FORTH HEREIN AND IN THE RELATED PROSPECTUS
SUPPLEMENT. NEITHER THE SECURITIES NOR THE UNDERLYING MORTGAGE ASSETS WILL BE
GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE
DEPOSITOR, ANY SERVICER, ANY MASTER SERVICER, ANY ORIGINATOR, ANY TRUSTEE OR ANY
OF THEIR AFFILIATES, EXCEPT AS SET FORTH IN THE RELATED PROSPECTUS SUPPLEMENT.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR ANY RELATED PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
Offers of the Securities may be made through one or more different methods,
including offerings through underwriters, as more fully described herein and in
the related Prospectus Supplement. See "Plan of Distribution" herein and
"Underwriting" in the related Prospectus Supplement.
There will have been no public market for any series of Securities prior to
the offering thereof. There can be no assurance that a secondary market will
develop for the Securities of any series or, if it does develop, that such
market will continue.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of Securities unless accompanied by a Prospectus
Supplement.
- -------------------------------------------------------------------------------
The date of this Prospectus is _______________, 199__.
<PAGE>
AVAILABLE INFORMATION
The representative has filed a Registration Statement under the
Securities Act of 1933, as amended (the "1933 Act"), with the Securities and
Exchange Commission (the "Commission") with respect to the Certificates. The
Registration Statement and amendments thereof and to the exhibits thereto, as
well as such reports and other information, are available for inspection without
charge at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549; 7 World Trade Center, 13th Floor,
New York, New York 10048; and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of the Registration Statement and
amendments thereof and exhibits thereto may be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates and electronically through the Commission's
Electronic Data Gathering, Analysis and Retrieval system at the Commission's Web
site (http:\\www.sec.gov).
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Certificates
offered hereby and thereby nor an offer of the Certificates to any person in any
state or other jurisdiction in which such offer would be unlawful. The delivery
of this Prospectus at any time does not imply that information herein is correct
as of any time subsequent to its date.
REPORTS TO OWNERS
Periodic and annual reports concerning any Certificates and the related
Trust will be provided to the persons in whose names the Certificates are
registered (the "Owners"). See "Administration-Reports" herein. If specified in
the related Prospectus Supplement, a Series of Certificates may be issuable in
book-entry form. In such event, the related Certificates will be registered in
the name of a Clearing Agency (as defined herein) and, therefore, the Clearing
Agency will be the Owner for purposes hereof. All reports will be provided to
the Clearing Agency, which in turn will provide such reports to its Clearing
Agency Participants (as defined herein). Such Clearing Agency Participants will
then forward such reports to the beneficial owners of Certificates. See
"Description of the Certificates-Book-Entry Registration." The Depositor will
file or cause to be filed with the Commission such periodic reports with respect
to each Trust as are required under the Exchange Act and the rules and
regulations of the Commission thereunder. It is the Depositor's intent to
suspend filing such reports as soon as such reports are no longer statutorily
required.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed with respect to each respective Trust pursuant to
Sections 13(a), 13(c), 14 and 15(d) of the Securities Exchange Act of 1934
subsequent to the date of this Prospectus and prior to the termination of the
offering of the securities of such Trust offered hereby shall be deemed to be
incorporated by reference into this Prospectus when delivered with respect to
such Trust. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
Any person receiving a copy of this Prospectus may obtain, without
charge, upon written or oral request, a copy of any of the documents
incorporated by reference herein, except for the exhibits to such documents
(other than the documents expressly incorporated therein by reference). Requests
should be directed to AMRESCO Residential Credit Corporation, 3535 Inland Empire
Blvd., Ontario, California 91764 (telephone number (909) 941-3213).
<PAGE>
TABLE OF CONTENTS
Page
SUMMARY OF PROSPECTUS...................................................... 1
RISK FACTORS............................................................... 7
DESCRIPTION OF THE SECURITIES.............................................. 10
General............................................................... 11
Classes of Securities................................................. 12
Distributions of Principal and Interest............................... 13
Book Entry Registration............................................... 14
List of Owners of Securities.......................................... 15
THE TRUSTS................................................................. 15
Mortgage Loans........................................................ 15
Contracts............................................................. 17
Mortgage-Backed Securities............................................ 17
Other Mortgage Securities............................................. 18
CREDIT ENHANCEMENT......................................................... 18
SERVICING OF MORTGAGE LOANS AND
CONTRACTS............................................................. 22
Payments on Mortgage Loans............................................ 23
Advances.............................................................. 23
Collection and Other Servicing Procedures............................. 24
Primary Mortgage Insurance............................................ 25
Standard Hazard Insurance............................................. 26
Title Insurance Policies.............................................. 27
Claims Under Primary Mortgage Insurance Policies
and Standard Hazard Insurance Policies; Other
Realization Upon Defaulted Loan................................... 27
Servicing Compensation and Payment of Expenses........................ 28
Master Servicer....................................................... 28
ADMINISTRATION............................................................. 28
Assignment of Mortgage Assets......................................... 28
Evidence as to Compliance............................................. 31
The Trustee........................................................... 31
Administration of the Security Account................................ 31
Reports............................................................... 32
Forward Commitments; Pre-Funding...................................... 33
Servicer Events of Default............................................ 33
Rights Upon Servicer Event of Default................................. 33
Amendment............................................................. 34
Termination........................................................... 34
USE OF PROCEEDS............................................................ 35
THE DEPOSITOR.............................................................. 35
CERTAIN LEGAL ASPECTS OF THE MORTGAGE
ASSETS................................................................ 35
General............................................................... 35
Foreclosure........................................................... 36
Soldiers' and Sailors' Civil Relief Act............................... 41
The Contracts......................................................... 41
The Title I Program................................................... 44
LEGAL INVESTMENT MATTERS................................................... 44
ERISA CONSIDERATIONS....................................................... 45
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................... 46
Federal Income Tax Consequences For REMIC
Securities........................................................ 47
Taxation of Regular Securities........................................ 48
Taxation of Residual Securities....................................... 54
Treatment of Certain Items of REMIC Income and
Expense........................................................... 56
Tax-Related Restrictions on Transfer of Residual
Securities........................................................ 57
Sale or Exchange of a Residual Security............................... 59
Taxes That May Be Imposed on the REMIC Pool........................... 60
Liquidation of the REMIC Pool......................................... 61
Administrative Matters................................................ 61
Limitations on Deduction of Certain Expenses.......................... 61
Taxation of Certain Foreign Investors................................. 62
Backup Withholding.................................................... 62
Reporting Requirements................................................ 63
Federal Income Tax Consequences for Securities as to
Which No REMIC Election Is Made................................... 63
Premium and Discount.................................................. 65
Stripped Securities................................................... 66
Reporting Requirements and Backup Withholding......................... 69
Taxation of Certain Foreign Investors................................. 69
Debt Securities....................................................... 69
Taxation of Securities Classified as Partnership
Interests......................................................... 70
PLAN OF DISTRIBUTION....................................................... 70
RATINGS.................................................................... 71
LEGAL MATTERS.............................................................. 71
FINANCIAL INFORMATION...................................................... 71
INDEX TO LOCATION OF PRINCIPAL DEFINED
TERMS.................................................................A-1
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the Prospectus Supplement relating to a particular series of Securities and to
the related Agreement which will be prepared in connection with each series of
Securities. Unless otherwise specified, capitalized terms used and not defined
in this Summary of Prospectus have the meanings given to them in this Prospectus
and in the related Prospectus Supplement.
Securities............................ Mortgage Loan Asset Backed Securities,
issuable in series, in fully registered
form or book entry only form, in
authorized denominations, as described
in the Prospectus Supplement (the
"Securities"). Each Security will
evidence a debt obligation of, or a
beneficial ownership interest in, a
trust (a "Trust") created from time to
time pursuant to a pooling and
servicing agreement or trust agreement
(each, an "Agreement"). Securities
evidencing a debt obligation of a Trust
will be issued pursuant to a trust
indenture (each, an "Indenture")
between the Trust and an indenture
trustee.
The Depositor......................... AMRESCO Residential Securities
Corporation (the "Depositor") is a
Delaware corporation. The Depositor's
principal executive offices are located
at 700 N. Pearl Street, Suite 2400,
Dallas, Texas 75201; telephone number
(214) 953-7700. See "The Depositor"
herein. The Depositor or its affiliates
may retain or hold for sale from time
to time one or more classes of a series
of Securities.
The Servicer.......................... The entity or entities named as the
Servicer in the Prospectus Supplement
(the "Servicer"), will act as servicer,
with respect to the Mortgage Loans and
Contracts included in the related
Trust. The Servicer may be an affiliate
of the Depositor and may be the seller
of Mortgage Assets to the Depositor
(each, a "Seller").
The Master Servicer................... A "Master Servicer" may be specified in
the related Prospectus Supplement for
the related series of Securities.
The Trustee........................... The trustee (the "Trustee") for each
series of Securities which evidence a
beneficial ownership interest in the
Trust will be specified in the related
Prospectus Supplement.
The Indenture Trustee................. The indenture trustee (the "Indenture
Trustee") for each series of Securities
which evidence a debt obligation of the
Trust will be specified in the related
Prospectus Supplement.
Trust Assets.......................... The assets of a Trust will be
mortgage-related assets (the "Mortgage
Assets") consisting of one or more of
the following types of assets:
A. The Mortgage Loans................ "Mortgage Loans" may include: (i)
conventional (i.e., not insured or
guaranteed by any governmental agency)
Mortgage Loans secured by one-to-four
family residential properties; (ii)
Mortgage Loans secured by security
interests in shares issued by private,
non-profit, cooperative housing
corporations ("Cooperatives") and in
the related proprietary leases or
occupancy agreements granting exclusive
rights to occupy specific dwelling
units in such Cooperatives' buildings;
(iii) Mortgage Loans
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secured by junior liens on the related
mortgaged properties, including Title I
Loans and other types of home
improvement retail installment
contracts; and (iv) Mortgage Loans
secured by timeshare estates
representing an ownership interest in
common with other owners in one or more
vacation units entitling the owner
thereof to the exclusive use of a unit
and access to the accompanying
recreational facilities for the week or
weeks owned. See "The Trusts - Mortgage
Loans" herein.
B. Contracts......................... Contracts may include conditional sales
contracts and installment sales or loan
agreements or participation interests
therein secured by new or used
Manufactured Homes (as defined herein).
Contracts may be conventional (i.e.,
not insured or guaranteed by any
government agency) or insured by the
Federal Housing Administration ("FHA"),
including Title I Contracts, or
partially guaranteed by the Veterans
Administration ("VA"), as specified in
the related Prospectus Supplement. See
"The Trusts - Contracts" herein.
C. Mortgage-Backed Securities......... "Mortgage-Backed Securities" (or "MBS")
may include (i) private (that is, not
guaranteed or insured by the United
States or any agency or instrumentality
thereof) mortgage participations,
mortgage pass-through certificates or
other mortgage-backed securities or
(ii) certificates insured or guaranteed
by Federal Home Loan Mortgage
Corporation ("FHLMC") or Federal
National Mortgage Association ("FNMA")
or Government National Mortgage
Association ("GNMA"). See "The Trusts -
Mortgage-Backed Securities" herein.
D. Other Mortgage Assets............. Trust assets may also include
reinvestment income, reserve funds,
cash accounts, insurance policies
(including financial guaranty insurance
policies and surety bonds), guaranties,
letters of credit or similar types of
credit support or enhancement as
described in the related Prospectus
Supplement.
The related Prospectus Supplement for a
series of Securities will describe the
Mortgage Assets to be included in the
Trust for such series.
The Securities........................ The Securities of any series may be
issued in one or more classes, as
specified in the Prospectus Supplement.
One or more classes of Securities of
each series (i) may be entitled to
receive distributions allocable only to
principal, only to interest or to any
combination thereof; (ii) may be
entitled to receive distributions only
of prepayments of principal throughout
the lives of the Securities or during
specified periods; (iii) may be
subordinated in the right to receive
distributions of scheduled payments of
principal, prepayments of principal,
interest or any combination thereof to
one or more other classes of Securities
of such series throughout the lives of
the Securities or during specified
periods; (iv) may be entitled to
receive such distributions only after
the occurrence of events specified in
the Prospectus Supplement; (v) may be
entitled to receive distributions in
accordance with a schedule or formula
or on the basis of collections from
designated portions of the assets in
the related Trust; (vi) as to
Securities entitled to distributions
allocable to interest, may be entitled
to receive interest at a fixed rate or
a rate that is subject to change from
time to time; (vii) may accrue
interest, with such accrued interest
added to the principal or notional
amount of the Securities, and no
payments being made thereon
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until certain other classes of the
series have been paid in full; and
(viii) as to Securities entitled to
distributions allocable to interest,
may be entitled to distributions
allocable to interest only after the
occurrence of events specified in the
Prospectus Supplement and may accrue
interest until such events occur, in
each case as specified in the related
Prospectus Supplement. The timing and
amounts of such distributions may vary
among classes, over time, or otherwise
as specified in the related Prospectus
Supplement.
Distributions on
the Securities...................... The related Prospectus Supplement will
specify (i) whether distributions on
the Securities entitled thereto will be
made monthly, quarterly, semi-annually
or at other intervals and dates out of
the payments received in respect of the
Mortgage Assets included in the related
Trust and other assets, if any, pledged
for the benefit of the related Owners
of Securities; (ii) the amount
allocable to payments of principal and
interest on any Distribution Date; and
(iii) whether all distributions will be
made pro rata to Owners of Securities
of the class entitled thereto.
The aggregate original principal
balance of the Securities will equal
the aggregate distributions allocable
to principal that such Securities will
be entitled to receive; the Securities
will have an aggregate original
principal balance equal to or less than
the aggregate unpaid principal balance
of the related Mortgage Assets (plus
amounts held in a Pre-Funding Account,
if any) as of the first day of the
month of creation of the Trust; and the
Securities will bear interest in the
aggregate at a rate (the "Pass-Through
Rate") equal to the interest rate borne
by the related Mortgage Assets net of
servicing fees and any other specified
amounts.
Pre-Funding Account................... A Trust may enter into an agreement
(each, a "Pre-Funding Agreement") with
the Depositor whereby the Depositor
will agree to transfer additional
Mortgage Assets to such Trust following
the date on which such Trust is
established and the related Securities
are issued. Any Pre-Funding Agreement
will require that any Mortgage Loans so
transferred conform to the requirements
specified in such Pre-Funding
Agreement. If a Pre- Funding Agreement
is to be utilized, the related Trustee
will be required to deposit in a
segregated account (each, a
"Pre-Funding Account") all or a portion
of the proceeds received by the Trustee
in connection with the sale of one or
more classes of Securities of the
related series; subsequently, the
additional Mortgage Assets will be
transferred to the related Trust in
exchange for money released to the
Depositor from the related Pre-Funding
Account. Each Pre-Funding Agreement
will set a specified period during
which any such transfers must occur,
which period will not exceed 90 days
from the date the Trust is established.
If all moneys originally deposited to
such Pre-Funding Account are not used
by the end of such specified period,
then any remaining moneys will be
applied as a mandatory prepayment of a
class or classes of Securities as
specified in the related Prospectus
Supplement. The specified period for
the acquisition by a Trust of
additional Mortgage Loans will
generally not exceed three months from
the date such Trust is established.
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<PAGE>
Optional Termination.................. The Servicer, the Seller, the
Depositor, or, if specified in the
related Prospectus Supplement, the
Owners of a related class of Securities
or a credit enhancer may at their
respective options effect early
retirement of a series of Securities
through the purchase of the Mortgage
Assets in the related Trust. See
"Administration - Termination" herein.
Mandatory Termination................. The Trustee, the Servicer or certain
other entities specified in the related
Prospectus Supplement may be required
to effect early retirement of a series
of Securities by soliciting competitive
bids for the purchase of the assets of
the related Trust or otherwise. See
"Administration -- Termination" herein.
Advances.............................. The Servicer of the Mortgage Loans and
Contracts will be obligated (but only
as specified in the related Prospectus
Supplement) to advance delinquent
installments of principal and/or
interest (less applicable servicing
fees) on the Mortgage Loans and
Contracts in a Trust. Any such
obligation to make advances may be
limited to amounts due to the Owners of
Securities of the related series, to
amounts deemed to be recoverable from
late payments or liquidation proceeds,
to specified periods or to any
combination thereof, in each case as
specified in the related Prospectus
Supplement. Any such advance will be
recoverable under the terms and
conditions specified in the related
Prospectus Supplement. See "Servicing
of Mortgage Loans and Contracts"
herein.
Credit Enhancement.................... If specified in the related Prospectus
Supplement, a series of Securities, or
certain classes within such series, may
have the benefit of one or more types
of credit enhancement ("Credit
Enhancement") including but not limited
to subordination, cross support,
mortgage pool insurance, special hazard
insurance, financial guaranty insurance
policies, a bankruptcy bond, reserve
funds, other insurance, guaranties and
similar instruments and arrangements.
The protection against losses afforded
by any such Credit Enhancement will be
limited. If Owners of Securities are
materially dependent upon Credit
Enhancement for timely payments of
interest and/or principal on their
Securities, the related Prospectus
Supplement will include information,
including financial information,
concerning the provider of such Credit
Enhancement. See "Credit Enhancement"
herein.
Book Entry Registration............... Securities of one or more classes of a
series may be issued in book entry form
("Book Entry Securities") in the name
of a clearing agency (a "Clearing
Agency") registered with the Securities
and Exchange Commission, or its
nominee. Transfers and pledges of Book
Entry Securities may be made only
through entries on the books of the
Clearing Agency in the name of brokers,
dealers, banks and other organizations
eligible to maintain accounts with the
Clearing Agency ("Clearing Agency
Participants") or their nominees.
Transfers and pledges by purchasers and
other beneficial owners of Book Entry
Securities ("Beneficial Owners") other
than Clearing Agency Participants may
be effected only through Clearing
Agency Participants. All references to
the Owners of Securities shall mean
Beneficial Owners to the extent
Beneficial Owners may exercise their
rights through a Clearing Agency.
Except as otherwise specified in this
Prospectus or a related Prospectus
Supplement, the term "Owners" shall be
deemed to include Beneficial Owners.
See "Risk Factors - Book
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<PAGE>
Entry Registration" and "Description of
the Securities - Book Entry
Registration" herein.
Certain Federal Income Tax
Consequences...................... Federal income tax consequences will
depend on, among other factors, whether
one or more elections are made to treat
a Trust or specified portions thereof
as a "real estate mortgage investment
conduit" ("REMIC") under the Internal
Revenue Code of 1986, as amended (the
"Code"), or, if no REMIC election is
made, whether the Securities are
considered to be debt obligations,
Standard Securities, Stripped
Securities or Partnership Interests.
The related Prospectus Supplement for
each series of Securities will specify
whether a REMIC election will be made.
See "Certain Federal Income Tax
Consequences" herein and in the related
Prospectus Supplement.
ERISA Considerations.................. A fiduciary of any employee benefit
plan subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or the Code should carefully
review with its own legal advisors
whether the purchase or holding of
Securities could give rise to a
transaction prohibited or otherwise
impermissible under ERISA or the Code.
Certain classes of Securities may not
be transferred unless the Trustee and
the Depositor are furnished with a
letter of representation or an opinion
of counsel to the effect that such
transfer will not result in a violation
of the prohibited transaction
provisions of ERISA and the Code and
will not subject the Trustee, the
Depositor or the Servicer to additional
obligations. See "Description of the
Securities - General" herein and "ERISA
Considerations" herein and in the
related Prospectus Supplement.
Legal Investment Matters.............. 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 certain types of institutional
investors to the extent provided in
SMMEA, subject, in any case, to any
other regulations which may govern
investments by such institutional
investors. Institutions whose
investment activities are subject to
review by federal or state authorities
should consult with their counsel or
the applicable authorities to determine
whether an investment in a particular
class of Securities (whether or not
such class constitutes a "mortgage
related security") complies with
applicable guidelines, policy
statements or restrictions. See "Legal
Investment." See "Legal Investment
Considerations" herein and in the
related Prospectus Supplement.
Use of Proceeds....................... Substantially all the net proceeds from
the sale of a series of Securities will
be applied to the purchase of the
Mortgage Assets included or to be
included in the related Trust (or to
reimburse the amounts previously used
to effect such purchase), the costs of
carrying the Mortgage Assets until sale
of the Securities and to pay other
expenses. See "Use of Proceeds" herein.
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Rating................................ It is a condition to the issuance of
each class of Securities that each
class of the Securities of such Series
be rated by one or more of Moody's
Investors Service, Inc. ("Moody's"),
Standard & Poor's Ratings Services
("S&P") and Fitch Investors Service,
Inc. ("Fitch" and each of Fitch,
Moody's and S&P, a "Rating Agency") in
one of their four highest rating
categories; provided, however, that one
or more classes of Subordinated
Securities and Residual Securities need
not be so rated. A security rating is
not a recommendation to buy, sell or
hold securities and may be subject to
revision or withdrawal at any time. No
person is obligated to maintain any
rating on any Security, and,
accordingly, there can be no assurance
that the ratings assigned to any class
of Securities upon initial issuance
thereof will not be lowered or
withdrawn by a Rating Agency at any
time thereafter. If a rating of any
class of Securities of a Series is
revised or withdrawn, the liquidity of
such class of Securities may be
adversely affected. In general, the
ratings address credit risk and do not
represent any assessment of the
likelihood or rate of principal
prepayments. See "Risk Factors" herein
and "Ratings" in the related Prospectus
Supplement.
Risk Factors.......................... Investment in the Securities will be
subject to one or more risk factors,
including declines in the value of
Mortgaged Properties, prepayment of
Mortgage Loans, higher risks of
defaults on particular types of
Mortgage Loans, limitations on security
for the Mortgage Loans, limitations on
credit enhancement, consumer credit
laws affecting the Mortgage Assets,
interest rates on the Mortgage Assets
resetting at different times or using
different indices than the Securities,
availability of Mortgage Assets to
satisfy Pre-Funding Agreements and
various other factors. See "Risk
Factors" herein and in the related
Prospectus Supplement.
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RISK FACTORS
Prospective investors should consider, among other things, the
following risk factors in connection with the purchase of the Securities:
Declining Real Estate Market; Geographic Concentration. If the
residential real estate market in general or a regional or local area where
Mortgage Assets for a Trust are concentrated should experience an overall
decline in property values, a significant downturn in economic conditions, or a
natural disaster, rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the mortgage lending industry.
See "The Trusts - Mortgage Loans" herein.
Limited Obligations. The Securities will not represent an interest in
or obligation of the Depositor. The Securities of each series will not be
insured or guaranteed by any government agency or instrumentality, the
Depositor, any Servicer or the Seller.
Prepayment Considerations; Optional Termination. The prepayment
experience on Mortgage Loans or Contracts constituting or underlying the
Mortgage Assets will affect the average life of each class of Securities
relating to a Trust. Prepayments may be influenced by a variety of economic,
geographic, social and other factors, including changes in interest rate levels.
In general, if mortgage interest rates fall, the rate of prepayment would be
expected to increase. Conversely, if mortgage interest rates rise, the rate of
prepayment would be expected to decrease. Other factors affecting prepayment of
mortgage loans include changes in housing needs, job transfers, unemployment and
servicing decisions. See "Prepayment and Yield Considerations" in the related
Prospectus Supplement. In addition, investors in the Securities should be aware
that the Servicer, the Seller, or, if specified in the related Prospectus
Supplement, the Owners of a Class of Securities or a credit enhancer may at
their respective options effect early retirement of a series of Securities
through the purchase of Mortgage Assets from the related Trust. See
"Administration-Termination" herein.
Risk of Higher Default Rates for Mortgage Loans with Balloon Payments.
A portion of the aggregate principal balance of the Mortgage Loans at any time
may be "balloon loans" that provide for the payment of the unamortized principal
balance of such Mortgage Loan in a single payment at maturity ("Balloon Loans").
Such Balloon Loans provide for equal monthly payments, consisting of principal
and interest, generally based on a 30- year amortization schedule, and a single
payment of the remaining balance of the Balloon Loan generally 5, 7, 10, or 15
years after origination. Amortization of a Balloon Loan based on a scheduled
period that is longer than the term of the loan results in a remaining principal
balance at maturity that is substantially larger than the regular scheduled
payments. The Depositor does not have any information regarding the default
history or prepayment history of payments on Balloon Loans. Because borrowers of
Balloon Loans are required to make substantial single payments upon maturity, it
is possible that the default risk associated with the Balloon Loans is greater
than that associated with fully-amortizing Mortgage Loans.
Security Interests and Other Aspects of the Contracts. Contracts may be
secured by a security interest in a Manufactured Home. Perfection of security
interests in the Manufactured Homes and enforcement of rights to realize upon
the value of the Manufactured Homes as collateral for the Contracts are subject
to a number of Federal and state laws, including the Uniform Commercial Code as
adopted in each state and each state's certificate of title statutes. The steps
necessary to perfect the security interest in a Manufactured Home will vary from
state to state. Because of the expense and administrative inconvenience
involved, no party will be required to amend any certificates of title to change
the lienholder specified therein to the Trustee and no party will be required to
deliver any certificate of title to the Trustee or note thereon the Trustee's
interest. Consequently, in some states, in the absence of such an amendment, the
assignment to the Trustee of the security interest in the Manufactured Home may
not be effective or such security interest may not be perfected and, in the
absence of such notation or delivery to the Trustee, the assignment of the
security interest in the Manufactured Home may not be effective against
creditors of the previous owner of the related Contract or a trustee in
bankruptcy of such previous owner. In addition, numerous Federal and state
consumer protection laws impose requirements on lending under conditional sales
contracts and installment loan agreements such as the Contracts, and the failure
by the lender or seller of goods to comply with such requirements could give
rise to liabilities of assignees for amounts due under such agreements
7
<PAGE>
and claims by such assignees may be subject to set-off as a result of such
lender's or seller's noncompliance. These laws would apply to the Trustee as
assignee of the Contracts. Each Seller of Contracts will warrant that each
Contract sold by it complies with all requirements of law and will make certain
warranties relating to the validity, subsistence, perfection and priority of the
security interest in each Manufactured Home securing a Contract. A breach of any
such warranty that materially adversely affects any Contract would create an
obligation of the Seller to repurchase such Contract unless such breach is
cured. If any related Credit Enhancement is exhausted and recovery of amounts
due on the Contracts is dependent on repossession and resale of Manufactured
Homes securing Contracts that are in default, certain other factors may limit
the ability of the Trust to realize upon the Manufactured Homes or may limit the
amount realized to less than the amount due. See "Certain Legal Aspects of the
Mortgage Assets - The Contracts" herein.
Limited Liquidity. There will be no market for the Securities of any
series prior to the issuance thereof, and there can be no assurance that a
secondary market will develop or, if it does develop, that it will provide
liquidity of investment or will continue for the life of the Securities of such
series. The market value of some or all of the classes of Securities will
fluctuate with changes in prevailing rates of interest. Consequently, the sale
of Securities in any market that may develop may be at a discount from the
principal amount or purchase price. Owners of Securities generally have no right
to request redemption of Securities, and the Securities are subject to
redemption only under the limited circumstances described in the related
Prospectus Supplement
Limited Assets. Owners of Securities of each series must rely upon
distributions on the related Mortgage Assets, together with the other specific
assets pledged for the benefit of such series (which assets may be subject to
release from such pledge prior to payment in full of the Securities), for the
payment of principal of, and interest on, that series of Securities. If the
assets comprising the Trust are insufficient to make payments on such
Securities, no other assets of the Depositor will be available for payment of
the deficiency. Because payments of principal will be applied to classes of
outstanding Securities of a series in the priority specified in the related
Prospectus Supplement, a deficiency may have a disproportionately greater effect
on the Securities of classes having lower priority in payment. In addition, due
to the priority of payments and the allocation of losses, defaults experienced
on the assets comprising a Trust may have a disproportionate effect on a
specified class or classes within such series.
Limitations, Reduction and Substitution of Credit Enhancement. Credit
Enhancement may be provided in one or more of the forms described in the related
Prospectus Supplement, including, but not limited to, prioritization as to
payments of one or more classes of such series, a Mortgage Pool Insurance
Policy, a Financial Guaranty Insurance Policy, a Special Hazard Insurance
Policy, a bankruptcy bond, one or more Reserve Funds, other insurance,
guaranties and similar instruments and agreements, or any combination thereof.
Regardless of the Credit Enhancement provided, the amount of coverage may be
limited in amount and in most cases will be subject to periodic reduction in
accordance with a schedule or formula. Furthermore, such Credit Enhancement may
provide only very limited coverage as to certain types of losses and may provide
no coverage as to certain other types of losses. The Trustee may be permitted to
reduce, terminate or substitute all or a portion of the Credit Enhancement for
any series of Securities, if the applicable rating agencies indicate that the
then-current rating thereof will not be adversely affected.
Original Issue Discount. All the Compound Interest Securities and
Stripped Securities that are entitled only to interest distributions will be,
and certain of the other Securities may be, issued with original issue discount
for federal income tax purposes. An Owner of a Security issued with original
issue discount will be required to include original issue discount in ordinary
gross income for federal income tax purposes as it accrues, in advance of
receipt of the cash attributable to such income. Accrued but unpaid interest on
such Securities generally will be treated as original issue discount for this
purpose. Moreover, the calculation of original issue discount on REMIC
Securities (as defined herein) is subject to uncertainties because of the lack
of guidance from the Internal Revenue Service under applicable statutory
provisions. See "Certain Federal Income Tax Consequences -- Federal Income Tax
Consequences for REMIC Securities," "-- Taxation of Regular Securities --
Variable Rate Regular Securities," "Certain Federal Income Tax Consequences --
Federal Income Tax Consequences for Securities as to Which No REMIC Election Is
Made -- Standard Securities," and "Certain Federal Income Tax Consequences --
Premium and Discount" and "-- Stripped Securities" herein. [Revise for debt
obligations]
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Book Entry Registration. Because transfers and pledges of Book Entry
Securities may be effected only through book entries at a Clearing Agency
through Clearing Agency Participants, the liquidity of the secondary market for
Book Entry Securities may be reduced to the extent that some investors are
unwilling to hold Securities in book entry form in the name of Clearing Agency
Participants and the ability to pledge Book Entry Securities may be limited due
to lack of a physical certificate. Beneficial Owners of Book Entry Securities
may, in certain cases, experience delay in the receipt of payments of principal
and interest because such payments will be forwarded by the Trustee to the
Clearing Agency who will then forward payment to the Clearing Agency
Participants who will thereafter forward payment to Beneficial Owners. In the
event of the insolvency of the Clearing Agency or of a Clearing Agency
Participant in whose name Securities are recorded, the ability of Beneficial
Owners to obtain timely payment and (if the limits of applicable insurance
coverage by the Securities Investor Protection Corporation are exceeded, or if
such coverage is otherwise unavailable) ultimate payment of principal and
interest on Book Entry Securities may be impaired.
The Status of the Mortgage Assets in the Event of Bankruptcy of the
Seller. The Seller and the Depositor intend that the transfers of the Mortgage
Assets from the Seller to the Depositor, and in turn to the applicable Trust,
constitute sales rather than pledges to secure indebtedness for insolvency
purposes. If, however, the Seller were to become a debtor under the federal
bankruptcy code, it is possible that a creditor, trustee-in-bankruptcy or
receiver of the Seller may argue that the sale thereof by the Seller is a pledge
rather than a sale. This position, if argued or accepted by a court, could
result in a delay in or reduction of distributions on the related Securities.
Junior Lien Mortgage Loans. Because Mortgage Loans secured by junior
(i.e., second, third, etc.) liens are subordinate to the rights of the
beneficiaries under the related senior deeds of trust or senior mortgages, a
decline in the residential real estate market would adversely affect the
position of the related Trust as a junior beneficiary or junior mortgagee before
having such an effect on the position of the related senior beneficiaries or
senior mortgagees. A rise in interest rates over a period of time, the general
condition of a Mortgaged Property and other factors may also have the effect of
reducing the value of the Mortgaged Property from the value at the time the
junior lien Mortgage Loan was originated and, as a result, may reduce the
likelihood that, in the event of a default by the borrower, liquidation or other
proceeds will be sufficient to satisfy the junior lien Mortgage Loan after
satisfaction of any senior liens and the payment of any liquidation expenses.
Liquidation expenses with respect to defaulted Mortgage Loans do not
vary directly with the outstanding principal balance of the Mortgage Loans at
the time of default. Therefore, assuming that a Servicer took the same steps in
realizing upon defaulted Mortgage Loans having small remaining principal
balances as in the case of defaulted Mortgage Loans having larger principal
balances, the amount realized after expenses of liquidation would be smaller as
a percentage of the outstanding principal balance of the smaller Mortgage Loans.
To the extent the average outstanding principal balances of the Mortgage Loans
in a Trust are relatively small, realizations net of liquidation expenses may
also be relatively small as a percentage of the principal amount of the Mortgage
Loans.
Reliance on Management of the Timeshare Unit. Unlike most conventional
single-family residential properties, the value of a timeshare unit is
substantially dependent on the management of the resort property in which it is
located. Management of timeshare resort properties includes operation of a
reservation system, maintenance of the physical structure, refurbishing of
individual units, maintenance and management of common areas and recreational
facilities, and facilitating the rental of individual units on behalf of
timeshare owners. In addition, timeshare units, which are purchased for
intervals of one or more specified weeks each year, are marketed as the owner's
purchase of future vacation opportunities rather than as a primary residence, a
second home or an investment. Accordingly, while Mortgagors are obligated to
make payments under their Mortgage Loan irrespective of any defect in, damage to
or change in conditions (such as poor management, faulty construction or
physical, social or environmental conditions) relating to the timeshare
properties, any such defect, damage or change in conditions could result in
delays in payment or in defaults by Mortgagors whose timeshare units are
affected.
Limitations on Interest Payments and Foreclosures. Generally, under the
terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the
"Relief Act"), or similar state legislation, a Mortgagor who enters military
service after the origination of the related Mortgage Loan (including a
Mortgagor who is a member of the National Guard or is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active
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duty) may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such Mortgagor's active duty status, unless a
court orders otherwise upon application of the lender. It is possible that such
action could have an effect, for an indeterminate period of time, on the ability
of the related Servicer to collect full amounts of interest on certain of the
Mortgage Loans. In addition, the Relief Act imposes limitations that would
impair the ability of the related Servicer to foreclose on an affected Mortgage
Loan during the Mortgagor's period of active duty status. Thus, in the event
that such a Mortgage Loan goes into default, there may be delays and losses
occasioned by the inability to realize upon the Mortgaged Property in a timely
fashion.
Limited Nature of Ratings. It is a condition to the issuance of the
Securities that each class of Securities be rated in one of the four highest
rating categories by one or more of Moody's, S&P or Fitch. See "Summary of
Prospectus-Ratings" herein. A security rating is not a recommendation to buy,
sell or hold securities and may be subject to revision or withdrawal at any
time. No person is obligated to maintain the rating on any Certificate, and,
accordingly, there can be no assurance that the ratings assigned to any class of
Securities on the date on which such Securities are initially issued will not be
lowered or withdrawn by a Rating Agency at any time thereafter. In the event any
rating is revised or withdrawn, the liquidity of the related Securities may be
adversely affected. Issuance of any of the Securities in book-entry form may
reduce the liquidity of such Securities in the secondary trading market because
investors may be unwilling to purchase Securities for which they cannot obtain
physical securities.
Applicable Legal and Regulatory Risks. Applicable federal and state
laws generally regulate interest rates and other charges, require certain
disclosures, prohibit unfair and deceptive practices, regulate debt collection,
and require licensing of the originators of the mortgage loans and contracts.
Depending on the provisions of the applicable law and the specified facts and
circumstances involved, violations of those laws, policies and principles may
limit the ability to collect all or part of the principal of or interest on the
Mortgage Loans and Contracts and may entitle the borrower to a refund of amounts
previously paid. In addition, many state and local authorities have imposed
stringent restrictions on the operations of timeshare developers, including
requirements of filing registration statements and advertising material with
state regulatory authorities regarding timeshare units being offered and
permitting the right to rescind an executed contract within specified time
periods and possibly permitting such purchasers to recover damages from such
timeshare developers. Such remedies could adversely affect the quality of
management of the related resort, in particular, the ability of the management
of the related resorts to minimize losses through remarketing efforts and/or
through the assumption programs. See "Certain Legal Aspects of the Mortgage
Assets" herein.
DESCRIPTION OF THE SECURITIES
Each Trust will be created pursuant to an Agreement entered into among
the Depositor, the Trustee, the Master Servicer, if any, and the Servicer. 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.
Securities which represent beneficial interests in the Trust will be issued
pursuant to the Agreement. Securities which represent debt obligations of the
Trust will be issued pursuant to an Indenture between the Trust and the
Indenture Trustee. The following summaries and the summaries set forth under
"Administration" describe certain provisions relating to each series of
Securities. The Prospectus Supplement for a series of Securities will describe
the specific provisions relating to such series. Such summaries do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to, all the provisions of the Agreement for each series of Securities.
The Depositor will provide Owners, without charge, on written request a copy of
the Agreement for the related series. Requests should be addressed to AMRESCO
Residential Securities Corporation, 700 N. Pearl Street, Suite 2400, Dallas,
Texas 75201. The Agreement relating to a series of Securities will be filed with
the Securities and Exchange Commission within 15 days after the date of issuance
of such series of Securities (the "Delivery Date").
The Securities of a series will be entitled to payment only from the
assets of the Trust and any other assets pledged for the benefit of the
Securities 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, the
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Trustee, the Master Servicer, if any, any Servicer or any affiliate thereof and
will not be guaranteed by any governmental agency. See "The Trusts" herein.
The Mortgage Assets relating to a series of Securities, other than
Title I Loans and GNMA MBS, will not be insured or guaranteed by any
governmental entity and, to the extent that delinquent payments on or losses in
respect of defaulted Mortgage Assets, are not advanced or paid from any
applicable Credit Enhancement, such delinquencies may result in delays in the
distribution of payments on, or losses allocated to one or more classes of
Securities of such series.
General
The Securities of each series will be issued either in book entry form
or in fully registered form. The minimum original denomination of each class of
Securities will be specified in the related Prospectus Supplement. The original
"Security Principal Balance" of each Security will equal the aggregate
distributions or payments allocable to principal to which such Security is
entitled and 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.
Except as described below under "Book Entry Registration" with respect
to Book Entry Securities, the Securities of each series will be transferable and
exchangeable on a "Security Register" to be maintained at the corporate trust
office or such other office or agency maintained for such purposes by the
Trustee or the Indenture Trustee. The Trustee or the Indenture Trustee will be
appointed initially as the "Security Registrar" and no service charge will be
made for any registration of transfer or exchange of Securities, but payment of
a sum sufficient to cover any tax or other governmental charge may be required.
Under current law the purchase and holding of certain classes of
Securities may result in "prohibited transactions" within the meaning of ERISA
and the Code. See "ERISA Considerations" herein and in the related Prospectus
Supplement. Transfer of Securities of such a class will not be registered unless
the transferee (i) executes a representation letter stating 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 Servicer or the Depositor to any obligation or liability in
addition to those undertaken in the Agreement.
As to each series, one or more elections may be made to treat the
related Trust or designated portions thereof as a REMIC for federal income tax
purposes. 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
Servicer and may only be made if certain conditions are satisfied. See "Certain
Federal Income Tax Considerations" herein. 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 Owners of Securities 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 "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 Servicer, the Trustee, an
Owner of Residual Securities or another person as specified in the related
Prospectus Supplement 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 person so specified will be entitled to
reimbursement for any such payment.
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Classes of Securities
Each series of Securities will be issued in one or more classes which
will evidence a beneficial ownership interest in, or a debt obligation payable
from, the assets of the Trust that are allocable to (i) principal of such class
of Securities and (ii) interest on such Securities. If specified in the
Prospectus Supplement, one or more classes of a series of Securities may
evidence a beneficial ownership interest in, or a debt obligation payable from,
separate groups of assets included in the related Trust.
The Securities will have an aggregate original Security Principal
Balance equal to the aggregate unpaid principal balance of the Mortgage Assets
(plus, amounts held in a Pre-Funding Account, if any) as of the time and day
prior to creation of the Trust specified in the related Prospectus Supplement
(the "Cut-Off Date") after deducting payments of principal due before the
Cut-Off Date and will bear interest at rates which, on a weighted basis, will be
equal to the Pass-Through Rate. The Pass-Through Rate will equal the weighted
average rate of interest borne by the related Mortgage Assets, net of the
aggregate servicing fees, amounts allocated to the residual interests and any
other amounts as are specified in the Prospectus Supplement. The original
Security Principal Balance (or Notional Principal Balance) of the Securities of
a series and the interest rate on the classes of such Securities will be
determined in the manner specified in the Prospectus Supplement.
Each class of Securities that is entitled to distributions allocable to
interest will bear interest at a fixed rate or a rate that is subject to change
from time to time (a) in accordance with a schedule, (b) by reference to an
index, or (c) otherwise (each, a "Security Interest Rate"). One or more classes
of Securities may provide for interest that accrues but is not currently payable
("Compound Interest Securities"). With respect to any class of Compound Interest
Securities, 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.
A series of Securities may include one or more classes entitled only to
distributions or payments (i) allocable to interest, (ii) allocable to principal
(and allocable as between scheduled payments of principal and Principal
Prepayments, as defined below), or (iii) allocable to both principal (and
allocable as between scheduled payments of principal and Principal Prepayments)
and interest. A series of Securities may consist of one or more classes as to
which distributions or payments will be allocated (i) on the basis of
collections from designated portions of the assets of the Trust, (ii) in
accordance with a schedule or formula, (iii) in relation to the occurrence of
events, or (iv) otherwise. The timing and amounts of such distributions or
payments may vary among classes, over time or otherwise.
A series of Securities may include one or more Classes of Scheduled
Amortization Securities and Companion Securities. "Scheduled Amortization
Securities" are Securities with respect to which payments of principal are to be
made in specified amounts on specified Distribution Dates, to the extent of
funds available on such Distribution Date. "Companion Securities" are Securities
which receive payments of all or a portion of any funds available on a given
Distribution Date which are in excess of amounts required to be applied to
payments on Scheduled Amortization Securities on such Distribution Date. Because
of the manner of application of payments of principal to Companion Securities,
the weighted average lives of Companion Securities of a series may be expected
to be more sensitive to the actual rate of prepayments on the Mortgage Assets in
the related Trust than will the Scheduled Amortization Securities of such
series.
One or more series of Securities may constitute series of "Special
Allocation Securities", which may include Senior Securities, Subordinated
Securities, Priority Securities and Non-Priority Securities. As specified in the
related Prospectus Supplement for a series of Special Allocation Securities, the
timing and/or priority of payments of principal and/or interest may favor one or
more classes of Securities over one or more other classes of Securities. Such
timing and/or priority may be modified or reordered upon the occurrence of one
or more specified events. Losses on Trust assets for such series may be
disproportionately borne by one or more classes of such series, and the proceeds
and distributions from such assets may be applied to the payment in full of one
or more classes within such series before the balance, if any, of such proceeds
are applied to one or more other classes within such series. For example,
Special Allocation Securities in a series may be comprised of one or more
classes of Senior Securities having a priority in right to distributions of
principal and interest over one or more classes of
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Subordinated Securities, as a form of Credit Enhancement. See "Credit
Enhancement -- Subordination" herein. Typically, the Subordinated Securities
will carry a rating by the rating agencies lower than that of the Senior
Securities. In addition, one or more classes of Securities ("Priority
Securities") may be entitled to a priority of distributions of principal or
interest from assets in the Trust over another class of Securities
("Non-Priority Securities"), but only after the exhaustion of other Credit
Enhancement applicable to such series. The Priority Securities and Non-Priority
Securities nonetheless may be within the same rating category.
Distributions of Principal and Interest
General. Distributions of principal and interest will be made to the
extent of funds available therefor, on the dates specified in the Prospectus
Supplement (each, a "Distribution Date") to the persons in whose names the
Securities are registered (the "Owners") at the close of business on the dates
specified in the Prospectus Supplement (each, a "Record Date"). With respect to
Securities other than Book Entry Securities, distributions will be made by check
or money order mailed to the person entitled thereto at the address appearing in
the Security Register or, if specified in the Prospectus Supplement, in the case
of Securities that are of a certain minimum denomination as specified in the
Prospectus Supplement, upon written request by the Owner of a Security, by wire
transfer or by such other means as are agreed upon with the person entitled
thereto; provided, however, that the final distribution in retirement of the
Securities (other than Book Entry Securities) will be made only upon
presentation and surrender of the Securities at the office or agency of the
Trustee specified in the notice of such final distribution. With respect to Book
Entry Securities, such payments will be made as described below under "Book
Entry Registration".
Distributions will be made out of, and only to the extent of, funds in
a separate account established and maintained for the benefit of the Securities
of the related series (the "Security Account" with respect to such series),
including any funds transferred from any related Reserve Fund. Amounts may be
invested in the Eligible Investments specified herein and in the Prospectus
Supplement, and all income or other gain from such investments will be deposited
in the related Security Account and may be available to make payments on the
Securities of the applicable series on the next succeeding Distribution Date or
pay other amounts owed by the Trust.
Distributions of Interest. Interest will accrue on the aggregate
Security Principal Balance (or, in the case of Securities entitled only to
distributions allocable to interest, the aggregate Notional Principal Balance
(as defined below)) of each class of Securities entitled to interest from the
date, at the applicable Security Interest Rate and for the periods (each, an
"Interest Accrual Period") specified in the Prospectus Supplement. The aggregate
Security Principal Balance of any class of Securities entitled to distributions
of principal will be the aggregate original Security Principal Balance of such
class of Securities, reduced by all distributions allocable to principal, and,
in the case of Compound Interest Securities, increased by all interest accrued
but not then distributable on such Compound Interest Securities. With respect to
a class of Securities entitled only to distributions allocable to interest, such
interest will accrue on a notional principal balance (the "Notional Principal
Balance") of such class, computed solely for purposes of determining the amount
of interest accrued and payable on such class of Securities.
To the extent funds are available therefor, interest accrued during
each Interest Accrual Period on each class of Securities entitled to interest
(other than a class of Compound Interest Securities) will be distributable on
the Distribution Dates specified in the 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
Prospectus Supplement. Distributions of interest on each class of Compound
Interest Securities will commence only after the occurrence of the events
specified in the Prospectus Supplement and, prior to such time, the aggregate
Security Principal Balance (or Notional Principal Balance) of such class of
Compound Interest Securities, will increase on each Distribution Date by the
amount of interest that accrued on such class of Compound Interest 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 Compound
Interest Securities will thereafter accrue interest on its outstanding Security
Principal Balance (or Notional Principal Balance) as so adjusted.
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Distributions of Principal. The 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.
One or more classes of Securities may be entitled to receive all or a
disproportionate percentage of the payments of principal which are received on
the related Mortgage Assets 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"). Any such allocation may have the effect
of accelerating the amortization of such Securities relative to the interests
evidenced by the other Securities.
Unscheduled Distributions. The Securities of a series may be subject to
receipt of distributions before the next scheduled Distribution Date under the
circumstances and in the manner described below and in the related Prospectus
Supplement. If applicable, such unscheduled distributions will be made on the
Securities of a series on the date and in the amount specified in the related
Prospectus Supplement if, due to substantial payments of principal (including
Principal Prepayments) on the related Mortgage Assets, low rates then available
for reinvestment of such payments or both, it is determined, based on specified
assumptions, that the amount anticipated to be on deposit in the Security
Account for such series on the next related Distribution Date, together with, if
applicable, any amounts available to be withdrawn from any related Reserve Fund
or from any other Credit Enhancement provided for such series, may be
insufficient to make required distributions on the Securities on such
Distribution Date. 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 and will include interest at the applicable Security Interest
Rate (if any) on the amount of the unscheduled distribution allocable to
principal for the period and to the date specified in the Prospectus Supplement.
All 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
except as otherwise stated in the related Prospectus Supplement, and, with
respect to Securities of the same class, unscheduled distributions of principal
will be made on a pro rata basis. Notice of any unscheduled distribution will be
given by the Trustee prior to the date of such distribution.
Book Entry Registration
Securities may be issued as Book Entry Securities and held in the name
of a Clearing Agency registered with the Securities and Exchange Commission or
its nominee. Transfers and pledges of Book Entry Securities may be made only
through entries on the books of the Clearing Agency in the name of Clearing
Agency Participants or their nominees. Clearing Agency Participants may also be
Beneficial Owners of Book Entry Securities.
Purchasers and other Beneficial Owners may not hold Book Entry
Securities directly but may hold, transfer or pledge their ownership interest in
the Securities only through Clearing Agency Participants. Furthermore,
Beneficial Owners will receive all payments of principal and interest with
respect to the Securities and, if applicable, may request redemption of
Securities, only through the Clearing Agency and the Clearing Agency
Participants. Beneficial Owners will not be registered Owners of Securities or
be entitled to receive definitive certificates representing their ownership
interest in the Securities except under the limited circumstances, if any,
described in the related Prospectus Supplement. See "Risk Factors -- Book Entry
Registration" herein.
If Securities of a series are issued as Book Entry Securities, the
Clearing Agency will be required to make book entry transfers among Clearing
Agency Participants, to receive and transmit payments of principal and interest
with respect to the Securities of such series, and to receive and transmit
requests for redemption with respect to such Securities. Clearing Agency
Participants with whom Beneficial Owners have accounts with respect to such Book
Entry Securities will be similarly required to make book entry transfers and
receive and transmit payments and redemption requests on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial Owners will not
be registered Owners of Securities and will not possess physical certificates, a
method will be provided whereby Beneficial Owners may receive payments, transfer
their interests, submit redemption requests and receive the reports provided
herein.
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List of Owners of Securities
Upon written request of a specified number or percentage of interests
of Owners of Securities of record of a series of Securities for purposes of
communicating with other Owners of Securities with respect to their rights as
Owners of Securities, the Trustee will afford such Owners access during business
hours to the most recent list of Owners of Securities of that series held by the
Trustee. With respect to Book Entry Securities, the only named Owner on the
Security Register will be the Clearing Agency.
Neither the Agreement nor the Trust Indenture, if any, will not provide
for the holding of any annual or other meetings of Owners of Securities.
THE TRUSTS
The Trust for a series of Securities will consist of: (i) the Mortgage
Assets (subject, if specified in the related Prospectus Supplement, to certain
exclusions, such as a portion of the mortgage interest rate being retained by
the Seller and not sold to the Trust) received on and after the related Cut-Off
Date; (ii) amounts, if any, deposited in a Pre-Funding Account; (iii) all
payments (subject, if specified in the Prospectus Supplement, to certain
exclusions, such as the retention by the Seller of payments due and accrued
before the related Cut-Off Date but collected after such Cut-Off Date) in
respect of such Mortgage Assets, which may be adjusted, to the extent specified
in the related Prospectus Supplement, in the case of interest payments on
Mortgage Assets, to the Pass-Through Rate; (iv) if specified in the Prospectus
Supplement, reinvestment income on such payments; (v) with respect to a Trust
that includes Mortgage Loans, or Contracts, all property acquired by foreclosure
or deed in lieu of foreclosure with respect to any such Mortgage Loan or
Contract; (vi) certain rights of the Trustee, the Depositor and the Servicer
under any insurance policies, hazard insurance or surety bonds required to be
maintained in respect of the related Mortgage Assets; and (vii) if so specified
in the Prospectus Supplement, one or more forms of Credit Enhancement.
The Securities of each series will be entitled to payment only from the
assets of the related Trust and any other assets pledged therefor and will not
be entitled to payments in respect of the assets of any other trust established
by the Depositor.
Mortgage Assets may be acquired by the Depositor from affiliated or
unaffiliated originators. The following is a brief description of the Mortgage
Assets expected to be included in the Trusts. If specific information respecting
the Mortgage Assets is not known at the time the related series of Securities
initially are 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. A copy of the Agreement and, if applicable, a copy of the Indenture
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 Mortgage
Assets relating to each series of Securities, will be attached to the related
Agreement delivered to the Trustee upon delivery of such Securities.
Mortgage Loans
The Mortgage Loans will be evidenced by promissory notes (the "Mortgage
Notes") secured by mortgages or deeds of trust (the "Mortgages") creating liens
on residential properties (the "Mortgaged Properties"). Such Mortgage Loans will
be within the broad classification of single family mortgage loans, defined
generally as loans on residences containing one to four dwelling units. If
specified in the Prospectus Supplement, the Mortgage Loans may include
cooperative apartment loans ("Cooperative Loans") secured by security interests
in shares issued by Cooperatives and in the related proprietary leases or
occupancy agreements granting exclusive rights to occupy specific dwelling units
in such Cooperatives' buildings, or the Mortgage Loans may be secured by junior
liens on the related mortgaged properties, including Title I Loans and other
types of home improvement retail installment contracts. The Mortgaged Properties
securing the Mortgage Loans may include investment properties and vacation and
second homes, including timeshare estates. Each Mortgage Loan will be selected
by the Depositor for inclusion
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in the Trust from among those acquired by the Depositor or originated or
acquired by one or more affiliated or unaffiliated originators, including newly
originated loans.
The Mortgage Loans will be "conventional" mortgage loans, that is they
will not be insured or guaranteed by any governmental agency, the principal and
interest on the Mortgage Loans included in the Trust for a series of Securities
will be payable either on the first day of each month or on different scheduled
due dates throughout each month, and the interest will be calculated either on a
simple-interest or actuarial method as described in the related Prospectus
Supplement. When a full principal amount is paid on a Mortgage Loan during a
month, the mortgagor is generally charged interest only on the days of the month
actually elapsed up to the date of such prepayment, at a daily interest rate
that is applied to the principal amount of the Mortgage Loan so prepaid.
The payment terms of the Mortgage Loans to be included in a Trust for a
series will be described in the related Prospectus Supplement and may include
any of the following features or combinations thereof or other features
described 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, a rate that is fixed for a
period of time or under certain circumstances and 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
Mortgage Loan for such periods and under such circumstances as may be
specified in the related Prospectus Supplement. Mortgage Loans may
provide for the payment of interest at a rate lower than the specified
mortgage rate for a period of time or for the life of the Mortgage Loan
with the amount of any difference contributed from funds supplied by
the seller of the Mortgaged Property or another source.
(b) Principal may be payable on a level debt service basis to
fully amortize the Mortgage Loan over its term, may be calculated on
the basis of an amortization schedule that is longer than the original
term to maturity or on an interest rate that is different from the
interest rate on the Mortgage 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. Principal may include
interest that has been deferred and added to the principal balance of
the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed
for the life of the Mortgage Loan, may increase over a specified period
of time or may change from period to period. Mortgage 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 Mortgage Loan or may
decline over time, and may be prohibited for the life of the Mortgage
Loan or for certain periods ("lockout periods"). Certain Mortgage 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 Mortgage Loans may permit
prepayments without payment of a fee unless the prepayment occurs
during specified time periods. The Mortgage Loans may include
"due-on-sale" clauses which permit the mortgagee to demand payment of
the entire Mortgage Loan in connection with the sale or certain
transfers of the related mortgaged property. Other Mortgage Loans may
be assumable by persons meeting the then applicable underwriting
standards of the Servicer, or as may be required by any applicable
government program.
With respect to a series for which the related Trust includes Mortgage
Loans, the related Prospectus Supplement may specify, among other things,
information regarding the interest rates (the "Mortgage Rates"), the average
Principal Balance and the aggregate Principal Balance, the years of origination
and original principal balances and the original loan-to-value ratios. The
"Principal Balance" of any Mortgage Loan will be the unpaid principal balance of
such Mortgage Loan as of the Cut-Off Date, after deducting any principal
payments due before
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the Cut-Off Date, reduced by all principal payments, including principal
payments advanced pursuant to the related Agreement, previously distributed with
respect to such Mortgage Loan and reported as allocable to principal.
The "loan-to-value ratio" of any Mortgage Loan will be determined by
dividing the principal amount of the Mortgage Loan by the original value
(defined below) of the related Mortgaged Property. The "principal amount" of the
Mortgage Loan, for purposes of computation of the Loan-to-Value Ratio of any
Mortgage Loan, will include any part of an origination fee that has been
financed. In some instances, it may also include amounts which the seller or
some other party to the transaction has paid to the mortgagee, such as minor
reductions in the purchase price made at the closing. The "original value" of a
Mortgage Loan is (a) in the case of any purchase money Mortgage Loan, the lesser
of (i) the value of the mortgaged property, based on an appraisal thereof, and
(ii) the selling price, and (b) otherwise the value of the mortgaged property,
based on an appraisal thereof.
There can be no assurance that the Original Value will reflect actual
real estate values during the term of a Mortgage Loan. If the residential real
estate market should experience an overall decline in property values such that
the outstanding principal balances of the Mortgage Loans become equal to or
greater than the values of the Mortgaged Properties, the actual rates of
delinquencies, foreclosures and losses could be significantly higher than those
now generally experienced in the mortgage lending industry. In addition, adverse
economic conditions (which may or may not affect real estate values) may affect
the timely and ultimate payment by mortgagors of scheduled payments of principal
and interest on the Mortgage Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the Mortgage Loans.
Contracts
Contracts included in the Trust with respect to a series of Securities
will consist of manufactured housing conditional sales contracts and installment
loan agreements or participation interests therein (collectively, "Contracts").
The Contracts may be conventional manufactured housing contracts or contracts
insured by the FHA, including Title I Contracts, or partially guaranteed by the
VA. Each Contract is secured by a Manufactured Home. The Prospectus Supplement
will specify whether the Contracts will be fully amortizing or have a balloon
payment and whether they will bear interest at a fixed or variable rate.
The related Prospectus Supplement may specify for the Contracts
contained in the related Contract Pool, among other things, the date of
origination of the Contracts; the annual percentage rates on the Contracts; the
loan-to-value ratios; the minimum and maximum outstanding principal balance as
of the Cut-Off Date and the average outstanding principal balance; the
outstanding principal balances of the Contracts included in the Contract Pool;
the original maturities of the Contracts; and the last maturity date of any
Contract.
Mortgage-Backed Securities
"Mortgage-Backed Securities" (or "MBS") may include (i) private (that
is, not guaranteed or insured by the United States or any agency or
instrumentality thereof) mortgage participations, mortgage pass-through
certificates or other mortgage-backed securities or (ii) certificates insured or
guaranteed by FNMA, FHLMC or GNMA.
The Prospectus Supplement for a series of Securities that evidence
interests in MBS will specify, to the extent available, (i) the aggregate
approximate initial and outstanding principal amount and type of the MBS to be
included in the Trust, (ii) the original and remaining term to stated maturity
of the MBS, if applicable, (iii) the pass-through or bond rate of the MBS or the
formula for determining such rates, (iv) the payment characteristics of the MBS,
(v) the MBS Issuer, MBS Servicer and MBS Trustee, as applicable, (vi) a
description of the credit support, if any, (vii) the circumstances under which
the stated underlying mortgage loans, or the MBS themselves may be purchased
prior to their maturity, (viii) the terms on which mortgage loans may be
substituted for those originally underlying the MBS, (ix) the servicing fees
payable under the MBS Agreement, (x) to the extent available to the Depositor,
information in respect of the underlying mortgage loans, and (xi) the
characteristics of any cash flow agreements that relate to the MBS.
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Other Mortgage Securities
Other Mortgage Securities include other securities that directly or
indirectly represent an ownership interest in, or are secured by and payable
from, single-family mortgage loans on real property or mortgage-backed
securities, including residual interests in issuances of collateralized mortgage
obligations or mortgage pass-through certificates, as well as other types of
mortgage-related assets and securities that may be developed and marketed from
time to time. The Prospectus Supplement for a series of Securities will describe
any Other Mortgage Securities to be included in the Trust for such series.
CREDIT ENHANCEMENT
General. Various forms of Credit Enhancement may be provided with
respect to one or more classes of a series of Securities or with respect to the
assets in the related Trust. Credit Enhancement may be in the form of the
subordination of one or more classes of the Securities of such series, the
establishment of one or more Reserve Funds, the use of a cross-support feature,
use of a Mortgage Pool Insurance Policy, Special Hazard Insurance Policy,
bankruptcy bond, or another form of Credit Enhancement described in the related
Prospectus Supplement, or any combination of the foregoing. Credit Enhancement
may not provide protection against all risks of loss and may not guarantee
repayment of the entire principal balance of the Securities and interest
thereon. If losses occur which exceed the amount covered by Credit Enhancement
or which are not covered by the Credit Enhancement, Owners will bear their
allocable share of losses.
Subordination. Distributions in respect of scheduled principal,
interest or any combination thereof otherwise payable to one or more classes of
Securities of a series (the "Subordinated Securities") may be paid to one or
more other classes of such series (the "Senior Securities") under the
circumstances and to the extent provided in the Prospectus Supplement. If
specified in the Prospectus Supplement, delays in receipt of scheduled payments
on the Mortgage Assets and losses on defaulted Mortgage Assets will 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 the Prospectus Supplement. The aggregate
distributions in respect of delinquent payments on the Mortgage Assets over the
lives of the Securities or at any time, the aggregate losses in respect of
defaulted Mortgage Assets which must be borne by the Subordinated Securities by
virtue of subordination and the amount of the distributions otherwise
distributable to the Subordinated Securities that will be distributable to
Owners of Senior Securities on any Distribution Date may be limited as specified
in the Prospectus Supplement. If aggregate distributions in respect of
delinquent payments on the Mortgage Assets or aggregate losses in respect of
such Mortgage Assets were to exceed the total amounts payable and available for
distribution to Owners of Subordinated Securities or, if applicable, were to
exceed the specified maximum amount, Owners of Senior Securities could
experience losses on the Securities.
In addition to or in lieu of the foregoing, all or any portion of
distributions otherwise payable to Subordinated Securities on any Distribution
Date may instead be deposited into one or more Reserve Funds (as defined below)
established by the Trustee. If so specified in the Prospectus Supplement, such
deposits may be made on each Distribution Date, on each Distribution Date for
specified periods, or on each Distribution Date until the balance in the Reserve
Fund has reached a specified amount and, following payments from the Reserve
Fund to Owners of Senior Securities or otherwise, thereafter to the extent
necessary to restore the balance in the Reserve Fund to required levels, in each
case as specified in the Prospectus Supplement. If so specified in the
Prospectus Supplement, amounts on deposit in the Reserve Fund may be released to
the Depositor or the Owners of any class of Securities at the times and under
the circumstances specified in the Prospectus Supplement.
If specified in the Prospectus Supplement, various classes of
Subordinate 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
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the Prospectus Supplement. As between classes of Subordinated Securities,
payments with respect to Senior Securities on account of delinquencies or losses
and payments to any Reserve Fund will be allocated as specified in the
Prospectus Supplement.
Financial Guaranty Insurance Policies. If so specified in the related
Prospectus Supplement, a financial guaranty insurance policy or surety bond
("Financial Guaranty Insurance Policy") may be obtained and maintained for each
class or series of Securities. The issuer of any Financial Guaranty Insurance
Policy (a "Financial Guaranty Insurer") will be described in the related
Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, a
Financial Guaranty Insurance Policy will unconditionally and irrevocably
guarantee to holders of Securities that an amount equal to each full and
complete insured payment will be received by an agent (an "Insurance Paying
Agent") of the Trustee or Indenture Trustee on behalf of such holders, for
distribution by the Trustee to them. The "insured payment" will be defined in
the related Prospectus Supplement, and will generally equal the full amount of
the distributions of principal and interest to which such holders are entitled
under the related Agreement or Indenture plus any other amounts specified
therein or in the related Prospectus Supplement (the "Insured Payment").
Financial Guaranty Insurance Policies may apply only to certain
specified classes, or may apply at the Mortgage Asset level and only to
specified Mortgage Assets.
The specific terms of any Financial Guaranty Insurance Policy will be
as set forth in the related Prospectus Supplement. Financial Guaranty Insurance
Policies may have limitations including (but not limited to) limitations on the
insurer's obligation to guarantee the obligations of the Originators to
repurchase or substitute for any Mortgage Loans. Financial Guaranty Insurance
Policies will not guarantee any specified rate of prepayments and/or to provide
funds to redeem Securities on any specified date.
Subject to the terms of the related Agreement, the Financial Guaranty
Insurer may be subrogated to the rights of each holder of Securities to receive
payments under the Securities to the extent of any payment by such Financial
Guaranty Insurer under the related Financial Guaranty Insurance Policy.
Cross-Support. If specified in the related Prospectus Supplement, the
beneficial ownership of separate groups of assets included in the Trust for a
series may be evidenced by separate classes of related series of Securities. In
such case, Credit Enhancement may be provided by a cross-support feature which
may require that distributions be made with respect to Securities evidencing
beneficial ownership of one or more asset groups prior to distributions to
Subordinated Securities evidencing a beneficial ownership interest in other
asset groups within the same Trust. The Prospectus Supplement for a series which
includes a cross-support feature will describe the manner and conditions for
applying such cross-support feature.
If specified in the Prospectus Supplement, the coverage provided by one
or more forms of Credit Enhancement may apply concurrently to two or more
separate Trusts for a separate series of Securities. If applicable, the
Prospectus Supplement will identify the Trusts 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 Trusts.
Pool Insurance. If specified in the related Prospectus Supplement, one
or more mortgage pool insurance policies (each, a "Mortgage Pool Insurance
Policy") will be obtained.
Any such Mortgage Pool Insurance Policy will, subject to the
limitations described below and in the Prospectus Supplement, cover loss by
reason of default in payments on such Mortgage Loans up to the amounts specified
in the Prospectus Supplement or report on Form 8-K and for the periods specified
in the Prospectus Supplement. The Trustee under the related Agreement will agree
to use its best reasonable efforts to cause to be maintained in effect any such
Mortgage Pool Insurance Policy and to supervise the filing of claims thereunder
to the issuer of such Mortgage Pool Insurance Policy (the "Pool Insurer") for
the period of time specified in the related
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Prospectus Supplement. A Mortgage Pool Insurance Policy, however, is not a
blanket policy against loss, because claims thereunder may only be made
respecting particular defaulted Mortgage Loans and only upon satisfaction of
certain conditions precedent set forth in such policy as described in the
related Prospectus Supplement. The Mortgage Pool Insurance Policies, if any,
will not cover loss due to a failure to pay or denial of a claim under a primary
mortgage insurance policy, irrespective of the reason therefor. The related
Prospectus Supplement will describe the terms of any applicable Mortgage Pool
Insurance Policy and will set forth certain information with respect to the
related Pool Insurer.
In general, a Mortgage Pool Insurance Policy may 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 Mortgage Loan,
including misrepresentation by the Mortgagor or persons involved in the
origination thereof or (ii) failure to construct a Mortgaged Property in
accordance with plans and specifications. If so specified in the related
Prospectus Supplement, a failure of coverage attributable to one of the
foregoing events might result in a breach of a representation and in such event
might give rise to an obligation to purchase the defaulted Mortgage Loan if the
breach materially and adversely affects the interests of the Owners and cannot
be cured.
The original amount of coverage under any Mortgage Pool Insurance
Policy will be reduced 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 will generally include
certain expenses incurred with respect to the applicable Mortgage Loans as well
as accrued interest on delinquent Mortgage Loans to the date of payment of the
claim. See "Certain Legal Aspects of the Mortgage Assets - Foreclosure" herein.
Accordingly, if aggregate net claims paid under any Mortgage Pool Insurance
Policy reach the original policy limit, coverage under that Mortgage Pool
Insurance Policy will be exhausted and any further losses will be borne by one
or more classes of Securities unless otherwise covered by another form of Credit
Enhancement, as specified in the Prospectus Supplement.
Since any Mortgage Pool Insurance Policy may require that the Mortgaged
Property subject to a defaulted Mortgage Loan be restored to its original
condition prior to claiming against the Pool Insurer, such policy may not
provide coverage against hazard losses. As set forth under "Servicing of
Mortgage Loans and Contracts -- Standard Hazard Insurance", the hazard policies
concerning the Mortgage Loans typically exclude from coverage physical damage
resulting from a number of causes and even when the damage is covered, may
afford recoveries which are significantly less than the full replacement cost of
such losses. Even if special hazard insurance is applicable as specified in the
Prospectus Supplement, no coverage in respect of special hazard losses will
cover all risks, and the amount of any such coverage will be limited. See
"Special Hazard Insurance" below. As a result, certain hazard risks will not be
insured against and will therefore be borne by Owners, unless otherwise covered
by another form of Credit Enhancement, as specified in the Prospectus
Supplement.
The terms of any Mortgage Pool Insurance Policy will be described in
the related Prospectus Supplement.
Special Hazard Insurance. If specified in the related Prospectus
Supplement, one or more special hazard insurance policies (each, a "Special
Hazard Insurance Policy") will be obtained.
Any such Special Hazard Insurance Policy will, subject to limitations
described below and in the Prospectus Supplement, cover (i) loss by reason of
damage to Mortgaged Properties caused by certain hazards (including earthquakes
and, to a limited extent, tidal waves and related water damage) not covered by
the standard form of hazard insurance policy for the respective states in which
the Mortgaged Properties are located or under flood insurance policies, if any,
covering the Mortgaged Properties, and (ii) loss caused by reason of the
application of the coinsurance clause contained in hazard insurance policies.
See "Servicing of Mortgage Loans and Contracts -- Standard Hazard Insurance."
Any Special Hazard Insurance Policy may not cover losses occasioned by war,
civil insurrection, certain governmental actions, errors in design, faulty
workmanship or materials (except under certain circumstances), nuclear reaction,
flood (if the Mortgaged Property is located in a federally designated flood
area), chemical contamination and certain other risks. Aggregate claims under
each Special Hazard Insurance Policy will be limited as described in the related
Prospectus Supplement. Any Special Hazard Insurance Policy may also
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provide that no claim may be paid unless hazard and, if applicable, flood
insurance on the Mortgaged Property has been kept in force and other protection
and preservation expenses have been paid.
Subject to the foregoing limitations, any Special Hazard Insurance
Policy generally will provide that, where there has been damage to property
securing a foreclosed Mortgage 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 with respect to such
Mortgage Loan, the issuer of the Special Hazard Insurance Policy (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 Mortgage 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
with respect to such property. If the unpaid principal balance 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 or replacement of the property will also
reduce coverage by such amount. Restoration of the property with the proceeds
described under (i) above will satisfy the condition under any applicable
Mortgage Pool Insurance Policy that the property be restored before a claim
under such Mortgage Pool Insurance Policy may be validly presented with respect
to the defaulted Mortgage Loan secured by such property. The payment described
under (ii) above will render unnecessary presentation of a claim in respect of
such Mortgage Loan under any related Mortgage Pool Insurance Policy. Therefore,
so long as a Mortgage Pool Insurance Policy remains in effect, the payment by
the Special Hazard Insurer under a Special Hazard Insurance Policy of the cost
of repair or replacement or the unpaid principal balance of the Mortgage Loan
plus accrued interest and certain expenses will not affect the total insurance
proceeds but will affect the relative amounts of coverage remaining under any
related Special Hazard Insurance Policy and any related Mortgage Pool Insurance
Policy.
The terms of any Special Hazard Insurance Policy will be described in
the related Prospectus Supplement.
Bankruptcy Bond. In the event of a bankruptcy of a borrower, the
bankruptcy court may establish the value of the property securing the related
Mortgage Loan at an amount less than the then outstanding principal balance of
such Mortgage Loan. The amount of the secured debt could be reduced to such
value and the holder of such Mortgage Loan thus would become an unsecured
creditor to the extent the outstanding principal balance of such Mortgage Loan
exceeds the value so assigned to the property by the bankruptcy court. In
addition, certain other modifications of the terms of a Mortgage Loan can result
from a bankruptcy proceeding, including the reduction in monthly payments
required to be made by the borrower. See "Certain Legal Aspects of the Mortgage
Assets" herein. If so provided in the related Prospectus Supplement, the
Depositor will obtain a bankruptcy bond or similar insurance contract (the
"bankruptcy bond") for proceedings with respect to borrowers under the
Bankruptcy Code. The bankruptcy bond will cover certain losses resulting from a
reduction by a bankruptcy court of scheduled payments of principal of and
interest on a Mortgage Loan or a reduction by such court of the principal amount
of a Mortgage 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 bankruptcy bond will provide coverage in the aggregate amount
specified in the related Prospectus Supplement. Such amount will be reduced by
payments made under such bankruptcy bond in respect of the related Mortgage
Loans and will not be restored.
If specified in the related Prospectus Supplement, other forms of
Credit Enhancement may be provided to cover such bankruptcy-related losses. Any
bankruptcy bond or other form of Credit Enhancement provided to cover
bankruptcy-related losses will be described in the related Prospectus
Supplement.
Reserve Funds. If specified in the Prospectus Supplement, cash, U.S.
Treasury securities, instruments evidencing ownership of principal or interest
payments thereon, letters of credit, surety bonds, demand notes, certificates of
deposit or a combination thereof in the aggregate amount specified in the
Prospectus Supplement will be deposited by the Depositor on the Delivery Date in
one or more accounts (each, a "Reserve Fund") established and maintained with
the Trustee. Such cash and the principal and interest payments on such other
investments will be used to enhance the likelihood of timely payment of
principal of, and interest on, or, if so specified in the
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Prospectus Supplement, to provide additional protection against losses in
respect of, the assets in the related Trust, to pay the expenses of the Trust or
for such other purposes specified in the Prospectus Supplement. Whether or not
the Depositor has any obligation to make such a deposit, certain amounts to
which the Owners of Subordinated Securities, if any, would otherwise be entitled
may instead be deposited into the Reserve Fund from time to time and in the
amounts as specified in the Prospectus Supplement. Any cash in any Reserve Fund
and the proceeds of any other instrument upon maturity will be invested in
Eligible Investments. 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 as a 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 Funds may be set forth in the
Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will
be available for withdrawal from the Reserve Fund for distribution with respect
to the Securities for the purposes, in the manner and at the times specified in
the Prospectus Supplement.
Other Insurance, Guaranties and Similar Instruments or Agreements. If
specified in the Prospectus Supplement, the related Trust may also include
insurance, guaranties, surety bonds, letters of credit, guaranteed investment
contracts or similar arrangements for the purpose of (i) maintaining timely
payments or providing additional protection against losses on the assets
included in such Trust, (ii) paying administrative expenses, (iii) establishing
a minimum reinvestment rate on the payments made in respect of such assets or
principal payment rate on such assets, (iv) guaranteeing timely payment of
principal and interest under the Securities, or for such other purpose as is
specified in such Prospectus Supplement. Such arrangements may include
agreements under which Owners are entitled to receive amounts deposited in
various accounts held by the Trustee upon the terms specified in the Prospectus
Supplement. Such arrangements may be in lieu of any obligation of the Servicers
or the Seller to advance delinquent installments in respect of the Mortgage
loans. See "Servicing of Mortgage Loans and Contracts -- Advances" herein.
SERVICING OF MORTGAGE LOANS AND CONTRACTS
With respect to each series of Securities, the related Mortgage Loans
and Contracts will be serviced by a sole servicer or by a master servicer with
various sub-servicers pursuant to, or as provided for in, the Agreement. The
Prospectus Supplement for each series will specify the servicer and the master
servicer, if any, for such series.
The Depositor will require adequate servicing experience, where
appropriate, and financial stability, generally including a net worth
requirement (to be specified in the Agreement) as well as satisfaction of
certain other criteria.
Each Servicer will be required to perform the customary functions of a
mortgage loan servicer, including collection of payments from borrowers (the
"Mortgagors") and remittance of such collections to the Trustee, maintenance of
applicable standard hazard insurance or primary mortgage insurance policies,
attempting to cure delinquencies, supervising foreclosures, management of
Mortgaged Properties under certain circumstances, and maintaining accounting
records relating to the Mortgage Loans and Contracts, as applicable, and, if
specified in the related Prospectus Supplement, maintenance of escrow or
impoundment accounts of Mortgagors for payment of taxes, insurance, and other
items required to be paid by the Mortgagor pursuant to the Mortgage Loan or
Contract. Each Servicer will also be obligated to make advances in respect of
delinquent installments on Mortgage Loans and Contracts, as applicable, as
described more fully under " -- Payments on Mortgage Loans" and " -- Advances"
below and in respect of certain taxes and insurance premiums not paid on a
timely basis by Mortgagors.
Each Servicer will be entitled to a monthly servicing fee as specified
in the related Prospectus Supplement. Each Servicer will also generally be
entitled to collect and retain, as part of its servicing compensation, late
payment charges and assumption underwriting fees. Each Servicer will be
reimbursed from proceeds of one or more of the insurance policies described
herein ("Insurance Proceeds") or from proceeds received in connection with the
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liquidation of defaulted Mortgage Loans ("Liquidation Proceeds") for certain
expenditures pursuant to the Agreement. See " - Advances" and " - Servicing
Compensation and Payment of Expenses" below.
Each Servicer will be required to service each Mortgage Loan and
Contract, as applicable, pursuant to the terms of the Agreement for the entire
term of such Mortgage Loan and Contract, as applicable, unless such Agreement is
earlier terminated. Upon termination, a replacement for the Servicer will be
appointed.
Payments on Mortgage Loans
Each Servicer will establish and maintain a separate account (each, a
"Custodial Account"). Subject to the following paragraph, each Custodial Account
must be an account the deposits in which are fully insured by either the Federal
Deposit Insurance Corporation ("FDIC") or the National Credit Union
Administration ("NCUA") or are, to the extent such deposits are in excess of the
coverage provided by such insurance, continuously secured by certain obligations
issued or guaranteed by the United States of America. If at any time the amount
on deposit in such Custodial Account shall exceed the amount so insured or
secured, the applicable Servicer must remit to the Trustee the amount on deposit
in such Custodial Account which exceeds the amount so insured or secured, less
any amount such Servicer may retain for its own account pursuant to its
Servicing Agreement.
Notwithstanding the foregoing, the deposits in a Servicer's Custodial
Account will not be required to be fully insured or secured as described above,
and such Servicer will not be required to remit amounts on deposit therein in
excess of the amount so insured or secured, so long as such Servicer meets
certain requirements established by the rating agencies requested to rate the
Securities.
Each Servicer is required to deposit into its Custodial Account on a
daily basis all amounts in respect of each Mortgage Loan received by such
Servicer, with interest adjusted to a rate (the "Remittance Rate") equal to the
related Mortgage Rate less the Servicer's servicing fee rate. On the day of each
month specified in the related Prospectus Supplement (the "Remittance Date"),
each Servicer of the Mortgage Loans will remit to the Trustee or Indenture
Trustee, if applicable, all funds held in its Custodial Account with respect to
each Mortgage Loan; provided, however, that Principal Prepayments may be
remitted on the Remittance Date in the month following the month of such
prepayment. Each Servicer will be required pursuant to the terms of the
Agreement and as specified in the related Prospectus Supplement, to remit with
each Principal Prepayment interest thereon at the Remittance Rate through the
last day of the month in which such Principal Prepayment is made. Each Servicer
may also be required to advance its own funds as described below.
Advances
With respect to a delinquent Mortgage Loan or Contract, the related
Servicer may be obligated (but only to the extent set forth in the related
Prospectus Supplement) to advance its own funds or funds from its Custodial
Account equal to the aggregate amount of payments of principal and interest
(adjusted to the applicable Remittance Rate) which were due on a due date and
which are delinquent as of the close of business on the business day preceding
the Remittance Date ("Monthly Advance"). Generally, such advances will be
required to be made by the Servicer unless the Servicer determines that such
advances ultimately would not be recoverable under any applicable insurance
policy, from the proceeds of liquidation of the related Mortgaged Properties, or
from any other source (any amount not so reimbursable being referred to herein
as a "Nonrecoverable Advance"). Such advance obligation generally will continue
through the month following the month of final liquidation of such Mortgage Loan
or Contract. Any Servicer funds thus advanced will be reimbursable to such
Servicer out of recoveries on the Mortgage Loans or Contracts with respect to
which such amounts were advanced. Each Servicer will also be obligated to make
advances with respect to certain taxes and insurance premiums not paid by
Mortgagors on a timely basis. Funds so advanced are reimbursable to the
Servicers out of recoveries on the related Mortgage Loans or Contracts. Each
Servicer's right of reimbursement for any advance will be prior to the rights of
the Trust to receive any related Insurance Proceeds or Liquidation Proceeds.
Failure by a Servicer to make a required Monthly Advance will be grounds for
termination under the related Agreement.
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Collection and Other Servicing Procedures
Each Servicer will service the Mortgage Loans and Contracts pursuant to
guidelines established in the related Agreement.
Mortgage Loans. The Servicer will be responsible for making reasonable
efforts to collect all payments called for under the Mortgage Loans. The
Servicer will be obligated to follow such normal practices and procedures as it
deems necessary or advisable to realize upon a defaulted Mortgage Loan. In this
regard, the Servicer may (directly or through a local assignee) sell the
property at a foreclosure or trustee's sale, negotiate with the Mortgagor for a
deed in lieu of foreclosure or, in the event a deficiency judgment is available
against the Mortgagor or other person (see "Certain Legal Aspects of the
Mortgage Assets -- Foreclosure - Anti-Deficiency Legislation and Other
Limitations on Lenders" for a description of the limited availability of
deficiency judgments), foreclose against such property and proceed for the
deficiency against the appropriate person. The amount of the ultimate net
recovery (including the proceeds of any Mortgage Pool Insurance Policy or other
applicable Credit Enhancement), after reimbursement to the Servicer of its
expenses incurred in connection with the liquidation of any such defaulted
Mortgage Loan and prior unreimbursed advances of principal and interest with
respect thereto will be deposited in the Security Account when realized and will
be distributed to Owners on the next Distribution Date following the month of
receipt.
With respect to Cooperative Loans, any prospective purchaser will
generally have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Certain Legal Aspects of the
Mortgage Assets" herein. This approval is usually based on the purchaser's
income and net worth and numerous other factors. Although the Cooperative's
approval is unlikely to be unreasonably withheld or delayed, the necessity of
acquiring such approval could limit the number of potential purchasers for those
shares and otherwise limit the Trust's ability to sell and realize the value of
those shares.
In general, a "tenant-stockholder" (as defined in Code Section 216(b)
(2)) of a corporation that qualifies as a "cooperative housing corporation"
within the meaning of Code Section 216(b)(1) is allowed a deduction for amounts
paid or accrued within his taxable year to the corporation representing his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Code Section 216(a) to the corporation under Code
Sections 163 and 164. In order for a corporation to qualify under Code Section
216(b)(1) for its taxable year in which such items are allowable as a deduction
to the corporation, such Section requires, among other things, that at least 80%
of the gross income of the corporation be derived from its tenant-stockholders.
By virtue of this requirement, the status of a corporation for purposes of Code
Section 216(b)(1) must be determined on a year-to-year basis. Consequently,
there can be no assurance that Cooperatives relating to the Cooperative Loans
will qualify under such Section for any particular year. In the event that such
a Cooperative fails to qualify for one or more years, the value of the
collateral securing any related Cooperative Loans could be significantly
impaired because no deduction would be allowable to its tenant-stockholders
under Code Section 216(a) with respect to those years. In view of the
significance of the tax benefits accorded tenant-stockholders of a corporation
that qualifies as a cooperative housing corporation, however, the likelihood
that such a failure would be permitted to continue over a period of years
appears remote.
The Servicer will expend its own funds to restore property securing a
Mortgage Loan which has sustained uninsured damage only if it determines that
such restoration will increase the proceeds to the Trust of liquidation of the
Mortgage Loan after the reimbursement to the Servicer of its expenses.
If a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Servicer will be obligated (to the extent it has knowledge of
such conveyance) to accelerate the maturity of the Mortgage Loan, unless it
reasonably believes it is unable to enforce that Mortgage Loan's "due-on-sale"
clause under the applicable law. If it reasonably believes it may be restricted
by law, for any reason, from enforcing such a "due-on-sale" clause, the Servicer
may enter 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 under the Mortgage Note, provided such person satisfies the
criteria required to maintain the coverage provided by applicable insurance
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policies (unless otherwise restricted by applicable law). Any fee collected by
the Servicer for entering into an assumption agreement will be retained by the
Servicer as additional servicing compensation. For a description of
circumstances in which the Servicer may be unable to enforce "due-on-sale"
clauses, see "Certain Legal Aspects of the Mortgage Assets -- Foreclosure --
Enforceability of Certain Provisions" herein. In connection with any such
assumption, the Mortgage Rate borne by the related Mortgage Note may not be
decreased.
If specified in the related Prospectus Supplement, the Servicer will
maintain with one or more depository institutions one or more accounts into
which it will deposit all payments of taxes, insurance premiums, assessments or
comparable items received for the account of the Mortgagors. Withdrawals from
such account or accounts may be made only to effect payment of taxes, insurance
premiums, assessments or comparable items, to reimburse the Servicer out of
related collections for any cost incurred in paying taxes, insurance premiums
and assessments or otherwise preserving or protecting the value of the
Mortgages, to refund to mortgagors any amounts determined to be overages and to
pay interest to Mortgagors on balances in such account or accounts to the extent
required by law.
So long as it acts as servicer of the Mortgage Loans, the Servicer will
be required to maintain certain insurance covering errors and omissions in the
performance of its obligations as servicer and certain fidelity bond coverage
ensuring against losses through wrongdoing of its officers, employees and
agents.
Contracts. Pursuant to the Agreement, the Servicer, either directly or
through sub-servicers subject to general supervision by the Servicer, will
perform diligently all services and duties required to be performed under the
Agreement, in the same manner as performed by prudent lending institutions of
manufactured housing installment sales contracts of the same type as the
Contracts in those jurisdictions where the related Manufactured Homes are
located. The duties to be performed by the Servicer will include collection and
remittance of principal and interest payments, collection of insurance claims
and, if necessary, repossession.
Each Agreement will provide that when any Manufactured Home securing a
Contract is about to be conveyed by the borrower, the Servicer (to the extent it
has knowledge of such prospective conveyance and prior to the time of the
consummation of such conveyance) may exercise its rights to accelerate the
maturity of such Contract under the applicable "due-on-sale" clause, if any,
unless the Servicer reasonably believes it is unable to enforce such
"due-on-sale" clause under applicable law. In such case the Servicer is
authorized to take or enter into an assumption agreement from or with the person
to whom such Manufactured Home has been or is about to be conveyed, pursuant to
which such person becomes liable under the Contract, provided such person
satisfies the criteria required to maintain the coverage provided by applicable
insurance policies (unless otherwise restricted by applicable law). Where
authorized by the Contract, the annual percentage rate may be increased, upon
assumption, to the then-prevailing market rate but will not be decreased.
Under each Agreement the Servicer will repossess or otherwise
comparably convert the ownership of properties securing such of the related
Contracts as come into and continue in default and as to which no satisfactory
arrangements can be made for collection of delinquent payments. In connection
with such repossession or other conversion, the Servicer will follow such
practices and procedures as it deems necessary or advisable and as shall be
normal and usual in its general servicing activities. The Servicer, however,
will not be required to expend its own funds in connection with any repossession
or towards the restoration of any property unless it determines (i) that such
restoration or repossession will increase the proceeds of liquidation of the
related Contract to the Trust after reimbursement to itself for such expenses
and (ii) that such expenses will be recoverable to it either through Liquidation
Proceeds or through Insurance Proceeds.
Primary Mortgage Insurance
Mortgage Loans that the Depositor acquires will generally not have
primary mortgage insurance. If obtained, the primary mortgage insurance policies
will not insure against certain losses which may be sustained in the event of a
personal bankruptcy of the mortgagor under a Mortgage Loan.
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Standard Hazard Insurance
Mortgage Loans. The Servicer will be required to cause to be maintained
for each Mortgage Loan a standard hazard insurance policy. The coverage of such
policy is required to be in an amount not less than the maximum insurable value
of the improvements securing such Mortgage Loan from time to time or the
principal balance owing on such Mortgage Loan from time to time, whichever is
less. In all events, such coverage shall be in an amount sufficient to ensure
avoidance of the applicability of the co-insurance provisions under the terms
and conditions of the applicable policy. The ability of each Servicer to assure
that hazard insurance proceeds are appropriately applied may be dependent on its
being named as an additional insured under any standard hazard insurance policy
and under any flood insurance policy referred to below, or upon the extent to
which information in this regard is furnished to such Servicer by Mortgagors.
Each Agreement may provide that the related Servicer may satisfy its obligation
to cause hazard insurance policies to be maintained by maintaining a blanket
policy insuring against hazard losses on the Mortgage Loans serviced by such
Servicer.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, wind-storm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers and, therefore, will not contain identical
terms and conditions, the basic terms thereof are dictated by state law. 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 flow), nuclear
reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, in certain cases, vandalism. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not intended to be all-inclusive. If the
property securing a Mortgage Loan is located in a federally designated flood
area, flood insurance will be required to be maintained in such amounts as would
be required by FNMA in connection with its mortgage loan purchase program. The
Depositor may also purchase special hazard insurance against certain of the
uninsured risks described above. See "Credit Enhancement -- Special Hazard
Insurance".
Since the amount of hazard insurance the Servicer is required to cause
to be maintained on the improvements securing the Mortgage Loans declines as the
principal balances owing thereon decrease, if the residential properties
securing the Mortgage Loans appreciate in value over time, the effect of
coinsurance in the event of partial loss may be that hazard insurance proceeds
will be insufficient to restore fully the damaged property.
The Depositor will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
Cooperative Loan. Generally, the Cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the Cooperative and
the tenant-stockholders of that Cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain such insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to such borrower's cooperative dwelling or such
Cooperative's building could significantly reduce the value of the collateral
securing such Cooperative Loan to the extent not covered by other credit
support.
Contracts. The Servicer will generally be required to cause to be
maintained with respect to each Contract one or more hazard insurance policies
which provide, at a minimum, the same coverage as a standard form fire and
extended coverage insurance policy that is customary for manufactured housing,
issued by a company authorized to issue such policies in the state in which the
Manufactured Home is located and in an amount which is not less than the maximum
insurable value of such Manufactured Home or the principal balance due from the
borrower on the related Contract, whichever is less. When a Manufactured Home's
location was, at the time of origination of the related Contract, within a
federally designated special flood hazard area, the Servicer also shall cause
such flood insurance to be maintained, which coverage shall be at least equal to
the minimum amount specified in the preceding sentence or such lesser amount as
may be available under the federal flood insurance program.
The Servicer may maintain, in lieu of causing individual hazard
insurance policies to be maintained with respect to each Manufactured Home, and
shall maintain, to the extent that the related Contract does not require the
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borrower to maintain a hazard insurance policy with respect to the related
Manufactured Home, one or more blanket insurance policies covering losses on the
borrowers' interests in the Contracts resulting from the absence or
insufficiency of individual hazard insurance policies.
The Servicer, to the extent practicable, will cause the borrowers to
pay all taxes and similar governmental charges when and as due. To the extent
that nonpayment of any taxes or charges would result in the creation of a lien
upon any Manufactured Home having a priority equal or senior to the lien of the
related Contract, the Servicer will pay any such delinquent tax or charge.
If the Servicer repossesses a Manufactured Home on behalf of the
Trustee, the Servicer will either (i) maintain at its expense hazard insurance
with respect to such Manufactured Home or (ii) indemnify the Trustee against any
damage to such Manufactured Home prior to resale or other disposition.
Title Insurance Policies
The Agreements will generally require that a title insurance policy be
in effect on each of the Mortgaged Properties and that such title insurance
policy contain no coverage exceptions, except customary exceptions generally
accepted in the mortgage banking industry.
Claims Under Primary Mortgage Insurance Policies and Standard Hazard Insurance
Policies; Other Realization Upon Defaulted Loan
Each Servicer will present claims to any primary insurer under any
related primary mortgage insurance policy and to the hazard insurer under any
related standard hazard insurance policy. All collections under any related
primary mortgage insurance policy or any related standard hazard insurance
policy (less any proceeds to be applied to the restoration or repair of the
related Mortgaged Property or to the reimbursement of Advances by the Servicer)
will be remitted to the Trustee.
If any Mortgaged Property securing a defaulted Mortgage Loan is damaged
and proceeds, if any, from the related standard hazard insurance policy are
insufficient to restore the damaged property to a condition sufficient to permit
recovery under any applicable Mortgage Pool Insurance Policy or any related
primary mortgage insurance policy, each Servicer may be required to expend its
own finds to restore the damaged property to the extent specified in the related
Prospectus Supplement, but only to the extent it determines such expenditures
are recoverable from Insurance Proceeds or Liquidation Proceeds.
If recovery under any applicable Mortgage Pool Insurance Policy or any
related primary mortgage insurance policy is not available, the Servicer will
nevertheless be obligated to attempt to realize upon the defaulted Mortgage
Loan. Foreclosure proceedings will be conducted by the Servicer in accordance
with the Agreement. If the proceeds of any liquidation of the Mortgaged Property
securing the defaulted Mortgage Loan are less than the Principal Balance of the
defaulted Mortgage Loan plus interest accrued thereon, a loss will be realized
on such Mortgage Loan, to the extent the applicable Credit Enhancement is not
sufficient, in the amount of such difference plus the aggregate of expenses
which are incurred by the Servicer in connection with such proceedings and are
reimbursable under the Agreement. In such case there will be a reduction in the
value of the Mortgage Loans and Trust may be unable to recover the full amount
of principal and interest due thereon.
In addition, where a Mortgaged Property securing a defaulted Mortgage
Loan can be resold for an amount exceeding the principal balance of the related
Mortgage Loan together with accrued interest and expenses, it may be expected
that, where retention of any such amount is legally permissible, the Pool
Insurer will exercise its right under the related Mortgage Pool Insurance
Policy, if any, to purchase such Mortgaged Property and realize for itself any
excess proceeds. Any amounts remaining in the Security Account after such
foreclosure or liquidation and attributable to such Mortgage Loan will be
distributed to Owners of the Securities.
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Servicing Compensation and Payment of Expenses
As compensation for its servicing duties, each Servicer will be
entitled to a monthly servicing fee in the amount specified in the related
Prospectus Supplement. In addition to the primary compensation, Servicer may be
permitted to retain all assumption underwriting fees and late payment charges,
to the extent collected from Mortgagors.
As set forth above, each Servicer will be entitled to reimbursement for
certain expenses incurred by it in connection with the liquidation of defaulted
Mortgage Loans and Contracts and in connection with advancing delinquent
payments. No loss will be suffered on the Securities by reason of such expenses
to the extent claims for such expenses are paid directly under any applicable
Mortgage Pool Insurance Policy, a primary mortgage insurance policy, the special
hazard insurance policy or from other forms of Credit Enhancement. In the event,
however, that the defaulted Mortgage Loans are not covered by a Mortgage Pool
Insurance Policy, primary mortgage insurance policies, the Special Hazard
Insurance Policy or another form of Credit Enhancement, or claims are either not
made or paid under such policies or Credit Enhancement, or if coverage
thereunder has ceased, such a loss will occur to the extent that the proceeds
from the liquidation of a defaulted Mortgage Loan or Contract, after
reimbursement of the Servicer's expenses, are less than the Principal Balance of
such defaulted Mortgage Loan or Contract.
Master Servicer
A Master Servicer may be specified in the related Prospectus Supplement
for the related series of Securities. Customary servicing functions with respect
to Mortgage Loans constituting the Mortgage Pool will be provided by the
Servicer directly or through one or more Sub-Servicers subject to supervision by
the Master Servicer. If the Master Servicer is not directly servicing the
Mortgage Loans, then the Master Servicer will (i) administer and supervise the
performance by the Servicer of its servicing responsibilities under the
Agreement with the Master Servicer, (ii) maintain a current data base with the
payment histories of each Mortgagor, (iii) review monthly servicing reports and
data relating to the Mortgage Pool for discrepancies and errors, and (iv) act as
back-up Servicer during the term of the transaction unless the Servicer is
terminated or resigns in such case the Master Servicer shall assume the
obligations of the Servicer.
The Master Servicer will be a party to the Agreement for any series for
which Mortgage Loans comprise the assets of a Trust. The Master Servicer will be
required to satisfy the standard established for the qualification of the Master
Servicer in the related Agreement. The Master Servicer will be compensated for
the performance of its services and duties under each Agreement as specified in
the related Prospectus Supplement.
ADMINISTRATION
The following summary describes certain provisions which will be common
to each Agreement. The summary does not purport to be complete and is subject
to, and qualified in its entirety by reference to, the provisions of a
particular Agreement. Material terms of a specific Agreement will be further
described in the related Prospectus Supplement.
Assignment of Mortgage Assets
Assignment of the Mortgage Loans. At the time of issuance, the
Depositor will assign the Mortgage Loans to the Trustee, together with all
principal and interest adjusted to the Remittance Rate, subject to exclusions
specified in the Prospectus Supplement, due on or with respect to such Mortgage
Loans on or after the Cut-Off Date. The Trustee and the Indenture Trustee will,
concurrently with such assignment, execute, countersign and deliver the
Securities to the Depositor in exchange for the Mortgage Loans. Each Mortgage
Loan will be identified in a schedule appearing as an exhibit to the Agreement.
Such schedule may include information as to the Principal Balance of each
Mortgage Loan as of the Cut-Off Date, as well as information respecting the
Mortgage Rate, the scheduled monthly payment of principal and interest as of the
Cut-Off Date and the maturity date of each Mortgage Note.
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In addition, as to each Mortgage Loan, the Depositor will deliver the
Mortgage Note and Mortgage, any assumption and modification agreement, an
assignment of the Mortgage in recordable form (but only recorded if so specified
in the related Prospectus Supplement), evidence of title insurance, if obtained,
and, if applicable, the certificate of private mortgage insurance. In instances
where recorded documents cannot be delivered due to delays in connection with
recording, the Depositor may deliver copies thereof and deliver the original
recorded documents promptly upon receipt.
With respect to any Mortgage Loans which are Cooperative Loans, the
Depositor will cause to be delivered the related original Cooperative note, the
original security agreement, the proprietary lease or occupancy agreement, the
recognition agreement, an executed financing agreement and the relevant stock
certificate and related blank stock powers. The Depositor will file in the
appropriate office an assignment of each Cooperative Loan.
Each Seller generally will represent and warrant to the Depositor with
respect to the Mortgage Loans sold by it, among other things, that (i) the
information set forth in the schedule of Mortgage Loans attached thereto is
correct in all material respects: (ii) a lender's title insurance policy or
binder for each Mortgage Loan subject to the Agreement was issued on the date of
origination thereof and each such policy or binder assurance is valid and
remains in full force and effect or a legal opinion concerning title or title
search was obtained or conducted in connection with the origination of the
Mortgage Loan; (iii) at the Delivery Date, the Seller has good title to the
Mortgage Loans and the Mortgage Loans are free of offsets, defenses or
counterclaims; (iv) at the Delivery Date, each Mortgage is a valid first lien on
the property securing the Mortgage Note (subject only to (a) the lien of current
real property taxes and assessments, (b) covenants, conditions, and
restrictions, rights of way, easements and other matters of public record as of
the date of the recording of such Mortgage, such exceptions appearing of record
being acceptable to mortgage lending institutions generally in the area wherein
the property subject to the Mortgage is located or specifically reflected in the
appraisal obtained by the Depositor and (c) other matters to which like
properties are commonly subject which do not materially interfere with the
benefits of the security intended to be provided by such Mortgage) and such
property is free of material damage and is in good repair or, with respect to a
junior lien Mortgage Loan, that such Mortgage is a valid junior lien Mortgage,
as the case may be and specifying the percentage of the Mortgage Loan Pool
comprised of junior lien Mortgage Loans; (v) at the Delivery Date, no Mortgage
Loan is 31 or more days delinquent (with such exceptions as may be specified in
the Prospectus Supplement) and there are no delinquent tax or assessment liens
against the property covered by the related Mortgage; (vi) at the Delivery Date,
the portion of each Mortgage Loan, if any, which in the circumstances set forth
below under "Servicing of Mortgage Loans and Contracts - Primary Mortgage
Insurance" should be insured with a private mortgage insurer is so insured; and
(vii) each Mortgage Loan at the time it was made complied in all material
respects with applicable state and federal laws, including, with out limitation,
usury, equal credit opportunity and disclosure laws. The Depositor's rights
against the Seller in the event of a breach of its representations will be
assigned to the Trustee, and, if applicable, the Indenture Trustee for the
benefit of the Securities of such series.
Assignment of Contracts. The Depositor will cause the Contracts to be
assigned to the Trustee, and, if applicable, to the Indenture Trustee, together
with principal and interest due on or with respect to the Contracts on and after
the Cut-Off Date. Each Contract will be identified in a loan schedule ("Contract
Loan Schedule") appearing as an exhibit to the related Agreement. Such Contract
Loan Schedule may specify, with respect to each Contract, among other things:
the original principal balance and the outstanding Principal Balance as of the
Cut-Off Date; the interest rate; the current scheduled payment of principal and
interest; and the maturity date.
In addition, with respect to each Contract, the Depositor will deliver
or cause to be delivered to the Trustee, the original Contract and copies of
documents and instruments related to each Contract and the security interest in
the Manufactured Home securing each Contract. To give notice of the right, title
and interest of the Trust, and, if applicable, the Indenture Trustee, to the
Contracts, the Depositor will cause appropriate UCC-1 financing statements to be
filed identifying the secured party and identifying all Contracts as collateral.
The Contracts will not be stamped or otherwise marked to reflect their
assignment by the Depositor. Therefore, if a subsequent purchaser were able to
take physical possession of the Contracts without notice of such assignment, the
interest of the Trust, and, if applicable, the Indenture Trustee in the
Contracts could be defeated. See "Certain Legal Aspects of the Mortgage Assets"
herein.
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The Depositor or the related Seller, as the case may be, may provide
limited representations and warranties concerning the Contracts. Such
representations and warranties may include: (i) that the information contained
in the Contract Loan Schedule provides an accurate listing of the Contracts and
that the information respecting such Contracts set forth in such Contract Loan
Schedule is true and correct in all material respects at the date or dates
respecting which such information is furnished; (ii) that, immediately prior to
the conveyance of the Contracts, the Depositor had good title to and was sole
owner of, each such Contract; and (iii) that there has been no other sale by it
of such Contract and that the Contract is not subject to any lien, charge,
security interest or other encumbrance.
Assignment of Mortgage-Backed Securities and Other Mortgage Securities.
With respect to each series, the Depositor will cause any Mortgage-Backed
Securities and Other Mortgage Securities included in the related Trust to be
registered in the name of the Trustee or, if applicable, the Indenture Trustee
(directly or through a participant in a depository). The Trustee or, if
applicable, the Indenture Trustee (or its custodian) will have possession of any
certificated Mortgage-Backed Securities and Other Mortgage Securities but will
not be in possession of or be assignee of record of any underlying assets for a
Mortgage-Backed Security or Other Mortgage Security. Each Mortgage-Backed
Security and Other Mortgage Security will be identified in a schedule appearing
as an exhibit to the related Agreement which may specify certain information
with respect to such security, including, as applicable, 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 such security. The Depositor will represent and warrant,
among other things, the information contained in such schedule is true and
correct and that immediately prior to the transfer of the related securities,
the Depositor had good title to, and was the sole owner of, each such security.
Repurchase or Substitution of Mortgage Loans and Contracts. The Trustee
and, if applicable, the Indenture Trustee will review the documents delivered to
it with respect to the Mortgage Loans and Contracts included in the related
Trust. If any document is not delivered or is found to be defective in any
material respect and the Depositor or the related Seller, if so required, cannot
deliver such document or cure such defect within the period specified in the
related Prospectus Supplement after notice thereof (which will be required to be
given within the period specified in the related Prospectus Supplement), and if
any other party obligated to deliver such document or cure such defect has not
done so and has not substituted or repurchased the affected Mortgage Loan or
Contract, then the Depositor will cause the Seller, not later than the first
date designated for the deposit of payments into the Security Account (a
"Deposit Date") which is more than a specified number of days after such period,
(a) if so provided in the Prospectus Supplement to remove the affected Mortgage
Loan or Contract from the Trust and substitute one or more other Mortgage Loans
or Contracts therefor or (b) repurchase the Mortgage Loan or Contract from the
Trustee for a price equal to 100% of its Principal Balance plus one month's
interest thereon at the applicable Remittance Rate. This repurchase and, if
applicable, substitution obligation will generally constitute the sole remedy
available for a material defect in a document relating to a Mortgage Loan or
Contract.
The Depositor is required to do or cause the Seller to do either of the
following (a) cure any breach of any representation or warranty that materially
and adversely affects the interests of the Owners in a Mortgage Loan (each, a
"Defective Mortgage Loan") or Contract within the period specified in the
related Prospectus Supplement of its discovery by the Depositor or its receipt
of notice thereof from the Trustee, (b) repurchase such Defective Mortgage Loan
or Contract not later than the first Deposit Date which is more than a specified
number of days after such period for a price equal to 100% of its Principal
Balance plus one month's interest thereon at the applicable Remittance Rate, or
(c) if so specified in the Prospectus Supplement, remove the affected Mortgage
Loan or Contract from the Trust and substitute one or more other mortgage loans
or contracts therefor. This repurchase and, if applicable, substitution
obligation will generally constitute the sole remedies available to the Trustee
for any such breach.
If the related Prospectus Supplement so provides, the Depositor or a
designated affiliate may be obligated to repurchase or substitute Mortgage Loans
or Contracts as described above, whether or not the Depositor obtains such an
agreement from the Seller which sold such Mortgage Loans or Contracts.
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If a REMIC election is to be made with respect to all or a portion of a
Trust, there may be federal income tax limitations on the right to substitute
Mortgage Loans or Contracts.
Evidence as to Compliance
The Agreement will provide that on or before a specified date in each
year, beginning the first such date that is at least a specified number of
months on and after the Cut-Off Date, a firm of independent public accountants
will furnish a statement to the Trustee to the effect that, based on an
examination of certain specified documents and records relating to the servicing
of the Depositor's mortgage loan portfolio conducted substantially in compliance
with the audit program for mortgages serviced for FNMA or FHLMC, the United
States Department of Housing and Urban Development Mortgage Audit Standards or
the Uniform Single Audit Program for Mortgage Bankers or in accordance with
other standards specified in the Agreement (the "Applicable Accounting
Standards"), such firm is of the opinion that such servicing has been conducted
in compliance with the Applicable Accounting Standards except for (a) such
exceptions as such firm shall believe to be immaterial and (b) such other
exceptions as shall be set forth in such statement.
The Trustee
Any commercial bank or trust company serving as Trustee may have normal
banking relationships with the Depositor. In addition, the Depositor and the
Trustee acting jointly will have the power and the responsibility for appointing
co-trustees or separate trustees of all or any part of the Trust relating to a
particular series of Securities. In the event of such appointment, all rights,
powers, duties and obligations conferred or imposed upon the Trustee by the
Agreement shall be conferred or imposed upon the Trustee and such separate
trustee or co-trustee jointly, or, in any jurisdiction in which the Trustee
shall be incompetent or unqualified to perform certain acts, singly upon such
separate trustee or co-trustee who shall exercise and perform such rights,
powers, duties and obligations solely at the direction of the Trustee.
The Trustee will make no representations as to the validity or
sufficiency of the Agreement, the Securities or of any Mortgage Asset or related
document, and will not be accountable for the use or application by the
Depositor of any funds paid to the Depositor in respect of the Securities or the
related assets, or amounts deposited in the Security Account or deposited into
the Distribution Account. If no Event of Default has occurred, the Trustee will
be required to perform only those duties specifically required of it under the
Agreement. However, upon receipt of the various certificates, reports or other
instruments required to be furnished to it, the Trustee will be required to
examine them to determine whether they conform to the requirements of the
Agreement.
The Trustee may resign at any time, and the Depositor may remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Agreement, if the Trustee becomes insolvent or in such other instances, if any,
as are set forth in the Agreement. Following any resignation or removal of the
Trustee, the Depositor will be obligated to appoint a successor Trustee. Any
resignation or removal of the Trustee and appointment of a successor Trustee
will not become effective until acceptance of the appointment by the successor
Trustee.
Administration of the Security Account
The Agreement will require that the Security Account be either (i)
maintained with a depository institution the debt obligations of which (or, in
the case of a depository institution which is a part of a holding company
structure, the debt obligations of the holding company of which) have a rating
acceptable to each rating agency that was requested to rate the Securities, or
(ii) an account or accounts the deposits in which are fully 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 FDIC. The collateral eligible to secure amounts in
the Security Account is limited to United States government securities and other
investments acceptable to the rating agencies rating such series of Securities,
and may include one or more Securities of a series ("Eligible Investments"). If
so specified in the related Prospectus Supplement, a Security Account may be
maintained as an interest bearing account, or the funds held therein may be
invested pending each succeeding Payment Date in Eligible Investments. If so
specified in the related Prospectus Supplement, the Servicer or its designee
will be
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entitled to receive any such interest or other income earned on funds in the
Security Account as additional compensation. The Servicer will deposit in the
Security Account from amounts previously deposited by it into the Servicer's
Custodial Account on the related Remittance Date the following payments and
collections received or made by it on and after the Cut-Off Date (including
scheduled payments of principal and interest due on and after the Cut-Off Date
but received before the Cut-Off Date):
(i) all Mortgagor payments on account of principal, including
Principal Prepayments and, if specified in the related Prospectus
Supplement, prepayment penalties:
(ii) all Mortgagor payments on account of interest, adjusted
to the Remittance Rate;
(iii) all Liquidation Proceeds net of certain amounts
reimbursed to the Servicer or other person entitled thereto, as
described above;
(iv) all Insurance Proceeds, other than proceeds to be applied
to the restoration or repair of the related property or released to the
Mortgagor and net of certain amounts reimbursed to the Servicer or
other person entitled thereto, as described above;
(v) all condemnation awards or settlements which are not
released to the Mortgagor in accordance with normal servicing
procedures;
(vi) any Advances made as described under "Servicing of
Mortgage Loans and Contracts - Advances" herein and certain other
amounts required under the Agreement to be deposited in the Security
Account;
(vii) all proceeds of any Mortgage Loan or Contract or
property acquired in respect thereof repurchased by the Depositor, the
Seller or otherwise as described above or under "Termination" below;
(viii) all amounts, if any, required to be deposited in the
Security Account from any Credit Enhancement for the related series;
and
(ix) all other amounts required to be deposited in the
Security Account pursuant to the related Agreement.
Reports
Concurrently with each distribution on the Securities, there will be
mailed to Owners a statement generally setting forth, to the extent applicable
to any series, among other things:
(i) the aggregate amount of such distribution allocable to
principal, separately identifying the amount allocable to each class;
(ii) the amount of such distribution allocable to interest,
separately identifying the amount allocable to each class;
(iii) the aggregate Security Principal Balance of each class
of the Securities after giving effect to distributions on such
Distribution Date;
(iv) the aggregate Security Principal Balance of any class of
Compound Interest Securities after giving effect to any increase in
such Principal Balance that results from the accrual of interest that
is not yet distributable thereon;
(v) if applicable, the amount otherwise distributable to any
class of Securities that was distributed to other classes of
Securities;
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(vi) if any class of Securities has priority in the right to
receive Principal Prepayments, the amount of Principal Prepayments in
respect of the related Mortgage Assets;
(vii) the aggregate Principal Balance and number of Mortgage
Loans and Contracts which were delinquent as to a total of two
installments of principal and interest; and
(viii) the aggregate Principal Balances of Mortgage Loans and
Contracts which (a) were delinquent 30-59 days, 60-89 days, and 90 days
or more, or other delinquency categories of similar nature and (b) were
in foreclosure.
Customary information deemed necessary for Owners to prepare their tax
returns will be furnished annually (in the case of Book Entry Securities, the
above described statement and such annual information will be sent to the
Clearing Agency, which will provide such reports to the Clearing Agency
Participants in accordance with its procedures).
Forward Commitments; Pre-Funding
The Trustee of a Trust may enter into a Pre-Funding Agreement for the
transfer of additional Mortgage Loans and Contracts to such Trust following the
date on which such Trust is established and the related Securities are issued.
The Trustee of a Trust may enter into Pre-Funding Agreements to permit the
acquisition of additional Mortgage Loans that could not be delivered by the
Depositor or have not formally completed the origination process, in each case
prior to the Delivery Date. Any Pre-Funding Agreement will require that any
Mortgage Loans so transferred to a Trust conform to the requirements specified
in such Pre-Funding Agreement. If a Pre-Funding Agreement is to be utilized, the
related Trustee will be required to deposit in the Purchase Account all or a
portion of the proceeds received by the Trustee in connection with the sale of
one or more classes of Securities of the related series; the additional Mortgage
Loans will be transferred to the related Trust in exchange for money released
from the related Pre-Funding Account. Each Pre-Funding Agreement will set a
specified period during which any such transfers must occur. The Pre-Funding
Agreement or the related Agreement will require that, if all moneys originally
deposited to such Pre-Funding Account are not so used by the end of such
specified period, then any remaining moneys will be applied as a mandatory
prepayment of the related class or classes of Securities as specified in the
related Prospectus Supplement. The specified period for the acquisition by a
Trust of additional Mortgage Loans is not expected to exceed three months from
the date such Trust is established.
Servicer Events of Default
"Events of Default" under the Agreement will consist of (i) any failure
by the Servicer to duly observe or perform in any material respect any other of
its covenants or agreements in the Agreement materially affecting the rights of
Owners which continues unremedied for a specified number of days after the
giving of written notice of such failure to the Depositor by the Trustee or to
the Servicer and the Trustee by the Owners of Securities evidencing interests in
the Trust aggregating not less than 25% of the affected class of Securities; and
(ii) certain events of insolvency, readjustment of debt, marshaling of assets
and liabilities or similar proceedings and certain actions by the Servicer
indicating its insolvency, reorganization or inability to pay its obligations.
Rights Upon Servicer Event of Default
As long as an Event of Default under the Agreement remains unremedied
by the Servicer, the Trustee or Owners of Securities evidencing an ownership
interest in the Trust may terminate all the rights and obligations of the
Servicer under the Agreement, whereupon the Trustee or Master Servicer, if any,
or a new Servicer appointed pursuant to the Agreement, will succeed to all the
responsibilities, duties and liabilities of the Servicer under the Agreement and
will be entitled to similar compensation arrangements. Following such
termination, the Depositor shall appoint any established mortgage loan servicer
satisfying the qualification standards established in the Agreement to act as
successor to the Servicer under the Agreement. If no such successor shall have
been appointed within a specified number of days following such termination,
then either the Depositor or the Trustee may petition
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a court of competent jurisdiction for the appointment of a successor Servicer.
Pending the appointment of a successor Servicer, the Trustee or the Master
Servicer, if any, shall act as Servicer.
The Owners of Securities evidencing an ownership interest in the Trust
will not have any right under the Agreement to institute any proceeding with
respect to the Agreement, unless they previously have given to the Trustee
written notice of default and unless the Owners of the percentage of such
Securities specified in the Prospectus Supplement have made written request to
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 a
specified number of days has neglected or refused to institute any such
proceedings. Nevertheless, the Trustee is under no obligation to exercise any of
the trusts or powers vested in it by the Agreement or to make any investigation
of matters arising thereunder or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of any of
the Owners, unless such Owners have offered to the Trustee reasonable security
or indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby.
Amendment
An Agreement generally may be amended by the Depositor, the Servicer
and the Trustee, without the consent of the Owners of the Securities evidencing
an ownership interest in the Trust, to cure any ambiguity, to correct or
supplement any provision therein which may be defective or inconsistent with any
other provision therein, to take any action necessary to maintain REMIC status
of any Trust as to which a REMIC election has been made or to add any other
provisions with respect to matters or questions arising under the Agreement
which are not materially inconsistent with the provisions of the Agreement;
provided that such action will not, as evidenced by an opinion of counsel
satisfactory to the Trustee, adversely affect in any material respect the
interests of any Owners of such Securities. An Agreement may also be amended by
the Depositor, the Servicer, and the Trustee with the consent of the Owners of
Securities evidencing an ownership interest in the Trust aggregating not less
than a majority of the aggregate Security Principal Balance of such Securities
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of such Agreement or of modifying in any
manner the rights of such Owners; provided, however, that no such amendment may
(i) reduce in any manner the amount of, or delay the timing of, collections of
payments received on the related Mortgage Assets or distributions which are
required to be made on any such Security without the consent of the Owner of
such Security, (ii) adversely affect in any material respect the interests of
the Owners of any class of such Securities in any manner other than as described
in (i), without the consent of the Owners of Securities of such class evidencing
not less than a majority of the interests of such class or (iii) reduce the
aforesaid percentage of Securities of any such class required to consent to any
such amendment, without the consent of the Owners of all such Securities of such
class then outstanding. Any other amendment provisions inconsistent with the
foregoing shall be specified in the related Prospectus Supplement.
Termination
The obligations of the Depositor, the Servicer, and the Trustee created
by the Agreement will terminate upon the payment as required by the Agreement of
all amounts held by the Servicer or in the Security Account and required to be
paid to them pursuant to the Agreement after the later of (i) the maturity or
other liquidation of the last Mortgage Asset subject thereto or the disposition
of all property acquired upon foreclosure of any such Mortgage Loan or Contract
or (ii) the repurchase by the Depositor from the Trust of all the outstanding
Securities or all remaining assets in the Trust. The Agreement will establish
the repurchase price for the assets in the Trust and the allocation of such
purchase price among the classes of Securities. The exercise of such right will
effect early retirement of the Securities of that series, but the Depositor's
right so to repurchase will be subject to the conditions described in the
related Prospectus Supplement. If a REMIC election is to be made with respect to
all or a portion of a Trust, there may be additional conditions to the
termination of such Trust which will be described in the related Prospectus
Supplement. In no event, however, will the Trust continue beyond the expiration
of 21 years from the death of the survivor of certain persons named in the
Agreement. The Trustee will give written notice of termination of the Agreement
to each Owner, and the final distribution will be made only upon surrender and
cancellation of the Securities at an office or agency of the Trustee specified
in such notice of termination.
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USE OF PROCEEDS
Substantially all the net proceeds to be received from the sale of each
series of Securities will be applied to the simultaneous purchase of the
Mortgage Assets related to such series (or to reimburse the amounts previously
used to effect such a purchase), the costs of carrying such Mortgage Assets
until sale of the Securities and to pay other expenses.
THE DEPOSITOR
The Depositor will have no ongoing servicing obligations or
responsibilities with respect to any Mortgage or ContractS. The Depositor does
not have, nor is it expected in the future to have, any significant net worth.
The Depositor anticipates that it will acquire Mortgage Assets in the
open market or in privately negotiated transactions, which may be through or
from an affiliate. The Depositor will not receive any fees or other commissions
in connection with its acquisition of Mortgage Assets or its sale of such
Mortgage Assets to the Trust.
Neither the Depositor nor any of its affiliates will insure or
guarantee the Securities of any series.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS
The following discussion contains summaries of certain legal aspects of
mortgage loans and manufactured housing contracts which are general in nature.
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 Mortgage Loans and Contracts is situated.
The summaries are qualified in their entirety be reference to the applicable
federal and state laws governing the Mortgage Loans and Contracts.
General
Mortgages. The Mortgage Loans will be secured either by deeds of trust
or mortgages. A mortgage creates a lien upon the real property encumbered by the
mortgage. It is not prior to liens for real estate taxes and assessments.
Priority between mortgages depends on their terms and generally on the order of
filing with a state or county office. There are two parties to a mortgage: the
mortgagor, who is the borrower and homeowner or the land trustee (as described
below), 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-homeowner called the trustor (similar to a mortgagor), a
lender (similar to a mortgagee) called the beneficiary, and a third-party
grantee called the trustee. Under a deed of trust, the borrower grants the
property, irrevocably until the debt is paid, in trust and generally with a
power of sale, to the trustee to secure payment of the obligation. The trustee's
authority under a deed of trust and the mortgagee's authority under a mortgage
are governed by law, the express provisions of the deed of trust and, in some
cases, the directions of the beneficiary.
Cooperatives. Certain of the Mortgage Loans may be Cooperative Loans.
The private, non-profit, cooperative apartment corporation owns all the real
property that comprises the project, including the land, separate dwelling units
and all common areas. The cooperative is directly responsible for project
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. If there is a blanket mortgage on the cooperative apartment
building and or underlying land, as is generally the case, the cooperative, as
project mortgagor, is also responsible for meeting these mortgage obligations. A
blanket mortgage is ordinarily incurred by the cooperative in connection with
the construction or purchase of the cooperative's apartment building. The
interest of the occupant under proprietary leases or occupancy agreements to
which that cooperative is a party are generally subordinate to the interest of
the holder of the blanket mortgage in that building. If the cooperative is
unable to meet the payment obligations arising under its blanket mortgage, the
mortgagee holding the blanket mortgage could foreclose on that mortgage and
terminate all subordinate proprietary leases and occupancy
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agreements. In addition, the blanket mortgage on a cooperative may provide
financing in the form of a mortgage that does not fully amortize with a
significant portion of principal being due in one lump sum at final maturity.
The inability of the cooperative to refinance this mortgage and its consequent
inability to make such final payment could lead to foreclosure by the mortgagee
providing the financing. A foreclosure in either event by the holder of the
blanket mortgage could eliminate or significantly diminish the value of any
collateral held by the lender who financed the purchase by an individual
tenant-stockholder of cooperative shares or in the case of a Trust including
Cooperative Loans, the collateral securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership
of stock shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units. Generally, a tenant-stockholder of a cooperative must
make a monthly payment to the cooperative representing such tenant-stockholder's
pro rata share of the cooperative's payments for its blanket mortgage, real
property taxes, maintenance expenses and other capital or ordinary expenses. An
ownership interest in a cooperative and accompanying occupancy rights is
financed through a cooperative share loan evidenced by a promissory note and
secured by a security interest in the occupancy agreement or proprietary lease
and in the related cooperative shares. The lender takes possession of the share
certificate and a counterpart of the proprietary lease or occupancy agreement
and a financing statement covering the proprietary lease or occupancy agreement
and the cooperative shares is filed in the appropriate state and local offices
to perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of cooperative
shares.
Timeshare Units. Because timeshare interests are considered to be
interests in real property, the manner and method of obtaining and enforcing a
security interest in a timeshare estate is similar to the methods used in other
real property lending transactions. The timeshare units comprising Mortgage
Loans are either mortgages or deeds of trust or other instruments under
applicable state law creating a first lien on the timeshare estate securing the
related Mortgage Note, depending upon the prevailing practice in the state in
which the timeshare estate is located. A mortgage creates a lien upon the
timeshare estate, which lien is generally not prior to liens for real estate
taxes and assessments. Priority between mortgages depends on their terms and
generally on the order of filing with a state or county office.
Foreclosure
Mortgages. Foreclosure of a deed of trust is generally accomplished by
a non-judicial trustee's sale under a specific provision in the deed of trust
that authorizes the trustee to sell the property to a third party upon any
default by the borrower under the terms of the note or deed of trust. In some
states, the trustee must record a notice of default and send a copy to the
borrower-trustor and any person who has recorded a request for a copy of a
notice of default and notice of sale. In addition, the trustee must provide
notice in some states to any other individual having an interest in the real
property, including any junior lienholders. The borrower, or any other person
having a junior encumbrance on the real estate, may, during a reinstatement
period, cure the default by paying the entire amount in arrears plus the 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. 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
defendant. Judicial foreclosure proceedings are often not protested by any of
the parties defendant. However, when the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be time
consuming. After the completion of judicial foreclosure, the court generally
issues a judgment of foreclosure and appoints a referee or other court officer
to conduct the sale of the property.
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In case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty a potential buyer at the sale would
have in determining the exact status of title and because the physical condition
of the property may have deteriorated during foreclosure proceedings, it is
uncommon for a third party to purchase the property at the foreclosure sale.
Rather it is common for the lender to purchase the property from the trustee or
referee for an amount equal to the principal amount of the mortgage or deed of
trust, accrued and unpaid interest and expenses of foreclosure. Thereafter, the
lender will assume the burdens of ownership, including paying real estate taxes,
obtaining casualty 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 insurance proceeds.
When the junior mortgagee or beneficiary under a junior deed of trust
cures the default and state law allows it to reinstate or redeem by paying the
full amount of the senior mortgage or deed of trust, then in those states the
amount paid so to cure or redeem generally becomes a part of the indebtedness
secured by the junior mortgage or deed of trust. See "Junior Liens; Rights of
Senior Mortgagors or Beneficiaries" below.
A sale conducted in accordance with the terms of the power of sale
contained in a mortgage or deed of trust is generally presumed to be conducted
regularly and fairly, and a conveyance of the real property by the trustee
confers, in most states, legal title to the real property to the purchaser, free
of all junior mortgages or deeds of trust and free of all other liens and claims
subordinate to the mortgage or deed of trust under which the sale is made (with
the exception of certain governmental liens). The purchaser's title is, however,
subject to all senior liens, encumbrances and mortgages and may be subject to
mechanic's and materialman's liens in some states. Thus, if the mortgage or deed
of trust being foreclosed is a junior mortgage or deed of trust, the sheriff or
trustee will convey title to the purchaser of the real property, subject to any
existing first mortgage or deed of trust and any other prior liens and claims.
The foreclosure of a junior mortgage or deed of trust, generally, will have an
effect on the first mortgage or deed of trust, if the senior mortgage or deed of
trust grants to the senior mortgagee or beneficiary the right to accelerate its
indebtedness under a "due-on-sale" clause or "due on further encumbrance" clause
contained in the senior mortgage or deed of trust. See "Anti-Deficiency
Legislation and Other Limitations on Lenders" below.
The proceeds received by the sheriff or trustee from the sale are
applied pursuant to the terms of the deed of trust, which may require
application first to the costs, fees and expenses of sale and then in
satisfaction of the indebtedness secured by the mortgage or deed of trust under
which the sale was conducted. In some states, any surplus money remaining may be
available to satisfy claims of the holders of junior mortgages or deeds of trust
and other junior liens and claims in order of their priority, whether or not the
mortgagor or trustor is in default, while in some states, any surplus money
remaining may be payable directly to the mortgagor or trustor. Any balance
remaining is generally payable to the mortgagor or trustor. Following the sale,
in some states the mortgagee or beneficiary following a foreclosure of a
mortgage or deed of trust may not obtain a deficiency judgment against the
mortgagor or trustor. A junior lienholder whose rights in the property are
terminated by the foreclosure by a senior lienholder will not share in the
proceeds from the subsequent disposition of the property.
Cooperative Loans. The cooperative shares owned by the
tenant-stockholder and pledged to the lender are, in almost all cases, subject
to restrictions on transfer as set forth in the cooperative's certificate of
incorporation and bylaws, as well as the proprietary lease or occupancy
agreement, and may be canceled by the cooperative for failure by the
tenant-stockholder to pay rent or other obligations or charges owned by such
tenant-stockholder, including mechanics' liens against the cooperative apartment
building incurred by such tenant-stockholder. The proprietary lease or occupancy
agreement generally permits the cooperative to terminate such lease or agreement
in the event an obligor fails to make payments or defaults in the performance of
covenants required thereunder. Typically, the lender and the cooperative enter
into a recognition agreement which establishes the rights and obligations of
both parties in the event of a default by the tenant-stockholder on its
obligations under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy
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agreement will usually constitute a default under the security agreement between
the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from a sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure
on a cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the Uniform
Commercial Code (the "UCC") and the security agreement relating to those shares.
Article 9 of the UCC requires that a sale be conducted in a "commercially
reasonable" manner. Whether a foreclosure sale has been conducted in a
"commercially reasonable" manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given the
debtor and the method, manner, time, place and terms of the foreclosure.
Generally, a sale conducted according to the usual practice of banks selling
similar collateral will be considered reasonably conducted. Article 9 of the UCC
provides that the proceeds of the sale will be applied first to pay the costs
and expenses of the sale and then to satisfy the indebtedness secured by the
lender's security interest. The recognition agreement, however, generally
provides that the lender's right to reimbursement is subject to the right of the
cooperative corporation to receive sums due under the proprietary lease or
occupancy agreement. If there are proceeds remaining, the lender must account to
the tenant-stockholder for the surplus. Conversely, if a portion of the
indebtedness remains unpaid, the tenant-stockholder is generally responsible for
the deficiency. See "Anti-Deficiency Legislation and Other Limitations on
Lenders" below.
Junior Liens; Rights of Senior Mortgagees or Beneficiaries. Certain of
the Mortgage Loans, including Title I Loans, may be secured by mortgages or
deeds of trust providing for junior (i.e., second, third, etc.) liens on the
related Mortgaged Properties which are junior to the other mortgages or deeds of
trust held by other lenders or institutional investors. The rights of the
beneficiary under a junior deed of trust or as mortgagee under a junior mortgage
are subordinate to those of the mortgagee or beneficiary under the senior
mortgage or deed of trust, including the prior rights of the senior mortgagee or
beneficiary to receive hazard insurance and condemnation proceeds and to cause
the property securing the Mortgage Loans to be sold upon default of the
mortgagor or trustor. As discussed more fully below, a junior mortgagee or
beneficiary in some states 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 senior mortgage or deed of trust, no notice of
default is required to be given to a junior mortgagee or beneficiary.
The forms of the mortgage or deed of trust used by most institutional
lenders generally confer on the mortgagee or beneficiary the right both to
receive all proceeds collected under any hazard insurance policy and all awards
made in connection with any condemnation proceedings, and to apply such proceeds
and awards to any indebtedness secured by the mortgage or deed of trust, in such
order as the mortgagee or beneficiary 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 the underlying first mortgage or deed of trust may 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 first mortgage or deed of trust. In
those situations, proceeds in excess of the amount of first mortgage
indebtedness generally may be applied to the indebtedness of a junior mortgage
or trust deed.
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Other provisions typically found in the form of the mortgagee or deed
of trust generally used by most institutional lenders obligate the mortgagor or
trustor 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 or beneficiary under the
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to perform
any of these obligations, the mortgagee or beneficiary typically is given the
right under the mortgage or deed of trust to perform the obligation itself at
its election, with the mortgagor or trustor agreeing to reimburse the mortgagee
or beneficiary for any sums expended by the mortgagee or beneficiary on behalf
of the trustor. All sums so expended by the mortgagee or beneficiary generally
become part of the indebtedness secured by the mortgage or deed of trust
Right 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 following
foreclosure. 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 is to diminish the ability of the lender to sell the foreclosed
property. The rights 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.
Anti-Deficiency Legislation and Other Limitations on Lenders. Certain
states have imposed statutory prohibitions that limit the remedies of a
beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment would be a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. 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.
Finally, other statutory provisions limit any deficiency judgment against the
former borrower following a judicial 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 judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including the federal bankruptcy laws and
state laws affording relief to debtors, may interfere with or affect the ability
of the secured mortgage lender to realize upon collateral and/or enforce a
deficiency judgment. For example, with respect to federal bankruptcy law, a
court with federal bankruptcy jurisdiction may permit a debtor through his or
her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary default in
respect of a mortgage loan on a debtor's residence by paying arrearages within a
reasonable time period and reinstating the original mortgage loan payment
schedule even though the lender accelerated the mortgage loan and final judgment
of foreclosure had been entered in state court (provided no sale of the
residence had yet occurred) prior to the filing of the debtor's petition. Some
courts with federal bankruptcy jurisdiction have approved plans, based on the
particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that such modifications may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule and reducing the lender's security interest to the value of
the residence, thus leaving the lender a general unsecured creditor for the
difference between the value of the residence and the outstanding balance of the
loan. Federal bankruptcy law and limited case law indicate that the foregoing
modifications could not be applied to the terms of a loan secured by property
that is the principal residence of the debtor.
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The Code provides priority to certain tax liens over the lien of the
mortgage. In addition, substantive requirements are imposed upon mortgage
lenders in connection with the origination and the servicing of mortgage loans
by numerous federal and some state consumer protection laws. 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. These federal laws impose specific statutory liabilities upon
lenders who originate mortgage loans and who fail to comply with the provisions
of the law. In some cases, this liability may affect assignees of the mortgage
loans.
Generally, Article 9 of the UCC governs foreclosure on cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted section 9-504 of the UCC to prohibit a deficiency award unless
the creditor establishes that the sale of the collateral (which, in the case of
a Cooperative Loan, would be the shares of the cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
Enforceability of Certain Provisions. Certain of the Mortgage Loans
will contain due-on-sale clauses. These clauses permit the lender to accelerate
the maturity of a loan if the borrower sells, transfers, or conveys the
property. The enforceability of these clauses was the subject of legislation or
litigation in many states, and in some cases the enforceability of these clauses
was limited or denied. However, the Garn-St. Germain Depository Institutions Act
of 1982 (the "Garn-St. Germain Act") preempts state constitutional, statutory
and case law prohibiting the enforcement of due-on-sale clauses and permits
lenders to enforce these clauses in accordance with their terms, subject to
certain limited exceptions. 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.
The Garn-St. Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the Garn-St. Germain Act (including federal
savings and loan associations and federal savings banks) may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St. Germain Act by the
Federal Home Loan Bank Board as succeeded by the Office of Thrift Supervision
(the "OTS"), also prohibit the imposition of a prepayment penalty upon the
acceleration of a loan pursuant to a due-on-sale clause. Any inability of the
Depositor to enforce due-on-sale clauses may affect the average life of the
Mortgage Loans and the number of Mortgage Loans that may be outstanding until
maturity.
Upon foreclosure, courts have imposed general equitable principles.
These 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 requirements that the lender undertake
affirmative and expensive actions to determine the causes for 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 the lender to
foreclose if the default under the mortgage instrument is not monetary, such as
the borrower falling to adequately maintain the property or the borrower
executing a second mortgage or deed of trust 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 deeds of trust or mortgages receive notices in
addition to the statutory-prescribed minimum. 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, or under a mortgage having a power of
sale, does not involve sufficient state action to afford constitutional
protections to the borrower.
The standard forms of note, mortgage and deed of trust generally
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 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. Under the
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Agreement, late charges (to the extent permitted by law and not waived by the
Servicer) will be retained by the Servicer as additional servicing compensation.
Adjustable Rate Loans. The laws of certain states may provide that
mortgage notes relating to adjustable rate loans are not negotiable instruments
under the UCC. In such event, the Trustee will not be deemed to be a "holder in
due course," within the meaning of the UCC and may take such a mortgage note
subject to certain restrictions on its ability to foreclose and to certain
contractual defenses available to a mortgagor.
Environmental Legislation. Certain states impose a statutory lien for
associated costs on property that is the subject of a cleanup action by the
state on account of hazardous wastes or hazardous substances released or
disposed of on the property. Such a lien will generally have priority over all
subsequent liens on the property and, in certain of these states, will have
priority over prior recorded liens including the lien of a mortgage. In
addition, under federal environmental legislation and under state law in a
number of states, a secured party which takes a deed in lieu of foreclosure or
acquires a mortgaged property at a foreclosure sale or assumes active control
over the operation or management of a property so as to be deemed an "owner" or
"operator" of the property may be liable for the costs of cleaning up a
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a secured lender (such as a Trust) to
homeowners. In the event that title to a Mortgaged Property securing a Mortgage
Loan in a Trust was acquired by the Trust and cleanup costs were incurred in
respect of the Mortgaged Property, the Trust might realize a loss if such costs
were required to be paid by the Trust.
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Soldiers' and Sailors' Civil Relief
Act, a borrower who enters military service after the origination of a Mortgage
Loan or Contract by such borrower (including a borrower who is a member of the
National Guard or is in reserve status at the time of the origination of the
Mortgage 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 or similar limitations under state
law could have an effect, for an indeterminate period of time, on the ability of
the Servicer to collect full amounts of interest on certain of the Mortgage
Loans. In addition, the Relief Act imposes limitations which would impair the
ability of the Servicer to foreclose on an affected Mortgage Loan during the
borrower's period of active duty status. Thus, in the event that such a Mortgage
Loan goes into default there may be delays and losses occasioned by the
inability to realize upon the Mortgaged Property in a timely fashion.
Any shortfalls in interest collections resulting from application of
the Relief Act could adversely affect Securities.
The Contracts
General. As a result of the Depositor's assignment of the Contracts,
the Owners will succeed collectively to all the rights (including the right to
receive payment on the Contracts) and will assume certain obligations of the
Depositor. Each Contract evidences both (a) the obligation of the obligor to
repay the loan evidenced thereby, and (b) the grant of a security interest in
the Manufactured Home to secure repayment of such lois. Certain aspects of both
features of the Contracts are described more fully below.
The Contracts generally are "chattel paper" as defined in the UCC in
effect in the states which the Manufactured Homes initially were registered.
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 Agreement, the
Depositor will transfer physical possession of the Contracts to the Trustee or,
if applicable, the Indenture Trustee or its custodians. 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
and, if applicable, the Indenture Trustee's security interest. The Contracts
will not be stamped or marked otherwise to reflect their assignment by the
Depositor. Therefore, if a subsequent purchaser were able to take physical
possession of the Contracts without notice of such assignment
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the Trustee's and, if applicable, the Indenture Trustee's and, if applicable,
the Indenture Trustee's interest in Contracts could be defeated.
Security Interests in the Manufactured Homes. The Manufactured Homes
securing the Contracts may be located in all 50 states. Security interests in
manufactured homes may be perfected either by notation of the secured party's
lien on the certificate of title or by delivery of the required documents and
payment of a fee to the state motor vehicle authority, depending on state law.
In some nontitle states, perfection pursuant to the provisions of the UCC is
required. The Depositor may effect such notation or delivery of the required
documents and fees, and obtain possession of the certificate of title, as
appropriate under the laws of the state in which any manufactured home securing
a manufactured housing conditional sales contract is registered. In the event
the Depositor fails, due to clerical errors, to effect such notation or
delivery, or files the security interest under the wrong law (for example, under
a motor vehicle title statute rather than under the UCC, in a few states), the
Trustee may not have a first priority security interest in the Manufactured Home
securing a Contract. As manufactured homes have become larger and often have
been attached to their sites without any apparent intention to move them, courts
in many states have held that manufactured homes, under certain circumstances,
may become subject to real estate title and recording laws. As a result, a
security interest in a manufactured home could be rendered subordinate to the
interests of other parties claiming an interest in the home under applicable
state real estate law. In order to perfect a security interest in a manufactured
home under real estate law, the holder of the security interest must file either
a "fixture filing" under the provisions of the UCC or a real estate mortgage
under the real estate laws of the state where the home is located. These filings
must be made in the real state records office of the county where the home is
located. So long as the borrower does not violate this agreement, a security
interest in the Manufactured Home will be governed by the certificate of title
laws or the UCC, and the notation of the security interest on the certificate of
title or the filing of a UCC financing statement will be effective to maintain
the priority of the security interest in the Manufactured Home. If, however, a
Manufactured Home is permanently attached to this site, other parties could
obtain an interest in the Manufactured Home which is prior to the security
interest transferred to the Trustee. With respect to a series of Securities and
as described in the related Prospectus Supplement, the Depositor may be required
to perfect a security interest in the Manufactured Home under applicable real
estate laws. If such real estate filings are not required and if any of the
foregoing events were to occur, the only recourse would be to pursue the Trust's
rights to require repurchase for breach of warranties.
The Depositor will assign its security interest in the Manufactured
Homes. Neither the Depositor nor the Trustee or, if applicable, Indenture
Trustee will amend the certificates of title to identify a new secured party.
Accordingly, the Depositor or the Seller will continue to be named as the
secured party on the certificates of title relating to the Manufactured Homes.
In most states, such assignment is an effective conveyance of such security
interest without amendment of any lien noted on the related certificate of title
and the new secured party succeeds to the rights of the secured party. However,
in some states there exists a risk that, in the absence of an amendment to the
certificate of title, such assignment of the security interest might not be held
effective against creditors of the Depositor or the Seller.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien on the certificate
of title or delivery of the required documents and fees will be sufficient to
protect against the rights of subsequent purchasers of a Manufactured Home or
subsequent lenders who take a security interest in the Manufactured Home. If
there are any Manufactured Homes as to which the security interest is not
perfected, such security interest would be subordinate to, among others,
subsequent purchasers for value of Manufactured Homes and holders of perfected
security interests. There also exists a risk in not identifying a new secured
party on the certificate of title that, through fraud or negligence, the
security interest could be released.
Enforcement of Security Interests in Manufactured Homes. The Servicer,
to the extent required by the related Agreement, may take action to enforce the
security interest with respect to Contracts in default by repossession and
resale of the Manufactured Homes securing such Contracts in default. So long as
the Manufactured Home has not become subject to the real estate law, a creditor
can repossess a Manufactured Home 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
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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 so that the debtor may redeem at or before such
resale. In the event of such repossession and resale of a Manufactured Home, the
Trustee would be entitled to be paid out of the sale proceeds before such
proceeds could be applied to the payment of the claims of unsecured creditors or
the holders of subsequently perfected security interests or, thereafter, to the
debtor.
If the owner of a Manufactured Home moves it to a state other than the
state in which such Manufactured Home initially is registered, under the laws of
most states the perfected security interest in the Manufactured Home would
continue for four months after such relocation and thereafter only if and after
the owner registers the Manufactured Home in such state. If the owner were to
relocate a Manufactured Home to another state and not re-register the
Manufactured Home in such state, and if steps are not taken to re-perfect the
security interest in such state, the security interest would cease to be
perfected. A majority of states generally requires surrender of a certificate of
title to re-register a Manufactured Home; accordingly, the Trustee or, if
applicable, the Indenture Trustee, must surrender possession if it holds the
certificate of title to such Manufactured Home or, in the case of Manufactured
Homes registered in states which provide for notation of lien, notice of
surrender would be given if the security interest in the Manufactured Home is
noted on the certificate of title. Accordingly, the there would be an
opportunity to re-perfect the security interest in the Manufactured Home in the
state of relocation. In states which do not require a certificate of title for
registration of a Manufactured Home, re-registration could defeat perfection. In
the ordinary course of servicing the manufactured housing conditional sales
contracts, the Servicer will be required to take steps to effect such
re-perfection upon receipt of notice of re-registration or information from the
obligor as to relocation. Similarly, when an obligor under a manufactured
housing conditional sales contract sells a Manufactured Home, possession of the
certificate of title must be surrendered or notice will be received as a result
of the lien noted thereon and accordingly there will be an opportunity to
require satisfaction of the related manufactured housing conditional sales
contract before release of the lien. Under each Agreement the Servicer is
obligated to take such steps, at the Servicer's expense, as are necessary to
maintain perfection of security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Depositor will represent in the Agreement that it has no knowledge of any such
liens with respect to any Manufactured Home securing payment on any Contract.
Nevertheless, such liens could arise at any time during the term of a Contract.
No notice will be given in the event such a lien arises.
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 Manufactured Home securing such debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments.
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 against such obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination of 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
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Code. In the case of some of these laws, the failure to comply with their
provisions may affect the enforceability of the related Contract
Transfers of Manufactured Homes; Enforceability of "Due-on-Sale"
Clauses. The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without consent and permit the acceleration of the maturity
of the Contracts upon any such sale or transfer for which consent has not been
granted. In certain cases, the transfer may be made by a delinquent obligor in
order to avoid a repossession proceeding with respect to a Manufactured Home.
In the case of a transfer of a Manufactured Home after which the
Servicer desires to accelerate the maturity of the related Contract, the
Servicer's ability to do so will depend on the enforceability under state law of
the "due-on-sale" clause. The Garn-St. Germain Act preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement of "due-on-sale"
clauses applicable to the Manufactured Homes. Consequently, in some states the
Servicer may be prohibited from enforcing a "due-on-sale" clause in respect of
certain Manufactured Homes.
The Title I Program
Certain of the Mortgage Loans or Contracts contained in a Trust 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 Title I loans, legal requirements, payment terms,
underwriting standards, eligibility requirements, insurance coverage and claims
proceeds related thereto shall be set forth in the related Prospectus
Supplement.
LEGAL INVESTMENT MATTERS
Unless otherwise set forth in the related Prospectus Supplement,
Securities of any series will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") so
long as they are rated by a Rating Agency in one of its two highest categories
and, as such, will be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including,
but not limited to, state-chartered savings banks, commercial banks, savings and
loan associations and insurance companies, as well as trustees and state
government employee retirement systems) 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
regulation to the same extent that, under applicable law, obligations issued by
or guaranteed as to principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for 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," the Securities will constitute legal
investments for entities subject to such legislation only to the extent provided
in such legislation. Certain States have enacted legislation which overrides the
preemption provisions of SMMEA.
SMMEA also amended the legal investment authority of federally
chartered depository institutions as follows: federal savings and loan
associations and federal savings bank may invest in, sell or otherwise deal with
mortgage-related 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 mortgage-related securities for
their own account without regard to the limitations generally applicable to
investment securities set forth in 12
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U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe.
The Federal Financial Institution Examination Counsel has adopted the
"Supervisory Policy Statement on Securities Activities" (the "Policy
Statement"), applicable to all depository institutions, setting forth guidelines
for and significant restrictions on investments in "high-risk mortgage
securities." The Policy Statement has been adopted by the Federal Reserve Board,
the Office of the Comptroller of the Currency, the FDIC and the Office of Thrift
Supervision with an effective date of February 10, 1992, as revised April 15,
1994. The Policy Statement generally indicates that a mortgage derivative
product will be deemed to be high risk if it exhibits greater price volatility
than a standard fixed rate thirty-year mortgage security. According to the
Policy Statement, prior to purchase, a depository institution will be required
to determine whether a mortgage derivative product that it is considering
acquiring is high-risk, and if so that the proposed acquisition would reduce the
institution's overall interest rate risk. Reliance on analysis and documentation
obtained from a securities dealer or other outside party without internal
analysis by the institution would be unacceptable. There can be no assurance as
to which classes of the Securities of any series will be treated as high-risk
under the Policy Statement. In addition, the National Credit Union
Administration has issued regulations governing federal credit union investments
which prohibit investment in certain specified types of securities, which may
include certain classes of Securities. Similar policy statement have been issued
by regulators having jurisdiction over other types of depository institutions.
There may be other restrictions on the ability of certain investors
either to purchase certain classes of Securities or to purchase any class of
Securities representing more than a specified percentage of the investors'
assets. The Depositor will make no representations as to the proper
characterization of any class of Securities for legal investment or other
purposes, or as to the ability of particular investors to purchase any class of
Securities under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any class of Securities. Accordingly, all
investors whose investment activities are subject to legal investment laws and
regulations, regulatory capital requirements or review by regulatory authorities
should consult with their own legal advisors in determining whether and to what
extent the Securities of any class constitute a legal investment under SMMEA or
are subject to investment, capital or other restrictions, and whether SMMEA has
been overridden in any jurisdiction applicable to such investor.
ERISA CONSIDERATIONS
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. Among other things, ERISA requires that the assets of
Plans be held in trust and that the trustee, or other duly authorized fiduciary,
have exclusive authority and discretion to manage and control the assets of such
Plans. ERISA also imposes certain duties on persons who are fiduciaries of
Plans. Under ERISA, any person who exercises any authority or control respecting
the management or disposition of the assets of a Plan is considered to be a
fiduciary of such Plan (subject to certain exceptions not here relevant). 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.
The United States Department of Labor (the "DOL") has issued
regulations concerning the definition of what constitutes the assets of a Plan.
(DOL 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. In such case, the
fiduciary making such an investment for the Plan could be deemed to have
delegated his or her asset management responsibility, and the underlying assets
and properties could be subject to ERISA reporting and disclosure. Certain
exceptions to the regulation may apply in the case of a Plan's investment in the
Securities, but the Depositor cannot predict in advance whether such exceptions
apply due to the factual nature of the conditions to be met. Accordingly,
because the Mortgage Loans and Contracts may be deemed Plan assets of each Plan
that
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purchases Securities, an investment in the Securities by a Plan might give rise
to a prohibited transaction under ERISA Sections 406 and 407 and be subject to
an excise tax under Code Section 4975 unless a statutory or administrative
exemption applies.
DOL Prohibited Transaction Exemption 83-1 ("PTE 83-1") exempts from
ERISA's prohibited transaction rules certain transactions relating to the
operation of residential mortgage 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 involving 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 PTE.
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 Owners 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 sponsor, and (iii) a limitation on the amount of the
payments 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.
Although the Trustee and, if applicable, the Indenture Trustee for any
series of Securities will be unaffiliated with the Depositor, there can be no
assurance that the system of insurance or subordination will meet the general or
specific conditions referred to above. In addition, the nature of a Trust's
assets or the characteristics of one or more classes of the related series of
Securities may not be included within the scope of PTE 83-1 or any other class
exemption under ERISA. The Prospectus Supplement will provide additional
information with respect to the application of ERISA and the Code to the related
Securities.
Several underwriters of mortgage-backed securities have applied for and
obtained ERISA prohibited transactions exemptions which are in some respects
broader than PTE 83-1. Such exemptions can only apply to mortgage-backed
securities which, among other conditions, are sold in an offering with respect
to which such underwriter serves as the sole or a managing underwriter, or as a
selling or placement agent. Several other underwriters have applied for similar
exemptions. If such an exemption might be applicable to a series of Securities,
the related Prospectus Supplement will refer to such possibility.
Each Plan fiduciary who is responsible for making the investment
decisions whether to purchase or commit to purchase and to hold Securities must
make its own determination as to whether the general and the specific conditions
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.
Any Plan proposing to invest in Securities should consult with its
counsel to confirm that such investment will not result in a prohibited
transaction and will satisfy the other requirements of ERISA and the Code.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the anticipated material
federal income tax consequences of the purchase, ownership and disposition of
Securities and is based upon the advice of Arter & Hadden, special counsel to
the Depositor. The discussion below does not purport to address all federal
income tax consequences that may be applicable to particular categories of
investors, some of which may be subject to special rules. The authorities on
which this discussion is based are subject to change or differing
interpretations, and any such change or
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interpretation could apply retroactively. This discussion reflects the
applicable provisions of the Code including recent amendments under the Omnibus
Budget Reconciliation Act of 1993 ("OBRA"), as well as final regulations
concerning REMICs (the "REMIC Regulations") promulgated on December 23, 1992,
and final regulations under Sections 1271 through 1273 and 1275 of the Code
concerning debt instruments promulgated on January 27, 1994 (the "OID
Regulations"). The Depositor intends to rely on the OID Regulations for all
Securities offered pursuant to this Prospectus; however, investors should be
aware that the OID Regulations do not adequately address certain issues relevant
to prepayable securities, such as the Securities. Investors should consult their
own tax advisors in determining the federal, state, local and any other tax
consequences to them of the purchase, ownership and disposition of Securities,
particularly with respect to federal income tax changes effected by OBRA and the
REMIC Regulations. The Prospectus Supplement for each series of Securities will
discuss any special tax consideration applicable to any class of Securities of
such series, and the discussion below is qualified by any such discussion in the
related Prospectus Supplement.
For purposes of this discussion, where the applicable Prospectus
Supplement provides for a fixed retained yield with respect to the Mortgage
Assets underlying a series of Securities, references to the Mortgage Assets will
be deemed to refer to that portion of the Mortgage Assets held by the Trust
which does not include the fixed retained yield.
Federal Income Tax Consequences For REMIC Securities
General. With respect to a particular series of Securities, an election
may be made to treat the Trust or one or more trusts or segregated pools of
assets therein as one or more REMICs within the meaning of Code Section 860D. A
Trust or a portion or portions thereof as to which one or more REMIC elections
will be made will be referred to as a "REMIC Pool." For purposes of this
discussion, Securities of a series as to which one or more REMIC elections are
made are referred to as "REMIC Securities" and will consist of one or more
classes of "Regular Securities" and one class of "Residual Securities" in the
case of each REMIC Pool. Qualification as a REMIC requires ongoing compliance
with certain conditions. With respect to each series of REMIC Securities, Arter
& Hadden, counsel to the Depositor, will deliver its opinion to the Depositor
that (unless otherwise limited in the related Prospectus Supplement) assuming
(i) the making of an appropriate election, (ii) compliance with the Agreement
and (iii) compliance with any changes in the law, including any amendments to
the Code or applicable Treasury regulations thereunder, each REMIC Pool will
qualify as a REMIC. In such case, the Regular Securities will be considered to
be "regular interests" in the REMIC Pool and generally will be treated for
federal income tax purposes as if they were newly originated debt instruments,
and the Residual Securities will be considered to be "residual interests" in the
REMIC Pool. The Prospectus Supplement for each series of Securities will
indicate whether one or more REMIC elections with respect to the related Trust
will be made, in which event references to "REMIC" or "REMIC Pool" herein shall
be deemed to refer to each such REMIC Pool. Arter & Hadden, counsel to the
Depositor, is of the opinion that if a Trust qualifies as a REMIC, the tax
consequences to the Owners will be as described below.
Status of REMIC Securities. REMIC Securities held by a mutual savings
bank or a domestic building and loan association (a "Thrift Institution") will
constitute "qualifying real property loans" within the meaning of Code Section
593(d)(1) in the same proportion that the assets of the REMIC Pool would be so
treated. REMIC Securities held by a domestic building and loan association will
constitute "a regular or residual interest in a REMIC" within the meaning of
Code Section 7701(a) (19)(C) (xi) in the same proportion that the assets of the
REMIC Pool would be treated as "loans secured by an interest in real property"
within the meaning of Code Section 7701(a)(19)(C)(v) or as other assets
described in Code Section 7701(a)(19)(C). REMIC Securities held by a real estate
investment trust (a "REIT") will constitute "real estate assets" within the
meaning of Code Section 856(c)(5)(A), and interest on the REMIC Securities will
be considered "interest on obligations secured by mortgages on real property or
on interests in real property" within the meaning of Code Section 856(c)(3)(B)
in the same proportion that, for both purposes, the assets of the REMIC Pool
would be so treated. If at all times 95% or more of the assets of the REMIC Pool
constitute qualifying assets for Thrift Institutions and REITs, the REMIC
Securities will be treated entirely as qualifying assets for such entities.
Moreover, the REMIC Regulations provide that, for purposes of Code Sections
593(d)(1) and 856(c)(5)(A), payments of principal and interest on the Mortgage
Assets that are reinvested pending distribution to holders of REMIC Securities,
constitute qualifying assets for such entities. Where two
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REMIC Pools are part of a tiered structure they will be treated as one REMIC for
purposes of the tests described above respecting asset ownership of more or less
than 95%. Notwithstanding the foregoing, however, REMIC income received by a
REIT owning a residual interest in a REMIC Pool could be treated in part as
non-qualifying REIT income if the REMIC Pool holds Mortgage Assets with respect
to which income is contingent on mortgagor profits or property appreciation. In
addition, if the assets of the REMIC include buy-down Mortgage Assets, it is
possible that the percentage of such assets constituting "qualifying real
property loans" or "loans secured by an interest in real property" for purposes
of Code Sections 593(d)(1) and 7701(a)(19)(C)(v), respectively, may be required
to be reduced by the amount of the related buy-down funds. REMIC Securities held
by a regulated investment company will not constitute "government securities"
within the meaning of Code Section 851(b)(4)(A)(i). REMIC Securities held by
certain financial institutions will constitute an "evidence of indebtedness"
within the meaning of Code Section 582(c)(i). REMIC Securities representing
interests in obligations secured by manufactured housing treated as single
family residences under Code Section 25(e)(10) will be considered interests in
"qualified mortgages" as defined in Code Section 860E(a)(3).
Qualification as a REMIC. In order for the REMIC Pool to qualify as a
REMIC, there must be ongoing compliance on the part of the REMIC Pool with the
requirements set forth in the Code. The REMIC Pool must fulfill an asset test,
which requires that no more than a de minimis amount of the assets of the REMIC
Pool, as of the close of the third calendar month beginning after the Delivery
Date (which for purposes of this discussion is the date of issuance of the REMIC
Securities) and at all times thereafter, may consist of assets other than
"qualified mortgages" and "permitted investments." The REMIC Regulations provide
a "safe harbor" pursuant to which the de minimis requirement will be met if at
all times the aggregate adjusted basis of any nonqualified assets (i.e., assets
other than qualified mortgages and permitted investments) is less than 1% of the
aggregate adjusted basis of all the REMIC Pool's assets.
If a REMIC Pool fails to comply with one or more of the requirements of
the Code for REMIC status during any taxable year, the REMIC Pool will not be
treated as a REMIC for such year and thereafter. In this event, the
classification of the REMIC Pool for federal income tax purposes is uncertain.
The REMIC Pool might be entitled to treatment as a grantor trust under the rules
described in "Federal Income Tax Consequences for Securities as to Which No
REMIC Election Is Made." In that case, no entity-level tax would be imposed on
the REMIC Pool. Alternatively, the Regular Securities may continue to be treated
as debt instruments for federal income tax purposes; but the REMIC Pool could be
treated as a taxable mortgage pool (a "TMP"). If the REMIC Pool is treated as a
TMP, any residual income of the REMIC Pool (income from the Mortgage Assets less
interest and original issue discount expense allocable to the Regular Securities
and any administrative expenses of the REMIC Pool) would be subject to corporate
income tax at the REMIC Pool level. On the other hand, an entity with multiple
classes of ownership interests may be treated as a separate association taxable
as a corporation under Treasury regulations, and the Regular Securities may be
treated as equity interests therein. The Code, however, authorizes the Treasury
Department to issue regulations that address situations where failure to meet
one or more of the requirements for REMIC status occurs inadvertently and in
good faith, and disqualification of the REMIC Pool would occur absent regulatory
relief. Investors should be aware, however, that the Conference Committee Report
to the Tax Reform Act of 1986 (the "1986 Act") indicates that the relief may be
accompanied by sanctions, such as the imposition of a corporate tax on all or a
portion of the REMIC Pool's income for the period of time in which the
requirements for REMIC status are not satisfied.
Taxation of Regular Securities
General. Payments received by holders of Regular Securities generally
should be accorded the same tax treatment under the Code as payments received on
ordinary taxable corporate debt instruments. In general, interest, original
issue discount and market discount on a Regular Security will be treated as
ordinary income to a holder of the Regular Security (the "Regular
Securityholder") as they accrue, and principal payments on a Regular Security
will be treated as a return of capital to the extent of the Regular
Securityholder's basis in the Regular Security allocable thereto. Regular
Securityholders must use the accrual method of accounting with regard to Regular
Securities, regardless of the method of accounting otherwise used by such
Regular Securityholders.
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Original Issue Discount. Regular Securities may be issued with
"original issue discount" within the meaning of Code Section 1273(a). Holders of
any class of Regular Securities having original issue discount generally must
include original issue discount in ordinary income for federal income tax
purposes as it accrues, in accordance with a constant interest method that takes
into account the compounding of interest, in advance of receipt of the cash
attributable to such income. While the Depositor anticipates that the amount of
original issue discount required to be included in a Regular Securityholder's
income in any taxable year will be computed as described below, there can be no
assurance that the rules described below will be applied to the Regular
Securities in the manner described.
Each Regular Security (except to the extent described below with
respect to a Regular Security on which distributions of principal are made in a
single installment or upon an earlier distribution by lot of a specified
principal amount upon the request of a Regular Securityholder or by random lot
(a "Retail Class Security")) will be treated as a single installment obligation
for purposes of determining the original issue discount includible in a Regular
Securityholder's income. The total amount of original issue discount on a
Regular Security is the excess of the "stated redemption price at maturity" of
the Regular Security over its "issue price." The issue price of a Regular
Security is the first price at which a substantial amount of Regular Securities
of that class are first sold to the public. The Depositor will determine
original issue discount by including the amount paid by an initial Regular
Securityholder for accrued interest that relates to a period prior to the issue
date of the Regular Security in the issue price of a Regular Security and will
include in the stated redemption price at maturity any interest paid on the
first Distribution Date to the extent such interest is attributable to a period
in excess of the number of days between the issue date and such first
Distribution Date. The stated redemption price at maturity of a Regular Security
always includes the original principal amount of the Regular Security, but
generally will not include distributions of stated interest if such interest
distributions constitute "qualified stated interest." Qualified stated interest
generally means stated interest that is unconditionally payable in cash or in
property (other than debt instruments of the issuer) at least annually at (i) a
single fixed rate, (ii) one or more qualified floating rates (as described
below), (iii) a fixed rate followed by one or more qualified floating rates,
(iv) a single objective rate (as described below) or (v) a fixed rate and an
objective rate that is a qualified inverse floating rate. 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. The interest on such debt securities
will be unconditionally payable and constitute qualified stated interest, not
OID. Nevertheless, 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. Any stated interest in excess of the qualified stated interest is included
in the stated redemption price at maturity. If the amount of original issue
discount is "de minimis" as described below, the amount of original issue
discount is treated as zero, and all stated interest is treated as qualified
stated interest. Distributions of interest on Regular Securities with respect to
which deferred interest will accrue may not constitute qualified stated
interest, in which case the stated redemption price at maturity of such Regular
Securities includes all distributions of interest as well as principal thereon.
Moreover, if the interval between the issue date and the first Distribution Date
on a Regular Security is longer than the interval between subsequent
Distribution Dates (and interest paid on the first Distribution Date is less
than would have been earned if the stated interest rate were applied to
outstanding principal during each day in such interval), the stated interest
distributions on such Regular Security technically do not constitute qualified
stated interest. In such case a special rule, applying solely for the purpose of
determining whether original issue discount is de minimis, provides that the
interest shortfall for the long first period (i.e., the interest that would have
been earned if interest had been paid on the first Distribution Date for each
day the Regular Security was outstanding) is treated as made at a fixed rate if
the value of the rate on which the payment is based is adjusted in a reasonable
manner to take into account the length of the interval. Regular Securityholders
should consult their own tax advisors to determine the issue price and stated
redemption price at maturity of a Regular Security.
Under a de minimis rule, original issue discount on a Regular Security
will be considered to be zero if such original issue discount is less than 0.25%
of the stated redemption price at maturity of the Regular Security multiplied by
the weighted average maturity of the Regular Security. For this purpose, the
weighted maturity of the Regular 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
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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 Regular Security and the denominator of which is the stated redemption
price at maturity of the Regular Security. Although currently unclear, it
appears that the schedule of such distributions should be determined in
accordance with the assumed rate of prepayment of the Mortgage Assets and the
anticipated reinvestment rate, if any, relating to the Regular Securities (the
"Prepayment Assumption"). The Prepayment Assumption with respect to a series of
Regular Securities will be set forth in the related Prospectus Supplement. The
holder of a debt instrument includes any de minimis original issue discount in
income pro rata as stated principal payments are received.
Of the total amount of original issue discount on a Regular Security,
the Regular Securityholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue discount on the Regular Security accrued during an accrual period for each
day on which he holds the Regular Security, including the date of purchase but
excluding the date of disposition. Although not free from doubt, the Depositor
intends to treat the monthly period ending on the day before each Distribution
Date as the accrual period, rather than the monthly period corresponding to the
prior calendar month. With respect to each Regular Security, a calculation will
be made of the original issue discount that accrues during each successive full
accrual period (or shorter period from the date of original issue) that ends on
the day before the related Distribution Date on the Regular Security. For a
Regular Security, original issue discount is to be calculated initially based on
a schedule of maturity dates that takes into account the level of prepayments
and an anticipated reinvestment rate that are most likely to occur, which is
expected to be based on the Prepayment Assumption. The original issue discount
accruing in a full accrual period would be the excess, if any, of (i) the sum of
(a) the present value of all of the remaining distributions to be made on the
Regular Security as of the end of that accrual period that are included in the
Regular Security's stated redemption price at maturity and (b) the distributions
made on the Regular Security during the accrual period that are included in the
Regular Security's stated redemption price at maturity over (ii) the adjusted
issue price of the Regular Security at the beginning of the accrual period. The
present value of the remaining distributions referred to in the preceding
sentence is calculated based on (i) the yield to maturity of the Regular
Security at the issue date, (ii) events (including actual prepayments) that have
occurred prior to the end of the accrual period and (iii) the Prepayment
Assumption. For these purposes, the adjusted issue price of a Regular Security
at the beginning of any accrual period equals the issue price of the Regular
Security, increased by the aggregate amount of original issue discount with
respect to the Regular Security that accrued in all prior accrual periods and
reduced by the amount of distributions included in the Regular Security's stated
redemption price at maturity that were made on the Regular Security in such
prior period. The original issue discount accruing during any accrual period (as
determined in this paragraph) will then be divided by the number of days in the
period to determine the daily portion of original issue discount for each day in
the period.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Securityholder generally
will increase to take into account prepayments on the Regular Securities as a
result of prepayments on the Mortgage Assets or that exceed the Prepayment
Assumption, and generally will decrease (but not below zero for any period) if
the prepayments are slower than the Prepayment Assumption. In the event of a
change in circumstances that does not result in a substantially contemporaneous
pro rata prepayment, the yield and maturity of the Regular Securities are
redetermined by treating the Regular Securities as reissued on the date of the
change for an amount equal to the adjusted issue price of the Regular
Securities. To the extent specified in the applicable Prospectus Supplement, an
increase in prepayments on the Mortgage Assets with respect to a series of
Regular Securities can result in both a change in the priority of principal
payments with respect to certain classes of Regular Securities and either an
increase or decrease in the daily portions of original issue discount with
respect to such Regular Securities.
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A purchaser of a Regular Security at a price greater than the issue
price also will be required to include in gross income the daily portions of the
original issue discount on the Regular Security. With respect to such a
purchaser, the daily portion for any day is reduced by the amount that would be
the daily portion for such day (computed in accordance with the rules set forth
above) multiplied by a fraction, the numerator of which is the amount, if any,
by which the price paid by such purchaser for the Regular Security exceeds the
sum of the issue price and the aggregate amount of original issue discount that
would have been includible in the gross income of an original holder of the
Regular Security who purchased the Regular Security at its issue price, less any
prior distributions included in the stated redemption price at maturity, and the
denominator of which is the sum of the daily portions for such Regular Security
(computed in accordance with the rules set forth above) for all days after the
date of purchase and ending on the date on which the remaining principal amount
of such Regular Security is expected to be reduced to zero under the Prepayment
Assumption.
A Securityholder may elect to include in gross income all stated
interest, original issue discount, de minimis original issue discount, market
discount (as described below under "Market Discount"), de minimis market
discount and unstated interest (as adjusted for any amortizable bond premium or
acquisition premium) currently as it accrues using the constant yield to
maturity method. If this election is made, the holder is treated as satisfying
the requirements for making the elections with respect to amortization of
premium and current inclusion of market discount, each as described under
"Premium" and "Market Discount" below.
Variable Rate Regular Securities. Regular Securities may provide for
interest based on a variable rate. The OID Regulations provide special rules for
variable rate instruments that meet three requirements. First, the noncontingent
principal payments may not exceed the instrument's issue price by more than a
specified amount equal to the lesser of (i) .015 multiplied by the product of
the total noncontingent payments and the weighted average maturity or (ii) 15%
of the total noncontingent principal payments. Second, the instrument must
provide for stated interest (compounded or paid at least annually) at (i) one or
more qualified floating rates, (ii) a single fixed rate followed by one or more
qualified floating rates, (iii) a single objective rate or (iv) a single fixed
rate and a single objective rate that is a qualified inverse floating rate.
Third, the instrument must provide that each qualified floating rate or
objective rate in effect during an accrual period is set at a current value of
that rate (one occurring in the interval beginning three months before and
ending one year after the rate is first in effect on the Regular Security). A
rate is a qualified floating rate if variations in the rate can reasonably be
expected to measure contemporaneous variations in the cost of newly borrowed
funds. Generally, neither (i) a multiple of a qualified floating rate in excess
of a fixed multiple that is greater than zero but not more than 1.35 (and
increased or decreased by a fixed rate) nor (ii) a cap or floor that is likely
to cause the interest rate on a Regular Security to be significantly less or
more than the overall expected return on the Regular Security is considered a
qualified floating rate. An objective rate is a rate based on changes in the
price of actively traded property or an index of such prices or is a rate based
on (including multiples of) one or more qualified floating rates. An objective
rate is a qualified inverse floating rate if the rate is equal to a fixed rate
minus a qualified floating rate and variations in such rate can reasonably be
expected to reflect inversely contemporaneous variations in the cost of newly
borrowed funds. A rate will not be an objective rate if it is reasonably
expected that the average rate during the first half of the instrument's term
will be significantly more or less than the average rate in the final term. An
objective rate must be determined according to a single formula that is fixed
throughout the term of the Regular Security. Stated interest on a variable rate
debt instrument is qualified stated interest if the interest is unconditionally
payable in cash or property at least annually.
In general, the determination of original issue discount and qualified
stated interest on a variable rate debt instrument is made by converting the
debt instrument into a fixed rate debt instrument and then applying the general
original issue discount rules described above to the instrument. If a variable
rate debt instrument provides for stated interest at a single qualified floating
rate or objective rate, all stated interest is qualified stated interest and the
amount of original issue discount, if any, is determined by assuming the
variable rate is a fixed rate equal to (a) in the case of a qualified floating
or inverse floating rate, the value, as of the issue date, of the qualified
floating inverse floating rate or (b) in the case of an objective rate (other
than a qualified inverse floating rate), a fixed rate that reflects the yield
that is reasonably expected for the debt instrument. For all other variable rate
debt instruments, the amount of interest and original issue discount accruals
are determined using the following steps. First, a fixed rate substitute for
each variable rate under the debt instrument is determined. In general, the
fixed rate substitute is a fixed rate equal to the rate of the applicable type
of variable rate as of the issue date. Second,
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an equivalent fixed rate debt instrument is constructed using the fixed rate
substitute(s) in lieu of the variable rates and keeping all other terms
identical. Third, the amount of qualified stated interest and original issue
discount with respect to the equivalent fixed rate debt instrument are
determined under the rules for fixed rate debt instruments. Finally, appropriate
adjustments for actual variable rates are made during the term by increasing or
decreasing the qualified stated interest to reflect the amount actually paid
during the applicable accrual period as compared to the interest assumed to be
accrued or paid under the equivalent fixed rate debt instrument. If there is no
qualified stated interest under the equivalent fixed rate debt instrument, the
adjustment is made to the original issue discount for the period.
Where the issue price of a Regular Security exceeds the original
principal amount of the Regular Security, it appears appropriate to reduce the
ordinary income reportable for an accrual period by a portion of such excess in
a manner similar to the amortization of premium on the constant yield method.
Under proposed regulations (the "contingent payment rules"), a Regular Security
that provides for (i) non-contingent payments greater than or equal to its issue
price and (ii) one or more contingent payments determined by reference to the
value of publicly traded stock, securities, commodities, or other publicly
traded property must be divided into its component parts for purposes of
performing original issue discount calculations (and possibly for other federal
income tax purposes as well). The non-contingent portion of the Regular Security
would be treated as a debt instrument, and the original issue discount accruals
on that portion would be computed in the same manner as with any non-contingent
debt instrument. The issue price of the non-contingent portion would be that
portion of the issue price of the Regular Security that reflects the right to
receive the non-contingent payments, determined in the same manner as if the
separate non-contingent debt instrument were a debt instrument issued as part of
an investment unit. The contingent components of the Regular Security would
constitute options or other property rights and would be taxed as if issued as a
separate instrument. No accrual of original issue discount generally would be
required with respect to such components under the contingent payment rules.
Accordingly, the rate at which income is accrued by a Securityholder may vary
depending on whether the original issue discount rules or the contingent payment
rules apply to certain variable rate debt instruments.
Market Discount. A purchaser of a Regular Security also may be subject
to the market discount rules of Code Sections 1276 through 1278. Under these
sections and the principles applied by the OID Regulations in the context of
original issue discount, "market discount" is the amount by which a subsequent
purchaser's initial basis in the Regular Security (i) is exceeded by the stated
redemption price at maturity of the Regular Security or (ii) in the case of a
Regular Security having original issue discount, is exceed by the sum of the
issue price of such Regular Security plus any original issue discount that would
have previously accrued thereon if held by an original Regular Securityholder
(who purchased the Regular Security at its issue price), in either case less any
prior distributions included in the stated redemption price at maturity of such
Regular Security. Such purchaser generally will be required to recognize accrued
market discount as ordinary income as distributions includible in the stated
redemption price at maturity of such Regular Security are received in an amount
not exceeding any such distribution. That recognition rule would apply
regardless of whether the purchaser is a cash-basis or accrual-basis taxpayer.
Such market discount would accrue in a manner to be provided in Treasury
regulations and should take into account the Prepayment Assumption. The
Conference Committee Report to the 1986 Act provides that until such regulations
are issued, such market discount would accrue either (i) on the basis of a
constant interest rate or (ii) in the ratio of stated interest allocable to the
relevant period to the sum of the interest for such period plus the remaining
interest as of the end of such period, or in the case of a Regular Security
issued with original issue discount, in the ratio of original issue discount
accrued for the relevant period to the sum of the original issue discount
accrued for such period plus the remaining original issue discount as of the end
of such period. Such purchaser also generally will be required to treat a
portion of any gain on a sale or exchange of the Regular Security as ordinary
income to the extent of the market discount accrued to the date of disposition
under one of the foregoing methods, less any accrued market discount previously
reported as ordinary income as partial distributions in reduction of the stated
redemption price at maturity were received. Such purchaser will be required to
defer deduction of a portion of the excess of the interest paid or accrued on
indebtedness incurred to purchase or carry a Regular Security over the interest
distributable thereon. The deferred portion of such interest expense in any
taxable year generally will not exceed the accrued market discount on the
Regular Security for such year. Any such deferred interest expense is, in
general, allowed as a deduction not later than the year in which the related
market discount income is recognized or the Regular Security is disposed of. As
an alternative to the inclusion of market discount in income on the
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foregoing basis, the Regular Securityholder may elect to include market discount
in income currently as it accrues in all market discount instruments acquired by
such Regular Securityholder in that taxable year or thereafter, in which case
the interest deferral rule will not apply. In Revenue Procedure 92-67, the
Internal Revenue Service set forth procedures for taxpayers (1) electing under
Code Section 1278(b) to include market discount in income currently, (2)
electing under rules of Code Section 1276(b) to use a constant interest rate to
determine accrued market discount on a bond where the holder of the bond is
required to determine the amount of accrued market discount at a time prior to
the holder's disposition of the bond, and (3) requesting consent to revoke an
election under Code Section 1278(b).
By analogy to the OID Regulations, market discount with respect to a
Regular Security will be considered to be zero if such market discount is less
than 0.25% of the remaining stated redemption price at maturity of such Regular
Security multiplied by the weighted average maturity of the Regular Security
(determined as described above under "Original Issue Discount") remaining after
the date of purchase. Treasury regulations implementing the market discount
rules have not yet been issued, and therefore investors should consult their own
tax advisors regarding the application of these rules as well as the
advisability of making any of the elections with respect thereto.
Premium. A Regular Security purchased at a cost greater than its
remaining stated redemption price at maturity generally is considered to be
purchased at a premium. If the Regular Securityholder holds such Regular
Security as a "capital asset" within the meaning of Code Section 1221, the
Regular Securityholder may elect under Code Section 171 to amortize such premium
under a constant yield method that reflects compounding based on the interval
between payments on the Regular Securities. This election, once made, applies to
all obligations held by the taxpayer at the beginning of the first taxable year
to which such section applies and to all taxable debt obligations thereafter
acquired and is binding on such taxpayer in all subsequent years. The Conference
Committee Report to the 1986 Act indicates a Congressional intent that the same
rules that apply to the accrual of market discount on installment obligations
will also apply to amortizing bond premium under Code Section 171 on installment
obligations such as the Regular Securities, although it is unclear whether the
alternatives to the constant interest method described above under "Market
Discount" are available. Except as otherwise provided in Treasury regulations
yet to be issued amortizable bond premium will be treated as an offset to
interest income on a Regular Security rather than as a separate deduction item.
Purchasers who pay a premium for their Regular Securities should consult their
tax advisors regarding the election to amortize premium and the method to be
employed.
Sale or Exchange of Regular Securities. If a Regular Securityholder
sells or exchanges a Regular Security, the Regular Securityholder will recognize
gain or loss equal to the difference, if any, between the amount received and
his adjusted basis in the Regular Security. The adjusted basis of a Regular
Security generally will equal the cost of the Regular Security to the seller,
increased by any original issue discount or market discount previously included
in the seller's gross income with respect to the Regular Security and reduced by
amounts included in the stated redemption price at maturity of the Regular
Security that were previously received by the seller and by any amortized
premium.
Except as described above with respect to market discount, and except
as provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Security realized by an investor who holds the Regular Security as a
capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Security has been held for the long-term
capital gain holding period (currently more than one year). Gain from the
disposition of a Regular Security that might otherwise be capital gain will be
treated as ordinary income to the extent that such gain does not exceed the
excess, if any, of (i) the amount that would have been includible in the gross
income of the holder if his yield on such Regular Security were 110% of the
applicable Federal rate under Code Section 1274(d) as of the date of purchase
over (ii) the amount of income actually includible in the gross income of such
holder with respect to the Regular Security. In addition, gain or loss
recognized from the sale of a Regular Security by certain banks or thrift
institutions will be treated as ordinary income or loss pursuant to Code Section
582(c). The maximum tax rate for individuals on the excess of net long-term
capital gain over net short-term capital loss is 28%.
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Taxation of Residual Securities
Taxation of REMIC Income. Generally, the "daily portions" of REMIC
taxable income or net loss will be includible as ordinary income or loss in
determining the federal taxable income of holders of Residual Securities
("Residual Securityholders") and will not be taxed separately to the REMIC Pool.
The daily portions of REMIC taxable income or net loss of a Residual
Securityholder are determined by allocating the REMIC Pool's taxable income or
net loss for each calendar quarter ratably to each day in such quarter and by
allocating such daily portion among the Residual Securityholders in proportion
to their respective holdings of Residual Securities in the REMIC Pool on such
day. REMIC taxable income is generally determined in the same manner as the
taxable income of an individual using a calendar year and the accrual method of
accounting, except that (i) the limitation on deductibility of investment
interest expense and expenses for the production of income do not apply, (ii)
all bad loans will be deductible as business bad debts and (iii) the limitation
on the deductibility of interest and expenses related to tax-exempt income will
apply. REMIC taxable income generally means the REMIC Pool's gross income,
including interest, original issue discount income and market discount income,
if any, on the Mortgage Assets, plus income on reinvestment of cashflows and
reserve assets, minus deductions, including interest and original issue discount
expense on the Regular Securities, servicing fees on the Mortgage Assets and
other administrative expenses of the REMIC Pool, amortization of premium, if
any, with respect to the Mortgage Assets, and any tax imposed on the REMIC's
income from foreclosure property. The requirement that Residual Securityholders
report their pro rata share of taxable income or net loss of the REMIC Pool will
continue until there are no Securities of any class of the related series
outstanding.
The taxable income recognized by a Residual Securityholder in any
taxable year will be affected by, among other factors, the relationship between
the timing of recognition of interest and original issue discount or market
discount income or amortization of premium with respect to the Mortgage Assets,
on the one hand, and the timing of deductions for interest (including original
issue discount) on the Regular Securities, on the other hand. Because of the way
REMIC taxable income is calculated, a Residual Securityholder may recognize
"phantom" income (i.e., income recognized for tax purposes in excess of income
as determined under financial accounting or economic principles) which will be
matched in later years by a corresponding tax loss or reduction in taxable
income, but which could lower the yield to Residual Securityholders due to the
lower present value of such future loss or reduction. For example, if an
interest in the Mortgage Assets is acquired by the REMIC Pool at a discount, and
one or more of such Mortgage Assets is prepaid, the Residual Securityholder may
recognize taxable income without being entitled to receive a corresponding
amount of cash because (i) the prepayment may be used in whole or in part to
make distributions in reduction of principal on the Regular Securities and (ii)
the discount income on the Mortgage Loan which is includible in the REMIC's
taxable income may exceed the discount deduction allowed to the REMIC upon such
distributions on the Regular Securities. When there is more than one class of
Regular Securities that distribute principal sequentially, this mismatching of
income and deductions is particularly likely to occur in the early years
following issuance of the Regular Securities when distributions in reduction of
principal are being made in respect of earlier maturing classes of Securities to
the extent that such classes are not issued with substantial discount. If
taxable income attributable to such a mismatching is realized in general, losses
would be allowed in later years as distributions on the later classes of Regular
Securities are made. Taxable income may also be greater in earlier years than in
later years as a result of the fact that interest expense deductions, expressed
as a percentage of the outstanding principal amount of such a series of Regular
Securities, may increase over time as distributions in reduction of principal
are made on the lower yielding classes of Regular Securities, where interest
income with respect to any given Mortgage Loan will remain constant over time as
a percentage of the outstanding principal amount of that loan. Consequently,
Residual Securityholders must have sufficient other sources of cash to pay any
federal, state or local income taxes due as a result of such mismatching or
unrelated deductions against which to offset such income. Prospective investors
should be aware, however, that a portion of such income may be ineligible for
offset by such investor's unrelated deductions. See the discussion of "excess
inclusions" below under "Limitations on Offset or Exemption of REMIC Income;
Excess Inclusions." The timing of such mismatching of income and deductions
described in this paragraph, if present with respect to a series of Securities,
may have a significant adverse effect upon the Residual Securityholders
after-tax rate of return. In addition, a Residual Securityholder's taxable
income during certain periods may exceed the income reflected by such
Securityholder for such periods in accordance with generally accepted accounting
principles. Investors should consult their own advisors concerning the proper
tax and accounting treatment of their investment in Residual Securities.
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Basis and Losses. The amount of any net loss of the REMIC Pool that may
be taken into account by the Residual Securityholder is limited to the adjusted
basis of the Residual Security as of the close of the quarter (or time of
disposition of the Residual Security if earlier), determined without taking into
account the net loss for the quarter. The initial adjusted basis of a purchaser
of a Residual Security is the amount paid for such Residual Security. Such
adjusted basis will be increased by the amount of taxable income of the REMIC
Pool reportable by the Residual Securityholder and decreased by the amount of
loss of the REMIC Pool reportable by the Residual Securityholder. A cash
distribution from the REMIC Pool also will reduce such adjusted basis (but not
below zero). Any loss that is disallowed on account of this limitation may be
carried over indefinitely with respect to the Residual Securityholder as to whom
such loss was disallowed and may be used by such Residual Securityholder only to
offset any income generated by the same REMIC Pool. Residual Securityholders
should consult their tax advisors about other limitations on the deductibility
of net losses that may apply to them.
A Residual Securityholder will not be permitted to amortize directly
the cost of its Residual Security as an offset to its share of the taxable
income of the related REMIC Pool. Such taxable income will not include cash
received by the REMIC Pool that represents a recovery of the REMIC Pool's basis
in its assets. Such recovery of basis by the REMIC Pool will have the effect of
amortization of the issue price of the Residual Securities over their life. In
view of the possible acceleration of the income of Residual Securityholders
described above under "Taxation of REMIC Income," the period of time over which
such issue price is effectively amortized may be longer than the economic life
of the Residual Securities.
If a Residual Security has a negative value, it is not clear whether
its issue price would be considered to be zero or such negative amount for
purposes of determining the REMIC Pool's basis in its assets. The REMIC
Regulations do not address whether residual interests could have a negative
basis and a negative issue price. The Depositor does not intend to treat a class
of Residual Securities as having a value of less than zero for purposes of
determining the bases of the related REMIC Pool in its assets.
Further, to the extent that the initial adjusted basis of Residual
Securityholder (other than an original holder) in the Residual Security is
greater than the corresponding portion of the REMIC Pool's basis in the Mortgage
Assets, the Residual Securityholder will not recover a portion of such basis
until termination of the REMIC Pool unless Treasury regulations yet to be issued
provide for periodic adjustments to the REMIC income otherwise reportable by
such holder. The REMIC Regulations do not so provide. See "Treatment of Certain
Items of REMIC Income and Expense - Market Discount" below regarding the basis
of Mortgage Assets to the REMIC Pool and "Sale or Exchange of Residual
Securities" below regarding possible treatment of a loss upon termination of the
REMIC Pool as a capital loss.
Mark to Market Rules
Prospective purchasers of a Residual Security should be aware that on
December 18, 1993, the Internal Revenue Service released temporary regulations
(the "Temporary Regulations") relating to the requirement that a securities
dealer mark to market securities held for sale to customers. This mark-to-market
requirement applies to all securities of a dealer, except to the extent that the
dealer has specifically identified a security as held for investment. The
Temporary Regulations provide that for purposes of this mark-to-market
requirement, a "negative value" Residual Security is not treated as a security
and thus may not be marked to market. In general, a Residual Security has
negative value if, as of the date a taxpayer acquires the Residual Security, the
present value of the tax liabilities associated with holding the Residual
Security exceeds the sum of (i) the present value of the expected future
distributions on the Residual Security, and (ii) the present value of the
anticipated tax savings associated with holding the Residual Security as the
REMIC generates losses. The amounts and present values of the anticipated tax
liabilities, expected future distributions and anticipated tax savings are all
to be determined using (i) the prepayment and reinvestment assumptions adopted
under Section 1272(a)(6), or that would have been adopted had the REMIC's
regular interests been issued with original issue discount, (ii) any required or
permitted clean up calls, or required qualified liquidation, provided for in the
REMIC's organizational documents and (iii) a discount rate equal to the
"applicable Federal rate" instrument issued on the date of acquisition of the
Residual Security ending on or after December 31, 1993. Prospective purchasers
of a Residual Security should consult their tax advisors regarding the possible
application of the Temporary Regulations.
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Treatment of Certain Items of REMIC Income and Expense
Original Issue Discount. Generally, the REMIC Pool's deductions for
original issue discount will be determined in the same manner as original issue
discount income on Regular Securities as described above under "Taxation of
Regular Securities -- Original Issue Discount" and "Variable Rate Regular
Securities," without regard to the de minimis rule described therein.
Market Discount. The REMIC Pool will have market discount income in
respect of Mortgage Assets if, in general, the basis of the REMIC Pool in such
Mortgage Assets is exceeded by their unpaid principal balances. The REMIC Pool's
basis in such Mortgage Assets is generally the fair market value of the Mortgage
Assets immediately after the transfer thereof to the REMIC Pool. The REMIC
Regulations provide that such basis is equal in the aggregate to the issue
prices of all regular and residual interests in the REMIC Pool. In respect of
Mortgage Assets that have market discount to which Code Section 1276 applies,
the accrued portion of such market discount would be recognized currently by the
REMIC as an item of ordinary income. Market discount income generally should
accrue in the manner described above under "Taxation of Regular Securities --
Market Discount." The rules of Code Section 1276 concerning market discount
income will not, however, apply in the case of Mortgage Assets originated on or
prior to July 18, 1984, if any. With respect to such Mortgage Assets market
discount is generally includible in REMIC taxable income or ordinary gross
income pro rata as principal payments are received. Under another interpretation
of the Code and relevant legislative history, market discount on such Mortgage
Assets might be required to be recognized currently by the REMIC, in the same
manner that market discount would be recognized with respect to Mortgage Assets
originated after July 18, 1984. Under that method, a REMIC would tend to
recognize market discount more rapidly than it would otherwise. In either case,
the deduction of a portion of the interest expense on the Regular Securities
allocable to such discount may be deferred until such discount is included in
income, and any gain on the sale or exchange thereof will be treated as ordinary
income to the extent of the deferred interest deductible at that time.
Premium. Generally, if the basis of the REMIC Pool in the Mortgage
Assets exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired such Mortgage Assets at a premium equal to the
amount of such excess. As stated above,the REMIC Pool's basis in the Mortgage
Assets is the fair market value of the Mortgage Assets, based on the aggregate
of the issue prices of the regular and residual interests in the REMIC Pool
immediately after the transfer thereof to the REMIC Pool. In a manner analogous
to the discussion above under "Taxation of Regular Securities -- Premium," a
person that holds Mortgage Assets as a capital asset under Code Section 1221 may
elect under Code Section 171 to amortize premium on Mortgage Assets originated
after September 27, 1985, under a constant yield method. Amortizable bond
premium will be treated as an offset to interest income on the Mortgage Assets,
rather than as a separate deduction item. Because substantially all the
mortgagors with respect to the Mortgage Assets are expected to be individuals,
Code Section 171 will not be available. Premium on Mortgage Assets may be
deductible in accordance with a reasonable method regularly employed by the
holder thereof. The allocation of such premium pro rata among principal payments
should be considered a reasonable method; however, the Internal Revenue Service
may argue that such premium should be allocated in a different manner, such as
allocating such premium entirely to the final payment of principal.
Limitations on Offset or Exemption of REMIC Income; Excess Inclusions.
A portion of the income allocable to a Residual Security (referred to in the
Code as an "excess inclusion") for any calendar quarter, with an exception
discussed below for certain thrift institutions, will be subject to federal
income tax in all events. Thus, for example, an excess inclusion (i) cannot,
except as described below, be offset by any unrelated losses or loss carryovers
of a Residual Securityholder, (ii) will be treated as "unrelated business
taxable income" within the meaning of Code Section 512 if the Residual
Securityholder is a pension fund or any other organization that is subject to
tax only on its unrelated business taxable income and (iii) is not eligible for
any reduction in the rate of withholding tax in the case of a Residual
Securityholder that is a foreign investor, as further discussed in "Taxation of
Certain Foreign Investors -- Residual Securities" below. Except as discussed
below with respect to excess inclusions from Residual Securities without
"significant value," this general rule does not apply to thrift institutions to
which Code Section 593 applies. For this purpose a thrift institution and its
qualified subsidiary are considered a single corporation. A qualified subsidiary
is one all the stock of which, and substantially all the debt of which, is held
by the thrift institution and which is organized and operating exclusively in
connection with the organization and operation of
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one or more REMICs. Except in the case of a thrift institution (including
qualified subsidiaries) members of an affiliated group are treated as one
corporation for purposes of applying the limitation on offset of excess
inclusion income.
Except as discussed in the following paragraph, with respect to excess
inclusions from Residual Securities without "significant value," for any
Residual Securityholder, the excess inclusion for any calendar quarter is the
excess, if any, of (i) the income of such Residual Securityholder for that
calendar quarter from its Residual Security over (ii) the sum of the "daily
accruals" (as defined below) for all days during the calendar quarter on which
the Residual Securityholder holds such Residual Security. For this purpose, the
daily accruals with respect to a Residual Security are determined by allocating
to each day in the calendar quarter its ratable portion of the product of the
"adjusted issue price" (as defined below) of the Residual Security at the
beginning of the calendar quarter and 120 percent of the "Federal long-term
rate" in effect at the time the Residual Security is issued. For this purposes
the "adjusted issue price" of a Residual Security at the beginning of any
calendar quarter equals the issue price of the Residual Security (adjusted for
contributions), increased by the amount of daily accruals for all prior
quarters, and decreased (but not below zero) by the aggregate amount of payments
made on the Residual Security before the beginning of such quarter. The Federal
long-term rate is an average of current yields on Treasury securities with a
remaining term of greater than nine years, computed and published monthly by the
IRS.
The Code provides that to the extent provided in regulations, as an
exception to the general rule described above, the entire amount of income
accruing on a Residual Security will be treated as an excess inclusion if the
Residual Securities in the aggregate are considered not to have "significant
value." The Treasury Department has not yet provided regulations in this respect
and the REMIC Regulations did not adopt this rule. The exception from the excess
inclusion rules applicable to thrift institutions does not apply, however, if
the Residual Securities do not have significant value. Under the REMIC
Regulations, the Residual Securities will have significant value if: (i) the
aggregate of the issue prices of the Residual Securities is at least two percent
of the aggregate issue prices of all Regular Securities and Residual Securities
in the REMIC and (ii) the anticipated weighted average life of the Residual
Securities is at least 20 percent of the REMIC's anticipated weighted average
life based on the prepayment and reinvestment assumptions used in pricing the
transaction and any recognized or permitted clean up calls or any required
qualified liquidation. Although not entirely clear, the REMIC Regulations
indicate that the significant value determination is made only on the Startup
Day. The anticipated weighted average life of a Residual Security with a
principal balance and a market rate of interest is computed by multiplying the
amount of each expected principal payment by the number of years (or portions
thereof) from the Startup Day, adding these sums and dividing by the total
principal expected to be paid on such Residual Security based on the relevant
prepayment assumption and expected reinvestment income. The anticipated weighted
average life of a Residual Security with either no specified principal balance
or a principal balance and rights to interest payments disproportionate to such
principal balance, would be computed under the formula described above but would
include all payments expected on the Residual Security instead of only the
principal payments. The anticipated weighted average life of a REMIC is a
weighted average of the anticipated weighted average lives of all classes of
interest in the REMIC.
Under Treasury regulations to be promulgated, a portion of the
dividends paid by a REIT which owns a Residual Security are to be designated as
excess inclusions in an amount corresponding to the Residual Security's
allocable share of the excess inclusions. Similar rules apply in the case of
regulated investment companies, common trust funds and cooperatives. Thus,
investors in such entities which own a Residual Security will be subject to the
limitations on excess inclusions described above. The REMIC Regulations do not
provide guidance on this issue.
Tax-Related Restrictions on Transfer of Residual Securities
Disqualified Organizations. If legal title or beneficial interest in a
Residual Security is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Security for periods after the transfer and (ii) the highest marginal
federal corporate income tax rate. The REMIC Regulations provide that the
anticipated excess inclusion are based on actual prepayment experience to the
date of the transfer and projected payments based on the Prepayment Assumption.
The present value discount rate equals the applicable Federal rate under Code
Section 1274(d) that would apply to a debt instrument that was issued on the
date the Disqualified
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Organization acquired the Residual Security and whose term ended on the close of
the last quarter in which excess inclusion was expected to accrue with respect
to the Residual Security. Such a tax generally would be imposed on the
transferor of the Residual Security, except that where such transfer is through
an agent (including a broker, nominee, or other middleman) for a Disqualified
Organization, the tax would instead be imposed on such agent. A transferor of a
Residual Security would in no event, however, be liable for such tax with
respect to a transfer if the transferee furnishes to the transferor an affidavit
that the transferee is not a Disqualified Organization and, as of the time of
the transfer, the transferor does not have actual knowledge that such affidavit
is false. The tax also may be waived by the Treasury Department if the
Disqualified Organization promptly disposes of the Residual Security and the
transferor pays income tax at the highest corporate rate on the excess inclusion
for the period the Residual Security is actually held by the Disqualified
Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Security during a taxable year and a
Disqualified Organization is the record holder of an equity interest in such
entity, then a tax is imposed on such entity equal to the product of (i) the
amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period such interest is held by such Disqualified
Organization and (ii) the highest marginal federal corporate income tax rate.
Such tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for
such tax if it has received an affidavit from such record holder that (i) states
under penalty of perjury that it is not a Disqualified Organization or (ii)
furnishes a social security number and states under penalties of perjury that
the social security number is that of the transferee, provided that during the
period such person is the record holder of the Residual Security, the
Pass-Through Entity does not have actual knowledge that such affidavit is false.
For these purposes, (i) "Disqualified Organization" means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
its activities are subject to tax and a majority of its board of directors is
not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 521) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511 and (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis. Except as may be provided in Treasury
regulations yet to be issued, any person holding an interest in a Pass- Through
Entity as a nominee for another will, with respect to such interest, be treated
as a Pass-Through Entity.
The Agreement with respect to a series of Securities will provide that
neither legal title nor beneficial interest in a Residual Security may be
transferred or registered unless (i) the proposed transferee provides to the
Depositor and the Trustee an affidavit to the effect that such transferee is not
a Disqualified Organization, is not purchasing such Residual Securities on
behalf of a Disqualified Organization (i.e., as a broker, nominee or middleman
thereof) and is not an entity that holds REMIC residual securities as nominee to
facilitate the clearance and settlement of such securities through electronic
book-entry changes in accounts of participating organizations and (ii) the
transferor provides a statement in writing to the Depositor and the Trustee that
it has no actual knowledge that such affidavit is false. Moreover, the Agreement
will provide that any attempted or purported transfer in violation of these
transfer restrictions will be null and void and will vest no rights in any
purported transferee. Each Residual Security with respect to a series will have
a legend referring to such restrictions on transfer, and each Residual
Securityholder will be deemed to have agreed, as a condition of ownership
thereof, to any amendments to the related Agreement required under the Code or
applicable Treasury regulations to effectuate the foregoing restrictions.
Information necessary to compute an applicable excise tax must be furnished to
the Internal Revenue Service and to the requesting party within 60 days of the
request, and the Depositor or the Trustee may charge a fee for computing and
providing such information.
Noneconomic Residual Interests. Under the REMIC Regulations certain
transfers of Residual Securities are disregarded, in which case the transferor
continues to be treated as the owner of the Residual Securities and thus
continues to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the Final REMIC Regulations, a transfer of a Noneconomic
Residual Interest (defined below) to a Residual Securityholder
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(other than a Residual Securityholder who is not a U.S. Person, as defined below
under "Foreign Investors") is disregarded for all federal income tax purposes
unless no significant purpose of the transfer is to impede the assessment or
collection of tax. A residual interest in a REMIC (including a residual interest
with a positive value at issuance) 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 at least equals the product of the
present value of the anticipated excess inclusions and the highest federal
corporate income tax rate in effect 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 taxes accrue on the
anticipated excess inclusions in an amount sufficient to satisfy the accrued
taxes. The anticipated excess inclusions and the present value rate are
determined in the same manner as set forth above under "Disqualified
Organizations." A significant purpose to impede the assessment or collection of
tax exists if the transferor, at the time of the transfer, either knew or should
have known (had "improper knowledge") that the transferor would be unwilling or
unable to pay taxes due on its share of the taxable income of the REMIC. Under
the REMIC Regulations, a transferor is presumed not to have improper knowledge
if (i) the transferor conducted, at the time of the transfer, a reasonable
investigation of the financial condition of the transferee and, as a result of
the investigation, the transferor found that the transferee had historically
paid its debts as they came due and found no significant evidence to indicate
that the transferor will not continue to pay its debts as they come due in the
future; and (ii) the transferee represents to the transferor that it understands
that, as the holder of the Noneconomic Residual Interest, the transferee may
incur tax liabilities in excess of any cash flows generated by the residual
interest and that the transferee intends to pay taxes associated with holding of
residual interest as they become due. The Agreement will require the transferee
of a Residual Security to state as part of the affidavit described above under
the heading "Disqualified Organizations" that such transferee (i) has
historically paid its debts as they come due, (ii) intends to continue to pay
its debts as they come due in the future, (iii) understands that, as the holder
of a Noneconomic Residual Interest, it may incur tax liabilities in excess of
any cash flows generated by the Residual Security, and (iv) intends to pay any
and all taxes associated with holding the Residual Security as they become due.
The transferor must have no reason to believe that such statement is untrue.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Security that has "tax avoidance potential" to a "foreign person" will
be disregarded for all federal tax purposes. This rule appears intended to apply
to a transferee who is not a "U.S. Person" (as defined below), unless such
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Security is deemed to have tax
avoidance potential unless, at the time of the transfer, the transferor
reasonably expects that, for each excess inclusion, (i) the REMIC Pool will
distribute to the transferee residual interest holder an amount that will equal
at least 30% of the excess inclusions and (ii) that each such amount will be
distributed at or after the time at which the excess inclusion accrues and not
later than the close of the calendar year following the calendar year of
accrual. If the non-U.S. Person transfers the Residual Security back to a U.S.
Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The Prospectus Supplement relating to a series of Securities may
provide that a Residual Security may not be purchased by or transferred to any
person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. 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 or any political subdivision thereof or an estate or trust that is
subject to U.S. federal income tax regardless of the source of its income.
Sale or Exchange of a Residual Security
Upon the sale or exchange of a Residual Security, the Residual
Securityholder will recognize gain or loss equal to the excess, if any, of the
amount realized over the adjusted basis (as described above under "Taxation of
Securities - Basis and Losses") of such Residual Securityholder in such Residual
Security at the time of the sale or exchange. In addition to reporting the
taxable income of the REMIC Pool, a Residual Securityholder will have taxable
income to the extent that any cash distribution to him from the REMIC Pool
exceeds such adjusted basis on that Distribution Date. Such income will be
treated as gain from the sale or exchange of the Residual Security. It is
possible that the termination of the REMIC Pool may be treated as a sale or
exchange of a Residual
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Securityholder's Residual Security, in which case, if the Residual
Securityholder has an adjusted basis in his Residual Security remaining when his
interest in the REMIC Pool terminates, and if he holds such Residual Security as
a capital asset under Code Section 1221, then he will recognize a capital loss
at that time in the amount of such remaining adjusted basis.
The Conference Committee Report to the 1986 Act provides that, except
as provided in Treasury regulations yet to be issued. the wash sale rules of
Code Section 1091 will apply to disposition of Residual Securities.
Consequently, losses on dispositions of Residual Securities will be disallowed
where the seller of the Residual Security, during the period beginning six
months before the sale or disposition of the Residual Security and ending six
months after such sale or disposition, acquires (or enters into any other
transaction that results in the application of Code Section 1091) any residual
interest in any REMIC or any interest in a "taxable mortgage pool" (such as a
non-REMIC owner trust) that is economically comparable to a Residual Security.
Taxes That May Be Imposed on the REMIC Pool
Prohibited Transactions. Net income from certain transactions by the
REMIC Pool, called prohibited transactions, will not be part of the calculation
of income or loss includible in the federal income tax returns of Residual
Securityholders, but rather will be taxed directly to the REMIC Pool at a 100%
rate. Prohibited transactions generally include (i) the disposition of a
qualified mortgage other than for (a) substitution within two years of the
Startup Day for a defective (including a defaulted) obligation (or repurchase in
lieu of substitution of a defective (including a defaulted) obligation at any
time) or for any qualified mortgage within three months of the Startup Day, (b)
foreclosure, default or imminent default of a qualified mortgage, (c) bankruptcy
or insolvency of the REMIC Pool or (d) a qualified (complete) liquidation, (ii)
the receipt of income from assets that are not the type of mortgages or
investments that the REMIC Pool is permitted to hold, (iii) the receipt of
compensation for services or (iv) the receipt of gain from disposition of cash
flow investments other than pursuant to a qualified liquidation. Notwithstanding
(i) and (iv), it is not a prohibited transaction to sell REMIC Pool property to
prevent a default on Regular Securities as a result of a default on qualified
mortgages or to facilitate a clean-up call (generally, an optional termination
to save administrative costs when no more than a small percentage of the
Securities is outstanding). The REMIC Regulations indicate that the modification
of a Mortgage Loan generally will not be treated as a disposition if it is
occasioned by a default or reasonably foreseeable default, an assumption of the
Mortgage Loan, the waiver of a due-on-sale or encumbrance clause or the
conversion of an interest rate by a mortgagor pursuant to the terms of a
convertible adjustable rate Mortgage Loan. The REMIC Regulations also provide
that the modification of mortgage loans underlying Mortgage-Backed Securities
will not be treated as a modification of the Mortgage-Backed Securities,
provided that the trust including the was not created to avoid prohibited
transaction rules.
Contributions to the REMIC Pool After the Startup Day. In general, the
REMIC Pool will be subject to a tax at a 100% rate on the value of any property
contributed to the REMIC Pool after the Startup Day. Exceptions are provided for
cash contributions to the REMIC Pool (i) during the three months following the
Startup Day, (ii) made to a qualified reserve fund by a Residual Securityholder,
(iii) in the nature of a guarantee, (iv) made to facilitate a qualified
liquidation or clean-up call and (v) as otherwise permitted in Treasury
regulations yet to be issued.
Net Income from Foreclosure Property. The REMIC Pool will be subject to
federal income tax at the highest corporate rate on "net income from foreclosure
property," determined by reference to the rules applicable to real estate
investment trusts. Generally, property acquired by the REMIC Pool through
foreclosure or deed in lieu of foreclosure would be treated as "foreclosure
property" for a period of two years, with possible extensions. Net income from
foreclosure property generally means (i) gain from the sale of a foreclosure
property that is inventory property and (ii) gross income from foreclosure
property other than qualifying rents and other qualifying income for a real
estate investment trust.
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Liquidation of the REMIC Pool
If a REMIC Pool and the Trustee adopt a plan of complete liquidation,
within the meaning of Code Section 860F(a)(4)(A)(i) and sell all the REMIC
Pool's assets (other than cash) within a 90-day period beginning on the date of
the adoption of the plan of liquidation, the REMIC Pool will recognize no gain
or loss on the sale of its assets, provided that the REMIC Pool credits or
distributes in liquidation all the sale proceeds plus its cash (other than
amounts retained to meet claims against the REMIC Pool) to holders of Regular
Securities and Residual Securityholders within the 90-day period.
Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar
year basis and to file federal income tax returns for federal income tax
purposes in a manner similar to a partnership. The form for such income tax
return is Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax
Return. The Trustee will be required to sign the REMIC Pool's returns. Treasury
regulations provide that, except where there is a single Residual Securityholder
for an entire taxable year, the REMIC Pool generally will be subject to the
procedural and administrative rules of the Code applicable to partnerships,
including the determination by the Internal Revenue Service of any adjustments
to, among other things, items of REMIC income, gain, loss, deduction or credit
in a unified administrative proceeding. The Depositor or other designated
Residual Securityholders will be obligated to act as "tax matters person," as
defined in applicable Treasury regulations, with respect to the REMIC Pool. If
the Code or applicable Treasury regulations do not permit the Depositor to act
as tax matters person in its capacity as agent of the Residual Securityholders,
the Residual Securityholder chosen by the Residual Securityholders or such other
person specified pursuant to Treasury regulations will be required to act as tax
matters person.
Treasury regulations provide that a holder of a Residual Security is
not required to treat items on its return consistently with their treatment on
the REMIC Pool's return if a holder owns 100% of the Residual Securities for the
entire calendar year. Otherwise, each holder of a Residual Security is required
to treat items on its return consistently with their treatment on the REMIC
Pool's return, unless the holder of a Residual Security either files a statement
identifying the inconsistency or establishes that the inconsistency resulted
from incorrect information received from the REMIC Pool. The Service may assess
a deficiency resulting from a failure to comply with the consistency requirement
without instituting an administrative proceeding at the REMIC Pool level.
Limitations on Deduction of Certain Expenses
An investor who is an individual, estate or trust will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such itemized deductions, in the aggregate, do not exceed
2% of the investor's adjusted gross income. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser of (i) 3% of the excess, if
any, of adjusted gross income over $100,000, adjusted yearly for inflation
($50,000, adjusted yearly for inflation, in the case of a married individual
filing a separate return), or (ii) 80% of the amount of itemized deductions
otherwise allowable for such year. In the case of a REMIC Pool, such deductions
may include deductions under Code Section 212 for servicing fees and all
administrative and other expenses relating to the REMIC Pool or any similar
expenses allocated to the REMIC Pool with respect to a regular interest it holds
in another REMIC. Such investors who hold REMIC Securities either directly or
indirectly through certain pass-through entities may have their pro rata share
of such expenses allocated to them as additional gross income, but may be
subject to such limitation on deductions. In addition, such expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause such investors to be subject to significant additional tax liability.
Treasury regulations provide that the additional gross income and corresponding
amount of expenses generally are to be allocated entirely to the holders of
Residual Securities in the case of a REMIC Pool that would not qualify as a
fixed investment trust in the absence of a REMIC election. However, such
additional gross income and limitation on deductions will apply to the allocable
portion of such expenses to holders of Regular Securities, as well as holders of
Residual Securities, where such Regular Securities are issued in a manner that
is similar to pass-through certificates in a fixed investment trust. In general,
such allocable portion will be determined based on the ratio that a REMIC
Securityholder's income, determined on a daily basis, bears to the income of all
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holders of Regular Securities and Residual Securities with respect to a REMIC
Pool. As a result, individuals, estates or trusts holding REMIC Securities
(either directly or indirectly through a grantor trust, partnership, S
corporation, REMIC, or certain other pass-through entities described in the
foregoing Treasury regulations) may have taxable income in excess of the
interest income at the pass-through rate on Regular Securities that are issued
in a single class or otherwise consistently with fixed investment trust status
or in excess of cash distributions for the related period on Residual
Securities.
Taxation of Certain Foreign Investors
Regular Securities. Interest, including original issue discount,
distributable to Regular Securityholders who are nonresident aliens, foreign
corporations, or other Non-U.S. Persons (as defined below), will be considered
"portfolio interest" and therefore, generally will not be subject to 30% United
States withholding tax, provided that such Non-U.S. Person (i) is not a
"10-percent shareholder" within the meaning of Code Section 871(h)(3)(B) or a
controlled foreign corporation described in Code Section 881(c)(3)(C) and (ii)
provides the Trustee, or the person who would otherwise be required to withhold
tax from such distributions under Code Sections 1441 or 1442, with an
appropriate statement, signed under penalties of perjury, identifying the
beneficial owner and stating, among other things, that the beneficial owner of
the Regular Security is a Non-U.S. Person. If such statement, or any other
required statement, is not provided, 30% withholding will apply unless reduced
or eliminated pursuant to an applicable tax treaty or unless the interest on the
Regular Security is effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Person. In the latter case,
such Non-U.S. Person will be subject to United States federal income tax at
regular rates. Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Regular
Security. The term "Non-U.S. Person" means any person who is not a U.S. Person.
Residual Securities. The Conference Committee Report to the 1986 Act
indicates that amounts paid to Residual Securityholders who are Non-U.S. Persons
are treated as interest for purposes of the 30% (or lower treaty rate) United
States withholding tax. Treasury regulations provide that amounts distributed to
Residual Securityholders qualify as "portfolio interest," subject to the
conditions described in "Regular Securities" above, but only to the extent that
(i) the Mortgage Assets were issued after July 18, 1984. and (ii) the Trust fund
or segregated pool of assets therein (as to which a separate REMIC election will
be made), to which the Residual Security relates, consists of obligations issued
in "registered form" within the meaning of Code Section 163(f)(1). Generally,
Mortgage Assets will not be, but regular interests in another REMIC Pool will
be, considered obligations issued in registered form. Furthermore, a Residual
Securityholder will not be entitled to any exemption from the 30% withholding
tax (or lower treaty rate) to the extent of that portion of REMIC taxable income
that constitutes an "excess inclusion." See "Taxation of Residual Securities --
Limitations on Offset or Exemption of REMIC Income; Excess Inclusions." If the
amounts paid to Residual Securityholders who are Non-U.S. Persons are
effectively connected with the conduct of a trade or business within the United
States by such Non-U.S. Persons, 30% (or lower treaty rate) withholding will not
apply. Instead, the amounts paid to such Non-U.S. Persons will be subject to
United States federal income tax at regular rates. If 30% (or lower treaty rate)
withholding is applicable, such amounts generally will be taken into account for
purposes of withholding only when paid or otherwise distributed (or when the
Residual Security is disposed of) under rules similar to withholding upon
disposition of debt instruments that have original issue discount. See
"Tax-Related Restrictions on Transfer of Residual Securities -- Foreign
Investors" above concerning the disregard of certain transfers having "tax
avoidance potential." Investors who are Non-U.S. Persons should consult their
own tax advisors regarding the specific tax consequences to them of owning
Residual Securities.
Backup Withholding
Distributions made on the Regular Securities, and proceeds from the
sale of the Regular Securities to or through certain brokers, may be subject to
a "backup" withholding tax under Code Section 3406 of 31% on "reportable
payments" (including interest distributions, original issue discount, and, under
certain circumstances, principal distributions) unless the Regular
Securityholder complies with certain reporting and/or certification procedures,
including the provision of its taxpayer identification number to the Trustee,
its agent or the broker who effected the sale of the Regular Security, or such
Securityholder is otherwise an exempt recipient under applicable
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provisions of the Code. Any amounts to be withheld from distribution on the
Regular Securities would be refunded by the Internal Revenue Service or allowed
as a credit against the Regular Securityholder's federal income tax liability.
Reporting Requirements
Reports of accrued interest and original issue discount will be made
annually to the Internal Revenue Service and to individuals, estates, non-exempt
and non-charitable trusts, and partnerships who are either holders of record of
Regular Securities or beneficial owners who own Regular Securities through a
broker or middleman as nominee. All brokers, nominees and all other non-exempt
holders of record of Regular Securities (including corporations, non-calendar
year taxpayers, securities or commodities dealers, real estate investment
trusts, investment companies, common trust funds, thrift institutions and
charitable trusts) may request such information for any calendar quarter by
telephone or in writing by contacting the person designated in Internal Revenue
Service Publication 938 with respect to a particular series of Regular
Securities. Holders through nominees must request such information from the
nominee. Treasury regulations provide that information necessary to compute the
accrual of any market discount on the Regular Securities must be furnished for
calendar years beginning after 1990.
The Internal Revenue Service's Form 1066 has an accompanying Schedule
Q, Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each Residual Securityholder by the end of the month following
the close of each calendar quarter (41 days after the end of a quarter under
proposed Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual
Securityholders, furnished annually, if applicable, to holders of Regular
Securities, and filed annually with the Internal Revenue Service concerning Code
Section 67 expenses (see "Limitations on Deduction of Certain Expenses" above)
allocable to such holders. Furthermore, under such regulations, information must
be furnished quarterly to Residual Securityholders, furnished annually to
holders of Regular Securities, and filed annually with the Internal Revenue
Service concerning the percentage of the REMIC Pool's assets meeting the
qualified asset tests described above under "Federal Income Tax Consequences for
REMIC Securities," above."
Federal Income Tax Consequences for Securities as to Which No REMIC Election Is
Made
Standard Securities
General. If no election is made to treat a Trust (or a segregated pool
of assets therein) with respect to a series of Securities as a REMIC, the Trust
may be classified as a grantor trust under subparagraph E, Part 1 of subchapter
J of the Code and not as a partnership or association taxable as a corporation.
With respect to each series of Securities where no REMIC election is made, Arter
& Hadden, counsel to the Depositor, will deliver its opinion to the Depositor
that (unless otherwise limited in the related Prospectus Supplement) the related
Trust will be classified as a grantor trust and not as a partnership or
association taxable as a corporation. Arter & Hadden, counsel to the Depositor,
is of the opinion that if a Trust does not elect REMIC status and is not treated
as a partnership, the tax consequences to the Owners will be as described below.
Where there is no fixed retained yield with respect to the Mortgage Assets
underlying the Securities of a series, and where such Securities are not
designated as Stripped Securities, as described below under "Stripped
Securities" or as Partnership Interests described under "Taxation of Securities
Classified as Partnership Interests," the holder of each such "Standard
Security" in such series will be treated as the owner of a pro rata undivided
interest in the ordinary income and corpus portions of the Trust represented by
his Security and will be considered the beneficial owner of a pro rata undivided
interest in each of the Mortgage Assets, subject to the discussion below under
"Recharacterization of Servicing Fees." With respect to each series of
Securities where no REMIC election is made, Arter & Hadden, counsel to the
Depositor, will deliver its opinion to the Depositor that (unless otherwise
limited in the related Prospectus Supplement) the related Trust will be
classified as a grantor trust and not as a partnership or association taxable as
a corporation. Accordingly, the holder of a Security (a "Securityholder") of a
particular series will be required to report on its federal income tax return
its pro rata share of the entire income from the Mortgage Assets,
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original issue discount (if any), prepayment fees, assumption fees, and late
payment charges received by or on behalf of the Trust, in accordance with such
Securityholder's method of accounting. A Securityholder generally will be able
to deduct its share of servicing fees and all administrative and other expenses
of the Trust in accordance with his method of accounting, provided that such
amounts are reasonable compensation for services rendered to that Trust.
Securityholders who are individuals, estates or trusts, however, either directly
or indirectly through certain pass-through entities, will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, including deductions under Code Section 212 for servicing fees and all such
administrative and other expenses of the Trust, to the extent that such
deductions, in the aggregate, do not exceed two percent of an investor's
adjusted gross income. In addition, Code Section 68 provides that itemized
deductions otherwise allowable for a taxable year of an individual taxpayer will
be reduced by the lesser of (i) 3% of the excess, if any, of adjusted gross
income over $100,000, adjusted yearly for inflation ($50,000, adjusted yearly
for inflation, in the case of a married individual filing a separate return), or
(ii) 80% of the amount of itemized deductions otherwise allowable for such year.
As a result, such investors may have aggregate taxable income in excess of the
aggregate amount of cash received on such Securities with respect to interest at
the pass-through rate on such Securities or discount thereon. In addition, such
expenses are not deductible at all for purposes of computing the alternative
minimum tax and may cause such investors to be subject to significant additional
tax liability. Moreover, where there is fixed retained yield with respect to the
Mortgage Assets underlying a series of Securities or where the servicing fees
are in excess of reasonable servicing compensation, the transaction will be
subject to the application of the "stripped bond" and "stripped coupon" rules of
the Code, as described below under "Stripped Securities" and "Premium and
Discount -- Recharacterization of Servicing Fees," respectively.
Tax Status. Unless otherwise disclosed in a related Prospectus
Supplement and subject to the discussion below with respect to buy-down Mortgage
Assets, Arter & Hadden, counsel to the Depositor, will deliver its opinion to
the Depositor that:
1. A Standard Security owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) will be
considered to represent "loans . . . secured by an interest in real
property" within the meaning of Code Section 7701(a)(19)(C)(v),
provided that the real property securing the Mortgage Assets
represented by that Security is of the type described in such section.
2. A Standard Security owned by a financial institution
described in Code Section 593(a) will be considered to represent
"qualifying real property loans" within the meaning of Code Section
592(d)(1), provided that the real property securing the Mortgage Assets
represented by that Security is of the type described in such section.
3. A Standard Security owned by a real estate investment trust
will be considered to represent "real estate assets" within the meaning
of Code Section 856(C) (5) (A) to the extent that the assets of the
related Trust consist of qualified assets, and interest income on such
assets will be considered "interest on obligations secured by mortgages
on real property" within the meaning of Code Section 856(c)(3)(B).
4. A Standard Security owned by a REMIC will be considered to
represent an "obligation (including any participation or certificate of
beneficial ownership therein) which is principally secured by an
interest in real property" within the meaning of Code Section
860G(a)(3)(A) to the extent that the assets of the related Trust
consist of "qualified mortgages" within the meaning of Code Section
860G(a)(3).
An issue arises as to whether buy-down Mortgage Assets may be
characterized in their entirety under the Code provisions cited in the
immediately preceding paragraph. Code Section 593(d)(l)(C) provides that the
term "qualifying real property loan" does not include a loan "to the extent
secured by a deposit in or share of the taxpayer." The application of this
provision to a buy-down fund with respect to a buy-down Mortgage Loan is
uncertain, but may require that a taxpayer's investment in a buy-down Mortgage
Loan be reduced by the buy-down fund. As to the treatment of buy-down Mortgage
Assets as "qualifying real property loans" under Code Section 593(d)(i) if the
exception of Code Section 593(d)(1)(C) is inapplicable, as "loans . . . secured
"by an interest in real property" under Code Section 7701(a)(19)(C)(v), as "real
estate assets" under Code Section 856(c)(5)(A), and as
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"obligation[s] principally secured by an interest in real property" under Code
Section 860G(a)(3)(A), there is indirect authority supporting treatment of an
investment in a buy-down Mortgage Loan as entirely secured by real property if
the fair market value of the real property securing the loan exceeds the
principal amount of the loan at the time of issuance or acquisition, as the case
may be. There is no assurance that the treatment described above is proper.
Accordingly, Securityholders are urged to consult their own tax advisors
concerning the effects of such arrangements on the characterization of such
Securityholder's investment for federal income tax purposes.
Premium and Discount
Securityholders are advised to consult with their tax advisors as to
the federal income tax treatment of premium and discount arising either upon
initial acquisition of Securities or thereafter.
Premium. The treatment of premium incurred upon the purchase of a
Security will be determined generally as described above under " -- Taxation of
Regular Securities -- Premium."
Original Issue Discount. The Internal Revenue Service has stated in
published rulings that, in circumstances similar to those described herein, the
original issue discount rules will be applicable to a Securityholder's interest
in those Mortgage Assets as to which the conditions for the application of those
sections are met. Rules regarding periodic inclusion of original issue discount
income are applicable to mortgages of corporations originated after May 27,
1969, mortgages of noncorporate mortgagors (other than individuals) originated
after July l, 1982, and mortgages of individuals originated after March 2, 1984.
Such original issue discount could arise by the charging of points by the
originator of the mortgages in an amount greater than a statutory de minimis
exception, to the extent that the points are not currently deductible under
applicable Code provisions or are not for services provided by the lender. It is
generally not anticipated that adjustable rate Mortgage Assets will be treated
as issued with original issue discount. However, the application of the OID
Regulations to adjustable rate mortgage loans with incentive interest rates or
annual or lifetime interest rate caps may result in original issue discount.
Original issue discount must generally be reported as ordinary gross
income as it accrues under a constant yield method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
Code Section 1272 provides, however, for a reduction in the amount of original
issue discount includible in the income of a holder of an obligation that
acquires the obligation after its initial issuance at a price greater than the
sum of the original issue price and the previously accrued original issue
discount, less prior payments of principal. Accordingly, if such Mortgage Assets
acquired by a Securityholder are purchased at a price equal to the then unpaid
principal amount of such Mortgage Assets, no original issue discount
attributable to the difference between the issue price and the original
principal amount of such Mortgage Assets (i.e., points) will be includible by
such holder.
Market Discount. Securityholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the Mortgage Assets will be determined and
will be reported as ordinary income generally in the manner described above
under " -- Taxation of Regular Securities -- Market Discount."
Recharacterization of Servicing Fees. If the servicing fees paid to
Servicers were deemed to exceed reasonable servicing compensation, the amount of
such excess would be nondeductible under Code Section 162 or 212. In this
regard,there are no authoritative guidelines for federal income tax purposes as
to either the maximum amount of servicing compensation that may be considered
reasonable in the context of this or similar transactions or whether, in the
case of the Securities, the reasonableness of servicing compensation should be
determined on a weighted average or loan-by-loan basis. If a loan-by-loan basis
is appropriate, the likelihood that such amount would exceed reasonable
servicing compensation as to some of the Mortgage Assets would be increased.
Recently issued Internal Revenue Service guidance indicates that a servicing fee
in excess of reasonable compensation ("excess servicing") will cause the
Mortgage Assets to be treated under the "stripped bond" rules. Such guidance
provides safe harbors for servicing deemed to be reasonable and requires
taxpayers to demonstrate that the value of servicing fees in excess of such
amounts is not greater than the value of the services provided.
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Accordingly, if the Internal Revenue Service's approach is upheld, a
servicer that receives excess servicing fees would be viewed as retaining an
ownership interest in a portion of the interest payments on the Mortgage Assets.
Under the rules of Code Section 1286, the separation of the right to receive
some of or all the interest payments on an obligation from the right to receive
some or all of the principal payments on the obligation would result in
treatment of such Mortgage Assets as "stripped coupons" and "stripped bonds."
While Securityholders would still be treated as owners of beneficial interests
in a grantor trust for federal income tax purposes, the corpus of such trust
could be viewed as excluding the portion of the Mortgage Assets the ownership of
which is attributed to a servicer, or as including such portion as a second
class of equitable interest. Applicable Treasury regulations treat such an
arrangement as a fixed investment trust, since the multiple classes of trust
interests should be treated as merely facilitating direct investments in the
trust assets and the existence of multiple classes of ownership interests is
incidental to that purpose. In general, such a recharacterization should not
have any significant effect upon the timing or amount of income reported by a
Securityholder, except that the income reported by a cash method holder may be
slightly accelerated. See "Stripped Securities" below for a further description
of the federal income tax treatment of stripped bonds and stripped coupons.
In the alternative, the amount, if any, by which the servicing fees
paid to the servicers are deemed to exceed reasonable compensation for servicing
could be treated as deferred payments of purchase price by the Securityholders
to purchase an undivided interest in the Mortgage Assets. In such event, the
present value of such additional payments might be included in the
Securityholder's basis in such undivided interests for purposes of determining
whether the Security was acquired at a discount, at par, or at a premium. Under
this alternative, Securityholders may also be entitled to a deduction for
unstated interest with respect to each deferred payment. The Internal Revenue
Service may take the position that the specific statutory provisions of Code
Section 1286 described above override the alternative described in this
paragraph. Securityholders are advised to consult their tax advisors as to the
proper treatment of the amounts paid to the servicers as set forth herein as
servicing compensation or under either of the alternatives set forth above.
Sale or Exchange of Securities. Upon sale or exchange of a Security, a
Securityholder will recognize gain or loss equal to the difference between the
amount realized on the sale and its aggregate adjusted basis in the Mortgage
Assets and other assets represented by the Security. In general, the aggregate
adjusted basis will equal the Securityholder's cost for the Security, increased
by the amount of any income previously reported with respect to the Security and
decreased by the amount of any losses previously reported with respect to the
Security and the amount of any distributions received thereon. Except as
provided above with respect to market discount on any Mortgage Assets, and
except for certain financial institutions subject to the provisions of Code
Section 582(c), any such gain or loss would be capital gain or loss if the
Security was held as a capital asset.
Stripped Securities
General. Pursuant to Code Section 1286, the separation of ownership of
the right to receive some of or all the principal payments on an obligation from
ownership of the right to receive some of or all the interest payments results
in the creation of "stripped bonds" with respect to principal payments and
"stripped coupons" with respect to interest payments. For purposes of this
discussion, Securities that are subject to those rules will be referred to as
"Stripped Securities." The Securities will be subject to those rules if (i) the
Depositor or any of its affiliates retains (for its own account or for purposes
of resale), in the form of fixed retained yield or otherwise, an ownership
interest in a portion of the payments on the Mortgage Assets, (ii) the
Depositor, any of its affiliates or a servicer is treated as having an ownership
interest in the Mortgage Assets to the extent it is paid (or retains) servicing
compensation in an amount greater than reasonable consideration for servicing
the Mortgage Assets (see "Standard Securities -- Recharacterization of the
Servicing Fees" above) and (iii) a class of Securities are issued in two or more
classes or subclasses representing the right to non pro rata percentages of the
interest and principal payments on the Mortgage Assets.
In general, a holder of a Stripped Security (a "Stripped
Securityholder") will be considered to own "stripped bonds" with respect to its
pro rata share of all or a portion of the principal payments on each Mortgage
Loan and/or "stripped coupons" with respect to its pro rata share of all or a
portion of the interest payments on each Mortgage Loan, including the Stripped
Security's allocable share of the servicing fees paid, to the extent that
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such fees represent reasonable compensation for services rendered. See
discussion above under "Standard Securities -- Recharacterization of Servicing
Fees." For this purpose the servicing fees will be allocated to the Stripped
Securities in proportion to the respective offering price of each class (or
subclass) of Stripped Securities. The holder of a Stripped Security generally
will be entitled to a deduction each year in respect of the servicing fees, as
described above under "-- Federal Income Tax Consequences for Securities as to
Which No REMIC Election is Made -- Standard Securities -- General," subject to
the limitation described therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally
as a new obligation issued (i) on the date that the stripped interest is
purchased and (ii) at a price equal to its purchase price or, if more than one
stripped interest is purchased, the share of the purchase price allocable to
such stripped interest. Each stripped interest generally will have original
issue discount equal to the excess of its stated redemption price at maturity
(or, in the case of a stripped coupon, the amount payable on the due date of
such coupon) over its issue price. This treatment is based on the
interrelationship of Code Section 1286 and the regulations thereunder, Code
Sections 1272 through 1275, and the OID Regulations. While under Code Section
1286 computations with respect to Stripped Securities arguably should be made in
one of the ways described below, the OID Regulations state, in general, that all
debt instruments issued in connection with the same transaction must be treated
as a single debt instrument. The Trustee will make and report all computations
described below using this aggregate approach, unless substantial legal
authority requires otherwise.
Furthermore, the regulations under Code Section 1286 support the
treatment of a Stripped Security as a single debt instrument issued on the date
it is originated for purposes of calculating any original issue discount. The
preamble to such regulations state that such regulations are premised on the
assumption that an aggregation approach is appropriate in determining whether
original issue discount on a stripped bond or stripped coupon is de minimis. In
addition, under these regulations, a Stripped Security that represents a right
to payments of both interest and principal may be viewed either as issued with
original issue discount or market discount (as described below), at a de minimis
original issue discount, or presumably, at a premium. The preamble to such
regulations also provide that such regulations are premised on the assumption
that generally the interest component of such a Stripped Security would be
treated as stated interest under the original issue discount rules. Further, the
regulations provide that the purchaser of such a Stripped Security may be
required to account for any discount as market discount rather than original
issue discount if either (i) the initial discount with respect to the Strip
Security was treated as zero under the de minimis rule or (ii) no more than 100
basis points in excess of reasonable servicing is stripped off the related
Mortgage Assets. Any such market discount would be reportable as described above
under "Federal Income Tax Consequences for REMIC Securities -- Taxation of
Regular Securities -- Market Discount," without regard to the de minimis rule
therein.
Status of Stripped Securities. No specific legal authority exists as to
whether the character of the Stripped Securities, for federal income tax
purposes, will be the same as that of the Mortgage Assets. Stripped Securities
owned by applicable holders should be considered to represent "qualifying real
property loans" within the meaning or Code Section 593(d)(1), "real estate
assets" within the meaning of Code Section 856(c)(A), "obligations(s) . . .
principally secured by an interest in real property" within the meaning of Code
Section 860G(a)(3)(A), and "loans . . . secured by an interest in real property"
within the meaning of Code Section 7701(a)(19)(C)(v), and interest (including
original issue discount) income attributable to Stripped Securities should be
considered to represent "interest on obligations secured by mortgages on real
property" within the meaning or Code Section 856(c)(3)(B), provided that in each
case the Mortgage Assets and interest on such Mortgage Assets qualify for such
treatment. The application of such Code provisions to buy-down Mortgage Assets
is uncertain. See " -- Federal Income Tax Consequences for Securities as to
Which No REMIC Election is Made" and " -- Standard Securities -- Tax Status"
above.
Original Issue Discount. Except as described above under " -- General,"
each Stripped Security will be considered to have been issued (i) on the date
that the stripped interest is purchased and (ii) at a price equal to its
purchase price or, if more than one stripped interest is purchased, the share of
the purchase price allocable to such stripped interest. Each stripped interest
generally will have original issue discount equal to the excess of its stated
redemption price at maturity (or, in the case of a stripped coupon, the amount
payable on the due date of such coupon) over its issue price. Original issue
discount with respect to a Stripped Security must be included in
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ordinary income as it accrues, in accordance with a constant yield method that
takes into account the compounding of interest, which may be prior to the
receipt of the cash attributable to such income. The amount of original issue
discount required to be included in the income of a Stripped Securityholder in
any taxable year should be computed generally as described above under "Federal
Income Tax Consequences for REMIC Securities -- Taxation of Regular Securities
- -- Original Issue Discount" and "-- Variable Rate Regular Securities." With the
apparent exception of a Stripped Security issued with de minimis original issue
discount, as described above under "-- General," however, the issue price of a
Stripped Security will be the purchase price paid by each holder thereof, and
the stated redemption price at maturity will include the aggregate amount of the
payments to be made on the Stripped Security to such Stripped Securityholder,
presumably under the Prepayment Assumption, other than amounts treated as
qualified stated interest.
If the Mortgage Assets prepay at a rate either faster or slower than
that under the Prepayment Assumption, a Stripped Securityholder's recognition of
original issue discount will be either accelerated or decelerated and the amount
of such original issue discount will be either increased or decreased depending
on the relative interests in principal and interest on each Mortgage Loan
represented by such Stripped Securityholder's Stripped Security. While the
matter is not free from doubt, the holder of a Stripped Security should be
entitled in the year that it becomes certain (assuming no further prepayments)
that the holder will not recover a portion of its adjusted basis in such
Stripped Security to recognize an ordinary loss equal to such portion of
unrecoverable basis.
As an alternative to the method described above, the fact that some of
or all the interest payments with respect to the Stripped Securities will not be
made if the Mortgage Assets are prepaid could lead to the interpretation that
such interest payments are "contingent" within the meaning of the proposed
regulations issued under Code Section 1274 that address the treatment of
contingent payments. If the rules of those proposed regulations apply, treatment
of a Stripped Security under such rules depends on whether the aggregate amount
of principal payments, if any, to be made on the Stripped Security is less than
or greater than its issue price. If the aggregate principal payments are greater
than or equal to the issue price, the principal payments would be treated as a
separate installment obligation issued at a price equal to the purchase price
for the Stripped Security. In such case, original issue discount would be
calculated and accrued under the method described above without consideration of
the interest payments with respect to the Stripped Security. Such payments of
interest would be includible in the Stripped Securityholder's gross income in
the taxable year in which the amounts become fixed. If the aggregate amount of
principal payments to be made on the Stripped Security is less than its issue
price, each payment of principal would be treated as a return of basis. Each
payment of interest would be treated as includible in gross income to the extent
of the applicable Federal rate under Code Section 1274(d), as applied to the
adjusted basis of the Stripped Security, while amounts received in excess of the
applicable Federal rate, as applied to the adjusted basis of the Stripped
Security, would be characterized as a return of basis until the total amount of
interest payments treated as a return of basis equalled the excess of the
purchase price over the aggregate stated principal payments. Any additional
interest payments thereafter would be treated as ordinary income. While not free
from doubt, uncertainty as to the payment of interest arising as a result of the
possibility of prepayment of the Mortgage Assets should not cause the rules
under the proposed contingent payment regulations to apply to interest with
respect to the Stripped Securities.
Sale or Exchange of Stripped Securities. Sale or exchange of a Stripped
Security prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Stripped
Securityholder's adjusted basis in such Stripped Security, as described above
under "Federal Income Tax Consequences for REMIC Securities -- Taxation of
Regular Securities - Sale or Exchange of Regular Securities." To the extent that
a subsequent purchaser's purchase price is exceeded by the remaining payments on
the Stripped Securities, such subsequent purchaser will be required for federal
income tax purposes to accrue and report such excess as if it were original
issue discount in the manner described above. It is not clear for this purpose
whether the assumed prepayment rate that is to be used in the case of a Stripped
Securityholder other than by original Stripped Securityholder should be the
Prepayment Assumption or a new rate based on the circumstances at the date of
subsequent purchase.
Purchase of More Than One Class of Stripped Securities. Where an
investor purchases more than one class of Stripped Securities, it is currently
unclear whether for federal income tax purposes such classes of Stripped
Securities should be treated separately or aggregated for purposes of the rules
described above.
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Because of these possible varying characterizations of Stripped
Securities and the resultant differing treatment of income recognition, Stripped
Securityholders are urged to consult their own tax advisors regarding the proper
treatment of Stripped Securities for federal income tax purposes.
Reporting Requirements and Backup Withholding
The Trustee will furnish, within a reasonable time after the end of
each calendar year, to each Securityholder or Stripped Securityholder at any
time during such year, such information (prepared on the basis described above)
as the Trustee deems to be necessary or desirable to enable such Securityholders
to prepare their federal income tax returns. Such information will include the
amount of original issue discount accrued on Securities held by persons other
than Securityholders exempted from the reporting requirements. The amounts
required to be reported by the Trustee may not be equal to the proper amount of
original issue discount required to be reported as taxable income by a
Securityholder, other than an original Securityholder. The Trustee will also
file such original issue discount information with the Internal Revenue Service.
If a Securityholder fails to supply an accurate taxpayer identification number
or if the Secretary of the Treasury determines that a Securityholder has not
reported all interest and dividend income required to be shown on his federal
income tax return, 31% backup withholding may be required in respect of any
reportable payments, as described above under "-- Backup Withholding."
Taxation of Certain Foreign Investors
To the extent that a Security evidences ownership in Mortgage Assets
that are issued on or before July 18, 1984, interest or original issue discount
paid by the person required to withhold tax under Code Section 1441 or 1442,
which apply to nonresident aliens, foreign corporations, or other Non-U.S.
Persons generally will be subject to 30% United States withholding tax, or such
lower rate as may be provided for interest by an applicable tax treaty. Accrued
original issue discount or market discount recognized by the Securityholder on
the sale or exchange of such a Security also will be subject to federal income
tax at the same rate.
Treasury regulations provide that interest or original issue discount
paid by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Assets issued after July 18, 1984, will be
"portfolio interest" and will be treated in the manner, and such persons will
be subject to the same certification requirements described above under
"--Taxation of Certain Foreign Investors -- Regular Securities."
Debt Securities
General. "Debt Securities," if issued and as described in the related
Prospectus Supplement may be issued either as (i) non-recourse debt of the
Depositor secured by the related Mortgage Assets, in which case the related
Trust will constitute only a security device which constitutes a collateral
arrangement for the issuance of secured debt and not an entity for federal
income tax purposes or (ii) debt of a partnership, in which case the related
Trust will constitute a partnership for federal income tax purposes. In either
case, Debt Securities, will follow the federal income tax treatment hereinafter
described.
Original Issue Discount. It is likely that the Debt Securities will be
treated as having been issued with "original issue discount" within the meaning
of Code Section 1273(a) because interest payments on the Debt Securities may, in
the event of certain shortfalls, be deferred for periods exceeding one year. As
a result, interest payments may not be considered "qualified stated interest"
payments.
In general, a holder of a Debt Security having original issue discount
must include original issue discount in ordinary income as it accrues in advance
of receipt of the cash attributable to the discount, regardless of the method of
accounting otherwise used. The amount of original issue discount on a Debt
Security will be computed generally as described under "-- Federal Income Tax
Consequences for REMIC Certificates" and "Taxation of Regular Certificates --
Original Issue Discount" and "-- Variable Rate Regular Certificates." The
Depositor intends to report any information required with respect to the Debt
Securities based on the OID Regulations.
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Market Discount. A purchaser of a Debt Security may be subject to the
market discount rules of Code Sections 1276 through 1278. In general, "market
discount" is the amount by which the stated redemption price at maturity (or, in
the case of a Debt Security issued with original issue discount, the adjusted
issue price) of the Debt Security exceeds the purchaser's basis in a Debt
Security. The holder of a Debt Security that has market discount generally will
be required to include accrued market discount in ordinary income to the extent
payments includible in the stated redemption price at maturity of such Debt
Security are received. The amount of market discount on a Debt Security will be
computed generally as described under "Federal Income Tax Consequences for REMIC
Certificates" and "-- Taxation of Regular Certificates -- Market Discount."
Premium. A Debt Security purchased at a cost greater than its currently
outstanding stated redemption price at maturity is considered to be purchased at
a premium. A holder of a Debt Security who holds a Debt Security as a "capital
asset" within the meaning of Code Section 1221 may elect under Code Section 171
to amortize the premium under the constant interest method. That election will
apply to all premium obligations that the holder of a Debt Security acquires on
or after the first day of the taxable year for which the election is made,
unless the IRS permits the revocation of the election. In addition, it appears
that the same rules that apply to the accrual of market discount on installment
obligations are intended to apply in amortizing premium on installment
obligations such as the Debt Securities, although it is unclear whether the
alternatives to the constant interest method described above under "Market
Discount" are available. The portion of the premium deductible pursuant to an
election under Section 171 and allocable to a particular period will be treated
as a reduction in interest payments on the Debt Security during that period. A
holder of a Debt Security who neither has in place nor makes an election to
amortize bond premium could be required to allocate that premium as a loss
(which would be a capital loss if the Debt Security is held as a capital asset)
as those principal payments are received.
Sale or Exchange of Debt Securities. If a holder of a Debt Security
sells or exchanges a Debt Security, the holder of a Debt Security will recognize
gain or loss equal to the difference, if any, between the amount received and
the holder of a Debt Security's adjusted basis in the Debt Security. The
adjusted basis in the Debt Security generally will equal its initial cost,
increased by any original issue discount or market discount previously included
in the seller's gross income with respect to the Debt Security and reduced by
the payments previously received on the Debt Security, other than payments of
qualified stated interest, and by any amortized premium.
In general, except as described above with respect to market discount,
and except for certain financial institutions subject to Code Section 582(c),
any gain or loss on the sale or exchange of a Debt Security recognized by an
investor who holds the Debt Security as a capital asset (within the meaning of
Code Section 1221), will be capital gain or loss and will be long-term or
short-term depending on whether the Debt Security has been held for more than
one year. For corporate taxpayers, there is no preferential rate afforded to
long-term capital gains. For individual taxpayers, all net capital gains are
currently subject to a maximum nominal rate of tax of 28%.
Taxation of Securities Classified as Partnership Interests
Certain Trusts may be treated as partnerships for Federal income tax
purposes. In such event, the Trusts may issue Securities characterized as
"Partnership Interests" as discussed in the related Prospectus Supplement. With
respect to such series of Partnership Interests, Arter & Hadden, counsel to the
Depositor, will deliver its opinion to the Depositor that (unless otherwise
limited in the related Prospectus Supplement) the Trust will be characterized as
a partnership and not an association taxable as a corporation for federal income
tax purposes, which will also cover any material federal income tax consequences
applicable to the Owners.
PLAN OF DISTRIBUTION
Securities are being offered hereby in series through one or more
underwriters or groups of underwriters (the "Underwriters"). The Prospectus
Supplement will set forth the terms of offering of the series of Securities,
including the public offering or purchase price of each class of Securities of
such series being offered thereby or the method by which such price will be
determined and the net proceeds to the Depositor from the sale of each such
class. Such Securities will be acquired by the Underwriters for their own
account and may be resold from time to time in one or more transactions
including negotiated transactions, at fixed public offering prices or at varying
prices
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to be determined at the time of sale or at the time of commitment therefor. The
managing Underwriter or Underwriters with respect to the offer and sale of a
particular series of Securities will be set forth on the cover of the Prospectus
Supplement relating to such series and the members of the underwriting
syndicate, if any, will be named in such Prospectus Supplement
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. Underwriters and dealers participating
in the distribution of the Securities may be deemed to be underwriters in
connection with such Securities, and any discounts or commissions received by
them from the Depositor and any profit on the resale of Securities by them may
be deemed to be underwriting discounts and commissions under the Securities Act
of 1933, as amended. The Prospectus Supplement will describe any such
compensation paid by the Depositor.
It is anticipated that the underwriting agreement pertaining to the
sale of any series of Securities will provide that the obligations of the
Underwriters will be subject to certain conditions precedent, that the
Underwriters will be obligated to purchase all such Securities if any are
purchased and that the Depositor will indemnify the Underwriters against certain
civil liabilities, including liabilities under the Securities Act of 1933, as
amended.
RATINGS
Each class of Securities of a Series will be rated at their initial
issuance in one of the four highest categories by at least one Rating Agency.
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 Agency. No person is obligated to maintain the rating on any
Security, and, accordingly, there can be no assurance that the ratings assigned
to a Security upon initial issuance will not be lowered or withdrawn by a Rating
Agency at any time thereafter. In general, ratings address credit risk and do
not represent any assessment of the likelihood or rate of principal prepayments.
LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Securities will be passed upon for the Depositor by Arter & Hadden, Washington,
D.C. and by Keith Blackwell, General Counsel for the Depositor. Certain legal
matters relating to insolvency issues and certain federal income tax matters
concerning the Securities will be passed upon for the Depositor by Arter &
Hadden.
FINANCIAL INFORMATION
A Trust will be formed with respect to each series of Securities. No
Trust will have any assets or obligations prior to the issuance of the related
series of Securities. No Trust will engage in any activities other than those
described herein or in the Prospectus Supplement. Accordingly, no financial
statement with respect to any Trust is included in this Prospectus or will be
included in the Prospectus Supplement.
The Depositor has determined that its financial statements are not
material to the offering made hereby.
A Prospectus Supplement and the related Form 8-K (which will be
incorporated by reference to the Registration Statement) may contain financial
statements of the related Credit Enhancer, if any.
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APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Page
1986 Act...................................................................48
Agreement...................................................................1
Applicable Accounting Standards............................................31
Balloon Loans...............................................................7
Beneficial Owners...........................................................4
BIF........................................................................31
Book Entry Certificates.....................................................4
Certificate Account........................................................13
Certificate Interest Rate..................................................12
Certificate Principal Balance..............................................11
Certificate Register.......................................................11
Certificate Registrar......................................................11
Certificateholder..........................................................63
Certificates................................................................1
Clearing Agency.............................................................4
Clearing Agency Participants................................................4
Code........................................................................5
Companion Certificates.....................................................12
Compound Interest Certificates.............................................12
Contract Loan Schedule.....................................................29
Contracts..................................................................17
Cooperative Loans..........................................................15
Cooperatives................................................................1
Credit Enhancement..........................................................4
Custodial Account..........................................................23
Cut-Off Date...............................................................12
Debt Securities............................................................69
Defective Mortgage Loan....................................................30
Delivery Date..............................................................10
Deposit Date...............................................................30
Depositor...................................................................1
Disqualified Organization..................................................58
Distribution Date..........................................................13
DOL........................................................................45
Eligible Investments.......................................................31
ERISA.......................................................................5
Events of Default..........................................................33
FDIC.......................................................................23
FHA.........................................................................2
Fitch.......................................................................6
Garn-St. Germain Act.......................................................40
GNMA........................................................................2
Insurance Proceeds.........................................................22
Interest Accrual Period....................................................13
Liquidation Proceeds.......................................................23
Loan-to-Value Ratio........................................................17
Master Servicer.............................................................1
MBS.........................................................................2
Monthly Advance............................................................23
Moody's.....................................................................6
Mortgage Assets.............................................................1
Mortgage Loans..............................................................1
Mortgage Notes.............................................................15
Mortgage Pool Insurance Policy.............................................19
Mortgage Rates.............................................................16
Mortgage-Backed Securities..................................................2
Mortgaged Properties.......................................................15
Mortgages..................................................................15
Mortgagors.................................................................22
NCUA.......................................................................23
Non-Priority Certificates..................................................13
Non-U.S. Person............................................................62
Noneconomic Residual Interest..............................................59
Nonrecoverable Advance.....................................................23
Notional Principal Balance.................................................13
OBRA.......................................................................47
OID Regulations............................................................47
Original Value.............................................................17
OTS........................................................................40
Owners.....................................................................13
Partnership Interests......................................................70
Pass-Through Entity........................................................58
Pass-Through Rate...........................................................3
Plans......................................................................45
Pool Insurer...............................................................19
Pre-Funding Account.........................................................3
Pre-Funding Agreement.......................................................3
Prepayment Assumption......................................................50
Principal Balance..........................................................16
Principal Prepayments......................................................14
Priority Certificates......................................................13
PTE 83-1...................................................................46
Rating Agency...............................................................6
Record Date................................................................13
Regular Certificateholder..................................................48
Regular Certificates.......................................................47
REIT.......................................................................47
Relief Act..................................................................9
REMIC.......................................................................5
REMIC Certificates.........................................................47
REMIC Pool.................................................................47
REMIC Regulations..........................................................47
Remittance Date............................................................23
Remittance Rate............................................................23
Reserve Fund...............................................................21
Residual Certificateholders................................................54
Residual Certificates......................................................47
Retail Class Certificate...................................................49
S&P.........................................................................6
SAIF.......................................................................31
Scheduled Amortization Certificates........................................12
Seller......................................................................1
Senior Certificates........................................................18
Servicer....................................................................1
Special Allocation Certificates............................................12
Special Hazard Insurance Policy............................................20
Special Hazard Insurer.....................................................21
Standard Certificate.......................................................63
Stripped Certificateholder.................................................66
Stripped Certificates......................................................66
Subordinated Certificates..................................................18
Thrift Institution.........................................................47
Title I Program............................................................44
TMP........................................................................48
Trust.......................................................................1
Trustee.....................................................................1
U.S. Person................................................................59
UCC........................................................................38
Underwriters...............................................................70
VA..........................................................................2
A-1
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This preliminary prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.
Preliminary Prospectus Dated __________, 1996
Mortgage Pass-Through Certificates
(Issuable in Series)
AMRESCO Residential Securities Corporation
(Depositor)
This Prospectus relates to Mortgage Pass-Through Certificates to be
issued from time to time in one or more series (and one or more classes within a
series), certain classes of which may be offered on terms determined at the time
of sale and described in this Prospectus and the related Prospectus Supplement.
Each Certificate will be issued by a separate trust (each, a "Trust") and will
evidence a beneficial ownership interest in a Trust. The assets of a Trust will
include one or more of the following: (i) multifamily or commercial mortgage
loans and/or installment contracts for the sale of multifamily or commercial
properties; (ii) multifamily or commercial mortgage-backed securities
representing an interest in, or that are secured by pledges of, multifamily or
commercial loans; and (iii) reinvestment income, reserve funds, cash accounts,
insurance policies, guaranties, letters of credit or other assets as described
in the related Prospectus Supplement.
One or more classes of Certificates of a series may be (i) entitled to
receive distributions allocable to principal, principal prepayments, interest or
any combination thereof prior to one or more other classes of Certificates of
such series or after the occurrence of certain events and (ii) subordinated in
the right to receive such distributions to one or more senior classes of
Certificates of such series, in each case as specified in the related Prospectus
Supplement. Interest on each class of Certificates entitled to distributions
allocable to interest will accrue at a fixed rate or at a rate that is subject
to change from time to time as specified in the related Prospectus Supplement.
The Depositor or its affiliates may retain or hold for sale from time to time
one or more classes of a series of Certificates.
Distributions on the Certificates will be made at the intervals and on
the dates specified in the related Prospectus Supplement from the assets of the
related Trust and any other assets pledged for the benefit of the Certificates.
An affiliate of the Depositor may make or obtain for the benefit of the
Certificates limited representations and warranties with respect to mortgage
assets assigned to the Trust. Neither the Depositor or any affiliate will have
any other obligation with respect to the Certificates.
The yield on each class of Certificates of a series will be affected by
the rate of payment of principal (including prepayments) on mortgage assets in
the related Trust. Each series of Certificates will be subject to early
termination under the circumstances described herein and in the related
Prospectus Supplement.
It is a condition to the issuance of the Certificates that the
Certificates be rated in not less than the fourth highest rating category by a
nationally recognized rating organization.
See "Risk Factors" beginning on Page 6 herein and beginning on Page
S-10 in the related Prospectus Supplement for a discussion of significant risk
factors.
See "ERISA Considerations" herein and in the related Prospectus
Supplement for a discussion of restrictions on the acquisition of Certificates
by "plan fiduciaries."
If specified in a Prospectus Supplement, an election may be made to
treat the Trust for the related series or specified portions thereof as a "real
estate mortgage investment conduit" ("REMIC") for federal income tax purposes.
See "Certain Federal Income Tax Consequences" herein and in the related
Prospectus Supplement.
An investor should carefully review the information in the related
Prospectus Supplement concerning the risks associated with the different types
and classes of Certificates.
THE ASSETS OF A TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE RELATED
CERTIFICATES. THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF
THE DEPOSITOR, ANY SERVICER, ANY ORIGINATOR OR ANY OF THEIR AFFILIATES, EXCEPT
AS SET FORTH HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT. NEITHER THE
CERTIFICATES NOR THE UNDERLYING MORTGAGE ASSETS WILL BE GUARANTEED OR INSURED BY
ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE DEPOSITOR, ANY SERVICER,
ANY ORIGINATOR OR ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH IN THE RELATED
PROSPECTUS SUPPLEMENT.
- --------------------------------------------------------------------------------
THESE CERTIFICATES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR ANY RELATED PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
Offers of the Certificates may be made through one or more different
methods, including offerings through underwriters, as more fully described under
"Plan of Distribution" herein and in the related Prospectus Supplement.
There will have been no public market for any series of Certificates
prior to the offering thereof. There can be no assurance that a secondary market
will develop for the Certificates of any series or, if it does develop, that
such market will continue.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of Certificates unless accompanied by a Prospectus
Supplement.
- --------------------------------------------------------------------------------
The date of this Prospectus is _____________, 199__
<PAGE>
TABLE OF CONTENTS
Page
SUMMARY OF PROSPECTUS....................................................... 1
RISK FACTORS................................................................ 6
DESCRIPTION OF THE CERTIFICATES............................................. 9
General................................................................ 9
Classes of Certificates................................................ 10
Distributions of Principal and Interest................................ 11
Book Entry Registration................................................ 12
List of Owners of Certificates......................................... 13
THE TRUSTS.................................................................. 13
Mortgage Loans......................................................... 14
Mortgage-Backed Securities............................................. 16
CREDIT ENHANCEMENT.......................................................... 17
SERVICING OF THE MORTGAGE LOANS............................................. 19
Payments on Mortgage Loans............................................. 19
Advances............................................................... 20
Collection and Other Servicing Procedures.............................. 20
Standard Hazard Insurance.............................................. 21
Title Insurance Policies............................................... 21
Claims Under Standard Hazard Insurance
Policies; Other Realization Upon
Defaulted Loans.................................................... 21
Servicing Compensation and Payment of
Expenses........................................................... 22
POOLING AND ADMINISTRATION.................................................. 22
Assignment of Mortgage Assets.......................................... 22
Evidence as to Compliance.............................................. 24
The Trustee............................................................ 24
Administration of the Certificate Account.............................. 25
Reports................................................................ 25
Forward Commitments; Pre-Funding....................................... 26
Servicer Events of Default............................................. 26
Rights Upon Servicer Event of Default.................................. 27
Amendment.............................................................. 27
Termination............................................................ 28
USE OF PROCEEDS............................................................. 28
THE DEPOSITOR............................................................... 28
CERTAIN LEGAL ASPECTS OF THE
MORTGAGE ASSETS........................................................ 28
The Mortgage Loans..................................................... 28
General................................................................ 28
Leases and Rents....................................................... 29
Foreclosure............................................................ 29
Installment Contracts.................................................. 33
Subordinate Financing.................................................. 33
LEGAL INVESTMENT MATTERS.................................................... 33
ERISA CONSIDERATIONS........................................................ 34
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES........................................................... 36
Federal Income Tax Consequences For
REMIC Certificates................................................. 36
Taxation of Regular Certificates....................................... 38
Taxation of Residual Certificates...................................... 43
Treatment of Certain Items of REMIC
Income and Expense................................................. 45
Tax-Related Restrictions on Transfer of
Residual Certificates.............................................. 47
Sale or Exchange of a Residual Certificate............................. 49
Taxes That May Be Imposed on the
REMIC Pool......................................................... 49
Liquidation of the REMIC Pool.......................................... 50
Administrative Matters................................................. 50
Limitations on Deduction of Certain
Expenses........................................................... 51
Taxation of Certain Foreign Investors.................................. 51
Backup Withholding..................................................... 52
Reporting Requirements................................................. 52
Federal Income Tax Consequences for
Certificates as to Which No REMIC
Election Is Made................................................... 53
Premium and Discount................................................... 54
Stripped Certificates.................................................. 56
Reporting Requirements and Backup
Withholding........................................................ 58
Taxation of Certain Foreign Investors.................................. 58
Taxation of Securities Classified as
Partnership Interests.............................................. 59
PLAN OF DISTRIBUTION........................................................ 59
LEGAL MATTERS............................................................... 59
FINANCIAL INFORMATION....................................................... 59
INDEX TO LOCATION OF PRINCIPAL
DEFINED TERMS..........................................................A-1
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed with respect to each respective Trust pursuant to
Sections 13(a), 13(c), 14 and 15(d) of the Securities Exchange Act of 1934
subsequent to the date of this Prospectus and prior to the termination of the
offering of the securities of such Trust offered hereby shall be deemed to be
incorporated by reference into this Prospectus when delivered with respect to
such Trust. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
Any person receiving a copy of this Prospectus may obtain, without charge,
upon written or oral request, a copy of any of the documents incorporated by
reference herein, except for the exhibits to such documents (other than the
documents expressly incorporated therein by reference). Requests should be
directed to AMRESCO Residential Securities Corporation, 700 N. Pearl Street,
Suite 2400, Dallas, Texas 75201 (telephone number (214) 953-7700).
<PAGE>
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the Prospectus Supplement relating to a particular series of Certificates and to
the related Agreement which will be prepared in connection with each series of
Certificates. Unless otherwise specified, capitalized terms used and not defined
in this Summary of Prospectus have the meanings given to them in this Prospectus
and in the related Prospectus Supplement.
Title of Securities................... Mortgage Pass-Through Certificates,
issuable in series, in fully registered
form or in book entry only form, in
authorized denominations, as described
in the Prospectus Supplement (the
"Certificates"). Each Certificate will
represent a beneficial ownership
interest in a trust (a "Trust") created
by the Depositor from time to time
pursuant to a pooling and
administration agreement (each, an
"Agreement").
The Depositor......................... AMRESCO Residential Securities
Corporation (the "Depositor") is a
Delaware corporation. The Depositor's
principal executive offices are located
at 700 N. Pearl Street, Suite 2400,
Dallas, Texas 75201; telephone number
(214) 953-7700. See "The Depositor"
herein. The Depositor or its affiliates
may retain or hold for sale from time
to time one or more classes of a series
of Certificates.
The Servicer.......................... The entity or entities named as the
Servicer in the Prospectus Supplement
(each, a "Servicer"), will act as
administrator, and may act as a
servicer, with respect to the Mortgage
Loans included in the related Trust.
The Servicer may be an affiliate of the
Depositor and may be the related seller
of Mortgage Assets to the Depositor
(each, a "Seller").
The Trustee........................... The trustee (the "Trustee") for each
series of Certificates will be
specified in the related Prospectus
Supplement.
Trust Assets.......................... The assets of a Trust will primarily be
made up of mortgage-related assets (the
"Mortgage Assets") consisting of one or
more of the following types of assets:
A. The Mortgage Loans................. "Mortgage Loans" may include fixed rate
or adjustable rate (i) conventional
multifamily mortgage loans
("Conventional Multifamily Loans") or
mortgages insured by the Federal
Housing Authority (the "FHA")
("FHA-Insured Multifamily Loans" and
together with the Conventional
Multifamily Loans, "Multifamily
Loans"), in each case secured by rental
apartment buildings or projects
containing five or more residential
units on mortgage loans on apartment
buildings owned by Cooperatives (each,
a "Multifamily Property"), (ii)
commercial loans secured by office
buildings, shopping centers, retail
stores, hotels or motels, nursing
homes, hospitals or other health-care
related facilities, mobile home parks,
warehouse facilities, mini-warehouse
facilities or self-storage facilities,
industrial plants, mixed use or other
types of income-producing properties
or unimproved land (each, a "Commercial
Property"; a Multifamily Property or a
Commercial Property is a "Mortgaged
Property") and/or (iii) installment
contracts ("Installment Contracts") for
the sale of Multifamily Properties or
Commercial Properties.
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A Mortgage Loan may provide for accrual
of interest thereon at an interest rate
(a "Mortgage Loan Rate") that is fixed
over time, or that adjusts from time to
time, or that may be converted at the
borrower's election from an adjustable
to a fixed Mortgage Loan Rate, or from
a fixed to an adjustable Mortgage Loan
Rate. Adjustable rate Mortgage Loans
("Adjustable Rate Mortgage Loans") may
permit or require periodic changes in
their interest rates ("Adjustable
Mortgage Loan Rates") and in their
monthly payments. Mortgage Loans may
provide for no amortization of the
principal amount prior to maturity or
for a specified period after
origination, with the entire unpaid
principal balance to be paid in a lump
sum at maturity, or may provide for
full amortization of principal. The
Mortgage Loans may provide for negative
amortization. The Mortgage Loans may
provide for a prohibition on prepayment
or require payment of a premium or a
yield maintenance penalty in connection
with a prepayment. See "The Trust --
Mortgage Loans" herein.
B. Mortgage-
Backed Securities................... "Mortgage-Backed Securities" or "MBS"
may include (i) private (that is, not
guaranteed or insured by the United
States or any agency or instrumentality
thereof) mortgage participations,
mortgage pass-through certificates or
other mortgage-backed securities or
(ii) certificates insured or guaranteed
by Federal Home Loan Mortgage
Corporation ("FHLMC"), Federal National
Mortgage Association ("FNMA"),
Government National Mortgage
Association ("GNMA") or the Federal
Agricultural Mortgage Corporation
("FAMC"). See "The Trust --
Mortgage-Backed Securities" herein.
Trust Assets may also include
reinvestment income, reserve funds,
cash accounts, insurance policies,
guaranties, letters of credit or other
assets as described in the related
Prospectus Supplement.
The Certificates...................... The Certificates of any series may be
issued in one or more classes, as
specified in the Prospectus Supplement.
One or more classes of Certificates of
each series (i) may be entitled to
receive distributions allocable only to
principal, only to interest or to any
combination thereof; (ii) may be
entitled to receive distributions only
of prepayments of principal throughout
the lives of the Certificates or during
specified periods; (iii) may be
subordinated in the right to receive
distributions of scheduled payments of
principal, prepayments of principal,
interest or any combination thereof to
one or more other classes of
Certificates of such series throughout
the lives of the Certificates or during
specified periods; (iv) may be entitled
to receive such distributions only
after the occurrence of events
specified in the Prospectus Supplement;
(v) may be entitled to receive
distributions in accordance with a
schedule or formula or on the basis of
collections from designated portions of
the assets in the related Trust; (vi)
as to Certificates entitled to
distributions allocable to interest,
may be entitled to receive interest at
a fixed rate or a rate that is subject
to change from time to time; (vii) may
accrue interest, with such accrued
interest added to the principal amount
of the Certificates, and no payments
being made thereon until certain other
classes of the series have been paid in
full; and (viii) as to Certificates
entitled to distributions allocable to
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interest, may be entitled to
distributions allocable to interest
only after the occurrence of events
specified in the Prospectus Supplement
and may accrue interest until such
events occur, in each case as specified
in the Prospectus Supplement. The
timing and amounts of such
distributions may vary among classes,
over time, or otherwise as specified in
the related Prospectus Supplement.
Distributions on
the Certificates.................... The related Prospectus Supplement will
specify (i) whether distributions on
the Certificates entitled thereto will
be made monthly, quarterly, semi-
annually or at other intervals and
dates out of the payments received in
respect of the Mortgage Assets included
in the related Trust and other assets,
if any, pledged for the benefit of the
related Owners of Certificates, (ii)
the amount allocable to payments of
principal and interest on any
Distribution Date and (iii) whether all
distributions will be made pro rata to
Owners of Certificates of the class
entitled thereto.
The aggregate original principal
balance of the Certificates will equal
the aggregate distributions allocable
to principal that such Certificates
will be entitled to receive; the
Certificates will have an aggregate
original principal balance equal to the
aggregate unpaid principal balance of
the related Mortgage as of the first
day of the month of creation of the
Trust; and the Certificates will bear
interest in the aggregate at a rate
(the "Pass-Through Rate") equal to the
interest rate borne by the related
Mortgage net of servicing fees and any
other specified amounts.
Forward Commitments;
Pre-Funding........................ A Trust may enter into an agreement
(each, a "Pre-Funding Agreement") with
the Depositor whereby the Depositor
will agree to transfer additional
Mortgage Assets to such Trust following
the date on which such Trust is
established and the related
Certificates are issued. Any
Pre-Funding Agreement will require that
any Mortgage Assets so transferred
conform to the requirements specified
in such Pre-Funding Agreement. If a
Pre- Funding Agreement is to be
utilized, the related Trustee will be
required to deposit in a segregated
account (each, a "Pre-Funding Account")
all or a portion of the proceeds
received by the Trustee in connection
with the sale of one or more classes of
Certificates of the related series;
subsequently, the additional Mortgage
Assets will be transferred to the
related Trust in exchange for money
released to the Depositor from the
related Pre-Funding Account. Each
Pre-Funding Agreement will set a
specified period during which any such
transfers must occur. The related
Agreement will require that, if all
moneys originally deposited to such
Pre- Funding Account are not used by
the end of such specified period, then
any remaining moneys will be applied as
a mandatory prepayment of a class or
classes of Certificates as specified in
the related Prospectus Supplement. The
specified period for the acquisition by
a Trust of additional Mortgage Assets
will generally not exceed three months
from the date such Trust is
established.
Optional Termination.................. The Servicer, the Seller, the
Depositor, or, if specified in the
related Prospectus Supplement, the
Owners of a related class of
Certificates or a credit enhancer may
at their respective options effect
early retirement of
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a series of Certificates through the
purchase of the Mortgage Assets in the
related Trust. See "Pooling and
Administration -- Termination" herein.
Mandatory Termination................. The Trustee, the Servicer or certain
other entities specified in the related
Prospectus Supplement may be required
to effect early retirement of a series
of Certificates by soliciting
competitive bids for the purchase of
the assets of the related Trust or
otherwise. See "Pooling and
Administration -- Termination" herein.
Advances.............................. The Servicer will be obligated (but
only to the extent set forth in the
related Prospectus Supplement) to
advance delinquent installments of
principal and interest (less applicable
servicing fees) on the Mortgage Loans
in a Trust. Any such obligation to make
advances may be limited to amounts due
to the Owners of Certificates of the
related series, to amounts deemed to be
recoverable from late payments or
liquidation proceeds, to specified
periods or any combination thereof, in
each case as specified in the related
Prospectus Supplement. Any such advance
will be recoverable as specified in the
related Prospectus Supplement. See
"Servicing of Mortgage Loans --
Advances" herein.
Credit Enhancement.................... A series of Certificates, or certain
classes within such series, may have
the benefit of one or more types of
credit enhancement ("Credit
Enhancement") including but not limited
to subordination, cross support,
reserve funds, certificate insurance,
guaranties and similar instruments and
arrangements. The protection against
losses afforded by any such Credit
Enhancement will be limited. See
"Credit Enhancement" herein.
Book Entry Registration............... Certificates of one or more classes of
a series may be issued in book entry
form ("Book Entry Certificates") in the
name of a clearing agency (a "Clearing
Agency") registered with the Securities
and Exchange Commission, or its
nominee. Transfers and pledges of Book
Entry Certificates may be made only
through entries on the books of the
Clearing Agency in the name of brokers,
dealers, banks and other organizations
eligible to maintain accounts with the
Clearing Agency ("Clearing Agency
Participants") or their nominees.
Transfers and pledges by purchasers and
other beneficial owners of Book Entry
Certificates ("Beneficial Owners")
other than Clearing Agency Participants
may be effected only through Clearing
Agency Participants. Beneficial Owners
will receive payments of principal and
interest, and, if applicable, may
tender Certificates for redemption to
the Trustee, only through the Clearing
Agency and Clearing Agency
Participants. All references to
"Owners" shall mean Beneficial Owners
to the extent Beneficial Owners may
exercise their rights through a
Clearing Agency. See "Risk Factors --
Book Entry Registration" and
"Description of the Certificates --
Book Entry Registration" herein.
Certain Federal Income Tax
Consequences...................... Federal income tax consequences will
depend on, among other factors, whether
one or more elections are made to treat
a Trust or specified portions thereof
as a "real estate mortgage investment
conduit" ("REMIC") under the Internal
Revenue Code of 1986, as amended (the
"Code"), or, if no REMIC election is
made, whether the Certificates are
considered to be Standard Certificates,
Stripped Certificates or Partnership
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<PAGE>
Interests. The related Prospectus
Supplement for each series of
Certificates will specify which type of
tax treatment will apply to the related
Certificates. See "Certain Federal
Income Tax Consequences" herein and in
the related Prospectus Supplement.
ERISA Considerations.................. A fiduciary of any employee benefit
plan subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or the Code should carefully
review with its own legal advisors
whether the purchase or holding of
Certificates could give rise to a
transaction prohibited or otherwise
impermissible under ERISA or the Code.
Certain classes of Certificates may not
be transferred unless the Trustee and
the Depositor are furnished with a
letter of representation or an opinion
of counsel to the effect that such
transfer will not result in a violation
of the prohibited transaction
provisions of ERISA or the Code and
will not subject the Trustee, the
Depositor or the Servicer to additional
obligations. See "Description of the
Certificates -- General" and "ERISA
Considerations" herein and in the
related Prospectus Supplement.
Legal Investment Matters.............. Certificates may constitute "mortgage
related securities" under the Secondary
Mortgage Market Enhancement Act of 1984
("SMMEA") so long as they are rated in
one of the two highest rating
categories by the Rating Agency or
Agencies identified in the related
Prospectus Supplement and, as such,
would be "legal investments" for
certain types of institutional
investors to the extent provided in
SMMEA, subject to state laws overriding
SMMEA. Institutions whose investment
activities are subject to review by
federal or state regulatory authorities
should consult with their counsel or
the applicable authorities to determine
whether an investment in such
Certificates complies with applicable
guidelines, policy statements or
restrictions. See "Legal Investment
Matters" herein.
Use of Proceeds....................... Substantially all the net proceeds from
the sale of a series of Certificates
will be applied to the simultaneous
purchase of the Mortgage Assets
included in the related Trust (or to
reimburse the amounts previously used
to effect such purchase), the costs of
carrying the Mortgage Assets until sale
of the Certificates and to pay other
expenses. See "Use of Proceeds" herein.
Rating................................ Each class of Certificates offered by a
Prospectus Supplement will be rated in
one of the four highest rating
categories of a nationally recognized
statistical rating agency; provided,
however, that one or more classes of
Subordinated Certificates and Residual
Certificates, which will not be so
offered, need not be so rated.
Risk Factors.......................... Investment in the Certificates will be
subject to one or more risk factors,
including declines in the value of
Mortgaged Properties, prepayment of
Mortgage Assets, higher risks of
defaults on particular types of
Mortgage Loans, limitations on security
for the Mortgage Loans, limitations on
Credit Enhancement and various other
factors. See "Risk Factors" herein and
in the related Prospectus Supplement.
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RISK FACTORS
Prospective investors should consider, among other things, the
following risk factors in connection with the purchase of the Certificates:
General. Mortgage Loans made on the security of a multifamily or
commercial property may entail risks of delinquency and foreclosure, and risks
of loss in the event thereof, that are greater than similar risks associated
with loans made on the security of a single-family property. The ability of a
borrower to repay a loan secured by an income-producing property typically is
dependent primarily upon the successful operation of such property rather than
upon the existence of independent income or assets of the borrower; thus, the
value of an income-producing property is directly related to the net operating
income derived from such property. If the residential or commercial real estate
market in general or a regional or local area where Mortgage Assets are
concentrated should experience an overall decline in property values or a
significant downturn in economic conditions, rates of delinquencies,
foreclosures and losses on Mortgage Loans could be higher than those now
generally experienced in the mortgage lending industry.
A number of the Mortgage Loans may be secured by liens on
owner-occupied Mortgaged Properties or on Mortgaged Properties leased to a
single tenant. Accordingly, a decline in the financial condition of the borrower
or single tenant, as applicable, may have a disproportionately greater effect on
the net operating income from such Mortgaged Properties than would be the case
with respect to Mortgaged Properties with multiple tenants. Furthermore, the
value of any Mortgaged Property may be adversely affected by risks generally
incident to interests in real property, including changes in general or local
economic conditions and/or specific industry segments; declines in real estate
values; declines in rental or occupancy rates; increases in interest rates, real
estate tax rates and other operating expenses; changes in governmental rules,
regulations and fiscal policies, including environmental legislation; acts of
God; and other factors. See "The Trusts -- Mortgage Loans" herein.
In addition, additional risk may be presented by the type and use of a
particular Mortgaged Property. For instance, Mortgaged Properties that operate
as hospitals and nursing homes may present special risks to lenders due to the
significant governmental regulation of the ownership, operation, maintenance and
financing of health care institutions. Hotel and motel properties are often
operated pursuant to franchise, management or operating agreements which may be
terminable by the franchisor or operator. Moreover, the transferability of a
hotel's operating, liquor and other licenses upon a transfer of the hotel,
whether through purchase or foreclosure, is subject to local law requirements.
Multifamily Loans may be affected by excessive building resulting in an
oversupply of rental housing stock or a decrease in employment reducing the
demand for rental units in the area, by federal, state or local regulations and
controls affecting rents, prices of goods, fuel and energy consumption and
prices, water and environmental restrictions affecting new construction, by
increasing labor and materials costs, and by the relative attractiveness to
tenants of the multifamily rental projects securing the Multifamily Loans.
Repayment of a Multifamily Loan secured by an apartment building owned by a
cooperative will depend primarily on the receipt of payments from the tenant
stockholders of the cooperative and its ability to refinance the loan at
maturity.
It is anticipated that some or all of the Mortgage Loans will be
nonrecourse loans or loans for which recourse may be restricted or
unenforceable. As to those Mortgage Loans, recourse in the event of borrower
default will be limited to the specific real property and other assets, if any,
that were pledged to secure the Mortgage Loan. However, even with respect to
those Mortgage Loans that provide for recourse against the borrower and its
assets generally, there can be no assurance that enforcement of such recourse
provisions will be practicable, or that the assets of the borrower will be
sufficient to permit a recovery in respect of a defaulted Mortgage Loan in
excess of the liquidation value of the related Mortgaged Property.
Further, the concentration of default, foreclosure and loss risks in
individual Mortgage Loans will generally be greater than for pools of
single-family loans because Mortgage Loans will generally consist of a smaller
number of higher balance loans than would a pool of single-family loans of
comparable aggregate unpaid principal balance.
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Limited Obligations. The Certificates will not represent an interest in
or obligation of the Depositor. The Certificates of each series will not be
insured or guaranteed by any government agency or instrumentality, the
Depositor, the Servicer or the Seller.
Prepayment Considerations. The prepayment experience on the Mortgage
Loans and the mortgage loans underlying the Mortgage-Backed Securities (the
"Underlying Mortgage Loans") will affect the average life of each class of
related Certificates. Prepayments may be influenced by restrictions on
prepayment for specified periods or requirements for payment of prepayment
premiums which are contained in the Mortgage Loans and the Underlying Mortgage
Loans as well as by a variety of other factors, including the difference between
the interest rates on the Mortgage Loans or the Underlying Mortgage Loans
(giving consideration to the cost of refinancing) and prevailing mortgage rates.
In general, if mortgage interest rates fall below the interest rates on the
Mortgage Loans or the Underlying Mortgage Loans, the rate of prepayment would be
expected to increase. Conversely, if mortgage interest rates rise above the
interest rates on the Mortgage Loans or the Underlying Mortgage Loans, the rate
of prepayment would be expected to decrease. See "Certain Prepayment and Yield
Considerations" in the related Prospectus Supplement.
Risk of Higher Default Rates for Mortgage Loans with Balloon Payments.
A portion of the aggregate principal balance of the Mortgage Loans at any time
may be "balloon loans" that do not fully amortize (or may not amortize at all)
over their terms to maturity and, thus, provide for the payment of the
unamortized principal balance of such Mortgage Loan in a single payment at
maturity ("Balloon Loans"). Amortization of a Balloon Loan based on a scheduled
period that is longer than the term of the loan results in a remaining principal
balance at maturity that is substantially larger than the regular scheduled
payments. Mortgage Loans of this type involve a greater degree of risk than
self-amortizing loans because the ability of a borrower to make a balloon
payment typically will depend upon its ability either to fully refinance the
loan or to sell the related Mortgaged Property at a price sufficient to permit
the borrower to make the balloon payment. The ability of a borrower to
accomplish either of these goals will be affected by a number of factors,
including the value of the related Mortgaged Property, the level of available
mortgage rates at the time of sale or refinancing, the borrower's equity in the
related Mortgaged Property, the financial condition and operating history of the
borrower and the related Mortgaged Property, tax laws, rent control laws (with
respect to certain residential properties), Medicaid and Medicare reimbursement
rates (with respect to hospitals and nursing homes), prevailing general economic
conditions and the availability of credit for loans secured by commercial or
multifamily, as the case may be, real properties generally.
Limited Liquidity. There will be no market for the Certificates of any
series prior to the issuance thereof, and there can be no assurance that a
secondary market will develop or, if it does develop, that it will provide
liquidity of investment or will continue for the life of the Certificates of
such series. The market value of the Certificates will fluctuate with changes in
prevailing rates of interest. Consequently, the sale of Certificates in any
market that may develop may be at a discount from the Certificates' par value or
purchase price. Owners of Certificates have no right to request redemption of
Certificates, and the Certificates are subject to redemption only under the
limited circumstances described in each such Prospectus Supplement
Limited Assets. Owners of Certificates of each series must rely upon
distributions on the related Mortgage Assets, together with the other specific
assets pledged for the benefit of such series (which assets may be subject to
release from such pledge prior to payment in full of the Certificates), for the
payment of principal of, and interest on, that series of Certificates. If the
assets comprising the Trust are insufficient to make payments on such
Certificates, no other assets of the Depositor will be available for payment of
the deficiency. Because payments of principal will be applied to classes of
outstanding Certificates of a series in the priority specified in the related
Prospectus Supplement, a deficiency may have a disproportionately greater effect
on the Certificates of classes having lower priority in payment. In addition,
due to the priority of payments and the allocation of losses, defaults
experienced on the assets comprising a Trust may have a disproportionate effect
on a specified class or classes within such series.
Mortgage Type. Mortgage Loans made to partnerships, corporations or
other entities may entail risks of loss from delinquency and foreclosure that
are greater than those of Mortgage Loans made to individuals. The
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mortgagor's sophistication and form of organization may increase the likelihood
of protracted litigation or bankruptcy in default situations.
Limitations, Reduction and Substitution of Credit Enhancement. Credit
Enhancement may be provided in one or more of the forms described in the related
Prospectus Supplement, including, but not limited to, prioritization as to
payments of one or more classes of such series, one or more Reserve Funds, as
defined herein, insurance, guaranties and similar instruments and agreements, or
any combination thereof. Regardless of the Credit Enhancement provided, the
amount of coverage will be limited in amount and in most cases will be subject
to periodic reduction in accordance with a schedule or formula. Furthermore,
such Credit Enhancement may provide only very limited coverage as to certain
types of losses and may provide no coverage as to certain other types of losses.
The Trustee may be permitted to reduce, terminate or substitute all or a portion
of the Credit Enhancement for any series of Certificates, if the applicable
rating agencies indicate that the then-current rating thereof will not be
adversely affected.
Original Issue Discount. All the Compound Interest Certificates (as
defined herein) will be, and certain of the other Certificates may be, issued
with original issue discount for federal income tax purposes. An Owner of a
Certificate issued with original issue discount will be required to include
original issue discount in ordinary gross income for federal income tax purposes
as it accrues, in advance of receipt of the cash attributable to such income.
Accrued but unpaid interest on the Compound Interest Certificates generally will
be treated as original issue discount for this purpose. For this purpose,
however, many issues relevant to the determination of the amount and manner of
reporting original issue discount for prepayable securities, such as the
Certificates, are not adequately addressed under the current tax rules. See
"Certain Federal Income Tax Consequences - Federal Income Tax Consequences for
REMIC Certificates," "- Taxation of Regular Certificates", "- Variable Rate
Regular Certificates" and "Certain Federal Income Tax Consequences - Federal
Income Tax Consequences for Certificates as to Which No REMIC Election Is Made -
Standard Certificates," "- Premium and Discount," and "- Stripped Certificates"
herein.
Book Entry Registration. Because transfers and pledges of Book Entry
Certificates may be effected only through book entries at a Clearing Agency
through Clearing Agency Participants, the liquidity of the secondary market for
Book Entry Certificates may be reduced to the extent that some investors are
unwilling to hold Certificates in book entry form in the name of Clearing Agency
Participants and the ability to pledge Book Entry Certificates may be limited
due to lack of a physical certificate. Beneficial Owners of Book Entry
Certificates may, in certain cases, experience delay in the receipt of payments
of principal and interest because such payments will be forwarded by the Trustee
to the Clearing Agency who will then forward payment to the Clearing Agency
Participants who will thereafter forward payment to Beneficial Owners. In the
event of the insolvency of the Clearing Agency or of a Clearing Agency
Participant in whose name Certificates are recorded, the ability of Beneficial
Owners to obtain timely payment and (if the limits of applicable insurance
coverage by the Securities Investor Protection Corporation are exceeded, or if
such coverage is otherwise unavailable) ultimate payment of principal and
interest on Book Entry Certificates may be impaired.
Certain Matters Relating to Insolvency. The sellers of the Mortgage
Assets to the Depositor and the Depositor intend that the transfers of such
Mortgage Assets to the Depositor, and in turn to the applicable Trust,
constitute sales rather than pledges to secure indebtedness of the seller for
insolvency purposes. If, however, a seller of Mortgage Assets were to become a
debtor under the federal bankruptcy code, it is possible that a creditor,
trustee-in-bankruptcy or receiver of such seller may argue that the sale thereof
by such seller is a pledge rather than a sale. This position, if argued or
accepted by a court, could result in a delay in or reduction of distributions on
the related Certificates.
Leases and Rents. The Mortgage Loans typically will be secured by an
assignment of leases and rents pursuant to which the borrower assigns to the
lender its right, title and interest as landlord under the leases of the related
Mortgaged Property, and the income derived therefrom, as further security for
the related Mortgage Loan, while retaining a license to collect rents for so
long as there is no default. If the borrower defaults, the license terminates
and the lender is entitled to collect rents. Some state laws may require that
the lender take possession of the Mortgaged Property and obtain a judicial
appointment of a receiver before becoming entitled to collect the
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rents. In addition, if bankruptcy or similar proceedings are commenced by or in
respect of the borrower, the lender's ability to collect the rents may be
adversely affected. See "Certain Legal Aspects of Mortgage Assets -- Leases and
Rents".
DESCRIPTION OF THE CERTIFICATES
Each Trust will be created pursuant to a separate Agreement entered
into among the Depositor, the Trustee and the Servicer. The provisions of each
Agreement will vary depending upon the nature of the Certificates to be issued
thereunder and the nature of the related Trust. Certificates which represent
beneficial interests in the Trust will be issued pursuant to the Agreement. The
following summaries and the summaries set forth under "Pooling and
Administration" describe certain provisions relating to each series of
Certificates. The Prospectus Supplement for a series of Certificates will
describe the specific provisions relating to such series. Such summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all the provisions of the Agreement for each series of
Certificates. The Depositor will provide Owners of Certificates, without charge,
on written request a copy of the Agreement for the related series. Requests
should be addressed to AMRESCO Residential Securities Corporation, 700 N. Pearl
Street, Suite 2400, Dallas, Texas 75201. The Agreement relating to a series of
Certificates will be filed with the Securities and Exchange Commission within 15
days after the date of issuance of such series of Certificates (the "Delivery
Date").
The Certificates of a series will be entitled to payment only from the
assets of the Trust and any other assets pledged for the benefit of the
Certificates and will not be entitled to payments in respect of the assets
included in any other trust fund established by the Depositor. The Certificates
will not represent obligations of the Depositor, any Servicer or any affiliate
thereof and will not be guaranteed by any governmental agency. See "The Trust"
herein.
The Mortgage Assets relating to a series of Certificates, other than
GNMA Certificates, will not be insured or guaranteed by any governmental entity
and, to the extent that delinquent payments on or losses in respect of defaulted
Mortgage Assets are not advanced or paid from any applicable Credit Enhancement,
such delinquencies may result in delays in the distribution of payments on, or
losses allocated to, one or more classes of Certificates of such series.
General
The Certificates of each series will be issued either in book entry
form or in fully registered form. The minimum original denomination of each
class of Certificates will be specified in the related Prospectus Supplement.
The original "Certificate Principal Balance" of each Certificate will equal the
aggregate distributions allocable to principal to which such Certificate is
entitled and distributions allocable to interest on each Certificate that is not
entitled to distributions allocable to principal will be calculated based on the
"Notional Principal Balance" of such Certificate. The Notional Principal Balance
of a Certificate 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.
Except as described below under "Book Entry Registration" with respect
to Book Entry Certificates, the Certificate of each series will be transferable
and exchangeable on a "Certificate Register" to be maintained at the corporate
trust office of the Trustee or such other office or agency maintained for such
purposes by the Trustee. The Trustee will be appointed initially as the
"Certificate Registrar" and no service change will be made for any registration
of transfer or exchange of Certificates, but payment of a sum sufficient to
cover any tax or other governmental charge may be required.
Under current law the purchase and holding of certain classes of
Certificates may result in "prohibited transactions" within the meaning of ERISA
and the Code. See "ERISA Considerations" herein. Transfer of Certificates of
such a class will not be registered unless the transferee (i) executes a
representation letter stating 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
Certificates of such a class by or on behalf
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of such plan, account or arrangement is permissible under applicable law and
will not subject the Trustee, the Servicer or the Depositor to any obligation or
liability in addition to those undertaken in the Agreement.
As to each series, one or more elections may be made to treat the
related Trust or designated portions thereof as a REMIC for federal income tax
purposes. 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
Servicer and may only be made if certain conditions are satisfied. See "Certain
Federal Income Tax Considerations" herein. 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 Owners of Certificates 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 "residual interests" in the related REMIC, as
defined in the Code. All other classes of Certificates 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
Servicer, the Trustee, an Owner of Residual Certificates, as defined herein, or
another person as specified in the related Prospectus Supplement 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 person so specified will be entitled to reimbursement for any such payment.
Classes of Certificates
Each series of Certificates will be issued in one or more classes
which will evidence the beneficial ownership in, or the debt obligation payable
from, any distributions in respect of the assets of the Trust that are allocable
to (i) principal of such class of Certificates and (ii) interest on such
Certificates. One or more classes of a series of Certificates may evidence
beneficial ownership interests in, or the debt obligation payable from, separate
groups of assets included in the related Trust.
The Certificates will have an aggregate original Certificate Principal
Balance equal to the aggregate unpaid principal balance of the Mortgage Assets
as of the time and day prior to creation of the Trust specified in the related
Prospectus Supplement (the "Cut-Off Date") after deducting payments of principal
due before the Cut-Off Date and will bear interest at rates which, on a weighted
basis, will be equal to the Pass-Through Rate which will equal the weighted
average rate of interest borne by the related Mortgage Assets, net of the
aggregate servicing fees, amounts allocated to the residual interests and any
other amounts (including fees payable to the Administrator) as are specified in
the Prospectus Supplement. The original Certificate Principal Balance (or
Notional Principal Balance) of the Certificates of a series and the interest
rate on the classes of such Certificates will be determined in the manner
specified in the Prospectus Supplement.
Each class of Certificates that is entitled to distributions allocable
to interest will bear interest at a fixed rate or a rate that is subject to
change from time to time (a) in accordance with schedule, (b) by reference to an
index, or (c) otherwise (each, a "Certificate Interest Rate"), in each case as
specified in the Prospectus Supplement. One or more classes of Certificates may
provide for interest that accrues but is not currently payable ("Compound
Interest Certificates"). With respect to any class of Compound Interest
Certificates, if specified in the Prospectus Supplement, any interest that has
accrued but is not paid on a given Distribution Date will be added to the
aggregate Certificate Principal Balance of such class of Certificates on that
Distribution Date.
A series of Certificates may include one or more classes entitled only
to distributions (i) allocable to interest, (ii) allocable to principal (and
allocable as between scheduled payments of principal and Principal Prepayments,
as defined below) or (iii) allocable to both principal (and allocable as between
scheduled payments of principal and Principal Prepayments) and interest. A
series of Certificates may consist of one or more classes as to which
distributions will be allocated (i) on the basis of collections from designated
portions of the assets of the Trust, (ii) in accordance with a schedule or
formula, (iii) in relation to the occurrence of events, or (iv) otherwise. The
timing and amounts of such distributions may vary among classes, over time or
otherwise.
A series of Certificates may include one or more Classes of Scheduled
Amortization Certificates and Companion Certificates. "Scheduled Amortization
Certificates" are Certificates with respect to which payments
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of principal are to be made in specified amounts on specified Distribution
Dates, to the extent of funds available on such Distribution Date. "Companion
Certificates" are Certificates which receive payments of all or a portion of any
funds available on a given Distribution Date which are in excess of amounts
required to be applied to payments on Scheduled Amortization Certificates on
such Distribution Date. Because of the manner of application of payments of
principal to Companion Certificates, the weighted average lives of Companion
Certificates of a series may be expected to be more sensitive to the actual rate
of prepayments on the Mortgage Assets in the related Trust than will the
Scheduled Amortization Certificates of such series.
One or more series of Certificates may constitute series of "Special
Allocation Certificates", which may include Senior Certificates, Subordinated
Certificates, Priority Certificates and Non-Priority Certificates, as defined
herein. As specified in the related Prospectus Supplement for a series of
Special Allocation Certificates, the timing and/or priority of payments of
principal and/or interest may favor one or more classes of Certificates over one
or more other classes of Certificates. Such timing and/or priority may be
modified or reordered upon the occurrence of one or more specified events.
Losses on Trust assets for such series may be disproportionately borne by one or
more classes of such series, and the proceeds and distributions from such assets
may be applied to the payment in full of one or more classes within such series
before the balance, if any, of such proceeds are applied to one or more other
classes within such series. For example, Special Allocation Certificates in a
series may be comprised of one or more classes of Senior Certificates having a
priority in right to distributions of principal and interest over one or more
classes of Subordinated Certificates as a form of Credit Enhancement. See
"Credit Enhancement Subordination" herein. Typically, the Subordinated
Certificates will carry a rating by the rating agencies lower than that of the
Senior Certificates. In addition, one or more classes of Certificates ("Priority
Certificates") may be entitled to a priority of distributions of principal or
interest from assets in the Trust over another class of Certificates
("Non-Priority Certificates"), but only after the exhaustion of other Credit
Enhancement applicable to such series. The Priority Certificates and
Non-Priority Certificates nonetheless may be within the same rating category.
Distributions of Principal and Interest
General. Distributions of principal and interest will be made, to the
extent of funds available therefor, on the dates specified in the Prospectus
Supplement (each, a "Distribution Date") to the persons in whose names the
Certificates are registered (the "Owner") at the close of business on the dates
specified in the Prospectus Supplement (each, a "Record Date"). With respect to
Certificates other than Book Entry Certificates, distributions will be made by
check or money order mailed to the person entitled thereto at the address
appearing in the Certificate Register or, if specified in the Prospectus
Supplement, in the case of Certificates that are of a certain minimum
denomination as specified in the Prospectus Supplement, upon written request by
the Owner of a Certificate, by wire transfer or by such other means as are
agreed upon with the person entitled thereto; provided, however, that the final
distribution in retirement of the Certificates (other than Book Entry
Certificates) will be made only upon presentation and surrender of the
Certificates at the office or agency of the Trustee specified in the notice of
such final distribution. With respect to Book Entry Certificates, such payments
will be made as described below under "Book Entry Registration".
Distributions will be made out of, and only to the extent of, funds in
a separate account established and maintained for the benefit of the
Certificates of the related series (the "Certificate Account" with respect to
such series), including any funds transferred from any related Reserve Fund.
Amounts may be invested in the Eligible Investments, and all income or other
gain from such investments will be deposited in the related Certificate Account
and will be available to make payments on the Certificates of the applicable
series on the next succeeding Distribution Date.
Distributions of Interest. Interest will accrue on the aggregate
Certificate Principal Balance (or, in the case of Certificates entitled only to
distributions allocable to interest, the aggregate Notional Principal Balance of
each class of Certificates entitled to interest from the date, at the applicable
Certificate Interest Rate and for the periods (each, an "Interest Accrual
Period") specified in the Prospectus Supplement. The aggregate "Certificate
Principal Balance" of any class of Certificates entitled to distributions of
principal will be the aggregate original Certificate Principal Balance of such
class of Certificates specified in the Prospectus Supplement, reduced by all
distributions allocable to principal, and, in the case of Compound Interest
Certificates, increased by all interest accrued but not
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then distributable on such Compound Interest Certificates. With respect to a
class of Certificates entitled only to distributions allocable to interest, such
interest will accrue on the Notional Principal Balance of such class, computed
solely for purposes of determining the amount of interest accrued and payable on
such class of Certificates.
To the extent funds are available therefor, interest accrued during
each Interest Accrual Period on each class of Certificates entitled to interest
(other than a class of Compound Interest Certificates) will be distributable on
the Distribution Dates specified in the Prospectus Supplement until the
aggregate Certificate Principal Balance of the Certificates of such class has
been distributed in full or, in the case of Certificates entitled only to
distributions allocable to interest, until the aggregate Notional Principal
Balance of such Certificates is reduced to zero or for the period of time
designated in the Prospectus Supplement. Distributions of interest on each class
of Compound Interest Certificates will commence only after the occurrence of the
events specified in the Prospectus Supplement and, prior to such time, the
aggregate Certificate Principal Balance (or Notional Principal Balance) of such
class of Compound Interest Certificates, will increase on each Distribution Date
by the amount of interest that accrued on such class of Compound Interest
Certificates 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 Compound Interest Certificates will thereafter accrue interest on its
outstanding Certificate Principal Balance (or Notional Principal Balance) as so
adjusted.
Distributions of Principal. The Prospectus Supplement will specify the
method by which the amount of principal to be distributed on the Certificates on
each Distribution Date will be calculated and the manner in which such amount
will be allocated among the classes of Certificates entitled to distributions of
principal.
One or more classes of Senior Certificates may be entitled to receive
all or a disproportionate percentage of the payments of principal which are
received on the related Mortgage Assets 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"). Any such allocation may have
the effect of accelerating the amortization of such Certificates relative to the
interests evidenced by the other Certificates.
Unscheduled Distributions. The Certificates of a series may be subject
to receipt of distributions before the next scheduled Distribution Date under
the circumstances and in the manner described below and in the related
Prospectus Supplement. If applicable, such unscheduled distributions on the
Certificates of a series on the date and in the amount specified in the related
Prospectus Supplement if, due to substantial payments of principal (including
Principal Prepayments) on the related Mortgage Assets, low rates then available
for reinvestment of such payments or both, it is determined, based on specified
assumptions, that the amount anticipated to be on deposit in the Certificate
Account for such series on the next related Distribution Date, together with, if
applicable, any amounts available to be withdrawn from any related Reserve Fund
or from any other Credit Enhancement provided for such series, may be
insufficient to make required distributions on the Certificates on such
Distribution Date. 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 Certificates on the next
Distribution Date and will include interest at the applicable Certificate
Interest Rate (if any) on the amount of the unscheduled distribution allocable
to principal for the period and to the date specified in the Prospectus
Supplement.
All distributions allocable to principal in any unscheduled
distribution will be made in the same priority and manner as distributions of
principal on the Certificates would have been made on the next Distribution
Date, and, with respect to Certificates of the same class, unscheduled
distributions of principal will be made on a pro rata basis. Notice of any
unscheduled distribution will be given by the Trustee prior to the date of such
distribution.
Book Entry Registration
Certificates may be issued as Book Entry Certificates held in the name
of a Clearing Agency registered with the Securities and Exchange Commission or
its nominee. Transfers and pledges of Book Entry Certificates may be made only
through entries on the books of the Clearing Agency in the name of Clearing
Agency Participants or their nominees. Clearing Agency Participants may also be
Beneficial Owners of Book Entry Certificates.
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Purchasers and other Beneficial Owners may not hold Book Entry
Certificates directly but may hold, transfer or pledge their ownership interest
in the Certificates only through Clearing Agency Participants. Furthermore,
Beneficial Owners will receive all payments of principal and interest with
respect to the Certificates and, if applicable, may request redemption of
Certificates, only through the Clearing Agency and the Clearing Agency
Participants. Beneficial Owners will not be registered Owners of Certificates or
be entitled to receive definitive certificates representing their ownership
interest in the Certificates except under the limited circumstances, if any,
described in the related Prospectus Supplement. See "Risk Factors - Book Entry
Registration" herein.
If Certificates of a series are issued as Book Entry Certificates, the
Clearing Agency will be required to make book entry transfers among Clearing
Agency Participants, to receive and transmit payments of principal and interest
with respect to the Certificates of such series, and to receive and transmit
requests for redemption with respect to such Certificates. Clearing Agency
Participants with whom Beneficial Owners have accounts with respect to such Book
Entry Certificates will be similarly required to make book entry transfers and
receive and transmit payments and redemption requests on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial Owners will not
be registered Owners of Certificates and will not possess physical certificates,
a method will be provided whereby Beneficial Owners may receive payments,
transfer their interests, and submit redemption requests.
List of Owners of Certificates
Upon written request of three or more Owners of Certificates of record
of a series of Certificates for purposes of communicating with other Owners with
respect to their rights as Owners of Certificates, the Trustee will afford such
Owners access during business hours to the most recent list of Owners of
Certificates of that series held by the Trustee. With respect to Book Entry
Certificates, the only named Owner on the Certificate Register will be the
Clearing Agency.
The Agreement will not provide for the holding of any annual or other
meetings of Owners.
THE TRUSTS
The Trust Estate for a series of Certificates will consist of: (i) the
Mortgage Assets (subject, if specified in the Prospectus Supplement, to certain
exclusions); (ii) all payments (subject, if specified in the Prospectus
Supplement, to certain exclusions) received on and after the related Cut-Off
Date in respect of such Mortgage Assets, which may be adjusted, to the extent
specified in the related Prospectus Supplement, in the case of interest payments
on Mortgage Assets, to the Pass-Through Rate; (iii) if specified in the
Prospectus Supplement, reinvestment income on such payments; (iv) with respect
to a Trust that includes Mortgage Loans, all property acquired by foreclosure or
deed in lieu of foreclosure with respect to any such Mortgage Loan; (v) certain
rights of the Trustee, the Depositor and the Servicer under any policies
required to be maintained in respect of the related Mortgage Assets; and (vi) if
so specified in the Prospectus Supplement, one or more forms of Credit
Enhancement.
The Certificates of each series will be entitled to payment only from
the assets of the related Trust and any other assets pledged therefor and will
not be entitled to payments in respect of the assets of any other trust fund
established by the Depositor.
Mortgage Assets may be acquired by the Depositor from affiliated or
unaffiliated Originators. The following is a brief description of the Mortgage
Assets expected to be included in the Trusts. If specific information respecting
the Mortgage Assets is not known at the time the related series of Certificates
initially are 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
Certificates. A copy of the Agreement with respect to each series of
Certificates 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 Mortgage Assets relating to each series
of Certificates will be attached to the related Agreement delivered to the
Trustee upon delivery of such Certificates.
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Mortgage Loans
Mortgage Loans will consist of (i) Multifamily Loans consisting of
either Conventional Multifamily Loans or FHA-Insured Multifamily Loans secured
by mortgages or deeds of trust or other similar security instruments creating a
lien on rental apartment buildings or projects containing five or more units,
including, but not limited to, high-rise, mid-rise and garden apartments or
secured by apartment buildings owned by cooperative housing corporations or (ii)
Commercial Loans secured by mortgages, deeds of trust or similar security
instruments that create liens against office buildings, retail stores, hotels or
motels, nursing homes, hospitals or other health care- related facilities,
mobile home parks, warehouse facilities, mini-warehouse facilities, self-storage
facilities, industrial plants, mixed use or other types of income-producing
properties or unimproved land. The Multifamily Properties may include mixed
commercial and residential structures. Unless otherwise specified in the related
Prospectus Supplement, each Mortgage Loan will create a first priority mortgage
lien on a Mortgaged Property. A Mortgage Loan may create a lien on a borrower's
leasehold estate in a property; however, unless otherwise specified in the
related Prospectus Supplement, the term of any such leasehold will exceed the
term of the Mortgage Loan by at least two years. The Depositor expects that
Mortgage Loans will have been originated by mortgagees in the ordinary course of
their real estate lending activities. Each Mortgage Loan will bear interest at
an annual fixed rate or adjustable rate of interest specified in the Prospectus
Supplement.
The related Prospectus Supplement may specify for each Mortgage Loan:
the date of origination; the interest rate, or, in the case of Adjustable
Mortgage Loans, the initial Adjustable Mortgage Rate, the index or formula, if
any, used to determine the Adjustable Mortgage Rate, the margin or margins, if
any, to be added to or subtracted from the Index to calculate the Mortgage Loan
Rate, the maximum and minimum percentage adjustment, if any, for the life of the
Mortgage Loan and on any annual basis, and the frequency of adjustment; the
number of Mortgage Loans in the pool of Mortgage Loans (the "Mortgage Loan
Pool"); the original loan amount or range of original loan amounts; the original
loan-to-value ratio; the original and remaining term; and the balloon, principal
amortization or interest-only terms, if any. The related Prospectus Supplement
may also specify the number and type of units or total rentable square feet
contained in each Mortgaged Property, the loan amount per unit or per square
foot of rentable space, the percentage of units or total rentable square feet
occupied as of the Cut-Off Date, the appraised value of each Mortgaged Property
and whether each property is subject to local rent control ordinances and
whether the Mortgage Loan financed the acquisition or rehabilitation of the
underlying property or refinanced prior indebtedness.
Unless otherwise specified in the related Prospectus Supplement, all of
the Mortgage Loans will have had original terms to maturity of not more than 40
years and will provide for scheduled payments of principal, interest or both, to
be made on specified dates ("Due Dates") that occur monthly, quarterly or
semi-annually. A Mortgage Loan (i) may provide for accrual of interest thereon
at an interest rate (a "Mortgage Loan Rate") that is fixed over its term of that
adjusts from time to time, or that may be converted at the borrower's election
from an adjustable to a fixed Mortgage Loan Rate, or from a fixed to an
adjustable Mortgage Loan Rate, (ii) may provide for level payments to maturity
or for payments that adjust from time to time to accommodate changes in the
Mortgage Loan Rate or to reflect the occurrence of certain events, and may
permit negative amortization, (iii) may be fully amortizing over its term to
maturity, or may provide for little or no amortization over its term and thus
require a balloon payment on its stated maturity date, and (iv) may contain a
prohibition on prepayment (the period of such prohibition, a "Lock-out Period"
and its date of expiration, a "Lock-out Expiration Date") or require payment of
a premium or a yield maintenance penalty (a "Prepayment Premium") in connection
with a prepayment, in each case as described in the related Prospectus
Supplement. A Mortgage Loan may also contain a provision that entitles the
lender to a share of profits realized from the operation or disposition of the
Mortgaged Property (an "Equity Participation"), as described in the related
Prospectus Supplement. If holders of any class or classes of Offered
Certificates of a series will be entitled to all or a portion of an Equity
Participation, the related Prospectus Supplement will describe the Equity
Participation and the method or methods by which distributions in respect
thereof will be made to such holders.
Certain of the Multifamily Loans may be secured by apartment buildings
owned by a private, non-profit cooperative corporation ("Cooperative"). The
Cooperative is owned by tenant-stockholders who, through ownership of stock,
shares or membership certificates in the corporation, receive proprietary leases
or occupancy agreements
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which confer exclusive rights to occupy specific apartments or units. Generally,
a tenant-stockholder of a Cooperative must make a monthly payment to the
Cooperative representing such tenant-stockholder's pro rata share of the
cooperative's payments for its mortgage loan, real property taxes, maintenance
expenses and other capital or ordinary expenses. Such payments to the
Cooperative are in addition to any payments of principal and interest the
tenant-stockholder must make on any loans of the tenant-stockholder secured by
its shares in the Cooperative. The Cooperative will be directly responsible for
building management and, in most cases, payment of real estate taxes and hazard
and liability insurance. The Cooperative's ability to meet debt service
obligations on the Multifamily Loans, as well as all other operating expenses,
will be dependent in large part on the receipt of maintenance payments from the
tenant-stockholders, as well as any rental income from units or commercial
assessments on the tenant-stockholders. The Cooperative's ability to pay the
principal amount of the Multifamily Loan at maturity depends primarily on its
ability to pay the principal amount of the Multifamily Loan. The Depositor, the
Seller and the Administrator will have no obligation to provide refinancing for
the Multifamily Loans.
Lenders typically look to the Debt Service Coverage Ratio of a loan
secured by income-producing property as an important measure of the risk of
default on such loan. Unless otherwise defined in the related Prospectus
Supplement, the "Debt Service Coverage Ratio" of a Mortgage Loan at any given
time is the ratio of (i) the Net Operating Income of the related Mortgaged
Property for a twelve-month period to (ii) the annualized scheduled payments on
the Mortgage Loan and on any other loan that is secured by a lien on the
Mortgaged Property prior to the lien of the related Mortgage. Unless otherwise
defined in the related Prospectus Supplement. "Net Operating Income" means, for
any given period, the total operating revenues derived from a Mortgaged Property
during such period, minus the total operating expenses incurred in respect of
such Mortgaged Property during such period other than (i) non-cash items such as
depreciation and amortization, (ii) capital expenditures and (iii) debt service
on loans (including the related Mortgage Loan) secured by liens on the Mortgaged
Property. The Net Operating Income of a Mortgaged Property will fluctuate over
time and may or may not be sufficient to cover debt service on the related
Mortgage Loan at any given time. As the primary source of the operating revenues
of a non-owner occupied income-producing property, rental income (and
maintenance payments from tenant-stockholders of a Cooperative) may be affected
by the condition of the applicable real estate market and/or area economy. In
addition, properties typically leased, occupied or used on a short-term basis,
such as certain health care-related facilities, hotels and motels, and
mini-warehouse and self-storage facilities, tend to be affected more rapidly by
changes in market or business conditions than do properties typically leased for
longer periods, such as warehouses, retail stores, office buildings and
industrial plants. Commercial Properties may be owner-occupied or leased to a
single tenant. Thus, the Net Operating Income of such a Mortgaged Property may
depend substantially on the financial condition of the borrower or the single
tenant, and Mortgage Loans secured by liens on such properties may pose greater
risks than loans secured by liens on Multifamily Properties or on multi-tenant
Commercial Properties.
Increases in operating expenses due to the general economic climate or
economic conditions in a locality or industry segment, such as increases in
interest rates, real estate tax rates, energy costs, labor costs and other
operating expenses and/or to changes in governmental rules, regulations and
fiscal policies, may also affect the risk of default on a Mortgage Loan. As may
be further described in the related Prospectus Supplement, in some cases leases
of Mortgaged Properties may provide that the lessee, rather than the
borrower/landlord, is responsible for payment of operating expenses ("Net
Leases"). However, the existence of such "net of expense" provisions will result
in stable Net Operating Income to the borrower/landlord only to the extent that
the lessee is able to absorb operating expense increases while continuing to
make rent payments.
Lenders also look to the Loan-to-Value Ratio of a mortgage loan as a
measure of risk of loss if a property must be liquidated following a default.
Unless otherwise defined in the related Prospectus Supplement, the "Loan-
to-Value Ratio" of a Mortgage Loan at any given time is the ratio (expressed as
a percentage) of (i) the then outstanding principal balance of the Mortgage Loan
and the outstanding principal balance of any loan secured by a lien on the
related Mortgaged Property prior to the lien of the related Mortgage, to (ii)
the Value of such Mortgaged Property. The "Value" of a Mortgaged Property, is
generally its fair market value determined in an appraisal obtained by the
originator at the origination of such loan. The lower the Loan-to-Value Ratio,
the greater the percentage of the borrower's equity in a Mortgaged Property, and
thus the greater the cushion provided to the lender against loss on liquidation
following a default.
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Loan-to-Value Ratios will not necessarily constitute an accurate
measure of the risk of liquidation loss in a pool of Mortgage Loans. For
example, the value of a Mortgaged Property as of the date of initial issuance of
the related series of Certificates may be less than the Value determined at loan
origination, and will likely continue to fluctuate from time to time based upon
changes in economic conditions and the real estate market. Moreover, even when
current, an appraisal is not necessarily a reliable estimate of Value. Appraised
values of income-producing properties are generally based on the market
comparison method (recent sale value of comparable properties at the date of the
appraisal), the cost replacement method (the cost of replacing the property at
such date), the income capitalization method (a projection of value based upon
the property's projected net cash flow), or upon a selection from or
interpolation of the values derived from such methods. Each of these appraisal
methods can present analytical difficulties. It is often difficult to find truly
comparable properties that have recently been sold; the replacement of a
property may have little to do with its current market value; and income
capitalization is inherently based on inexact projections of income and expense
and the selection of an appropriate capitalization rate. Where more than one of
these appraisal methods are used and provide significantly different results, an
accurate determination of Value and, correspondingly, a reliable analysis of
default and loss risks, is even more difficult.
Mortgage-Backed Securities
Mortgage-Backed Securities ("MBS") may include (i) private (that is,
not guaranteed or insured by the United States or any agency or instrumentality
thereof) mortgage participations, mortgage pass-through certificates or other
mortgage-backed securities or (ii) certificates insured or guaranteed by FHLMC,
FNMA, GNMA or FAMC.
Any MBS will have been issued pursuant to a participation and servicing
agreement, a pooling and servicing agreement, an indenture or similar agreement
(an "MBS Agreement"). A seller (the "MBS Issuer") and/or servicer (the "MBS
Servicer") of the underlying mortgage loans will have entered into the MBS
Agreement with a trustee or a custodian under the MBS Agreement (the "MBS
Trustee"), if any, or with the original purchaser or purchasers of the MBS.
The MBS may have been issued in one or more classes with
characteristics similar to the classes of Certificates described herein.
Distributions in respect of the MBS will be made by the MBS Servicer or the MBS
Trustee on the dates specified in the related Prospectus Supplement. The MBS
Issuer or the MBS Servicer or another person specified in the related Prospectus
Supplement may have the right or obligation to repurchase or substitute assets
underlying the MBS after a certain date or under other circumstances specified
in the related Prospectus Supplement.
Reserve funds, subordination, cross-support or other credit enhancement
similar to that described for the Certificates under "Credit Enhancement" may
have been provided with respect to the MBS. The type, characteristics and amount
of such credit enhancement, if any, will be a function of the characteristics of
the underlying mortgage loans and other factors and generally will have been
established on the basis of the requirements of any rating agency that may have
assigned a rating to the MBS, or by the initial purchasers of the MBS.
The Prospectus Supplement for a series of Certificates that evidence
interests in MBS will specify, to the extent available, (i) the aggregate
approximately initial and outstanding principal amount and type of the MBS to be
included in the Trust, (ii) the original and remaining term to stated maturity
of the MBS, if applicable, (iii) the pass-through or bond rate of the MBS or the
formula for determining such rates, (iv) the payment characteristics of the MBS,
(v) the MBS Issuer, MBS Servicer and MBS Trustee, as applicable, (vi) a
description of the credit support, if any, (vii) the circumstances under which
the stated underlying mortgage loans or the MBS themselves may be purchased
prior to their maturity, (viii) the terms on which mortgage loans may be
substituted for those originally underlying the MBS, (ix) the servicing fees
payable under the MBS Agreement, (x) to the extent available to the Depositor,
information in respect of the underlying mortgage loans, and (xi) the
characteristics of any cash flow agreements that relate to the MBS.
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CREDIT ENHANCEMENT
General. Various forms of Credit Enhancement may be provided with
respect to one or more classes of a series of Certificates or with respect to
the assets in the related Trust. Credit Enhancement may be in the form of the
subordination of one or more classes of the Certificates of such series to other
classes, the establishment of one or more Reserve Funds, the use of a
cross-support feature, FHA insurance on the underlying Mortgage Loans, another
form of Credit Enhancement described in the related Prospectus Supplement, or
any combination of the foregoing. Credit Enhancement may not provide protection
against all risks of loss and may not guarantee repayment of the entire
principal balance of the Certificates and interest thereon.
Subordination. Distributions in respect of scheduled principal,
interest or any combination thereof otherwise payable to one or more classes of
Certificates of a series (the "Subordinated Certificates") may be paid to one or
more other classes of such series (the "Senior Certificates") under the
circumstances and to the extent provided in the Prospectus Supplement. For
example, delays in receipt of scheduled payments on the Mortgage Assets and
losses on defaulted Mortgage Assets may be borne first by the various classes of
Subordinated Certificates and thereafter by the various classes of Senior
Certificates. The aggregate distributions in respect of delinquent payments on
the Mortgage Assets over the lives of the Certificates or at any time, the
aggregate losses in respect of defaulted Mortgage Assets which must be borne by
the Subordinated Certificates by virtue of subordination and the amount of the
distributions otherwise distributable to the Subordinated Certificates that will
be distributable to Senior Certificates on any Distribution Date may be limited
as specified in the Prospectus Supplement. If aggregate distributions in respect
of delinquent payments on the Mortgage Assets or aggregate losses in respect of
such Mortgage Assets were to exceed the total amounts payable and available for
distribution to Owners of Subordinated Certificates or, if applicable, were to
exceed the specified maximum amount, Owners of Senior Certificates could
experience losses on the Certificates.
In addition to or in lieu of the foregoing, all or any portion of
distributions otherwise payable to Subordinated Certificates on any Distribution
Date may instead be required to be deposited into one or more Reserve Fund (as
defined below). Such deposits may be made on each Distribution Date, on each
Distribution Date for specified periods, or on each Distribution Date until the
balance in the Reserve Fund has reached a specified amount and, following
payments from the Reserve Fund to Senior Certificates or otherwise, to the
extent necessary to restore the balance in the Reserve Fund to required levels,
and amounts on deposit in the Reserve Fund may be released to the Depositor or
any class of Certificates in each case as specified in the Prospectus
Supplement.
If specified in the Prospectus Supplement, various classes of Senior
Certificates and Subordinated Certificates may themselves be subordinate in
their right to receive certain distributions to other classes of Senior and
Subordinated Certificates, respectively, through a cross-support mechanism or
otherwise.
As between classes of Senior Certificates and as between classes of
Subordinated Certificates, 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 Prospectus Supplement. As
between classes of Senior Certificates, payments to Senior Certificates on
account of delinquencies or losses and payments to any Reserve Fund will be
allocated as specified in the Prospectus Supplement.
Cross-Support. The beneficial ownership of separate groups of assets
included in the Trust for a series may be evidenced by separate classes of
related series of Certificates. In such case, Credit Enhancement may be provided
by a cross-support feature which may require that distributions be made with
respect to Certificates evidencing beneficial ownership of one or more asset
groups prior to distributions to Subordinated Certificates evidencing a
beneficial ownership interest in other asset groups within the same Trust. The
Prospectus Supplement for a series which includes a cross-support feature will
describe the manner and conditions for applying such cross- support feature.
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If specified in the Prospectus Supplement, the coverage provided by one
or more forms of Credit Enhancement may apply concurrently to two or more
separate Trusts for a separate series of Certificates. If applicable, the
Prospectus Supplement will identify the Trusts 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 Trusts.
FHA Insurance on the Multifamily Loans. There are two primary FHA
insurance programs that are available for Multifamily Loans. Sections 221(d) (3)
and (d) (4) of the National Housing Act (the "Housing Act") allow the Department
of Housing and Urban Development ("HUD") to insure mortgage loans that are
secured by newly constructed and substantially rehabilitated multifamily rental
projects. Generally the term of such a mortgage loan can be up to 40 years and
the ratio of loan amount to property replacement cost (as calculated by FHA) can
be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure mortgage loans
made for the purchase or refinancing of existing apartment projects which are at
least three years old. Under Section 223(f), the loan proceeds cannot be used
for substantial rehabilitation work, but repairs may be made for up to, in
general, the greater of 15% of the value of the project or a dollar amount per
apartment unit established from time to time by HUD. In general, the loan term
may not exceed 35 years and a loan to value ratio of no more than 85% for the
purchase of a project and 70% for the refinancing of a project is required.
FHA insurance is generally payable in cash or at the option of the
mortgagee in debentures. Such insurance does not cover 100% of the mortgage loan
but is instead subject to certain deductions and certain losses of interest from
the date of the default.
Reserve Funds. If specified in the Prospectus Supplement, cash, U.S.
Treasury securities, instruments evidencing ownership of principal or interest
payments thereon, letters of credit, surety bonds, demand notes, certificates of
deposit or a combination thereof in the aggregate amount specified in the
Prospectus Supplement will be deposited by the Depositor on the Delivery Date in
one or more accounts (each, a "Reserve Fund") established and maintained with
the Trustee. Such cash and the principal and interest payments on such other
investments will be used to enhance the likelihood of timely payment of
principal of, and interest on, or, if so specified in the Prospectus Supplement,
to provide additional protection against losses in respect of, the assets in the
related Trust, to pay the expenses of the Trust or for other purposes specified
in the Prospectus Supplement. Certain amounts to which the Owners of
Subordinated Certificates, if any, would otherwise be entitled may instead be
required to be deposited into a Reserve Fund from time to time and in the
amounts as specified in the Prospectus Supplement. Any cash in any Reserve Fund
and the proceeds of any other instrument upon maturity will be invested in
Eligible Investments. If a letter of credit is deposited with the Trustee, such
letter of credit will be irrevocable. Any instrument deposited in a Reserve Fund
will name the Trustee, as a beneficiary and will be issued by an entity
acceptable to each rating agency that rates the Certificates. Additional
information with respect to such instruments deposited in the Reserve Funds may
be set forth in the Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will
be available for withdrawal from the Reserve Fund for distribution with respect
to the Certificates for the purposes, in the manner and at the times specified
in the Prospectus Supplement.
Other Insurance, Guaranties and Similar Instruments or Agreements. If
specified in the Prospectus Supplement, the related Trust may also include
insurance, guaranties, surety bonds, letters of credit, guaranteed investment
contracts or similar arrangements for the purpose of (i) maintaining timely
payments or providing additional protection against losses on the assets
included in such Trust, (ii) paying administrative expenses, (iii) establishing
a minimum reinvestment rate on the payments made in respect of such assets or
principal payment rate on such assets, (iv) guaranteeing timely payment of
principal and interest under the Certificates, or for such other purpose as is
specified in such Prospectus Supplement. Such arrangements may include
agreements under which Owners of Certificates are entitled to receive amounts
deposited in various accounts held by the Trustee upon the terms specified in
the Prospectus Supplement. Such arrangements may be in lieu of any obligation of
the Servicer
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to advance delinquent installments in respect of the Mortgage Loans. See
"Servicing of the Mortgage Loans" herein.
SERVICING OF THE MORTGAGE LOANS
With respect to each series of Certificates, the related Mortgage Loans
will be serviced either (i) by the Servicer as sole servicer, (ii) by the
Servicer as administrator or master servicer, (iii) by another institution as
sole servicer or (iv) by another institution as administrator or master
servicer. If an institution other than the Servicer acts as sole servicer or as
master servicer for a series, the Servicer may have no servicing obligations
with respect to such series.
The Prospectus Supplement for each series will specify whether the
Servicer or another institution will act as sole servicer or master servicer for
such series. If the Servicer acts as master servicer or administrator for a
series, all references to a Servicer herein and under the headings "Servicing of
the Mortgage Loans" and "Pooling and Administration" herein should be read to
refer to the direct Servicer of such series. If an institution other than the
Servicer acts as sole Servicer for a series, or acts as master servicer for such
series, all references to the Servicer herein and under the headings "Servicing
of the Mortgage Loans" and "Pooling and Administration" herein should be read to
refer to such institution as sole or master servicer, as appropriate.
The related Prospectus Supplement will specify whether each Servicer is
a FNMA- or FHLMC-approved servicer of conventional mortgage loans. In addition,
the Depositor will require adequate servicing experience, where appropriate, and
financial stability, generally including a net worth requirement (to be
specified in the Agreement), as well as satisfaction of certain other criteria.
Each Servicer will be required to perform the customary functions of a
mortgage loan servicer, including collection of payments from borrowers (the
"Mortgagors") and remittance of such collections to the Trustee, maintenance of
applicable standard hazard insurance and primary mortgage insurance policies,
attempting to cure delinquencies, supervising foreclosures, management of
Mortgaged Properties under certain circumstances, maintaining accounting records
relating to the Mortgage Loans and, if specified in the related Prospectus
Supplement, maintenance of escrow or impoundment accounts of Mortgagors for
payment of taxes, insurance, and other items required to be paid by the
Mortgagor pursuant to the Mortgage Loan. Each Servicer will also be obligated to
make advances in respect of delinquent installments on Mortgage Loans as
applicable, as described more fully under "-- Payments on Mortgage Loans" and
"-- Advances" herein and in respect of certain taxes and insurance premiums not
paid on a timely basis by Mortgagors.
Each Servicer will be entitled to a monthly servicing fee as specified
in the related Prospectus Supplement. Each Servicer will also generally be
entitled to collect and retain, as part of its servicing compensation, late
payment charges and assumption underwriting fees. Each Servicer will be
reimbursed from proceeds of one or more of the insurance policies described
herein ("Insurance Proceeds") or from proceeds received in connection with
the liquidation of defaulted Mortgage Loans ("Liquidation Proceeds"). See
"--Servicing Compensation and Payment of Expenses" herein.
Each Servicer will be required to service each Mortgage Loan pursuant
to the terms of the Agreement for the entire term of such Mortgage Loan unless
the Agreement is earlier terminated. Upon termination, a replacement for the
Servicer will be appointed.
Payments on Mortgage Loans
Each Servicer will establish and maintain a separate account (each, a
"Custodial Account"). Subject to the following paragraph, each Custodial Account
must be an account the deposits in which are fully insured by either the Federal
Deposit Insurance Corporation ("FDIC") or the National Credit Union
Administration ("NCUA") or are, to the extent such deposits are in excess of the
coverage provided by such insurance, continuously secured by certain obligations
issued or guaranteed by the United States of America. If at any time the amount
on deposit in such Custodial Account shall exceed the amount so insured or
secured, the applicable Servicer must remit to the
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Trustee the amount on deposit in such Custodial Account which exceeds the amount
so insured or secured, less any amount such Servicer may retain for its own
account pursuant to its Agreement.
Notwithstanding the foregoing, the deposits in a Servicer's Custodial
Account will not be required to be fully insured or secured as described above,
and such Servicer will not be required to remit amounts on deposit therein in
excess of the amount so insured or secured, so long as such Servicer meets
certain requirements established by the rating agencies requested to rate the
Certificates.
Each Servicer is required to deposit into its Custodial Account on a
daily basis all amounts in respect of each Multifamily Loan received by such
Servicer, with interest adjusted to a rate (the "Remittance Rate") equal to the
related Mortgage Rate less the Servicer's servicing fee rate. On the 18th day of
each month, or such other day specified in the related Prospectus Supplement
(the "Remittance Date"), each Servicer of the Mortgage Loans will remit to the
Trustee all funds held in its Custodial Account with respect to each Mortgage
Loan; provided, however, that Principal Prepayments may be remitted on the
Remittance Date in the month following the month of such prepayment. Each
Servicer will be required pursuant to the terms of the related Servicing
Agreement and as specified in the related Prospectus Supplement, to remit with
each Principal Prepayment interest thereon at the Remittance Rate through the
last day of the month in which such Principal Prepayment is made. Each Servicer
is also required to advance its own funds as described below.
Advances
With respect to a delinquent Mortgage Loan, the related Servicer will
be obligated (but only to the extent set forth in the related Prospectus
Supplement) to advance its own funds or funds from its Custodial Account equal
to the aggregate amount of payments of principal and interest (adjusted to the
applicable Remittance Rate) which were due on a due date and which are
delinquent as of the close of business on the business day preceding the
Remittance Date ("Monthly Advance"). Generally such advances will be required to
be made by the Servicer unless the Servicer determines that such advances
ultimately would not be reimbursable under any applicable insurance policy, from
the proceeds of liquidation of the related Mortgaged Property, or from any other
source (any amount not so reimbursable being referred to herein as a
"Nonrecoverable Advance"). Such advance obligation will continue through the
month following the month of final liquidation of such Mortgage Loan. Any
Servicer funds thus advanced will be reimbursable to such Servicer out of
recoveries on the Multifamily Loans with respect to which such amounts were
advanced. The Servicers will also be obligated to make advances with respect to
certain taxes and insurance premiums not paid by Mortgagors on a timely basis.
Funds so advanced are reimbursable to the Servicers out of recoveries on the
related Mortgage Loans. Each Servicer's right of reimbursement for any advance
will be prior to the rights of the Trust to receive any related Insurance
Proceeds or Liquidation Proceeds.
Collection and Other Servicing Procedures
Each Servicer will service the Mortgage Loans pursuant to guidelines
established in the related Agreement.
Mortgage Loans. The Servicer will be responsible for making reasonable
efforts to collect all payments called for under the Mortgage Loans. The
Servicer will be obligated to follow such normal practices and procedures as it
deems necessary or advisable to realize upon a defaulted Mortgage Loan. In this
regard, the Servicer may (directly or through a local assignee) sell the
property at a foreclosure. The amount of the ultimate net recovery (including
the proceeds of any Credit Enhancement), after reimbursement to the Servicer of
its expenses incurred in connection with the liquidation of any such defaulted
Mortgage Loan and prior unreimbursed advances of principal and interest with
respect thereto will be deposited in the Certificate Account when realized and
will be distributed to Owners of Certificates on the next Distribution Date
following the month of receipt.
The Servicer will expend its own funds to restore property securing a
Mortgage Loan which has sustained uninsured damage only if it determines that
such restoration will increase the proceeds to the Trust of liquidation of the
Mortgage Loan after the reimbursement to the Servicer of its expenses.
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If specified in the related Prospectus Supplement, the Servicer will
maintain with one or more depository institutions one or more accounts into
which it will deposit all payments of taxes, insurance premiums, assessments or
comparable items received for the account of the Mortgagors. Withdrawals from
such account or accounts may be made only to effect payment of taxes, insurance
premiums, assessments or comparable items, to reimburse the Servicer out of
related collections for any cost incurred in paying taxes, insurance premiums
and assessments or otherwise preserving or protecting the value of the
Mortgages, to refund to Mortgagors any amounts determined to be overages and to
pay interest to mortgagors on balances in such account or accounts to the extent
required by law.
So long as it acts as servicer of the Mortgage Loans, the Servicer will
be required to maintain certain insurance covering errors and omissions in the
performance of its obligations as servicer and certain fidelity bond coverage
ensuring against losses through wrongdoing of its officers, employees and
agents.
Standard Hazard Insurance
The Servicer will be required to cause to be maintained, for each
Mortgage Loan, a standard hazard insurance policy with extended coverage in an
amount which is at least equal to the lesser of the original principal balance
of the Mortgage Loan or the replacement cost of the related Mortgaged Property.
Where any part of any improvement to the related Mortgage Property is located in
an area identified by the Flood Emergency Management Agency as having special
flood hazards and flood insurance has been made available, the Servicer is
required to cause to be maintained with a generally acceptable insurance carrier
a flood insurance policy meeting the requirements of the current guidelines of
the Federal Insurance Administration, providing coverage in an amount not less
than (i) the original principal balance of the Mortgage Loan, (ii) the insurable
value of the related Mortgage Property, or (iii) the maximum amount of insurance
available under the Flood Disaster Protection Act of 1973, as amended, whichever
is less. Each Agreement may provide that the related Servicer may satisfy its
obligation to cause hazard insurance to be maintained by maintaining a blanket
policy insuring against hazard loss on the Mortgage Loans serviced by such
Servicer.
Additional insurance coverage for specific properties in a Mortgage
Loan Pool included in the Trust for a series of Certificates will be described
in the related Prospectus Supplement.
Title Insurance Policies
The Agreement will require that the lien on each Mortgaged Property is
insured by a valid title insurance policy and that such title insurance policy
contain no coverage exceptions, except those permitted pursuant to the
guidelines heretofore established by Seller and amended from time to time.
Claims Under Standard Hazard Insurance Policies; Other Realization Upon
Defaulted Loans
Each Servicer will present claims to the hazard insurer under any
related standard hazard insurance policy. All collections under any related
standard hazard insurance policy (less any proceeds to be applied to the
restoration or repair of the related Mortgaged Property) will be remitted to the
Trustee.
If any Mortgaged Property securing a defaulted Multifamily Loan is
damaged and proceeds, if any, from the related standard hazard insurance policy
are insufficient to restore the damaged property, each Servicer will be required
to expend its own finds to restore the damaged property. In the event that a
Servicer fails to make a required expenditure, another party, such as a Master
Servicer or Trustee, may be required to make such expenditure as specified in
the related Prospectus Supplement. In either case, the Servicer will be required
to make such expenditures only to the extent it determines such expenditures are
recoverable from Insurance Proceeds or Liquidation Proceeds.
Foreclosure proceedings will be conducted by the Servicer with the
concurrence of the Depositor. If the proceeds of any liquidation of the
Mortgaged Property securing the defaulted Mortgage Loan are less than the
Principal Balance of the defaulted Mortgage Loan plus interest accrued thereon,
a loss will be realized on such
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Mortgage Loan, to the extent the applicable Credit Enhancement is not
sufficient, in the amount of such difference plus the aggregate of expenses
which are incurred by the Servicer in connection with such proceedings and which
are reimbursable under the Agreement. In such case there will be a reduction in
the value of the Mortgage Loans and the Trust may be unable to recover the full
amount of principal and interest due thereon.
Servicing Compensation and Payment of Expenses
As compensation for its servicing duties, each Servicer will be
entitled to a monthly servicing fee in the amount specified in the related
Prospectus Supplement. In addition to the primary compensation, each Servicer
will retain all late payment charges, to the extent collected from Mortgagors.
As set forth above, each Servicer will be entitled to reimbursement for
certain expenses incurred by it in connection with the liquidation of defaulted
Mortgage Loans and in connection with advancing delinquent payments. No loss
will be suffered on the Certificates by reason of such expenses to the extent
claims for such expenses are paid directly under any form of Credit Enhancement.
In the event, however, that the defaulted Mortgage Loans are not covered by any
form of Credit Enhancement, or claims are either not made or paid under such
policies or Credit Enhancement, or if coverage thereunder has ceased, such a
loss will occur to the extent that the proceeds from the liquidation of a
defaulted Mortgage Loan, after reimbursement of the Servicer's expenses, are
less than the Principal Balance of such defaulted Mortgage Loan.
POOLING AND ADMINISTRATION
The following summaries describe certain provisions of the Agreement.
The summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the Agreement. Where
particular provisions or terms used in the Agreement are referred to, such
provisions or terms are as specified in the Agreement. In addition, certain of
the following summaries only apply to an Agreement relating to series of
Certificates for which the related Trust includes Mortgage Loans. Provisions of
the Agreement relating to series of Certificates for which the related Trust
includes other types of Mortgage Assets will be summarized and described in the
related Prospectus Supplement.
Assignment of Mortgage Assets
Assignment of the Mortgage Loans. The Depositor will cause the Mortgage
Loans constituting the Mortgage Loan Pool to be assigned to the Trustee,
together with principal and interest due on or with respect to the Mortgage
Loans on and after the Cut-Off Date specified in the related Prospectus
Supplement. The Trustee will, concurrently with such assignment, authenticate
and deliver the Certificates. Each Mortgage Loan will be identified in a
schedule appearing as an exhibit to the Agreement (the "Mortgage Loan
Schedule"). The Mortgage Loan Schedule may specify, with respect to each
Mortgage Loan: the original principal amount of the adjusted principal balance
as of the close of business of the Cut-Off Date; the Mortgage Loan Rate; the
current scheduled monthly payment of principal, if any, and interest; the
amortization schedule, including the term and any balloon payment requirement;
the maturity of the Mortgage Loan; if the Mortgage Loan is an Adjustable
Mortgage Loan, the initial Adjustable Mortgage Loan Rate, the maximum and
minimum permitted Adjustable Mortgage Loan Rate, if any, the Adjustable Mortgage
Loan Rate as of the Cut-Off Date, and the original and current margin over the
index, if any.
In addition, the Depositor will, as to each Mortgage Loan, deliver or
cause to be delivered to the Trustee, the mortgage note endorsed without
recourse, the mortgage or deed of trust with evidence of recording indicated
thereon and an assignment of the instrument to the Trust in recordable form (but
not yet recorded).
Each seller of Mortgage Loans generally will represent, with respect to
the Mortgage Loans sold by it, among other things, that (i) immediately prior to
the transfer and assignment of the Mortgage Loans, the seller had good title to,
and was the sole owner of, each Mortgage Loan and there has been no other sale
or assignment thereof, (ii) as of the date of such transfer, the Mortgage Loans
are subject to no offsets, defenses or counterclaims,
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(iii) each Mortgage Loan at the time it was made complied in all material
respects with applicable state and federal laws, including usury, and disclosure
laws, (iv) a lender's policy of title insurance was issued on the date of the
origination of each Mortgage Loan and each such policy is valid and remains in
full force and effect, (v) as of the date of such transfer, each mortgage note
subject to the agreement is a valid first lien on the related Mortgaged Property
(subject only to (a) the lien of current real property taxes and assessments,
(b) covenants, conditions and restrictions, rights of way, easements and other
matters of public record as of the date of recording of such instrument of
indebtedness, such exceptions appearing of record and either being acceptable to
mortgage lending institutions generally or specifically reflected in the
appraisal made in connection with the origination of the related Mortgage Loan
and (c) other matters to which like properties are commonly subject which do not
materially interfere with the benefits of the security intended to be provided
by the instrument of indebtedness) and such property is free of material damage
and is in good repair, (vi) as of the date of such transfer, no Mortgage Loan is
more than 31 days delinquent in payment and there are no delinquent tax or
assessment liens against the related apartment project, and (vii) with respect
to each Mortgage Loan, if the Mortgaged Property is located in an area
identified by the Secretary of HUD as having special flood hazards and subject
in certain circumstances to the availability of flood insurance under the
National Flood Insurance Act of 1968, as amended, such Mortgaged Property is
covered by flood insurance if applicable regulations at the time such Mortgage
Loan was originated required that such flood insurance coverage be obtained.
All the representations and warranties of an originator in respect of a
Mortgage Loan will have been made as of the date on which such originator sold
the Mortgage Loan to the Depositor or its affiliate; the date as of which such
representations and warranties were made may be a date prior to the date of the
initial issuance of the related series of Certificates. A substantial period of
time may have elapsed between the date as of which the representations and
warranties were made and the later date of initial issuance of the related
series of Certificates. Because the representations and warranties referred to
in the preceding paragraph are expected to be the only representations and
warranties that will be made by an originator, the originator's repurchase
obligations described below will not arise if, during the period commencing on a
date of sale of a Mortgage Loan by the originator to the Depositor or its
affiliate, the relevant event occurs that would have given rise to such an
obligation had the event occurred prior to the sale of the affected Mortgage
Loan. Nothing, however, has come to the Depositor's attention that would cause
it to believe that the representations and warranties referred to in the
preceding paragraph will not be accurate and complete in all material respects
in respect of Mortgage Loans as of the date of initial issuance of the related
series of Certificates.
Assignment of Mortgage-Backed Securities. With respect to each series,
the Depositor will cause any Mortgage-Backed Securities included in the related
Trust to be registered in the name of the Trustee. The Trustee (or its
custodian) will have possession of any certificated Mortgage-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 Mortgage-Backed Security. Each Mortgage-Backed Security will be identified
in a schedule appearing as an exhibit to the related Agreement which may specify
certain information with respect to such security, including, as applicable, 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 such security. The Depositor will represent and
warrant to the Trustee, among other things, the information contained in such
schedule is true and correct and that immediately prior to the transfer of the
related securities to the Trustee, the Depositor had good title to, and was the
sole owner of, each such security.
Repurchase or Substitution of Mortgage Loans. The Trustee will review
the documents delivered to it with respect to the Mortgage Loans included in the
related Trust. If any document is not delivered or is found to be defective in
any material respect and the Seller cannot deliver such document or cure such
defect within 90 days after notice thereof (which the Trustee will undertake to
give within 45 days of the delivery of such documents), and if any other party
obligated to deliver such document or cure such defect has not done so and has
not substituted or repurchased the affected Mortgage Loan, then the Seller will,
not later than the first date designated for the deposit of payments into the
Certificate Account (a "Deposit Date") which is more than ten days after such
90-day period, (a) if so provided in the Prospectus Supplement remove the
affected Mortgage Loan from the Trust and substitute one or more other Mortgage
Loans therefor or (b) to repurchase the Mortgage Loan from the Trustee for a
price equal to 100% of its Principal Balance plus one month's interest thereon
at the applicable Remittance Rate.
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This repurchase and, if applicable, substitution obligation constitutes the sole
remedy available to the Trustee against the Seller for a material defect in a
document relating to a Mortgage Loan.
The Seller will agree to either (a) cure any breach of any
representation or warranty that materially and adversely affects the interests
of the Trust in a Mortgage Loan (each, a "Defective Mortgage Loan") within 90
days of its discovery by the Seller or its receipt of notice thereof from the
Trustee, (b) repurchase such Defective Mortgage Loan not later than the first
Deposit Date which is more than ten days after such 90-day period for a price
equal to 100% of its Principal Balance plus one month's interest thereon at the
applicable Remittance Rate, or (c) if so specified in the Prospectus Supplement,
to remove the affected Mortgage Loan from the Trust and substitute one or more
other mortgage loans or contracts therefor. Such purchase price will be
deposited in the Certificate Account on such Deposit Date. This repurchase and,
if applicable, substitution obligation will constitute the sole remedies
available to the Trustee for any such breach.
If a REMIC election is to be made with respect to all or a portion of a
Trust, there may be federal income tax limitations on the right to substitute
Multifamily Loans.
Evidence as to Compliance
The Agreement will provide that on or before a specified date in each
year, beginning the first such date that is at least a specified number of
months after the Cut-Off Date, a firm of independent public accountants will
furnish a statement to the Trustee to the effect that, based on an examination
of certain specified documents and records relating to the servicing of the
Servicer's mortgage loan portfolio conducted substantially in compliance with
the audit program for mortgages serviced for FNMA or FHLMC, the United States
Department of Housing and Urban Development Mortgage Audit Standards or the
Uniform Single Audit Program for Mortgage Bankers (the "Applicable Accounting
Standards"), such firm is of the opinion that such servicing has been conducted
in compliance with the Applicable Accounting Standards except for (a) such
exceptions as such firm shall believe to be immaterial and (b) such other
exceptions as shall be set forth in such statement.
The Trustee
Any commercial bank or trust company serving as Trustee may have normal
banking relationships with the Depositor. In addition, the Servicer and the
Trustee acting jointly will have the power and the responsibility for appointing
co-trustees or separate trustees of all or any part of the Trust relating to a
particular series of Certificates. In the event of such appointment, all rights,
powers, duties and obligations conferred or imposed upon the Trustee by the
Agreement shall be conferred or imposed upon the Trustee and such separate
trustee or co-trustee jointly, or, in any jurisdiction in which the Trustee
shall be incompetent or unqualified to perform certain acts, singly upon such
separate trustee or co-trustee who shall exercise and perform such rights,
powers, duties and obligations solely at the direction of the Trustee.
The Trustee will make no representations as to the validity or
sufficiency of the Agreement, the Certificates or of any Mortgage Loan or
Mortgage-Backed Securities or related document, and will not be accountable for
the use or application by the Depositor of any funds paid to the Depositor in
respect of the Certificates or the related assets, or amounts deposited in the
Certificate Account or deposited into the Distribution Account. If no Event of
Default, as defined herein, has occurred, the Trustee will be required to
perform only those duties specifically required of it under the Agreement.
However, upon receipt of the various certificates, reports or other instruments
required to be furnished to it, the Trustee will be required to examine them to
determine whether they conform to the requirements of the Agreement.
The Trustee may resign at any time, and the Depositor may remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Agreement, if the Trustee becomes insolvent or in such other instances, if any,
as are set forth in the Agreement. Following any resignation or removal of the
Trustee, the Servicer will be obligated to appoint a successor Trustee. Any
resignation or removal of the Trustee and appointment of a successor Trustee
does not become effective until acceptance of the appointment by the successor
Trustee.
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Administration of the Certificate Account
The Agreement will require that the Certificate Account be either (i)
maintained with a depository institution the debt obligations of which (or, in
the case of a depository institution which is a part of a holding company
structure, the debt obligations of the holding company of which) have a rating
acceptable to each rating agency that rated the Certificates, or (ii) an account
or accounts the deposits in which are fully insured by either the Bank Insurance
Fund (the "BIF") or the Savings Association Insurance Fund ("SAIF") of the FDIC.
The collateral eligible to secure amounts in the Certificate Account is limited
to United States government securities and other investments acceptable to each
rating agency that was requested to rate such series of Certificates, and may
include one or more Certificates of a series ("Eligible Investments"). If so
specified in the related Prospectus Supplement, a Certificate Account may be
maintained as an interest bearing account, or the funds held therein maybe
invested pending each succeeding Remittance Date in Eligible Investments. If so
specified in the related Prospectus Supplement, the Servicer or its designee
will be entitled to receive any such interest or other income earned on funds in
the Certificate Account as additional compensation. The Servicer will deposit in
the Certificate Account from amounts previously deposited by it into the
Servicer's Custodial Account on the related Remittance Date the following
payments and collections received or made by it on and after the Cut-Off Date
(including scheduled payments of principal and interest due on and after the
Cut-Off Date but received before the Cut-Off Date):
(i) all Mortgagor payments on account of principal, including
Principal Prepayments and, if specified in the related Prospectus
Supplement, prepayment penalties:
(ii) all Mortgagor payments on account of interest, adjusted
to the Remittance Rate;
(iii) all Liquidation Proceeds net of certain amounts
reimbursed to the Servicers, as described above;
(iv) all Insurance Proceeds, other than proceeds to be applied
to the restoration or repair of the related property or released to the
Mortgagor and net of certain amounts reimbursed to the Servicers, as
described above;
(v) all condemnation awards or settlements which are not
released to the Mortgagor in accordance with normal servicing
procedures;
(vi) any advances made as described under "Servicing of the
Mortgage Loans -- Advances" and certain other amounts required under
the Agreement to be deposited in the Certificate Account;
(vii) all proceeds of any Mortgage Loan or property acquired
in respect thereof repurchased by the Servicer, the Seller or otherwise
as described above or under "Termination" below;
(viii) all amounts, if any, required to be deposited in the
Certificate Account from any Credit Enhancement for the related series;
and
(ix) all other amounts required to be deposited in the
Certificate Account pursuant to the related Agreement.
Reports
Concurrently with each distribution on the Certificates, a statement
generally setting forth, to the extent applicable to any series, among other
things:
(i) the aggregate amount of such distribution allocable to
principal, separately identifying the amount allocable to each class;
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(ii) the amount of such distribution allocable to interest,
separately identifying the amount allocable to each class;
(iii) the aggregate Certificate Principal Balance of each
class of the Certificates after giving effect to distributions on such
Distribution Date;
(iv) the aggregate Certificate Principal Balance of any class
of Compound Interest Certificates after giving effect to any increase
in such Principal Balance that results from the accrual of interest
that is not yet distributable thereon;
(v) if applicable, the amount otherwise distributable to
Owners of any class of Certificates that was distributed to Owners of
other classes of Certificates;
(vi) if any class of Certificates has priority in the right to
receive Principal Prepayments, the amount of Principal Prepayments in
respect of the related Mortgage Assets;
(vii) the aggregate principal balance and number of Mortgage
Loans which were delinquent as to a total of two installments of
principal and interest; and
(viii) the aggregate principal balances of Mortgage Loans
which (a) were delinquent 30-59 days, 60-89 days, and 90 days or more,
and (b) were in foreclosure.
Customary information deemed necessary for Owners to prepare their tax
returns will be furnished annually.
Forward Commitments; Pre-Funding
The Trustee of a Trust may enter into a Pre-Funding Agreement for the
transfer of additional Mortgage Loans to such Trust following the date on which
such Trust is established and the related Certificates are issued. The Trustee
of a Trust may enter into Pre-Funding Agreements to permit the acquisition of
additional Mortgage Loans that could not be delivered by the Depositor or have
not formally completed the origination process, in each case prior to the
Delivery Date. Any Pre-Funding Agreement will require that any Mortgage Loans so
transferred to a Trust conform to the requirements specified in such Pre-Funding
Agreement. If a Pre-Funding Agreement is to be utilized, the related Trustee
will be required to deposit in the Pre-Funding Account all or a portion of the
proceeds received by the Trustee in connection with the sale of one or more
classes of Certificates of the related series; the additional Mortgage Loans
will be transferred to the related Trust in exchange for money released from the
related Pre-Funding Account. Each Pre-Funding Agreement will set a specified
period during which any such transfers must occur. The Pre-Funding Agreement or
the related Pooling and Servicing Agreement will require that, if all moneys
originally deposited to such Pre-Funding Account are not so used by the end of
such specified period, then any remaining moneys will be applied as a mandatory
prepayment of the related class or classes of Certificates as specified in the
related Prospectus Supplement. The specified period for the acquisition by a
Trust of additional Mortgage Loans is not expected to exceed three months from
the date such Trust is established.
Servicer Events of Default
"Events of Default" under the Agreement will consist of (i) any failure
by the Servicer to duly observe or perform in any material respect any other of
its covenants or agreements in the Agreement materially affecting the rights of
Owners which continues unremedied for 60 days after the giving of written notice
of such failure to the Depositor by the Trustee or to the Servicer and the
Trustee by the Owners of Certificates evidencing interests aggregating not less
than 25% of the affected class of Certificates; and (ii) certain events of
insolvency, readjustment of debt, marshaling of assets and liabilities or
similar proceedings and certain actions by the Depositor indicating its
insolvency, reorganization or inability to pay its obligations.
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If specified in the Prospectus Supplement, the Agreement will permit
the Trustee to sell the Mortgage Loans or Mortgage-Backed Securities and the
other assets of the Trust in the event that payments in respect thereto are
insufficient to make payments required in the Agreement. The assets of the Trust
will be sold only under the circumstances and in the manner specified in the
Prospectus Supplement.
Rights Upon Servicer Event of Default
As long as an Event of Default under the Agreement remains unremedied
by the Servicer, the Trustee, or, to the extent provided in the Prospectus
Supplement, a provider of Credit Enhancement and Owners of Certificates may
terminate all the rights and obligations of the Servicer under the Agreement,
whereupon the Trustee, or a new Servicer appointed pursuant to the Agreement,
will succeed to all the responsibilities, duties and liabilities of the Servicer
under the Agreement and will be entitled to similar compensation arrangements.
The Servicer shall be entitled to payment of certain amounts payable to it under
the Agreement, notwithstanding the termination of its activities as servicer.
Following such termination, the Depositor shall appoint any established housing
finance institution satisfying the qualification standards established in the
Agreement to act as successor to the Servicer under the Agreement. If no such
successor shall have been appointed within 30 days following such termination,
then either the Depositor or the Trustee may petition a court of competent
jurisdiction for the appointment of a successor Servicer. Pending the
appointment of a successor Servicer, the Trustee shall act as Administrator. The
Trustee, the Depositor and such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
to the Servicer under such Agreement.
The Owners of Certificates will not have any right under the Agreement
to institute any proceeding with respect to the Agreement, unless they
previously have given to the Trustee written notice of default and unless the
Owners of the percentage of Certificates specified in the Prospectus Supplement
have made written request to 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
proceedings. However, the Trustee is under no obligation to exercise any of the
trusts or powers vested in it by the Agreement or to make any investigation of
matters arising thereunder or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of any of
the Owners, unless such Owners have offered to the Trustee reasonable security
or indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby.
Amendment
The Agreement may be amended by the Depositor, the Servicer and the
Trustee, without the consent of the Owners of the Certificates, to cure any
ambiguity, to correct or supplement any provision therein which may be defective
or inconsistent with any other provision therein, to take any action necessary
to maintain REMIC status of any Trust as to which a REMIC election has been made
or to add any other provisions with respect to matters or questions arising
under the Agreement which are not materially inconsistent with the provisions of
the Agreement; provided that such action will not, as evidenced by an opinion of
counsel satisfactory to the Trustee, adversely affect in any material respect
the interests of any Owners of Certificates of that series. The Agreement may
also be amended by the Depositor, the Servicer and the Trustee with the consent
of the Owners of the Certificates evidencing interests aggregating not less than
66% of the aggregate Certificate Principal Balance of the Certificates of the
applicable series for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of such Agreement or of modifying in
any manner the rights of the Owners of the Certificates of that series;
provided, however, that no such amendment may (i) reduce in any manner the
amount of, or delay the timing of, collections of payments received on the
related Mortgage Assets or distributions which are required to be made on any
Certificate without the consent of the Owners of such Certificate, (ii)
adversely affect in any material respect the interests of the Owners of any
class of Certificates in any manner other than as described in (i), without the
consent of the Owners of Certificates of such class evidencing not less than 66%
of the interests of such class or (iii) reduce the aforesaid percentage of
Certificates of any class required to consent to any such amendment, without the
consent of the Owners of all Certificates of such class then outstanding,
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Termination
The obligations of the Depositor, the Servicer, and the Trustee created
by the Agreement will terminate upon the payment as required by the Agreement of
all amounts held by the Servicer or in the Certificate Account and required to
be paid to them pursuant to the Agreement after the later of (i) the maturity or
other liquidation of the last Mortgage Asset subject thereto or the disposition
of all property acquired upon foreclosure of any such Mortgage Loan or (ii) the
repurchase by the Depositor from the Trust of all the outstanding Certificates
or all remaining assets in the Trust. The Agreement will establish the
repurchase price for the assets in the Trust and the allocation of such purchase
price among the classes of Certificates. The exercise of such right will effect
early retirement of the Certificates of that series, but the Depositor's right
so to repurchase will be subject to the conditions described in the related
Prospectus Supplement. If a REMIC election is to be made with respect to all or
a portion of a Trust, there may be additional conditions to the termination of
such Trust which will be described in the related Prospectus Supplement. In no
event, however, will the trust created by the Agreement continue beyond the
expiration of 21 years from the death of the survivor of certain persons named
in the Agreement. The Trustee will give written notice of termination of the
Agreement to each Owner and the final distribution will be made only upon
surrender and cancellation of the Certificates at an office or agency of the
Trustee specified in such notice of termination.
USE OF PROCEEDS
Substantially all the net proceeds to be received from the sale of each
series of Certificates will be applied to the simultaneous purchase of the
Mortgage Assets related to such series (or to reimburse the amounts previously
used to effect such a purchase), the costs of carrying such Mortgage Assets
until sale of the Certificates and to pay other expenses.
THE DEPOSITOR
The Depositor will have no obligations or responsibilities with respect
to any Mortgage Loan. The Depositor does not have, nor is it expected in the
future to have, any significant net worth.
As specified in the related Prospectus Supplement, the Servicer with
respect to any series of Certificates evidencing interests in Mortgage Loans may
be an affiliate of the Depositor. The Depositor anticipates that it will acquire
Mortgage Assets in the open market or in privately negotiated transactions,
which may be through or from an affiliate.
Neither the Depositor nor any of its affiliates will insure or
guarantee the Certificates of any series.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS
The following discussion contains summaries of certain legal aspects of
multifamily mortgage loans which are general in nature. 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 Mortgage Loans is situated. The summaries are qualified in
their entirety be reference to the applicable federal and state laws governing
the Mortgage Loans.
The Mortgage Loans
General
The Mortgage Loans will be secured either by mortgages, deeds of trust
or deeds to secure debt, depending upon the prevailing practice in the state in
which the Mortgaged Property is located. A mortgage creates a lien upon the real
property encumbered by the mortgage. It is not prior to the lien for real estate
taxes and assessments. Priority between mortgages depends on their terms and
generally on the order of filing with a state or county office.
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There are two parties to a mortgage: the mortgagor, who is the borrower and
homeowner or the land trustee (as described below), 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-homeowner called the trustor (similar to a mortgagor), a lender
(similar to a mortgagee) called the beneficiary, and a third-party grantee
called the trustee. Under a deed of trust, the borrower grants the property,
irrevocably until the debt is paid, in trust and generally with a power of sale,
to the trustee to secure payment of the obligation. The trustee's authority
under a deed of trust and the mortgagee's authority under a mortgage are
governed by law, the express provisions of the deed of trust or mortgage and, in
some cases, the directions of the beneficiary.
Leases and Rents
Mortgages that encumber income-producing property often contain an
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease and
the income derived therefrom, while (unless rents are to be paid directly to the
lender) retaining a revocable license to collect the rents for so long as there
is no default. If the borrower defaults, the license terminates and the lender
is entitled to collect the rents. Local law may require that the lender take
possession of the property and/or obtain a court-appointed receiver before
becoming entitled to collect the rents.
In most states, hotel and motel room rates are considered accounts
receivable under the Uniform Commercial Code ("UCC"); in cases where hotels or
motels constitute loan security, the rates are generally pledged by the borrower
as additional security for the loan. In general, the lender must file financing
statements in order to perfect its security interest in the rates and must file
continuation statements, generally every five years, to maintain perfection of
such security interest. Even if the lender's security interest in room rates is
perfected under the UCC, it will generally be required to commence a foreclosure
action or otherwise take possession of the property in order to collect the room
rates following a default.
Foreclosure
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale under a specific provision in the deed of trust that
authorizes the trustee to sell the property to a third party upon any default by
the borrower under the terms of the note or deed of trust. In some states, the
trustee must record a notice of default and send a copy to the borrower-trustor
and any person who has recorded a request for a copy of a notice of default and
notice of sale. In addition, the trustee must provide notice in some states to
any other individual having an interest in the real property, including any
junior lienholders. The borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the 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. 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
defendant. Judicial foreclosure proceedings are often not protested by any of
the parties defendant. However, when the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be time
consuming. After the completion of judicial foreclosure, the court generally
issues a judgment of foreclosure and appoints a referee or other court officer
to conduct the sale of the property.
In case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty a potential buyer at the sale would
have in determining the exact status of title and because the physical condition
of the property may have deteriorated during foreclosure proceedings, it is
uncommon in most jurisdictions for a third party to purchase the property at
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the foreclosure sale. Rather it is common for the lender to purchase the
property from the trustee or referee for an amount equal to the principal amount
of the mortgage or deed of trust, accrued and unpaid interest and expenses of
foreclosure. Thereafter, the lender will assume the burdens of ownership,
including paying real estate taxes, obtaining casualty 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 insurance proceeds.
A sale conducted in accordance with the terms of the power of sale
contained in a mortgage or deed of trust is generally presumed to be conducted
regularly and fairly, and a conveyance of the real property by the trustee
confers, in most states, legal title to the real property to the purchaser, free
of all junior mortgages or deeds of trust and free of all other liens and claims
subordinate to the mortgage or deed of trust under which the sale is made (with
the exception of certain governmental liens). The purchaser's title is, however,
subject to all senior liens, encumbrances and mortgages and may be subject to
mechanic's and materialman's liens in some states.
The proceeds received by the sheriff or trustee from the sale are
applied pursuant to the terms of the deed of trust, which may require
application first to the costs, fees and expenses of sale and then in
satisfaction of the indebtedness secured by the mortgage or deed of trust under
which the sale was conducted. In some states, any surplus money remaining may be
available to satisfy claims of the holders of junior mortgages or deeds of trust
and other junior liens and claims in order of their priority, whether or not the
mortgagor or trustee is in default, while in some states, any surplus money
remaining may be payable directly to the mortgagor or trustor. Any balance
remaining is generally payable to the mortgagor or trustor.
Right 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 following
foreclosure. The right of redemption should be distinguished from the equity of
redemption, which is a non statutory right that must be exercised before
foreclosure. 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 is to diminish the ability of the lender to sell the foreclosed
property. The rights 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.
ln addition, numerous other statutory provisions, including the federal
bankruptcy laws and state laws affording relief to debtors, may interfere with
or affect the ability of the secured mortgage lender to realize upon collateral.
For example, with respect to federal bankruptcy law, a court with federal
bankruptcy jurisdiction may permit a debtor through a Chapter 11 rehabilitative
plan to cure a monetary default in respect of a mortgage loan by paying
arrearages within a reasonable time period and reinstating the original mortgage
loan payment schedule even though the lender accelerated the mortgage loan and
final judgment of foreclosure had been entered in state court (provided no sale
of the residence had yet occurred) prior to the filing of the debtor's petition.
Some courts with federal bankruptcy jurisdiction have approved plans, based on
the particular fact of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that such modifications may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule and reducing the lender's security interest to the value of
the residence, thus leaving the lender a general unsecured creditor for the
difference between the value of the residence and the outstanding balance of the
loan.
The Internal Revenue Code of 1986, as amended, provides priority to
certain tax liens over the lien of the mortgage.
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Enforceability of Certain Provisions. Certain of the Mortgage Loans
will contain due-on-sale classes. These clauses permit the lender to accelerate
the maturity of a loan if the borrower sells, transfers, or conveys the
property. The enforceability of these clauses was the subject of legislation or
litigation in many states, and in some cases the enforceability of these clauses
was limited or denied. However, the Garn-St. Germain Depository Institutions Act
of 1982 (the "Garn-St. Germain Act") preempts state constitutional, statutory
and case law prohibiting the enforcement of due-on-sale clauses and permits
lenders to enforce these clauses in accordance with their terms, subject to
certain limited exceptions. 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.
The Garn-St. Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the Garn-St. Germain Act (including federal
savings and loan associations and federal savings banks) may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St. Germain Act by the
Federal Home Loan Bank Board as succeeded by the Office of Thrift Supervision
("OTS"), also prohibit the imposition of a prepayment penalty upon the
acceleration of a loan pursuant to a due-on-sale clause. Any inability of the
Depositor to enforce due-on-sale clauses may affect the average life of the
Multifamily Loans and the number of Multifamily Loans that may be outstanding
until maturity.
Upon foreclosure, courts have imposed general equitable principles.
These 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 requirements that the lender undertake
affirmative and expensive actions to determine the causes for 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 the lender to
foreclose if the default under the mortgage instrument is not monetary, such as
the borrower falling to adequately maintain the property or the borrower
executing a second mortgage or deed of trust 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 deeds of trust or mortgages receive notices in
addition to the statutorily-prescribed minimum. For the most part, these cases
have upheld the notice provisions as being reasonable or have fund that the sale
by a trustee under a deed of trust, or under a mortgage having a power of sale,
does not involve sufficient state action to afford constitutional protections to
the borrower.
The standard forms of note, mortgage and deed of trust generally
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 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. Under the Agreement, late charges (to the extent permitted by law and
not waived by the Servicer) will be retained by the Servicer as additional
servicing compensation.
Adjustable Rate Loans. The laws of certain states may provide that
mortgage notes relating to adjustable rate loans are not negotiable instruments
under the Uniform Commercial Code. In such event, the Trustee will not be deemed
to be a "holder in due course," within the meaning of the Uniform Commercial
Code and may take such a mortgage note subject to certain restrictions on its
ability to foreclose and to certain contractual defenses available to a
mortgagor.
Environmental Risks. Real property pledged as security to a lender may
be subject to unforeseen environmental risks. Under the laws of certain states,
contamination of a property may give rise to a lien on the property to assure
the payment of costs of clean-up. In several states such a lien has priority
over the lien of an existing mortgage against such property. In addition, under
the laws of some states and under the federal Comprehensive Environmental
Response, Compensation and Liability Act of 1980 ("CERCLA"), a lender may be
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liable, as an "owner" or "operator," for costs of addressing releases or
threatened releases of hazardous substances that require remedy at a property,
if agents or employees of the lender have become sufficiently involved in the
operations of a borrower, regardless of whether or not the environmental damage
or threat was caused by a prior owner. A lender also risks such liability on
foreclosure of the Mortgaged Premises. Excluded from CERCLA's definition of
"owner" or "operator," however, is a person "who without participating in the
management of the facility, holds indicia of ownership primarily to protect his
security interest." On April 29, 1992, the United States Environmental
Protection Agency ("EPA") issued a final rule intended to protect lenders from
liability under CERCLA. This rule was in response to a 1990 decision of the
United States Court of Appeals for the Eleventh Circuit, United States v. Fleet
Factors Corp., which narrowly construed the security interest exemption under
CERCLA to hold lenders liable if they had the capacity to influence their
borrower's management of hazardous waste. While the scope of permissible
activities in which a lender may engage to protect its security interest is
still uncertain and the rule will not protect a lender against liability under
other laws or theories, EPA's rule provides conditions under which a lender may
demonstrate that it holds indicia of ownership primarily to protect its security
interest and does not participate in the management of the facility. If a lender
is or becomes liable, it can bring an action for contribution against the owner
or operator who created the environmental hazard, but that person or entity may
be bankrupt or otherwise judgment proof. Such clean-up costs may be substantial.
It is possible that such costs could become a liability of the Trust Estate and
occasion a loss in certain circumstances described above if such remedial costs
were incurred.
The Agreement provides that the Servicer may not acquire title to any
Mortgaged Property or take over its operation unless (i) directed, in writing,
by the Trustee to do so and (ii) the Servicer has previously determined, based
upon a report prepared by a person who regularly conducts environmental audits,
that such Mortgaged Property is in compliance with applicable environmental laws
and regulations or that such acquisition would not be more detrimental than
beneficial to the value of the Mortgaged Property and the interest therein of
the Trust. Title to any Mortgaged Property may not be foreclosed upon in the
name of the Trustee without the Trustee's prior written consent.
Leasehold Risks. Mortgage Loans may be secured by a mortgage on the
borrower's leasehold interest in a ground lease. Leasehold mortgage loans are
subject to certain risks not associated with mortgage loans secured by a lien on
the fee estate of the borrower. The most significant of these risks is that if
the borrower's leasehold were to be terminated upon a lease default or the
lessee's bankruptcy, the leasehold mortgagee would lose its security. This risk
may be lessened or substantially eliminated if the ground lease requires the
lessor to give the leasehold mortgagee notices of lessee defaults and an
opportunity to cure them, permits the leasehold estate to be assigned to and by
the leasehold mortgagee or the purchaser at a foreclosure sale, grants the
leasehold mortgagee the right to a new lease if the lessee's lease is terminated
in a bankruptcy proceeding and contains certain other protective provisions
typically included in a "mortgageable" ground lease.
Under the Bankruptcy Code, a landlord in bankruptcy may "reject" an
unexpired lease. If it does, the Bankruptcy Code permits the lessee to either
treat the least as terminated (an election that "mortgageable" ground leases
would prohibit) or "remain in possession of the leasehold." 11 U.S.C. ss.
365(g). The legislative history of this provision indicates that Congress
intended that lessees that elected to remain "possession of the leasehold" were
entitled to retain all of their leasehold rights under the reject lease, and
there is case law that construes the Bankruptcy Code consistent with that
intent. See e.g. Chestnut Ridge Plaza Associates, L.P. v. Fox Grocery Co. (In re
Chestnut Ridge Plaza Associates, L.P.). 156 B.R. 477 (Bankr. W.D. Pa. 1993).
However, some recent bankruptcy court decisions have held that a lessee's rights
under a lease rejected by a landlord in bankruptcy are limited to the lessee's
own physical possession of the leased premises under the terms of the lease, and
that the rejected lease does not otherwise continue. Thus, in In re Carlton
Restaurant, Inc. 151 B.R. 353 (Bankr. E.D. Pa. 1993) the court held that a
landlord's rejection of a lease in bankruptcy "excuses [it] from accepting
performance by a party other than a lessee who remains in possession."
Although none of the cases that have taken a restrictive view of the
rights of a lessee under a rejected lease involved a leasehold mortgage, whose
security might have been impaired as a result of the court's holding, the
holding that a landlord that rejects a lease in bankruptcy need not honor the
right to assign that lease or to recognize a sublease casts doubt upon the
ability of a leasehold mortgagee to realize upon its security in the case of the
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bankruptcy of the ground lessor. Representatives of the real estate lending
industry, which has lent billions of dollars on the security of ground leases,
have strongly criticized these cases. As a result, Congress is considering
legislation that would, if passed, clarify the Bankruptcy Code to effectively
overrule them. However, unless and until such legislation is passed or the cases
are overruled, some uncertainty will remain and ground lessee/borrowers may find
it difficult to refinance their mortgages.
Installment Contracts
The Mortgage Loans may also consist of Installment Contracts. Under an
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 real estate 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 its 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 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 for the real estate in a given state are simpler and
less time-consuming and costly than are the procedure for foreclosing and
obtaining clear title to a mortgaged property.
Subordinate Financing
Certain of the Mortgage Loans may not restrict the ability of the
borrower to use the Mortgaged Property as security for one or more additional
loans. Where a borrower encumbers a Mortgaged Property with one or more junior
liens, the senior lender is subjected to additional risk. First, the borrower
may have difficulty servicing and repaying multiple loans. Moreover, if the
subordinate financing permits recourse to the borrower (as is frequently the
case) and the senior loan does not, a borrower may have more incentive to repay
sums due on the subordinate loan. Second, acts of the senior lender that
prejudice the junior lender or impair the junior lender's security may create a
superior equity in favor of the junior lender. For example, if the borrower and
the senior lender agree to an increase in the principal amount of or the
interest rate payable on the senior loan, the senior lender may lose its
priority to the extent any existing junior lender is harmed or the borrower is
additionally burdened. Third, if the borrower defaults on the senior loan and/or
any junior loan or loans, the existence of junior loans and actions taken by
junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceedings by the senior lender.
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LEGAL INVESTMENT MATTERS
The Certificates may constitute "mortgage related securities" for
purposes of SMMEA, so long as they are rated in one of the two highest rating
categories by the Rating Agency or Agencies identified in the related Prospectus
Supplement and, as such, would be legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including but not limited to state-chartered savings banks, commercial banks,
saving and loan associations and insurance companies, as well as trustees and
state government employee retirement systems) created pursuant to or existing
under the laws of the United States or any State (including the District of
Columbia and Puerto Rico) whose authorized investments are subject to State
regulation to the same extent that, under applicable law, obligations issued by
or guaranteed as to principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for such entities. Under
SMMEA, in all States which enacted legislation prior to October 4, 1991
specifically limiting the legal investment authority of any of such entities
with respect to "mortgage related securities," the Certificates will constitute
legal investments for entities subject to such legislation only to the extent
provided in such legislation SMMEA provides, however, that in no event will the
enactment of any such legislation affect the validity of any contractual
commitment to purchase, bold or invest in any securities or require the sale or
over disposition of any securities, so long as such contractual commitment was
made or such securities were acquired prior to the enactment of such
legislation. Alaska, Arkansas, Colorado, Connecticut, Delaware, Florida,
Georgia, Illinois, Kansas, Louisiana, Maryland, Michigan, Missouri, Nebraska,
New Hampshire, New York, North Carolina, Ohio, South Dakota, Utah, Virginia and
West Virginia each enacted legislation overriding the exemption afforded by
SMMEA prior to the October 4, 1991 deadline.
Institutions whose investment activities are subject to legal
investment laws or regulations or review by certain regulatory authorities may
be subject to restrictions on investment in certain classes of the Certificates.
Any financial institution which is subject to the jurisdiction of the
Comptroller of the Currency, the Board of Governors of the Federal Reserve
System, the FDIC, the OTS, the NCUA or other federal or state agencies with
similar authority should review any applicable rules, guidelines and regulations
prior to purchasing the certificates. The Federal Financial Institutions
Examination Council, for example, has issued a Supervisory Policy Statement on
Securities Activities effective February 10, 1992 (the "Policy Statement"). The
Policy Statement has been adopted by the Comptroller of the Currency, the
Federal Reserve Board, the FDIC and the OTS with respect to the depository
institutions that they regulate. The Policy Statement prohibits depository
institutions from investing in certain "high-risk mortgage securities" except
under limited circumstances, and sets forth certain investment practices deemed
to be unsuitable for regulated institutions. The NCUA issued final regulations
effective December 2, 1991 that restrict and in some instances prohibit the
investment by federal credit unions in certain types of mortgage related
securities.
The foregoing does not take into consideration the applicability of
statutes, rules, reunions, orders, felines or agreements generally governing
investments made by a particular investor, including, but not limited to
"prudent investor" provisions, percentage-of-assets limits and provisions which
may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying."
Notwithstanding SMMEA, there may be other restrictions on the ability
of certain investors, including depository institutions, either to purchase
Certificates or to purchase Certificates representing more than a specified
percentage of the investors' assets.
Investors should consult their own legal advisors in determining
whether and to what extent the Certificates constitute legal investments for
such investors.
ERISA CONSIDERATIONS
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
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to ERISA and on persons who are fiduciaries with respect to such 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 Plan. ERISA also imposes
certain duties on persons who are fiduciaries of Plans. Under ERISA, any person
who exercises any authority or control respecting the management or disposition
of the assets of a Plan is considered to be a fiduciary of such Plan (subject to
certain exceptions not here relevant). 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.
The United States Department of Labor (the "DOL") has issued
regulations concerning the definition of what constitutes the assets of a Plan.
(DOL 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. In such cases, the
fiduciary making such an investment for the Plan could be deemed to have
delegated his or her asset management responsibility, and the underlying assets
and properties could be subject to ERISA reporting and disclosure. Certain
exceptions to the regulation may apply in the case of a Plan's investment in the
Certificates, but the Depositor cannot predict in advance whether such
exceptions apply due to the factual nature of the conditions to be met.
Accordingly, because the Multifamily Loans or Multifamily Mortgage-Backed
Securities may be deemed Plan assets of each Plan that purchases Certificates,
an investment in the Certificates by a Plan might give rise to a prohibited
transaction under ERISA Sections 406 and 407 and be subject to an excise tax
under Code Section 4975 unless a statutory or administrative exemption applies.
DOL Prohibited Transaction Exemption 83-1 ("PTE 83-1") exempts from
ERISA's prohibited transaction rules certain transactions relating to the
operation of residential mortgage 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 involving 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 PTE.
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 owners 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 Depositor, and (iii) a limitation on the amount of
the payments 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.
Although the Trustee for any series of Certificates will be
unaffiliated with the Depositor, there can be no assurance that the system of
insurance or subordination will meet the general or specific conditions referred
to above. In addition, the nature of a Trust's assets or the characteristics of
one or more classes of the related series of Certificates may not be included
within the scope of PTE 83-1 or any other class exemption under ERISA. The
Prospectus Supplement will provide additional information with respect to the
application of ERISA and the Code to the related Certificates.
Several underwriters of mortgage-backed securities have applied for and
obtained ERISA prohibited transactions exemptions which are in some respects
broader than PTE 83-1. Such exemptions can only apply to mortgage-backed
securities which, among other conditions, are sold in an offering with respect
to which such underwriter serves as the sole or a managing underwriter, or as a
selling or placement agent. Several other
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underwriters have applied for similar exemptions. If such an exemption might be
applicable to a series of Certificates, the related Prospectus Supplement will
refer to such possibility.
Each Plan fiduciary who is responsible for making the investment
decisions whether to purchase or commit to purchase and to hold Certificates
must make its own determination as to whether the general and the specific
conditions 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 Certificates is appropriate for the
Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
Any Plan proposing to invest in Certificates should consult with its
counsel to confirm that such investment will not result in a prohibited
transaction and will satisfy the other requirements of ERISA and the Code.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the anticipated material
federal income tax consequences of the purchase, ownership and disposition of
Certificates and is based upon the advice of Arter & Hadden, special counsel to
the Depositor. The discussion below does not purport to address all federal
income tax consequences that may be applicable to particular categories of
investors, some of which may be subject to special rules. The authorities on
which this discussion is based are subject to change or differing
interpretations, and any such change or interpretation could apply
retroactively. This discussion reflects the applicable provisions of the Code
including recent amendments under the Omnibus Budget Reconciliation Act of 1993
("OBRA"), as well as final regulations concerning REMICs (the "REMIC
Regulations") promulgated on December 23, 1992, and final regulations under
Sections 1271 through 1273 and 1275 of the Code concerning debt instruments
promulgated on January 27, 1994 (the "OID Regulations"). The Depositor intends
to rely on the OID Regulations for all Certificates offered pursuant to this
Prospectus; however, investors should be aware that the OID Regulations do not
adequately address certain issues relevant to prepayable securities, such as the
Certificates. Investors should consult their own tax advisors in determining the
federal, state, local and any other tax consequences to them of the purchase,
ownership and disposition of Certificates, particularly with respect to federal
income tax changes effected by OBRA and the REMIC Regulations. The Prospectus
Supplement for each series of Certificates will discuss any special tax
consideration applicable to any class of Certificates of such series, and the
discussion below is qualified by any such discussion in the related Prospectus
Supplement.
For purposes of this discussion, where the applicable Prospectus
Supplement provides for a fixed retained yield with respect to the Mortgage
Assets underlying a series of Certificates, references to the Mortgage Assets
will be deemed to refer to that portion of the Mortgage Assets held by the Trust
which does not include the fixed retained yield.
Federal Income Tax Consequences For REMIC Certificates
General. With respect to a particular series of Certificates, an
election may be made to treat the Trust or one or more trusts or segregated
pools of assets therein as one or more REMICs within the meaning of Code Section
860D. A Trust or a portion or portions thereof as to which one or more REMIC
elections will be made will be referred to as a "REMIC Pool." For purposes of
this discussion, Certificates of a series as to which one or more REMIC
elections are made are referred to as "REMIC Certificates" and will consist of
one or more classes of "Regular Certificates" and one class of "Residual
Certificates" in the case of each REMIC Pool. Qualification as a REMIC requires
ongoing compliance with certain conditions. With respect to each series of REMIC
Certificates, Arter & Hadden, counsel to the Depositor, will deliver its opinion
to the Depositor that (unless otherwise limited in the related Prospectus
Supplement), assuming (i) the making of an appropriate election, (ii) compliance
with the Agreement and (iii) compliance with any changes in the law, including
any amendments to the Code or applicable Treasury regulations thereunder, each
REMIC Pool will qualify as a REMIC. In such case, the Regular Certificates will
be considered to be "regular interests" in the REMIC Pool and generally will be
treated for federal income tax purposes as if they were newly originated debt
instruments, and the Residual Certificates will be considered to be "residual
interests" in the REMIC Pool. The Prospectus Supplement for each series of
Certificates will indicate
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whether one or more REMIC elections with respect to the related Trust will be
made, in which event references to "REMIC" or "REMIC Pool" herein shall be
deemed to refer to each such REMIC Pool. Arter & Hadden, counsel to the
Depositor, is of the opinion that if a Trust qualifies as a REMIC, the tax
consequences to the Owners will be as described below.
Status of REMIC Certificates. REMIC Certificates held by a mutual
savings bank or a domestic building and loan association (a "Thrift
Institution") will constitute "qualifying real property loans" within the
meaning of Code Section 593(d)(1) in the same proportion that the assets of the
REMIC Pool would be so treated. REMIC Certificates held by a domestic building
and loan association will constitute "a regular or residual interest in a REMIC"
within the meaning of Code Section 7701(a) (19)(C) (xi) in the same proportion
that the assets of the REMIC Pool would be treated as "loans secured by an
interest in real property" within the meaning of Code Section 7701(a)(19)(C)(v)
or as other assets described in Code Section 7701(a)(19)(C). REMIC Certificates
held by a real estate investment trust (a "REIT") will constitute "real estate
assets" within the meaning of Code Section 856(c)(5)(A), and interest on the
REMIC Certificates will be considered "interest on obligations secured by
mortgages on real property or on interests in real property" within the meaning
of Code Section 856(c)(3)(B) in the same proportion that, for both purposes, the
assets of the REMIC Pool would be so treated. If at all times 95% or more of the
assets of the REMIC Pool constitute qualifying assets for Thrift Institutions
and REITs, the REMIC Certificates will be treated entirely as qualifying assets
for such entities. Moreover, the REMIC Regulations provide that, for purposes of
Code Sections 593(d)(1) and 856(c)(5)(A), payments of principal and interest on
the Mortgage Assets that are reinvested pending distribution to holders of REMIC
Certificates, constitute qualifying assets for such entities. Where two REMIC
Pools are part of a tiered structure they will be treated as one REMIC for
purposes of the tests described above respecting asset ownership of more or less
than 95%. Notwithstanding the foregoing, however, REMIC income received by a
REIT owning a residual interest in a REMIC Pool could be treated in part as
non-qualifying REIT income if the REMIC Pool holds Mortgage Assets with respect
to which income is contingent on mortgagor profits or property appreciation. In
addition, if the assets of the REMIC include buy-down Mortgage Assets, it is
possible that the percentage of such assets constituting "qualifying real
property loans" or "loans secured by an interest in real property" for purposes
of Code Sections 593(d)(1) and 7701(a)(19)(C)(v), respectively, may be required
to be reduced by the amount of the related buy-down funds. REMIC Certificates
held by a regulated investment company will not constitute "government
securities" within the meaning of Code Section 851(b)(4)(A)(i). REMIC
Certificates held by certain financial institutions will constitute an "evidence
of indebtedness" within the meaning of Code Section 582(c)(i). REMIC
Certificates representing interests in obligations secured by manufactured
housing treated as single family residences under Code Section 25(e)(10) will be
considered interests in "qualified mortgages" as defined in Code Section
860E(a)(3).
Qualification as a REMIC. In order for the REMIC Pool to qualify as a
REMIC, there must be ongoing compliance on the part of the REMIC Pool with the
requirements set forth in the Code. The REMIC Pool must fulfill an asset test,
which requires that no more than a de minimis amount of the assets of the REMIC
Pool, as of the close of the third calendar month beginning after the Delivery
Date (which for purposes of this discussion is the date of issuance of the REMIC
Certificates) and at all times thereafter, may consist of assets other than
"qualified mortgages" and "permitted investments." The REMIC Regulations provide
a "safe harbor" pursuant to which the de minimis requirement will be met if at
all times the aggregate adjusted basis of any nonqualified assets (i.e., assets
other than qualified mortgages and permitted investments) is less than 1% of the
aggregate adjusted basis of all the REMIC Pool's assets.
If a REMIC Pool fails to comply with one or more of the requirements of
the Code for REMIC status during any taxable year, the REMIC Pool will not be
treated as a REMIC for such year and thereafter. In this event, the
classification of the REMIC Pool for federal income tax purposes is uncertain.
The REMIC Pool might be entitled to treatment as a grantor trust under the rules
described in "Federal Income Tax Consequences for Certificates as to Which No
REMIC Election Is Made." In that case, no entity-level tax would be imposed on
the REMIC Pool. Alternatively, the Regular Certificates may continue to be
treated as debt instruments for federal income tax purposes; but the REMIC Pool
could be treated as a taxable mortgage pool (a "TMP"). If the REMIC Pool is
treated as a TMP, any residual income of the REMIC Pool (income from the
Mortgage Assets less interest and original issue discount expense allocable to
the Regular Certificates and any administrative expenses of the REMIC Pool)
would be subject to corporate income tax at the REMIC Pool level. On the other
hand, an entity with
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multiple classes of ownership interests may be treated as a separate association
taxable as a corporation under Treasury regulations, and the Regular
Certificates may be treated as equity interests therein. The Code, however,
authorizes the Treasury Department to issue regulations that address situations
where failure to meet one or more of the requirements for REMIC status occurs
inadvertently and in good faith, and disqualification of the REMIC Pool would
occur absent regulatory relief. Investors should be aware, however, that the
Conference Committee Report to the Tax Reform Act of 1986 (the "1986 Act")
indicates that the relief may be accompanied by sanctions, such as the
imposition of a corporate tax on all or a portion of the REMIC Pool's income for
the period of time in which the requirements for REMIC status are not satisfied.
Taxation of Regular Certificates
General. Payments received by holders of Regular Certificates generally
should be accorded the same tax treatment under the Code as payments received on
ordinary taxable corporate debt instruments. In general, interest, original
issue discount and market discount on a Regular Certificate will be treated as
ordinary income to a holder of the Regular Certificate (the "Regular
Certificateholder") as they accrue, and principal payments on a Regular
Certificate will be treated as a return of capital to the extent of the Regular
Certificateholder's basis in the Regular Certificate allocable thereto. Regular
Certificateholders must use the accrual method of accounting with regard to
Regular Certificates, regardless of the method of accounting otherwise used by
such Regular Certificateholders.
Original Issue Discount. Regular Certificates may be issued with
"original issue discount" within the meaning of Code Section 1273(a). Holders of
any class of Regular Certificates having original issue discount generally must
include original issue discount in ordinary income for federal income tax
purposes as it accrues, in accordance with a constant interest method that takes
into account the compounding of interest, in advance of receipt of the cash
attributable to such income. While the Depositor anticipates that the amount of
original issue discount required to be included in a Regular Certificateholder's
income in any taxable year will be computed as described below, there can be no
assurance that the rules described below will be applied to the Regular
Certificates in the manner described.
Each Regular Certificate (except to the extent described below with
respect to a Regular Certificate on which distributions of principal are made in
a single installment or upon an earlier distribution by lot of a specified
principal amount upon the request of a Regular Certificateholder or by random
lot (a "Retail Class Certificate")) will be treated as a single installment
obligation for purposes of determining the original issue discount includible in
a Regular Certificateholder's income. The total amount of original issue
discount on a Regular Certificate is the excess of the "stated redemption price
at maturity" of the Regular Certificate over its "issue price." The issue price
of a Regular Certificate is the first price at which a substantial amount of
Regular Certificates of that class are first sold to the public. The Depositor
will determine original issue discount by including the amount paid by an
initial Regular Certificateholder for accrued interest that relates to a period
prior to the issue date of the Regular Certificate in the issue price of a
Regular Certificate and will include in the stated redemption price at maturity
any interest paid on the first Distribution Date to the extent such interest is
attributable to a period in excess of the number of days between the issue date
and such first Distribution Date. The stated redemption price at maturity of a
Regular Certificate always includes the original principal amount of the Regular
Certificate, but generally will not include distributions of stated interest if
such interest distributions constitute "qualified stated interest." Qualified
stated interest generally means stated interest that is unconditionally payable
in cash or in property (other than debt instruments of the issuer) at least
annually at (i) a single fixed rate, (ii) one or more qualified floating rates
(as described below), (iii) a fixed rate followed by one or more qualified
floating rates, (iv) a single objective rate (as described below) or (v) a fixed
rate and an objective rate that is a qualified inverse floating rate. 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. 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. Any stated interest in excess of the qualified stated interest is
included in the stated redemption price at maturity. If the amount of original
issue discount is "de minimis" as described below, the amount of original issue
discount is treated as zero, and all stated
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interest is treated as qualified stated interest. Distributions of interest on
Regular Certificates with respect to which deferred interest will accrue may not
constitute qualified stated interest, in which case the stated redemption price
at maturity of such Regular Certificates includes all distributions of interest
as well as principal thereon. Moreover, if the interval between the issue date
and the first Distribution Date on a Regular Certificate is longer than the
interval between subsequent Distribution Dates (and interest paid on the first
Distribution Date is less than would have been earned if the stated interest
rate were applied to outstanding principal during each day in such interval),
the stated interest distributions on such Regular Certificate technically do not
constitute qualified stated interest. In such case a special rule, applying
solely for the purpose of determining whether original issue discount is de
minimis, provides that the interest shortfall for the long first period (i.e.,
the interest that would have been earned if interest had been paid on the first
Distribution Date for each day the Regular Certificate was outstanding) is
treated as made at a fixed rate if the value of the rate on which the payment is
based is adjusted in a reasonable manner to take into account the length of the
interval. Regular Certificateholders should consult their own tax advisors to
determine the issue price and stated redemption price at maturity of a Regular
Certificate.
Under a de minimis rule, original issue discount on a Regular
Certificate will be considered to be zero if such original issue discount is
less than 0.25% of the stated redemption price at maturity of the Regular
Certificate multiplied by the weighted average maturity of the Regular
Certificate. For this purpose, the weighted maturity of the Regular Certificate
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 Regular Certificate
and the denominator of which is the stated redemption price at maturity of the
Regular Certificate. Although currently unclear, it appears that the schedule of
such distributions should be determined in accordance with the assumed rate of
prepayment of the Mortgage Assets and the anticipated reinvestment rate, if any,
relating to the Regular Certificates (the "Prepayment Assumption"). The
Prepayment Assumption with respect to a series of Regular Certificates will be
set forth in the related Prospectus Supplement. The holder of a debt instrument
includes any de minimis original issue discount in income pro rata as stated
principal payments are received.
Of the total amount of original issue discount on a Regular
Certificate, the Regular Certificateholder generally must include in gross
income for any taxable year the sum of the "daily portions," as defined below,
of the original issue discount on the Regular Certificate accrued during an
accrual period for each day on which he holds the Regular Certificate, including
the date of purchase but excluding the date of disposition. Although not free
from doubt, the Depositor intends to treat the monthly period ending on the day
before each Distribution Date as the accrual period, rather than the monthly
period corresponding to the prior calendar month. With respect to each Regular
Certificate, a calculation will be made of the original issue discount that
accrues during each successive full accrual period (or shorter period from the
date of original issue) that ends on the day before the related Distribution
Date on the Regular Certificate. For a Regular Certificate, original issue
discount is to be calculated initially based on a schedule of maturity dates
that takes into account the level of prepayments and an anticipated reinvestment
rate that are most likely to occur, which is expected to be based on the
Prepayment Assumption. The original issue discount accruing in a full accrual
period would be the excess, if any, of (i) the sum of (a) the present value of
all of the remaining distributions to be made on the Regular Certificate as of
the end of that accrual period that are included in the Regular Certificate's
stated redemption price at maturity and (b) the distributions made on the
Regular Certificate during the accrual period that are included in the Regular
Certificate's stated redemption price at maturity over (ii) the adjusted issue
price of the Regular Certificate at the beginning of the accrual period. The
present value of the remaining distributions referred to in the preceding
sentence is calculated based on (i) the yield to maturity of the Regular
Certificate at the issue date, (ii) events (including actual prepayments) that
have occurred prior to the end of the accrual period and (iii) the Prepayment
Assumption. For these purposes, the adjusted issue price of a Regular
Certificate at the beginning of any accrual period equals the issue price of the
Regular Certificate, increased by the aggregate amount of original issue
discount with respect to the Regular Certificate that accrued in all prior
accrual periods and reduced by the amount of distributions included in the
Regular Certificate's stated redemption price at maturity that were made on the
Regular Certificate in such prior period. The original issue discount accruing
during any accrual period (as determined in this paragraph) will then be divided
by the number of days in the period to determine the daily portion of original
issue discount for each day in the period.
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Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Certificateholder
generally will increase to take into account prepayments on the Regular
Certificates as a result of prepayments on the Mortgage Assets or that exceed
the Prepayment Assumption, and generally will decrease (but not below zero for
any period) if the prepayments are slower than the Prepayment Assumption. In the
event of a change in circumstances that does not result in a substantially
contemporaneous pro rata prepayment, the yield and maturity of the Regular
Certificates are redetermined by treating the Regular Certificates as reissued
on the date of the change for an amount equal to the adjusted issue price of the
Regular Certificates. To the extent specified in the applicable Prospectus
Supplement, an increase in prepayments on the Mortgage Assets with respect to a
series of Regular Certificates can result in both a change in the priority of
principal payments with respect to certain classes of Regular Certificates and
either an increase or decrease in the daily portions of original issue discount
with respect to such Regular Certificates.
A purchaser of a Regular Certificate at a price greater than the issue
price also will be required to include in gross income the daily portions of the
original issue discount on the Regular Certificate. With respect to such a
purchaser, the daily portion for any day is reduced by the amount that would be
the daily portion for such day (computed in accordance with the rules set forth
above) multiplied by a fraction, the numerator of which is the amount, if any,
by which the price paid by such purchaser for the Regular Certificate exceeds
the sum of the issue price and the aggregate amount of original issue discount
that would have been includible in the gross income of an original holder of the
Regular Certificate who purchased the Regular Certificate at its issue price,
less any prior distributions included in the stated redemption price at
maturity, and the denominator of which is the sum of the daily portions for such
Regular Certificate (computed in accordance with the rules set forth above) for
all days after the date of purchase and ending on the date on which the
remaining principal amount of such Regular Certificate is expected to be reduced
to zero under the Prepayment Assumption.
A Certificateholder may elect to include in gross income all stated
interest, original issue discount, de minimis original issue discount, market
discount (as described below under "Market Discount"), de minimis market
discount and unstated interest (as adjusted for any amortizable bond premium or
acquisition premium) currently as it accrues using the constant yield to
maturity method. If this election is made, the holder is treated as satisfying
the requirements for making the elections with respect to amortization of
premium and current inclusion of market discount, each as described under
"Premium" and "Market Discount" below.
Variable Rate Regular Certificates. Regular Certificates may provide
for interest based on a variable rate. The OID Regulations provide special rules
for variable rate instruments that meet three requirements. First, the
noncontingent principal payments may not exceed the instrument's issue price by
more than a specified amount equal to the lesser of (i) .015 multiplied by the
product of the total noncontingent payments and the weighted average maturity or
(ii) 15% of the total noncontingent principal payments. Second, the instrument
must provide for stated interest (compounded or paid at least annually) at (i)
one or more qualified floating rates, (ii) a single fixed rate followed by one
or more qualified floating rates, (iii) a single objective rate or (iv) a single
fixed rate and a single objective rate that is a qualified inverse floating
rate. Third, the instrument must provide that each qualified floating rate or
objective rate in effect during an accrual period is set at a current value of
that rate (one occurring in the interval beginning three months before and
ending one year after the rate is first in effect on the Regular Certificate). A
rate is a qualified floating rate if variations in the rate can reasonably be
expected to measure contemporaneous variations in the cost of newly borrowed
funds. Generally, neither (i) a multiple of a qualified floating rate in excess
of a fixed multiple that is greater than zero but not more than 1.35 (and
increased or decreased by a fixed rate) nor (ii) a cap or floor that is likely
to cause the interest rate on a Regular Certificate to be significantly less or
more than the overall expected return on the Regular Certificate is considered a
qualified floating rate. An objective rate is a rate based on changes in the
price of actively traded property or an index of such prices or is a rate based
on (including multiples of) one or more qualified floating rates. An objective
rate is a qualified inverse floating rate if the rate is equal to a fixed rate
minus a qualified floating rate and variations in such rate can reasonably be
expected to reflect inversely contemporaneous variations in the cost of newly
borrowed funds. A rate will not be an objective rate if it is reasonably
expected that the average rate during the first half of the instrument's term
will be significantly more or less than the average rate in the final term. An
objective rate must be determined according to a single formula that is fixed
throughout the term of the Regular Certificate. Stated
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interest on a variable rate debt instrument is qualified stated interest if the
interest is unconditionally payable in cash or property at least annually.
In general, the determination of original issue discount and qualified
stated interest on a variable rate debt instrument is made by converting the
debt instrument into a fixed rate debt instrument and then applying the general
original issue discount rules described above to the instrument. If a variable
rate debt instrument provides for stated interest at a single qualified floating
rate or objective rate, all stated interest is qualified stated interest and the
amount of original issue discount, if any, is determined by assuming the
variable rate is a fixed rate equal to (a) in the case of a qualified floating
or inverse floating rate, the value, as of the issue date, of the qualified
floating inverse floating rate or (b) in the case of an objective rate (other
than a qualified inverse floating rate), a fixed rate that reflects the yield
that is reasonably expected for the debt instrument. For all other variable rate
debt instruments, the amount of interest and original issue discount accruals
are determined using the following steps. First, a fixed rate substitute for
each variable rate under the debt instrument is determined. In general, the
fixed rate substitute is a fixed rate equal to the rate of the applicable type
of variable rate as of the issue date. Second, an equivalent fixed rate debt
instrument is constructed using the fixed rate substitute(s) in lieu of the
variable rates and keeping all other terms identical. Third, the amount of
qualified stated interest and original issue discount with respect to the
equivalent fixed rate debt instrument are determined under the rules for fixed
rate debt instruments. Finally, appropriate adjustments for actual variable
rates are made during the term by increasing or decreasing the qualified stated
interest to reflect the amount actually paid during the applicable accrual
period as compared to the interest assumed to be accrued or paid under the
equivalent fixed rate debt instrument. If there is no qualified stated interest
under the equivalent fixed rate debt instrument, the adjustment is made to the
original issue discount for the period.
Where the issue price of a Regular Certificate exceeds the original
principal amount of the Regular Certificate, it appears appropriate to reduce
the ordinary income reportable for an accrual period by a portion of such excess
in a manner similar to the amortization of premium on the constant yield method.
Under proposed regulations (the "contingent payment rules"), a Regular
Certificate that provides for (i) non-contingent payments greater than or equal
to its issue price and (ii) one or more contingent payments determined by
reference to the value of publicly traded stock, securities, commodities, or
other publicly traded property must be divided into its component parts for
purposes of performing original issue discount calculations (and possibly for
other federal income tax purposes as well). The non-contingent portion of the
Regular Certificate would be treated as a debt instrument, and the original
issue discount accruals on that portion would be computed in the same manner as
with any non-contingent debt instrument. The issue price of the non-contingent
portion would be that portion of the issue price of the Regular Certificate that
reflects the right to receive the non-contingent payments, determined in the
same manner as if the separate non-contingent debt instrument were a debt
instrument issued as part of an investment unit. The contingent components of
the Regular Certificate would constitute options or other property rights and
would be taxed as if issued as a separate instrument. No accrual of original
issue discount generally would be required with respect to such components under
the contingent payment rules. Accordingly, the rate at which income is accrued
by a Certificateholder may vary depending on whether the original issue discount
rules or the contingent payment rules apply to certain variable rate debt
instruments.
Market Discount. A purchaser of a Regular Certificate also may be
subject to the market discount rules of Code Sections 1276 through 1278. Under
these sections and the principles applied by the OID Regulations in the context
of original issue discount, "market discount" is the amount by which a
subsequent purchaser's initial basis in the Regular Certificate (i) is exceeded
by the stated redemption price at maturity of the Regular Certificate or (ii) in
the case of a Regular Certificate having original issue discount, is exceed by
the sum of the issue price of such Regular Certificate plus any original issue
discount that would have previously accrued thereon if held by an original
Regular Certificateholder (who purchased the Regular Certificate at its issue
price), in either case less any prior distributions included in the stated
redemption price at maturity of such Regular Certificate. Such purchaser
generally will be required to recognize accrued market discount as ordinary
income as distributions includible in the stated redemption price at maturity of
such Regular Certificate are received in an amount not exceeding any such
distribution. That recognition rule would apply regardless of whether the
purchaser is a cash-basis or accrual-basis taxpayer. Such market discount would
accrue in a manner to be provided in Treasury regulations and should take into
account the Prepayment Assumption. The Conference Committee Report to the
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1986 Act provides that until such regulations are issued, such market discount
would accrue either (i) on the basis of a constant interest rate or (ii) in the
ratio of stated interest allocable to the relevant period to the sum of the
interest for such period plus the remaining interest as of the end of such
period, or in the case of a Regular Certificate issued with original issue
discount, in the ratio of original issue discount accrued for the relevant
period to the sum of the original issue discount accrued for such period plus
the remaining original issue discount as of the end of such period. Such
purchaser also generally will be required to treat a portion of any gain on a
sale or exchange of the Regular Certificate as ordinary income to the extent of
the market discount accrued to the date of disposition under one of the
foregoing methods, less any accrued market discount previously reported as
ordinary income as partial distributions in reduction of the stated redemption
price at maturity were received. Such purchaser will be required to defer
deduction of a portion of the excess of the interest paid or accrued on
indebtedness incurred to purchase or carry a Regular Certificate over the
interest distributable thereon. The deferred portion of such interest expense in
any taxable year generally will not exceed the accrued market discount on the
Regular Certificate for such year. Any such deferred interest expense is, in
general, allowed as a deduction not later than the year in which the related
market discount income is recognized or the Regular Certificate is disposed of.
As an alternative to the inclusion of market discount in income on the foregoing
basis, the Regular Certificateholder may elect to include market discount in
income currently as it accrues in all market discount instruments acquired by
such Regular Certificateholder in that taxable year or thereafter, in which case
the interest deferral rule will not apply. In Revenue Procedure 92-67, the
Internal Revenue Service set forth procedures for taxpayers (1) electing under
Code Section 1278(b) to include market discount in income currently, (2)
electing under rules of Code Section 1276(b) to use a constant interest rate to
determine accrued market discount on a bond where the holder of the bond is
required to determine the amount of accrued market discount at a time prior to
the holder's disposition of the bond, and (3) requesting consent to revoke an
election under Code Section 1278(b).
By analogy to the OID Regulations, market discount with respect to a
Regular Certificate will be considered to be zero if such market discount is
less than 0.25% of the remaining stated redemption price at maturity of such
Regular Certificate multiplied by the weighted average maturity of the Regular
Certificate (determined as described above under "Original Issue Discount")
remaining after the date of purchase. Treasury regulations implementing the
market discount rules have not yet been issued, and therefore investors should
consult their own tax advisors regarding the application of these rules as well
as the advisability of making any of the elections with respect thereto.
Premium. A Regular Certificate purchased at a cost greater than its
remaining stated redemption price at maturity generally is considered to be
purchased at a premium. If the Regular Certificateholder holds such Regular
Certificate as a "capital asset" within the meaning of Code Section 1221, the
Regular Certificateholder may elect under Code Section 171 to amortize such
premium under a constant yield method that reflects compounding based on the
interval between payments on the Regular Certificates. This election, once made,
applies to all obligations held by the taxpayer at the beginning of the first
taxable year to which such section applies and to all taxable debt obligations
thereafter acquired and is binding on such taxpayer in all subsequent years. The
Conference Committee Report to the 1986 Act indicates a Congressional intent
that the same rules that apply to the accrual of market discount on installment
obligations will also apply to amortizing bond premium under Code Section 171 on
installment obligations such as the Regular Certificates, although it is unclear
whether the alternatives to the constant interest method described above under
"Market Discount" are available. Except as otherwise provided in Treasury
regulations yet to be issued amortizable bond premium will be treated as an
offset to interest income on a Regular Certificate rather than as a separate
deduction item. Purchasers who pay a premium for their Regular Certificates
should consult their tax advisors regarding the election to amortize premium and
the method to be employed.
Sale or Exchange of Regular Certificates. If a Regular
Certificateholder sells or exchanges a Regular Certificate, the Regular
Certificateholder will recognize gain or loss equal to the difference, if any,
between the amount received and his adjusted basis in the Regular Certificate.
The adjusted basis of a Regular Certificate generally will equal the cost of the
Regular Certificate to the seller, increased by any original issue discount or
market discount previously included in the seller's gross income with respect to
the Regular Certificate and reduced by amounts included in the stated redemption
price at maturity of the Regular Certificate that were previously received by
the seller and by any amortized premium.
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Except as described above with respect to market discount, and except
as provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate as
a capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Certificate has been held for the long-term
capital gain holding period (currently more than one year). Gain from the
disposition of a Regular Certificate that might otherwise be capital gain will
be treated as ordinary income to the extent that such gain does not exceed the
excess, if any, of (i) the amount that would have been includible in the gross
income of the holder if his yield on such Regular Certificate were 110% of the
applicable Federal rate under Code Section 1274(d) as of the date of purchase
over (ii) the amount of income actually includible in the gross income of such
holder with respect to the Regular Certificate. In addition, gain or loss
recognized from the sale of a Regular Certificate by certain banks or thrift
institutions will be treated as ordinary income or loss pursuant to Code Section
582(c). The maximum tax rate for individuals on the excess of net long-term
capital gain over net short-term capital loss is 28%.
Taxation of Residual Certificates
Taxation of REMIC Income. Generally, the "daily portions" of REMIC
taxable income or net loss will be includible as ordinary income or loss in
determining the federal taxable income of holders of Residual Certificates
("Residual Certificateholders") and will not be taxed separately to the REMIC
Pool. The daily portions of REMIC taxable income or net loss of a Residual
Certificateholder are determined by allocating the REMIC Pool's taxable income
or net loss for each calendar quarter ratably to each day in such quarter and by
allocating such daily portion among the Residual Certificateholders in
proportion to their respective holdings of Residual Certificates in the REMIC
Pool on such day. REMIC taxable income is generally determined in the same
manner as the taxable income of an individual using a calendar year and the
accrual method of accounting, except that (i) the limitation on deductibility of
investment interest expense and expenses for the production of income do not
apply, (ii) all bad loans will be deductible as business bad debts and (iii) the
limitation on the deductibility of interest and expenses related to tax-exempt
income will apply. REMIC taxable income generally means the REMIC Pool's gross
income, including interest, original issue discount income and market discount
income, if any, on the Mortgage Assets, plus income on reinvestment of cashflows
and reserve assets, minus deductions, including interest and original issue
discount expense on the Regular Certificates, servicing fees on the Mortgage
Assets and other administrative expenses of the REMIC Pool, amortization of
premium, if any, with respect to the Mortgage Assets, and any tax imposed on the
REMIC's income from foreclosure property. The requirement that Residual
Certificateholders report their pro rata share of taxable income or net loss of
the REMIC Pool will continue until there are no Certificates of any class of the
related series outstanding.
The taxable income recognized by a Residual Certificateholder in any
taxable year will be affected by, among other factors, the relationship between
the timing of recognition of interest and original issue discount or market
discount income or amortization of premium with respect to the Mortgage Assets,
on the one hand, and the timing of deductions for interest (including original
issue discount) on the Regular Certificates, on the other hand. Because of the
way REMIC taxable income is calculated, a Residual Certificateholder may
recognize "phantom" income (i.e., income recognized for tax purposes in excess
of income as determined under financial accounting or economic principles) which
will be matched in later years by a corresponding tax loss or reduction in
taxable income, but which could lower the yield to Residual Certificateholders
due to the lower present value of such future loss or reduction. For example, if
an interest in the Mortgage Assets is acquired by the REMIC Pool at a discount,
and one or more of such Mortgage Assets is prepaid, the Residual
Certificateholder may recognize taxable income without being entitled to receive
a corresponding amount of cash because (i) the prepayment may be used in whole
or in part to make distributions in reduction of principal on the Regular
Certificates and (ii) the discount income on the Mortgage Loan which is
includible in the REMIC's taxable income may exceed the discount deduction
allowed to the REMIC upon such distributions on the Regular Certificates. When
there is more than one class of Regular Certificates that distribute principal
sequentially, this mismatching of income and deductions is particularly likely
to occur in the early years following issuance of the Regular Certificates when
distributions in reduction of principal are being made in respect of earlier
maturing classes of Certificates to the extent that such classes are not issued
with substantial discount. If taxable income attributable to such a mismatching
is realized in general, losses would be allowed in later years as distributions
on the later classes of Regular Certificates are made. Taxable income may also
be greater in earlier years than in later years as a result of the fact that
interest expense deductions,
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expressed as a percentage of the outstanding principal amount of such a series
of Regular Certificates, may increase over time as distributions in reduction of
principal are made on the lower yielding classes of Regular Certificates, where
interest income with respect to any given Mortgage Loan will remain constant
over time as a percentage of the outstanding principal amount of that loan.
Consequently, Residual Certificateholders must have sufficient other sources of
cash to pay any federal, state or local income taxes due as a result of such
mismatching or unrelated deductions against which to offset such income.
Prospective investors should be aware, however, that a portion of such income
may be ineligible for offset by such investor's unrelated deductions. See the
discussion of "excess inclusions" below under "Limitations on Offset or
Exemption of REMIC Income; Excess Inclusions." The timing of such mismatching of
income and deductions described in this paragraph, if present with respect to a
series of Certificates, may have a significant adverse effect upon the Residual
Certificateholders after-tax rate of return. In addition, a Residual
Certificateholder's taxable income during certain periods may exceed the income
reflected by such Certificateholder for such periods in accordance with
generally accepted accounting principles. Investors should consult their own
advisors concerning the proper tax and accounting treatment of their investment
in Residual Certificates.
Basis and Losses. The amount of any net loss of the REMIC Pool that may
be taken into account by the Residual Certificateholder is limited to the
adjusted basis of the Residual Certificate as of the close of the quarter (or
time of disposition of the Residual Certificate if earlier), determined without
taking into account the net loss for the quarter. The initial adjusted basis of
a purchaser of a Residual Certificate is the amount paid for such Residual
Certificate. Such adjusted basis will be increased by the amount of taxable
income of the REMIC Pool reportable by the Residual Certificateholder and
decreased by the amount of loss of the REMIC Pool reportable by the Residual
Certificateholder. A cash distribution from the REMIC Pool also will reduce such
adjusted basis (but not below zero). Any loss that is disallowed on account of
this limitation may be carried over indefinitely with respect to the Residual
Certificateholder as to whom such loss was disallowed and may be used by such
Residual Certificateholder only to offset any income generated by the same REMIC
Pool. Residual Certificateholders should consult their tax advisors about other
limitations on the deductibility of net losses that may apply to them.
A Residual Certificateholder will not be permitted to amortize directly
the cost of its Residual Certificate as an offset to its share of the taxable
income of the related REMIC Pool. However, such taxable income will not include
cash received by the REMIC Pool that represents a recovery of the REMIC Pool's
basis in its assets. Such recovery of basis by the REMIC Pool will have the
effect of amortization of the issue price of the Residual Certificates over
their life. However, in view of the possible acceleration of the income of
Residual Certificateholders described above under "Taxation of REMIC Income,"
the period of time over which such issue price is effectively amortized may be
longer than the economic life of the Residual Certificates.
If a Residual Certificate has a negative value, it is not clear whether
its issue price would be considered to be zero or such negative amount for
purposes of determining the REMIC Pool's basis in its assets. The REMIC
Regulations do not address whether residual interests could have a negative
basis and a negative issue price. The Depositor does not intend to treat a class
of Residual Certificates as having a value of less than zero for purposes of
determining the bases of the related REMIC Pool in its assets.
Further, to the extent that the initial adjusted basis of Residual
Certificateholder (other than an original holder) in the Residual Certificate is
greater than the corresponding portion of the REMIC Pool's basis in the Mortgage
Assets, the Residual Certificateholder will not recover a portion of such basis
until termination of the REMIC Pool unless Treasury regulations yet to be issued
provide for periodic adjustments to the REMIC income otherwise reportable by
such holder. The REMIC Regulations do not so provide. See "Treatment of Certain
Items of REMIC Income and Expense -- Market Discount" below regarding the basis
of Mortgage Assets to the REMIC Pool and "Sale or Exchange of Residual
Certificates" below regarding possible treatment of a loss upon termination of
the REMIC Pool as a capital loss.
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Mark to Market Rules
Prospective purchasers of a Residual Certificate should be aware that
on December 18, 1993, the Internal Revenue Service released temporary
regulations (the "Temporary Regulations") relating to the requirement that a
securities dealer mark to market securities held for sale to customers. This
mark-to-market requirement applies to all securities of a dealer, except to the
extent that the dealer has specifically identified a security as held for
investment. The Temporary Regulations provide that for purposes of this
mark-to-market requirement, a "negative value" Residual Certificate is not
treated as a security and thus may not be marked to market. In general, a
Residual Certificate has negative value if, as of the date a taxpayer acquires
the Residual Certificate, the present value of the tax liabilities associated
with holding the Residual Certificate exceeds the sum of (i) the present value
of the expected future distributions on the Residual Certificate, and (ii) the
present value of the anticipated tax savings associated with holding the
Residual Certificate as the REMIC generates losses. The amounts and present
values of the anticipated tax liabilities, expected future distributions and
anticipated tax savings are all to be determined using (i) the prepayment and
reinvestment assumptions adopted under Section 1272(a)(6), or that would have
been adopted had the REMIC's regular interests been issued with original issue
discount, (ii) any required or permitted clean up calls, or required qualified
liquidation, provided for in the REMIC's organizational documents and (iii) a
discount rate equal to the "applicable Federal rate" instrument issued on the
date of acquisition of the Residual Certificate ending on or after December 31,
1993. Prospective purchasers of a Residual Certificate should consult their tax
advisors regarding the possible application of the Temporary Regulations.
Treatment of Certain Items of REMIC Income and Expense
Original Issue Discount. Generally, the REMIC Pool's deductions for
original issue discount will be determined in the same manner as original issue
discount income on Regular Certificates as described above under "Taxation of
Regular Certificates - Original Issue Discount" and "Variable Rate Regular
Certificates," without regard to the de minimis rule described therein.
Market Discount. The REMIC Pool will have market discount income in
respect of Mortgage Assets if, in general, the basis of the REMIC Pool in such
Mortgage Assets is exceeded by their unpaid principal balances. The REMIC Pool's
basis in such Mortgage Assets is generally the fair market value of the Mortgage
Assets immediately after the transfer thereof to the REMIC Pool. The REMIC
Regulations provide that such basis is equal in the aggregate to the issue
prices of all regular and residual interests in the REMIC Pool. In respect of
Mortgage Assets that have market discount to which Code Section 1276 applies,
the accrued portion of such market discount would be recognized currently by the
REMIC as an item of ordinary income. Market discount income generally should
accrue in the manner described above under "Taxation of Regular Certificates -
Market Discount." However, the rules of Code Section 1276 concerning market
discount income will not apply in the case of Mortgage Assets originated on or
prior to July 18, 1984, if any. With respect to such Mortgage Assets market
discount is generally includible in REMIC taxable income or ordinary gross
income pro rata as principal payments are received. Under another interpretation
of the Code and relevant legislative history, market discount on such Mortgage
Assets might be required to be recognized currently by the REMIC, in the same
manner that market discount would be recognized with respect to Mortgage Assets
originated after July 18, 1984. Under that method, a REMIC would tend to
recognize market discount more rapidly than it would otherwise. In either case,
the deduction of a portion of the interest expense on the Regular Certificates
allocable to such discount may be deferred until such discount is included in
income, and any gain on the sale or exchange thereof will be treated as ordinary
income to the extent of the deferred interest deductible at that time.
Premium. Generally, if the basis of the REMIC Pool in the Mortgage
Assets exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired such Mortgage Assets at a premium equal to the
amount of such excess. As stated above,the REMIC Pool's basis in the Mortgage
Assets is the fair market value of the Mortgage Assets, based on the aggregate
of the issue prices of the regular and residual interests in the REMIC Pool
immediately after the transfer thereof to the REMIC Pool. In a manner analogous
to the discussion above under "Taxation of Regular Certificates - Premium," a
person that holds a Mortgage Loan as a capital asset under Code Section 1221 may
elect under Code Section 171 to amortize premium on Mortgage Assets originated
after September 27, 1985 under a constant yield method. Amortizable bond premium
will be treated as an offset
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to interest income on the Mortgage Assets, rather than as a separate deduction
item. Because substantially all the mortgagors with respect to the Mortgage
Assets are expected to be individuals, Code Section 171 will not be available.
Premium on Mortgage Assets may be deductible in accordance with a reasonable
method regularly employed by the holder thereof. The allocation of such premium
pro rata among principal payments should be considered a reasonable method;
however, the Internal Revenue Service may argue that such premium should be
allocated in a different manner, such as allocating such premium entirely to the
final payment of principal.
Limitations on Offset or Exemption of REMIC Income; Excess Inclusions.
A portion of the income allocable to a Residual Certificate (referred to in the
Code as an "excess inclusion") for any calendar quarter, with an exception
discussed below for certain thrift institutions, will be subject to federal
income tax in all events. Thus, for example, an excess inclusion (i) cannot,
except as described below, be offset by any unrelated losses or loss carryovers
of a Residual Certificateholder, (ii) will be treated as "unrelated business
taxable income" within the meaning of Code Section 512 if the Residual
Certificateholder is a pension fund or any other organization that is subject to
tax only on its unrelated business taxable income and (iii) is not eligible for
any reduction in the rate of withholding tax in the case of a Residual
Certificateholder that is a foreign investor, as further discussed in "Taxation
of Certain Foreign Investors - Residual Certificates" below. Except as discussed
below with respect to excess inclusions from Residual Certificates without
"significant value," this general rule does not apply to thrift institutions to
which Code Section 593 applies. For this purpose a thrift institution and its
qualified subsidiary are considered a single corporation. A qualified subsidiary
is one all the stock of which, and substantially all the debt of which, is held
by the thrift institution and which is organized and operating exclusively in
connection with the organization and operation of one or more REMICs. Except in
the case of a thrift institution (including qualified subsidiaries) members of
an affiliated group are treated as one corporation for purposes of applying the
limitation on offset of excess inclusion income.
Except as discussed in the following paragraph, with respect to excess
inclusions from Residual Certificates without "significant value," for any
Residual Certificateholder, the excess inclusion for any calendar quarter is the
excess, if any, of (i) the income of such Residual Certificateholder for that
calendar quarter from its Residual Certificate over (ii) the sum of the "daily
accruals" (as defined below) for all days during the calendar quarter on which
the Residual Certificateholder holds such Residual Certificate. For this
purpose, the daily accruals with respect to a Residual Certificate are
determined by allocating to each day in the calendar quarter its ratable portion
of the product of the "adjusted issue price" (as defined below) of the Residual
Certificate at the beginning of the calendar quarter and 120 percent of the
"Federal long-term rate" in effect at the time the Residual Certificate is
issued. For this purposes the "adjusted issue price" of a Residual Certificate
at the beginning of any calendar quarter equals the issue price of the Residual
Certificate (adjusted for contributions), increased by the amount of daily
accruals for all prior quarters, and decreased (but not below zero) by the
aggregate amount of payments made on the Residual Certificate before the
beginning of such quarter. The Federal long-term rate is an average of current
yields on Treasury securities with a remaining term of greater than nine years,
computed and published monthly by the IRS.
The Code provides that to the extent provided in regulations, as an
exception to the general rule described above, the entire amount of income
accruing on a Residual Certificate will be treated as an excess inclusion if the
Residual Certificates in the aggregate are considered not to have "significant
value." The Treasury Department has not yet provided regulations in this respect
and the REMIC Regulations did not adopt this rule. However, the exception from
the excess inclusion rules applicable to thrift institutions does not apply if
the Residual Certificates do not have significant value. Under the REMIC
Regulations, the Residual Certificates will have significant value if: (i) the
aggregate of the issue prices of the Residual Certificates is at least two
percent of the aggregate issue prices of all Regular Certificates and Residual
Certificates in the REMIC and (ii) the anticipated weighted average life of the
Residual Certificates is at least 20 percent of the REMIC's anticipated weighted
average life based on the prepayment and reinvestment assumptions used in
pricing the transaction and any recognized or permitted clean up calls or any
required qualified liquidation. Although not entirely clear, the REMIC
Regulations indicate that the significant value determination is made only on
the Startup Day. The anticipated weighted average life of a Residual Certificate
with a principal balance and a market rate of interest is computed by
multiplying the amount of each expected principal payment by the number of years
(or portions thereof) from the Startup Day, adding these sums and dividing by
the total principal expected to be paid on such Residual Certificate based on
the relevant prepayment
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assumption and expected reinvestment income. The anticipated weighted average
life of a Residual Certificate with either no specified principal balance or a
principal balance and rights to interest payments disproportionate to such
principal balance, would be computed under the formula described above but would
include all payments expected on the Residual Certificate instead of only the
principal payments. The anticipated weighted average life of a REMIC is a
weighted average of the anticipated weighted average lives of all classes of
interest in the REMIC.
Under Treasury regulations to be promulgated, a portion of the
dividends paid by a REIT which owns a Residual Certificate are to be designated
as excess inclusions in an amount corresponding to the Residual Certificate's
allocable share of the excess inclusions. Similar rules apply in the case of
regulated investment companies, common trust funds and cooperatives. Thus,
investors in such entities which own a Residual Certificate will be subject to
the limitations on excess inclusions described above. The REMIC Regulations do
not provide guidance on this issue.
Tax-Related Restrictions on Transfer of Residual Certificates
Disqualified Organizations. If legal title or beneficial interest in a
Residual Certificate is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Certificate for periods after the transfer and (ii) the highest
marginal federal corporate income tax rate. The REMIC Regulations provide that
the anticipated excess inclusion are based on actual prepayment experience to
the date of the transfer and projected payments based on the Prepayment
Assumption. The present value discount rate equals the applicable Federal rate
under Code Section 1274(d) that would apply to a debt instrument that was issued
on the date the Disqualified Organization acquired the Residual Certificate and
whose term ended on the close of the last quarter in which excess inclusion was
expected to accrue with respect to the Residual Certificate. Such a tax
generally would be imposed on the transferor of the Residual Certificate, except
that where such transfer is through an agent (including a broker, nominee, or
other middleman) for a Disqualified Organization, the tax would instead be
imposed on such agent. However, a transferor of a Residual Certificate would in
no event be liable for such tax with respect to a transfer if the transferee
furnishes to the transferor an affidavit that the transferee is not a
Disqualified Organization and, as of the time of the transfer, the transferor
does not have actual knowledge that such affidavit is false. The tax also may be
waived by the Treasury Department if the Disqualified Organization promptly
disposes of the Residual Certificate and the transferor pays income tax at the
highest corporate rate on the excess inclusion for the period the Residual
Certificate is actually held by the Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period such interest is held by such Disqualified
Organization and (ii) the highest marginal federal corporate income tax rate.
Such tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for
such tax if it has received an affidavit from such record holder that (i) states
under penalty of perjury that it is not a Disqualified Organization or (ii)
furnishes a social security number and states under penalties of perjury that
the social security number is that of the transferee, provided that during the
period such person is the record holder of the Residual Certificate, the
Pass-Through Entity does not have actual knowledge that such affidavit is false.
For these purposes, (i) "Disqualified Organization" means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
its activities are subject to tax and a majority of its board of directors is
not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 521) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511 and (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative
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basis. Except as may be provided in Treasury regulations yet to be issued, any
person holding an interest in a Pass-Through Entity as a nominee for another
will, with respect to such interest, be treated as a Pass-Through Entity.
The Agreement with respect to a series of Certificates will provide
that neither legal title nor beneficial interest in a Residual Certificate may
be transferred or registered unless (i) the proposed transferee provides to the
Depositor and the Trustee an affidavit to the effect that such transferee is not
a Disqualified Organization, is not purchasing such Residual Certificates on
behalf of a Disqualified Organization (i.e., as a broker, nominee or middleman
thereof) and is not an entity that holds REMIC residual securities as nominee to
facilitate the clearance and settlement of such securities through electronic
book-entry changes in accounts of participating organizations and (ii) the
transferor provides a statement in writing to the Depositor and the Trustee that
it has no actual knowledge that such affidavit is false. Moreover, the Agreement
will provide that any attempted or purported transfer in violation of these
transfer restrictions will be null and void and will vest no rights in any
purported transferee. Each Residual Certificate with respect to a series will
have a legend referring to such restrictions on transfer, and each Residual
Certificateholder will be deemed to have agreed, as a condition of ownership
thereof, to any amendments to the related Agreement required under the Code or
applicable Treasury regulations to effectuate the foregoing restrictions.
Information necessary to compute an applicable excise tax must be furnished to
the Internal Revenue Service and to the requesting party within 60 days of the
request, and the Depositor or the Trustee may charge a fee for computing and
providing such information.
Noneconomic Residual Interests. Under the REMIC Regulations certain
transfers of Residual Certificates are disregarded, in which case the transferor
continues to be treated as the owner of the Residual Certificates and thus
continues to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the Final REMIC Regulations, a transfer of a Noneconomic
Residual Interest (defined below) to a Residual Certificateholder (other than a
Residual Certificateholder who is not a U.S. Person, as defined below under
"Foreign Investors") is disregarded for all federal income tax purposes unless
no significant purpose of the transfer is to impede the assessment or collection
of tax. A residual interest in a REMIC (including a residual interest with a
positive value at issuance) 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 at least equals the product of the present value of the
anticipated excess inclusions and the highest federal corporate income tax rate
in effect 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 taxes accrue on the anticipated excess inclusions
in an amount sufficient to satisfy the accrued taxes. The anticipated excess
inclusions and the present value rate are determined in the same manner as set
forth above under "Disqualified Organizations." A significant purpose to impede
the assessment or collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known (had "improper knowledge") that the
transferor would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. Under the REMIC Regulations, a transferor is
presumed not to have improper knowledge if (i) the transferor conducted, at the
time of the transfer, a reasonable investigation of the financial condition of
the transferee and, as a result of the investigation, the transferor found that
the transferee had historically paid its debts as they came due and found no
significant evidence to indicate that the transferor will not continue to pay
its debts as they come due in the future; and (ii) the transferee represents to
the transferor that it understands that, as the holder of the Noneconomic
Residual Interest, the transferee may incur tax liabilities in excess of any
cash flows generated by the residual interest and that the transferee intends to
pay taxes associated with holding of residual interest as they become due. The
Agreement will require the transferee of a Residual Certificate to state as part
of the affidavit described above under the heading "Disqualified Organizations"
that such transferee (i) has historically paid its debts as they come due, (ii)
intends to continue to pay its debts as they come due in the future, (iii)
understands that, as the holder of a Noneconomic Residual Interest, it may incur
tax liabilities in excess of any cash flows generated by the Residual
Certificate, and (iv) intends to pay any and all taxes associated with holding
the Residual Certificate as they become due. The transferor must have no reason
to believe that such statement is untrue.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Certificate that has "tax avoidance potential" to a "foreign person"
will be disregarded for all federal tax purposes. This rule appears intended to
apply to a transferee who is not a "U.S. Person" (as defined below), unless such
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Certificate is
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deemed to have tax avoidance potential unless, at the time of the transfer, the
transferor reasonably expects that, for each excess inclusion, (i) the REMIC
Pool will distribute to the transferee residual interest holder an amount that
will equal at least 30% of the excess inclusions and (ii) that each such amount
will be distributed at or after the time at which the excess inclusion accrues
and not later than the close of the calendar year following the calendar year of
accrual. If the non-U.S. Person transfers the Residual Certificate back to a
U.S. Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The Prospectus Supplement relating to a series of Certificates may
provide that a Residual Certificate may not be purchased by or transferred to
any person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. 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 or any political subdivision thereof or an estate or trust that is
subject to U.S. federal income tax regardless of the source of its income.
Sale or Exchange of a Residual Certificate
Upon the sale or exchange of a Residual Certificate, the Residual
Certificateholder will recognize gain or loss equal to the excess, if any, of
the amount realized over the adjusted basis (as described above under "Taxation
of Residual Certificates - Basis and Losses") of such Residual Certificateholder
in such Residual Certificate at the time of the sale or exchange. In addition to
reporting the taxable income of the REMIC Pool, a Residual Certificateholder
will have taxable income to the extent that any cash distribution to him from
the REMIC Pool exceeds such adjusted basis on that Distribution Date. Such
income will be treated as gain from the sale or exchange of the Residual
Certificate. It is possible that the termination of the REMIC Pool may be
treated as a sale or exchange of a Residual Certificateholder's Residual
Certificate, in which case, if the Residual Certificateholder has an adjusted
basis in his Residual Certificate remaining when his interest in the REMIC Pool
terminates, and if he holds such Residual Certificate as a capital asset under
Code Section 1221, then he will recognize a capital loss at that time in the
amount of such remaining adjusted basis.
The Conference Committee Report to the 1986 Act provides that, except
as provided in Treasury regulations yet to be issued the wash sale rules of Code
Section 1091 will apply to disposition of Residual Certificates. Consequently,
losses on dispositions of Residual Certificates will be disallowed where the
seller of the Residual Certificate, during the period beginning six months
before the sale or disposition of the Residual Certificate and ending six months
after such sale or disposition, acquires (or enters into any other transaction
that results in the application of Code Section 1091) any residual interest in
any REMIC or any interest in a "taxable mortgage pool" (such as a non-REMIC
owner trust) that is economically comparable to a Residual Certificate.
Taxes That May Be Imposed on the REMIC Pool
Prohibited Transactions. Net income from certain transactions by the
REMIC Pool, called prohibited transactions, will not be part of the calculation
of income or loss includible in the federal income tax returns of Residual
Certificateholders, but rather will be taxed directly to the REMIC Pool at a
100% rate. Prohibited transactions generally include (i) the disposition of a
qualified mortgage other than for (a) substitution within two years of the
Startup Day for a defective (including a defaulted) obligation (or repurchase in
lieu of substitution of a defective (including a defaulted) obligation at any
time) or for any qualified mortgage within three months of the Startup Day, (b)
foreclosure, default or imminent default of a qualified mortgage, (c) bankruptcy
or insolvency of the REMIC Pool or (d) a qualified (complete) liquidation, (ii)
the receipt of income from assets that are not the type of mortgages or
investments that the REMIC Pool is permitted to hold, (iii) the receipt of
compensation for services or (iv) the receipt of gain from disposition of cash
flow investments other than pursuant to a qualified liquidation. Notwithstanding
(i) and (iv), it is not a prohibited transaction to sell REMIC Pool property to
prevent a default on Regular Certificates as a result of a default on qualified
mortgages or to facilitate a clean-up call (generally, an optional termination
to save administrative costs when no more than a small percentage of the
Certificates is outstanding). The REMIC Regulations indicate that the
modification of a Mortgage Loan generally will not be treated as a disposition
if it is occasioned by a default or reasonably foreseeable default, an
assumption of the
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Mortgage Loan, the waiver of a due-on-sale or encumbrance clause or the
conversion of an interest rate by a mortgagor pursuant to the terms of a
convertible adjustable rate Mortgage Loan. The REMIC Regulations also provide
that the modification of mortgage loans underlying Mortgage-Backed Securities
will not be treated as a modification of the Mortgage-Backed Securities,
provided that the trust including the was not created to avoid prohibited
transaction rules.
Contributions to the REMIC Pool After the Startup Day. In general, the
REMIC Pool will be subject to a tax at a 100% rate on the value of any property
contributed to the REMIC Pool after the Startup Day. Exceptions are provided for
cash contributions to the REMIC Pool (i) during the three months following the
Startup Day, (ii) made to a qualified reserve fund by a Residual
Certificateholder, (iii) in the nature of a guarantee, (iv) made to facilitate a
qualified liquidation or clean-up call and (v) as otherwise permitted in
Treasury regulations yet to be issued.
Net Income from Foreclosure Property. The REMIC Pool will be subject to
federal income tax at the highest corporate rate on "net income from foreclosure
property," determined by reference to the rules applicable to real estate
investment trusts. Generally, property acquired by the REMIC Pool through
foreclosure or deed in lieu of foreclosure would be treated as "foreclosure
property" for a period of two years, with possible extensions. Net income from
foreclosure property generally means (i) gain from the sale of a foreclosure
property that is inventory property and (ii) gross income from foreclosure
property other than qualifying rents and other qualifying income for a real
estate investment trust.
Liquidation of the REMIC Pool
If a REMIC Pool and the Trustee adopt a plan of complete liquidation,
within the meaning of Code Section 860F(a)(4)(A)(i) and sell all of the REMIC
Pool's assets (other than cash) within a 90-day period beginning on the date of
the adoption of the plan of liquidation, the REMIC Pool will recognize no gain
or loss on the sale of its assets, provided that the REMIC Pool credits or
distributes in liquidation all of the sale proceeds plus its cash (other than
amounts retained to meet claims against the REMIC Pool) to holders of Regular
Certificates and Residual Certificateholders within the 90-day period.
Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar
year basis and to file federal income tax returns for federal income tax
purposes in a manner similar to a partnership. The form for such income tax
return is Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax
Return. The Trustee will be required to sign the REMIC Pool's returns. Treasury
regulations provide that, except where there is a single Residual
Certificateholder for an entire taxable year, the REMIC Pool generally will be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination by the Internal Revenue Service of any
adjustments to, among other things, items of REMIC income, gain, loss, deduction
or credit in a unified administrative proceeding. The Depositor or other
designated Residual Certificateholders will be obligated to act as "tax matters
person," as defined in applicable Treasury regulations, with respect to the
REMIC Pool. If the Code or applicable Treasury regulations do not permit the
Depositor to act as tax matters person in its capacity as agent of the Residual
Certificateholders, the Residual Certificateholder chosen by the Residual
Certificateholders or such other person specified pursuant to Treasury
regulations will be required to act as tax matters person.
Treasury regulations provide that a holder of a Residual Certificate is
not required to treat items on its return consistently with their treatment on
the REMIC Pool's return if a holder owns 100% of the Residual Certificates for
the entire calendar year. Otherwise, each holder of a Residual Certificate is
required to treat items on its return consistently with their treatment on the
REMIC Pool's return, unless the holder of a Residual Certificate either files a
statement identifying the inconsistency or establishes that the inconsistency
resulted from incorrect information received from the REMIC Pool. The Service
may assess a deficiency resulting from a failure to comply with the consistency
requirement without instituting an administrative proceeding at the REMIC Pool
level.
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Limitations on Deduction of Certain Expenses
An investor who is an individual, estate or trust will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such itemized deductions, in the aggregate, do not exceed
2% of the investor's adjusted gross income. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser of (i) 3% of the excess, if
any, of adjusted gross income over $100,000, adjusted yearly for inflation
($50,000, adjusted yearly for inflation, in the case of a married individual
filing a separate return), or (ii) 80% of the amount of itemized deductions
otherwise allowable for such year. In the case of a REMIC Pool, such deductions
may include deductions under Code Section 212 for servicing fees and all
administrative and other expenses relating to the REMIC Pool or any similar
expenses allocated to the REMIC Pool with respect to a regular interest it holds
in another REMIC. Such investors who hold REMIC Certificates either directly or
indirectly through certain pass-through entities may have their pro rata share
of such expenses allocated to them as additional gross income, but may be
subject to such limitation on deductions. In addition, such expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause such investors to be subject to significant additional tax liability.
Treasury regulations provide that the additional gross income and corresponding
amount of expenses generally are to be allocated entirely to the holders of
Residual Certificates in the case of a REMIC Pool that would not qualify as a
fixed investment trust in the absence of a REMIC election. However, such
additional gross income and limitation on deductions will apply to the allocable
portion of such expenses to holders of Regular Certificates, as well as holders
of Residual Certificates, where such Regular Certificates are issued in a manner
that is similar to pass-through certificates in a fixed investment trust. In
general, such allocable portion will be determined based on the ratio that a
REMIC Certificateholder's income, determined on a daily basis, bears to the
income of all holders of Regular Certificates and Residual Certificates with
respect to a REMIC Pool. As a result, individuals, estates or trusts holding
REMIC Certificates (either directly or indirectly through a grantor trust,
partnership, S corporation, REMIC, or certain other pass-through entities
described in the foregoing Treasury regulations) may have taxable income in
excess of the interest income at the pass-through rate on Regular Certificates
that are issued in a single class or otherwise consistently with fixed
investment trust status or in excess of cash distributions for the related
period on Residual Certificates.
Taxation of Certain Foreign Investors
Regular Certificates. Interest, including original issue discount,
distributable to Regular Certificateholders who are nonresident aliens, foreign
corporations, or other Non-U.S. Persons (as defined below), will be considered
"portfolio interest" and therefore, generally will not be subject to 30% United
States withholding tax, provided that such Non-U.S. Person (i) is not a
"10-percent shareholder" within the meaning of Code Section 871(h)(3)(B) or a
controlled foreign corporation described in Code Section 881(c)(3)(C) and (ii)
provides the Trustee, or the person who would otherwise be required to withhold
tax from such distributions under Code Sections 1441 or 1442, with an
appropriate statement, signed under penalties of perjury, identifying the
beneficial owner and stating, among other things, that the beneficial owner of
the Regular Certificate is a Non-U.S. Person. If such statement, or any other
required statement, is not provided, 30% withholding will apply unless reduced
or eliminated pursuant to an applicable tax treaty or unless the interest on the
Regular Certificate is effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Person. In the latter case,
such Non-U.S. Person will be subject to United States federal income tax at
regular rates. Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Regular
Certificate. The term "Non-U.S. Person" means any person who is not a U.S.
Person.
Residual Certificates. The Conference Committee Report to the 1986 Act
indicates that amounts paid to Residual Certificateholders who are Non-U.S.
Persons are treated as interest for purposes of the 30% (or lower treaty rate)
United States withholding tax. Treasury regulations provide that amounts
distributed to Residual Certificateholders qualify as "portfolio interest,"
subject to the conditions described in "Regular Certificates" above, but only to
the extent that (i) the Mortgage Assets were issued after July 18, 1984 and (ii)
the Trust fund or segregated pool of assets therein (as to which a separate
REMIC election will be made), to which the Residual Certificate relates,
consists of obligations issued in "registered form" within the meaning of Code
Section 163(f)(1). Generally, Mortgage Assets will not be, but regular interests
in another REMIC Pool will be, considered obligations
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issued in registered form. Furthermore, a Residual Certificateholder will not be
entitled to any exemption from the 30% withholding tax (or lower treaty rate) to
the extent of that portion of REMIC taxable income that constitutes an "excess
inclusion." See "Taxation of Residual Certificates -- Limitations on Offset or
Exemption of REMIC Income; Excess Inclusions." If the amounts paid to Residual
Certificateholders who are Non-U.S. Persons are effectively connected with the
conduct of a trade or business within the United States by such Non-U.S.
Persons, 30% (or lower treaty rate) withholding will not apply. Instead, the
amounts paid to such Non-U.S. Persons will be subject to United States federal
income tax at regular rates. If 30% (or lower treaty rate) withholding is
applicable, such amounts generally will be taken into account for purposes of
withholding only when paid or otherwise distributed (or when the Residual
Certificate is disposed of) under rules similar to withholding upon disposition
of debt instruments that have original issue discount. See "Tax-Related
Restrictions on Transfer of Residual Certificates -- Foreign Investors" above
concerning the disregard of certain transfers having "tax avoidance potential."
Investors who are Non-U.S. Persons should consult their own tax advisors
regarding the specific tax consequences to them of owning Residual Certificates.
Backup Withholding
Distributions made on the Regular Certificates, and proceeds from the
sale of the Regular Certificates to or through certain brokers, may be subject
to a "backup" withholding tax under Code Section 3406 of 31% on "reportable
payments" (including interest distributions, original issue discount, and, under
certain circumstances, principal distributions) unless the Regular
Certificateholder complies with certain reporting and/or certification
procedures, including the provision of its taxpayer identification number to the
Trustee, its agent or the broker who effected the sale of the Regular
Certificate, or such Certificateholder is otherwise an exempt recipient under
applicable provisions of the Code. Any amounts to be withheld from distribution
on the Regular Certificates would be refunded by the Internal Revenue Service or
allowed as a credit against the Regular Certificateholder's federal income tax
liability.
Reporting Requirements
Reports of accrued interest and original issue discount will be made
annually to the Internal Revenue Service and to individuals, estates, non-exempt
and non-charitable trusts, and partnerships who are either holders of record of
Regular Certificates or beneficial owners who own Regular Certificates through a
broker or middleman as nominee. All brokers, nominees and all other non-exempt
holders of record of Regular Certificates (including corporations, non-calendar
year taxpayers, securities or commodities dealers, real estate investment
trusts, investment companies, common trust funds, thrift institutions and
charitable trusts) may request such information for any calendar quarter by
telephone or in writing by contacting the person designated in Internal Revenue
Service Publication 938 with respect to a particular series of Regular
Certificates. Holders through nominees must request such information from the
nominee. Treasury regulations provide that information necessary to compute the
accrual of any market discount on the Regular Certificates must be furnished for
calendar years beginning after 1990.
The Internal Revenue Service's Form 1066 has an accompanying Schedule
Q, Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each Residual Certificateholder by the end of the month
following the close of each calendar quarter (41 days after the end of a quarter
under proposed Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual
Certificateholders, furnished annually, if applicable, to holders of Regular
Certificates, and filed annually with the Internal Revenue Service concerning
Code Section 67 expenses (see "Limitations on Deduction of Certain Expenses"
above) allocable to such holders. Furthermore, under such regulations,
information must be furnished quarterly to Residual Certificateholders,
furnished annually to holders of Regular Certificates, and filed annually with
the Internal Revenue Service concerning the percentage of the REMIC Pool's
assets meeting the qualified asset tests described above under "Federal Income
Tax Consequences for REMIC Certificates," above.
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Federal Income Tax Consequences for Certificates as to Which No REMIC Election
Is Made
Standard Certificates
General. If no election is made to treat a Trust (or a segregated pool
of assets therein) with respect to a series of Certificates as a REMIC, the
Trust may be classified as a grantor trust under subparagraph E, Part 1 of
subchapter J of the Code and not as a partnership or association taxable as a
corporation. Where there is no fixed retained yield with respect to the Mortgage
Assets underlying the Certificates of a series, and where such Certificates are
not designated as Stripped Certificates, as described below under "Stripped
Certificates" or as Partnership Interests described under "Taxation of
Securities Classified as Partnership Interests," the holder of each such
"Standard Certificate" in such series will be treated as the owner of a pro rata
undivided interest in the ordinary income and corpus portions of the Trust
represented by his Certificate and will be considered the beneficial owner of a
pro rata undivided interest in each of the Mortgage Assets, subject to the
discussion below under "Recharacterization of Servicing Fees." With respect to
each series of Certificates where no REMIC election is made, Arter & Hadden,
counsel to the Depositor, will deliver its opinion to the Depositor that (unless
otherwise limited in the related Prospectus Supplement) the related Trust will
be classified as a grantor trust and not as a partnership or association taxable
as a corporation. Arter & Hadden, counsel to the Depositor, is of the opinion
that if a Trust does not elect REMIC status and is not treated as a partnership,
the tax consequences to the Owners will be as described below. Accordingly, the
holder of a Certificate (a "Certificateholder") of a particular series will be
required to report on its federal income tax return its pro rata share of the
entire income from the Mortgage Assets, original issue discount (if any),
prepayment fees, assumption fees, and late payment charges received by or on
behalf of the Trust, in accordance with such Certificateholder's method of
accounting. A Certificateholder generally will be able to deduct its share of
servicing fees and all administrative and other expenses of the Trust in
accordance with his method of accounting, provided that such amounts are
reasonable compensation for services rendered to that Trust. However, investors
who are individuals, estates or trusts who own Certificates, either directly or
indirectly through certain pass-through entities, will be subject to limitation
with respect to certain itemized deductions described in Code Section 67,
including deductions under Code Section 212 for servicing fees and all such
administrative and other expenses of the Trust, to the extent that such
deductions, in the aggregate, do not exceed two percent of an investor's
adjusted gross income. In addition, Code Section 68 provides that itemized
deductions otherwise allowable for a taxable year of an individual taxpayer will
be reduced by the lesser of (i) 3% of the excess, if any, of adjusted gross
income over $100,000, adjusted yearly for inflation ($50,000, adjusted yearly
for inflation, in the case of a married individual filing a separate return), or
(ii) 80% of the amount of itemized deductions otherwise allowable for such year.
As a result such investors holding Certificates, directly or indirectly through
a pass-through entity, may have aggregate taxable income in excess of the
aggregate amount of cash received on such Certificates with respect to interest
at the pass-through rate on such Certificates or discount thereon. In addition,
such expenses are not deductible at all for purposes of computing the
alternative minimum tax and may cause such investors to be subject to
significant additional tax liability. Moreover, where there is fixed retained
yield with respect to the Mortgage Assets underlying a series of Certificates or
where the servicing fees are in excess of reasonable servicing compensation, the
transaction will be subject to the application of the "stripped bond" and
"stripped coupon" rules of the Code, as described below under "Stripped
Certificates" and "Premium and Discount -- Recharacterization of Servicing
Fees," respectively.
Tax Status. Unless otherwise disclosed in a related Prospectus
Supplement and subject to the discussion below with respect to buy-down Mortgage
Assets, Arter & Hadden, counsel to the Depositor, will deliver its opinion to
the Depositor that:
1. A Standard Certificate owned by a "domestic building and
loan association" within the meaning of Code Section 7701(a)(19) will
be considered to represent "loans . . . secured by an interest in real
property" within the meaning of Code Section 7701(a)(19)(C)(v),
provided that the real property securing the Mortgage Assets
represented by that Certificate is of the type described in such
section.
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2. A Standard Certificate owned by a financial institution
described in Code Section 593(a) will be considered to represent
"qualifying real property loans" within the meaning of Code Section
592(d)(1), provided that the real property securing the Mortgage Assets
represented by that Certificate is of the type described in such
section.
3. A Standard Certificate owned by a real estate investment
trust will be considered to represent "real estate assets" within the
meaning of Code Section 856(C) (5) (A) to the extent that the assets of
the related Trust consist of qualified assets, and interest income on
such assets will be considered "interest on obligations secured by
mortgages on real property" within the meaning of Code Section
856(c)(3)(B).
4. A Standard Certificate owned by a REMIC will be considered
to represent an "obligation (including any participation or certificate
of beneficial ownership therein) which is principally secured by an
interest in real property" within the meaning of Code Section
860G(a)(3)(A) to the extent that the assets of the related Trust
consist of "qualified mortgages" within the meaning of Code Section
860G(a)(3).
An issue arises as to whether buy-down Mortgage Assets may be
characterized in their entirety under the Code provisions cited in the
immediately preceding paragraph. Code Section 593(d)(l)(C) provides that the
term "qualifying real property loan" does not include a loan "to the extent
secured by a deposit in or share of the taxpayer." The application of this
provision to a buy-down fund with respect to a buy-down Mortgage Loan is
uncertain, but may require that a taxpayer's investment in a buy-down Mortgage
Loan be reduced by the buy-down fund. As to the treatment of buy-down Mortgage
Assets as "qualifying real property loans" under Code Section 593(d)(i) if the
exception of Code Section 593(d)(1)(C) is inapplicable, as "loans . . . secured
"by an interest in real property" under Code Section 7701(a)(19)(C)(v), as "real
estate assets" under Code Section 856(c)(5)(A), and as "obligation[s]
principally secured by an interest in real property" under Code Section
860G(a)(3)(A), there is indirect authority supporting treatment of an investment
in a buy-down Mortgage Loan as entirely secured by real property if the fair
market value of the real property securing the loan exceeds the principal amount
of the loan at the time of issuance or acquisition, as the case may be. There is
no assurance that the treatment described above is proper. Accordingly,
Certificateholders are urged to consult their own tax advisors concerning the
effects of such arrangements on the characterization of such Certificateholder's
investment for federal income tax purposes.
Premium and Discount
Certificateholders are advised to consult with their tax advisors as to
the federal income tax treatment of premium and discount arising either upon
initial acquisition of Certificates or thereafter.
Premium. The treatment of premium incurred upon the purchase of a
Certificate will be determined generally as described above under "-- Taxation
of Regular Certificates -- Premium."
Original Issue Discount. The Internal Revenue Service has stated in
published rulings that, in circumstances similar to those described herein, the
original issue discount rules will be applicable to a Certificateholder's
interest in those Mortgage Assets as to which the conditions for the application
of those sections are met. Rules regarding periodic inclusion of original issue
discount income are applicable to mortgages of corporations originated after May
27, 1969, mortgages of noncorporate mortgagors (other than individuals)
originated after July l, 1982, and mortgages of individuals originated after
March 2, 1984. Such original issue discount could arise by the charging of
points by the originator of the mortgages in an amount greater than a statutory
de minimis exception, to the extent that the points are not currently deductible
under applicable Code provisions or are not for services provided by the lender.
It is generally not anticipated that adjustable rate Mortgage Assets will be
treated as issued with original issue discount. However, the application of the
OID Regulations to adjustable rate mortgage loans with incentive interest rates
or annual or lifetime interest rate caps may result in original issue discount.
Original issue discount must generally be reported as ordinary gross
income as it accrues under a constant yield method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
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However, Code Section 1272 provide for a reduction in the amount of original
issue discount includible in the income of a holder of an obligation that
acquires the obligation after its initial issuance at a price greater than the
sum of the original issue price and the previously accrued original issue
discount, less prior payments of principal. Accordingly, if such Mortgage Assets
acquired by a Certificateholder are purchased at a price equal to the then
unpaid principal amount of such Mortgage Assets, no original issue discount
attributable to the difference between the issue price and the original
principal amount of such Mortgage Assets (i.e., points) will be includible by
such holder.
Market Discount. Certificateholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the Mortgage Assets will be determined and
will be reported as ordinary income generally in the manner described above
under "-- Taxation of Regular Certificates -- Market Discount."
Recharacterization of Servicing Fees. If the servicing fees paid to
Servicers were deemed to exceed reasonable servicing compensation, the amount of
such excess would be nondeductible under Code Section 162 or 212. In this
regard,there are no authoritative guidelines for federal income tax purposes as
to either the maximum amount of servicing compensation that may be considered
reasonable in the context of this or similar transactions or whether, in the
case of the Certificates, the reasonableness of servicing compensation should be
determined on a weighted average or loan-by-loan basis. If a loan-by-loan basis
is appropriate, the likelihood that such amount would exceed reasonable
servicing compensation as to some of the Mortgage Assets would be increased.
Recently issued Internal Revenue Service guidance indicates that a servicing fee
in excess of reasonable compensation ("excess servicing") will cause the
Mortgage Assets to be treated under the "stripped bond" rules. Such guidance
provides safe harbors for servicing deemed to be reasonable and requires
taxpayers to demonstrate that the value of servicing fees in excess of such
amounts is not greater than the value of the services provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a
servicer that receives excess servicing fees would be viewed as retaining an
ownership interest in a portion of the interest payments on the Mortgage Assets.
Under the rules of Code Section 1286, the separation of the right to receive
some or all of the interest payments on an obligation from the right to receive
some or all of the principal payments on the obligation would result in
treatment of such Mortgage Assets as "stripped coupons" and "stripped bonds."
While Certificateholders would still be treated as owners of beneficial
interests in a grantor trust for federal income tax purposes, the corpus of such
trust could be viewed as excluding the portion of the Mortgage Assets the
ownership of which is attributed to a servicer, or as including such portion as
a second class of equitable interest. Applicable Treasury regulations treat such
an arrangement as a fixed investment trust, since the multiple classes of trust
interests should be treated as merely facilitating direct investments in the
trust assets and the existence of multiple classes of ownership interests is
incidental to that purpose. In general, such a recharacterization should not
have any significant effect upon the timing or amount of income reported by a
Certificateholder, except that the income reported by a cash method holder may
be slightly accelerated. See "Stripped Certificates" below for a further
description of the federal income tax treatment of stripped bonds and stripped
coupons.
In the alternative, the amount, if any, by which the servicing fees
paid to the servicers are deemed to exceed reasonable compensation for servicing
could be treated as deferred payments of purchase price by the
Certificateholders to purchase an undivided interest in the Mortgage Assets. In
such event, the present value of such additional payments might be included in
the Certificateholder's basis in such undivided interests for purposes of
determining whether the Certificate was acquired at a discount, at par, or at a
premium. Under this alternative, Certificateholders may also be entitled to a
deduction for unstated interest with respect to each deferred payment. The
Internal Revenue Service may take the position that the specific statutory
provisions of Code Section 1286 described above override the alternative
described in this paragraph. Certificateholders are advised to consult their tax
advisors as to the proper treatment of the amounts paid to the servicers as set
forth herein as servicing compensation or under either of the alternatives set
forth above.
Sale or Exchange of Certificates. Upon sale or exchange of a
Certificate, a Certificateholder will recognize gain or loss equal to the
difference between the amount realized on the sale and its aggregate adjusted
basis in the Mortgage Assets and other assets represented by the Certificate. In
general, the aggregate adjusted basis will equal
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the Certificateholder's cost for the Certificate, increased by the amount of any
income previously reported with respect to the Certificate and decreased by the
amount of any losses previously reported with respect to the Certificate and the
amount of any distributions received thereon. Except as provided above with
respect to market discount on any Mortgage Assets, and except for certain
financial institutions subject to the provisions of Code Section 582(c), any
such gain or loss would be capital gain or loss if the Certificate was held as a
capital asset.
Stripped Certificates
General. Pursuant to Code Section 1286, the separation of ownership of
the right to receive some or all of the principal payments on an obligation from
ownership of the right to receive some or all of the interest payments results
in the creation of "stripped bonds" with respect to principal payments and
"stripped coupons" with respect to interest payments. For purposes of this
discussion, Certificates that are subject to those rules will be referred to as
"Stripped Certificates." The Certificates will be subject to those rules if (i)
the Depositor or any of its affiliates retains (for its own account or for
purposes of resale), in the form of fixed retained yield or otherwise, an
ownership interest in a portion of the payments on the Mortgage Assets, (ii) the
Depositor, any of its affiliates or a servicer is treated as having an ownership
interest in the Mortgage Assets to the extent it is paid (or retains) servicing
compensation in an amount greater than reasonable consideration for servicing
the Mortgage Assets (see "Standard Certificates -- Recharacterization of the
Servicing Fees" above) and (iii) a class of Certificates are issued in two or
more classes or subclasses representing the right to non pro rata percentages of
the interest and principal payments on the Mortgage Assets.
In general, a holder of a Stripped Certificate (a "Stripped
Certificateholder") will be considered to own "stripped bonds" with respect to
its pro rata share of all or a portion of the principal payments on each
Mortgage Loan and/or "stripped coupons" with respect to its pro rata share of
all or a portion of the interest payments on each Mortgage Loan, including the
Stripped Certificate's allocable share of the servicing fees paid, to the extent
that such fees represent reasonable compensation for services rendered. See
discussion above under "Standard Certificates -- Recharacterization of Servicing
Fees." For this purpose the servicing fees will be allocated to the Stripped
Certificates in proportion to the respective offering price of each class (or
subclass) of Stripped Certificates. The holder of a Stripped Certificate
generally will be entitled to a deduction each year in respect of the servicing
fees, as described above under "-- Federal Income Tax Consequences for
Certificates as to Which No REMIC Election is Made -- Standard Certificates --
General," subject to the limitation described therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally
as a new obligation issued (i) on the date that the stripped interest is
purchased and (ii) at a price equal to its purchase price or, if more than one
stripped interest is purchased, the share of the purchase price allocable to
such stripped interest. Each stripped interest generally will have original
issue discount equal to the excess of its stated redemption price at maturity
(or, in the case of a stripped coupon, the amount payable on the due date of
such coupon) over its issue price. This treatment is based on the
interrelationship of Code Section 1286 and the regulations thereunder, Code
Sections 1272 through 1275, and the OID Regulations. While under Code Section
1286 computations with respect to Stripped Certificates arguably should be made
in one of the ways described below, the OID Regulations state, in general, that
all debt instruments issued in connection with the same transaction must be
treated as a single debt instrument. The Trustee will make and report all
computations described below using this aggregate approach, unless substantial
legal authority requires otherwise.
Furthermore, the regulations under Code Section 1286 support the
treatment of a Stripped Certificate as a single debt instrument issued on the
date it is originated for purposes of calculating any original issue discount.
The preamble to such regulations state that such regulations are premised on the
assumption that an aggregation approach is appropriate in determining whether
original issue discount on a stripped bond or stripped coupon is de minimis. In
addition, under these regulations, a Stripped Certificate that represents a
right to payments of both interest and principal may be viewed either as issued
with original issue discount or market discount (as described below), at a de
minimis original issue discount, or presumably, at a premium. The preamble to
such regulations also provide that such regulations are premised on the
assumption that generally the interest component of such a Stripped Certificate
would be treated as stated interest under the original issue discount rules.
Further, the regulations provide that the purchaser of such a Stripped
Certificate may be required to account for any discount
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as market discount rather than original issue discount if either (i) the initial
discount with respect to the Strip Certificate was treated as zero under the de
minimis rule or (ii) no more than 100 basis points in excess of reasonable
servicing is stripped off the related Mortgage Assets. Any such market discount
would be reportable as described above under "Federal Income Tax Consequences
for REMIC Certificates -- Taxation of Regular Certificates -- Market Discount,"
without regard to the de minimis rule therein.
Status of Stripped Certificates. No specific legal authority exists as
to whether the character of the Stripped Certificates, for federal income tax
purposes, will be the same as that of the Mortgage Assets. Stripped Certificates
owned by applicable holders should be considered to represent "qualifying real
property loans" within the meaning or Code Section 593(d)(1), "real estate
assets" within the meaning of Code Section 856(c)(A), "obligations(s) . . .
principally secured by an interest in real property" within the meaning of Code
Section 860G(a)(3)(A), and "loans . . . secured by an interest in real property"
within the meaning of Code Section 7701(a)(19)(C)(v), and interest (including
original issue discount) income attributable to Stripped Certificates should be
considered to represent "interest on obligations secured by mortgages on real
property" within the meaning or Code Section 856(c)(3)(B), provided that in each
case the Mortgage Assets and interest on such Mortgage Assets qualify for such
treatment. The application of such Code provisions to buy-down Mortgage Assets
is uncertain. See "-- Federal Income Tax Consequences for Certificates as to
Which No REMIC Election is Made" and "-- Standard Certificates -- Tax Status"
above.
Original Issue Discount. Except as described above under "-- General,"
each Stripped Certificate will be considered to have been issued (i) on the date
that the stripped interest is purchased and (ii) at a price equal to its
purchase price or, if more than one stripped interest is purchased, the share of
the purchase price allocable to such stripped interest. Each stripped interest
generally will have original issue discount equal to the excess of its stated
redemption price at maturity (or, in the case of a stripped coupon, the amount
payable on the due date of such coupon) over its issue price. Original issue
discount with respect to a Stripped Certificate must be included in ordinary
income as it accrues, in accordance with a constant yield method that takes into
account the compounding of interest, which may be prior to the receipt of the
cash attributable to such income. The amount of original issue discount required
to be included in the income of a Stripped Certificateholder in any taxable year
should be computed generally as described above under "Federal Income Tax
Consequences for REMIC Certificates -- Taxation of Regular Certificates --
Original Issue Discount" and "-- Variable Rate Regular Certificates." However,
with the apparent exception of a Stripped Certificate issued with de minimis
original issue discount, as described above under "-- General," the issue price
of a Stripped Certificate will be the purchase price paid by each holder
thereof, and the stated redemption price at maturity will include the aggregate
amount of the payments to be made on the Stripped Certificate to such Stripped
Certificateholder, presumably under the Prepayment Assumption, other than
amounts treated as qualified stated interest.
If the Mortgage Assets prepay at a rate either faster or slower than
that under the Prepayment Assumption, a Stripped Certificateholder's recognition
of original issue discount will be either accelerated or decelerated and the
amount of such original issue discount will be either increased or decreased
depending on the relative interests in principal and interest on each Mortgage
Loan represented by such Stripped Certificateholder's Stripped Certificate.
While the matter is not free from doubt, the holder of a Stripped Certificate
should be entitled in the year that it becomes certain (assuming no further
prepayments) that the holder will not recover a portion of its adjusted basis in
such Stripped Certificate to recognize an ordinary loss equal to such portion of
unrecoverable basis.
As an alternative to the method described above, the fact that some of
or all the interest payments with respect to the Stripped Certificates will not
be made if the Mortgage Assets are prepaid could lead to the interpretation that
such interest payments are "contingent" within the meaning of the proposed
regulations issued under Code Section 1274 that address the treatment of
contingent payments. If the rules of those proposed regulations apply, treatment
of a Stripped Certificate under such rules depends on whether the aggregate
amount of principal payments, if any, to be made on the Stripped Certificate is
less than or greater than its issue price. If the aggregate principal payments
are greater than or equal to the issue price, the principal payments would be
treated as a separate installment obligation issued at a price equal to the
purchase price for the Stripped Certificate. In such case, original issue
discount would be calculated and accrued under the method described above
without consideration of the interest payments with respect to the Stripped
Certificate. Such payments of interest would be
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includible in the Stripped Certificateholder's gross income in the taxable year
in which the amounts become fixed. If the aggregate amount of principal payments
to be made on the Stripped Certificate is less than its issue price, each
payment of principal would be treated as a return of basis. Each payment of
interest would be treated as includible in gross income to the extent of the
applicable Federal rate under Code Section 1274(d), as applied to the adjusted
basis of the Stripped Certificate, while amounts received in excess of the
applicable Federal rate, as applied to the adjusted basis of the Stripped
Certificate, would be characterized as a return of basis until the total amount
of interest payments treated as a return of basis equalled the excess of the
purchase price over the aggregate stated principal payments. Any additional
interest payments thereafter would be treated as ordinary income. While not free
from doubt uncertainty as to the payment of interest arising as a result of the
possibility of prepayment of the Mortgage Assets should not cause the rules
under the proposed contingent payment regulations to apply to interest with
respect to the Stripped Certificates.
Sale or Exchange of Stripped Certificates. Sale or exchange of a
Stripped Certificate prior to its maturity will result in gain or loss equal to
the difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under "Federal Income Tax Consequences for REMIC Certificates -- Taxation
of Regular Certificates -- Sale or Exchange of Regular Certificates." To the
extent that a subsequent purchaser's purchase price is exceeded by the remaining
payments on the Stripped Certificates, such subsequent purchaser will be
required for federal income tax purposes to accrue and report such excess as if
it were original issue discount in the manner described above. It is not clear
for this purpose whether the assumed prepayment rate that is to be used in the
case of a Stripped Certificateholder other than by original Stripped
Certificateholder should be the Prepayment Assumption or a new rate based on the
circumstances at the date of subsequent purchase.
Purchase of More Than One Class of Stripped Certificates. Where an
investor purchases more than one class of Stripped Certificates, it is currently
unclear whether for federal income tax purposes such classes of Stripped
Certificates should be treated separately or aggregated for purposes of the
rules described above.
Because of these possible varying characterizations of Stripped
Certificates and the resultant differing treatment of income recognition,
Stripped Certificateholders are urged to consult their own tax advisors
regarding the proper treatment of Stripped Certificates for federal income tax
purposes.
Reporting Requirements and Backup Withholding
The Trustee will furnish, within a reasonable time after the end of
each calendar year, to each Certificateholder or Stripped Certificateholder at
any time during such year, such information (prepared on the basis described
above) as the Trustee deems to be necessary or desirable to enable such
Certificateholders to prepare their federal income tax returns. Such information
will include the amount of original issue discount accrued on Certificates held
by persons other than Certificateholders exempted from the reporting
requirements. The amounts required to be reported by the Trustee may not be
equal to the proper amount of original issue discount required to be reported as
taxable income by a Certificateholder, other than an original Certificateholder.
The Trustee will also file such original issue discount information with the
Internal Revenue Service. If a Certificateholder fails to supply an accurate
taxpayer identification number or if the Secretary of the Treasury determines
that a Certificateholder has not reported all interest and dividend income
required to be shown on his federal income tax return, 31% backup withholding
may be required in respect of any reportable payments, as described above under
"-- Backup Withholding."
Taxation of Certain Foreign Investors
To the extent that a Certificate evidences ownership in Mortgage Assets
that are issued on or before July 18, 1984, interest or original issue discount
paid by the person required to withhold tax under Code Section 1441 or 1442,
which apply to nonresident aliens, foreign corporations, or other Non-U.S.
Persons generally will be subject to 30% United States withholding tax, or such
lower rate as may be provided for interest by an applicable tax treaty. Accrued
original issue discount or market discount recognized by the Certificateholder
on the sale or exchange of such a Certificate also will be subject to federal
income tax at the same rate.
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Treasury regulations provide that interest or original issue discount
paid by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Assets issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will
be subject to the same certification requirements described above under
"-- Taxation of Certain Foreign Investors -- Regular Certificates."
Taxation of Securities Classified as Partnership Interests
Certain Trusts may be treated as partnerships for Federal income tax
purposes. In such event, the Trusts may issue Certificates characterized as
"Partnership Interests" as discussed in the related Prospectus Supplement. With
respect to such series of Partnership Interests, Arter & Hadden, counsel to the
Depositor, will deliver its opinion to the Depositor that (unless otherwise
limited in the related Prospectus Supplement) the Trust will be characterized as
a partnership and not an association taxable as a corporation for federal income
tax purposes, which will also cover any material federal income tax consequences
applicable to the Owners.
PLAN OF DISTRIBUTION
Certificates are being offered hereby in series through one or more
underwriters or groups of underwriters (the "Underwriters"). The Prospectus
Supplement will set forth the terms of offering of the series of Certificates,
including the public offering or purchase price of each class of Certificates of
such series being offered thereby or the method by which such price will be
determined and the net proceeds to the Depositor from the sale of each such
class. Such Certificates will be acquired by the Underwriters for their own
account and may be resold from time to time in one or more transactions
including negotiated transactions, at fixed public offering prices or at varying
prices to be determined at the time of sale or at the time of commitment
therefor. The managing Underwriter or Underwriters with respect to the offer and
sale of a particular series of Certificates will be set forth on the cover of
the Prospectus Supplement relating to such series and the members of the
underwriting syndicate, if any, will be named in such Prospectus Supplement.
In connection with the sale of the Certificates, Underwriters may
receive compensation from the Depositor or from purchasers of the Certificates
in the form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the Certificates may be deemed to be
underwriters in connection with such Certificates, and any discounts or
commissions received by them from the Depositor and any profit on the resale of
Certificates by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended. The Prospectus Supplement will
describe any such compensation paid by the Depositor.
It is anticipated that the underwriting agreement pertaining to the
sale of any series of Certificates will provide that the obligations of the
underwriters will be subject to certain conditions precedent, that the
Underwriters will be obligated to purchase all such Certificates if any are
purchased and that the Depositor will indemnify the underwriters against certain
civil liabilities, including liabilities under the Securities Act of 1933, as
amended.
LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Depositor by Arter & Hadden,
Washington, D.C. Certain federal income tax matters concerning the Certificates
will be passed upon for the Depositor by Arter & Hadden.
FINANCIAL INFORMATION
A Trust will be formed with respect to each series of Certificates. No
Trust will have any assets or obligations prior to the issuance of the related
series of Certificates. No Trust will engage in any activities other than those
described herein or in the Prospectus Supplement. Accordingly, no financial
statement with respect to any Trust is included in this Prospectus or will be
included in the Prospectus Supplement.
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APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Page
1986 Act...............................................................38
Adjustable Mortgage Loan Rates..........................................2
Adjustable Rate Mortgage Loans..........................................2
Agreement...............................................................1
Applicable Accounting Standards........................................24
Balloon Loans...........................................................7
Beneficial Owners.......................................................4
BIF....................................................................25
Book Entry Certificates.................................................4
CERCLA.................................................................31
Certificate Account....................................................11
Certificate Interest Rate..............................................10
Certificate Principal Balance...........................................9
Certificate Register....................................................9
Certificate Registrar...................................................9
Certificateholder......................................................53
Certificates............................................................1
Clearing Agency.........................................................4
Clearing Agency Participants............................................4
Code....................................................................4
Commercial Property.....................................................1
Companion Certificates.................................................11
Compound Interest Certificates.........................................10
Conventional Multifamily Loans..........................................1
Cooperative............................................................14
Credit Enhancement......................................................4
Custodial Account......................................................19
Cut-Off Date...........................................................10
Debt Service Coverage Ratio............................................15
Defective Mortgage Loan................................................24
Delivery Date...........................................................9
Deposit Date...........................................................23
Depositor...............................................................1
Disqualified Organization..............................................47
Distribution Date......................................................11
DOL....................................................................35
Due Dates..............................................................14
Eligible Investments...................................................25
EPA....................................................................32
ERISA...................................................................5
Events of Default......................................................26
FAMC....................................................................2
FDIC...................................................................19
FHA.....................................................................1
FHA-Insured Multifamily Loans...........................................1
FHLMC...................................................................2
FNMA....................................................................2
Garn-St. Germain Act...................................................31
GNMA....................................................................2
Housing Act............................................................18
Installment Contracts...................................................1
Insurance Proceeds.....................................................19
Interest Accrual Period................................................11
Liquidation Proceeds...................................................19
Loan-to-Value Ratio....................................................15
MBS.....................................................................2
MBS Agreement..........................................................16
MBS Issuer.............................................................16
MBS Servicer...........................................................16
MBS Trustee............................................................16
Monthly Advance........................................................20
Mortgage Assets.........................................................1
Mortgage Loan Pool.....................................................14
Mortgage Loan Rate......................................................2
Mortgage Loan Schedule.................................................22
Mortgage Loans..........................................................1
Mortgage-Backed Securities..............................................2
Mortgagors.............................................................19
Multifamily Property....................................................1
NCUA...................................................................19
Net Leases.............................................................15
Net Operating Income...................................................15
Non-U.S. Person........................................................51
Noneconomic Residual Interest..........................................48
Non-Priority Certificates..............................................11
Nonrecoverable Advance.................................................20
Notional Principal Balance..............................................9
OBRA...................................................................36
OID Regulations........................................................36
OTS....................................................................31
Parties in Interest....................................................35
Partnership Interests..................................................59
Pass-Through Entity....................................................47
Pass-Through Rate.......................................................3
Plans..................................................................34
Policy Statement.......................................................34
Pre-Funding Account.....................................................3
Pre-Funding Agreement...................................................3
Prepayment Assumption..................................................39
Principal Prepayments..................................................12
Priority Certificates..................................................11
PTE 83-1...............................................................35
Record Date............................................................11
Regular Certificateholder..............................................38
Regular Certificates...................................................36
REIT...................................................................37
REMIC...................................................................4
REMIC Certificates.....................................................36
REMIC Pool.............................................................36
REMIC Regulations......................................................36
Remittance Date........................................................20
Remittance Rate........................................................20
Reserve Fund...........................................................18
Residual Certificateholders............................................43
Residual Certificates..................................................36
Retail Class Certificate...............................................38
SAIF...................................................................25
Scheduled Amortization Certificates....................................10
Seller..................................................................1
Senior Certificates....................................................17
Servicer................................................................1
SMMEA...................................................................5
Special Allocation Certificates........................................11
Standard Certificate...................................................53
Stripped Certificateholder.............................................56
Stripped Certificates..................................................56
Subordinated Certificates..............................................17
Thrift Institution.....................................................37
TMP....................................................................37
Trust...................................................................1
Trust Assets............................................................1
Trustee.................................................................1
U.S. Person............................................................49
UCC....................................................................29
Underlying Mortgage Loans...............................................7
Underwriters...........................................................59
Value..................................................................15
A-1
<PAGE>
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Page
Accrual Period S-3
Actuarial Loans S-38
Appraised Values S-34
Beneficial Owners S-8
Book-Entry Certificates S-48
Business Day S-3
Capitalized Interest Account S-8
Carry Forward Amount S-4
CEDE S-8
Cede S-8
CEDE Participants S-50
Certificate Account S-45
Citibank S-8
Class A Distribution Amount S-3
Clean-Up Call Date S-1
Closing Date S-1
Compensating Interest S-60
Cooperative S-50
Coupon Rates S-2
Current Interest S-4
Cut-Off Date S-1
D&P S-66
Daily Collections S-59
Definitive Certificate S-48
Deleted Mortgage Loan S-23
Depositor S-1
DTC S-8
DTC Participants S-49
ERISA S-66
Euroclear S-8
Euroclear Operator S-50
Euroclear Participants S-50
European Depositaries S-9
Excess Subordinated Amount S-47
Exemption S-66
File S-58
Final Certification S-58
Final Scheduled Payment Dates S-39
Financial Intermediary S-48
Fitch S-66
Funding Period S-7
Initial Certificate Principal Balance S-39
Initial Mortgage Loans S-1
Insurance Policy S-6
Insured Payment S-6
Liquidation Proceeds S-59
Loan Balance S-57
Loan Purchase Price S-23
Loan-to-Value Ratios S-36
Long Beach Loans S-15
Monthly Remittance Date S-5
Moody's S-9
Morgan S-9
Mortgage Loans S-33
Page
Mortgaged Properties S-1
Mortgages S-1
Net Coupon Rate S-23
Net Liquidation Proceeds S-59
Notes S-1
Option One Guidelines S-19
Option One Loans S-19
Original Pre-Funded Amount S-2
Owners S-2
Participants S-48
Pass-Through Rate S-45
Payment Date S-3
Percentage Interest S-45
PHMC S-28
Plan S-66
Preference Amount S-5
Pre-Funded Amount S-7
Prepaid Installments S-60
Prepayments S-12
Preservation Expenses S-60
Principal and Interest Account S-59
Qualified Replacement Mortgage S-23
Qualifying Rate S-19
Rating Agencies S-9
Realized Loss S-47
Record Date S-3
Register S-45
Registrar S-45
Relevant Depositary S-48
Remittance Period S-5
REO Property S-60
Restricted Group S-67
Rules S-49
Seller S-1
Servicer S-1
Servicers S-1
Servicing Advance S-60
Servicing Fee Rate S-59
Specified Subordinated Amount S-46
Standard & Poor's S-9
Subordinate Certificates S-1
Subordinated Amount S-46
Subordination Deficit S-7
Subordination Increase Amount S-46
Subordination Reduction Amount S-47
Subsequent Cut-Off Date S-12
Subsequent Mortgage Loans S-2
Subsequent Transfer Agreement S-12
Subsequent Transfer Date S-7
Substitution Amount S-58
Terms and Conditions S-50
Trust S-43
Trust Estate S-43
Underwriters S-68
Weighted average life S-40
48705.1D
A-1
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses in connection
with the issuance and distribution of the Certificates, other than underwriting
discounts and commissions.*
<TABLE>
<CAPTION>
<S> <C>
Filing Fee for Registration Statement................................. $689,655.17
Legal Fees and Expenses*.............................................. **
Accounting Fees and Expenses*......................................... **
Trustee's Fees and Expenses (including counsel fees)*................. **
Printing and Engraving Fees*.......................................... **
Blue Sky Fees and Expenses*........................................... **
Rating Agency Fees*................................................... **
Miscellaneous*........................................................ **
Total........................................................... $___________
- ---------------------
<FN>
* Estimated in accordance with Item 511 of Regulation S-K.
** To be filed by Amendment.
</FN>
</TABLE>
Item 15. Exhibits.
<TABLE>
<CAPTION>
<S> <C> <C>
1.1 ** -- Form of Underwriting Agreement.
3.1 ** -- Certificate of Incorporation of AMRESCO Residential Securities Corporation.
3.2 ** -- Bylaws of AMRESCO Residential Securities Corporation.
4.1 ** -- Form of Single Family Pooling and Servicing Agreement.
4.2 ** -- Form of Multifamily/Commercial Pooling and Servicing Agreement.
4.3 * -- Form of Trust Agreement for Debt Securities.
4.4 * -- Form of Trust Indenture for Debt Securities.
5.1 * -- Opinion of Arter & Hadden regarding the legality of the Certificates.
8.1 * -- Opinion of Arter & Hadden regarding tax matters.
8.2 * -- Opinion of Arter & Hadden regarding tax matters.
10.1 ** -- Representative Form(s) of Mortgage Note(s).
10.2 ** -- Representative Form of Mortgage.
10.10 ** -- Form of Agreement with Clearing Agency.
23.1 * -- Consent of Arter & Hadden (included as part of Exhibit 5.1, 8.1 and 8.2).
24.1 * -- Powers of Attorney.
24.3 *** -- Consent of Independent Auditor of Certificate Insurer.
- -----------------
<FN>
*Filed herewith.
**Incorporated by reference from the Registrant's Registration Statement Number 33-99346.
***To be filed by amendment.
</FN>
</TABLE>
II-1
<PAGE>
Item 16. Undertakings
A. Undertaking in Respect of Indemnification. Insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
B. Undertaking pursuant to Rule 415.
---------------------------------
The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement;
(i) to include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) to reflect in the prospectus any acts or events arising
after the effective date of this Registration Statement (or the more
recent post-effective amendment thereof) which, individually or in the
aggregate, represents a fundamental change in the information set forth
in this Registration Statement;
(iii) to include any material information with respect to
the plan of distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement;
provided, however, that paragraphs (i) and (ii) do not apply if the Registration
Statement is on Form S-3 or Form S-8, and the information required to be
included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the Registrant pursuant to Section 13 or Section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference in the
Registration Statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
II-2
<PAGE>
C. Undertaking pursuant to Rule 430A.
----------------------------------
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(l) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
[Remainder of Page Intentionally Left Blank]
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant hereby certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Dallas, State of Texas, on the 24th day of July,
1996.
AMRESCO RESIDENTIAL SECURITIES
CORPORATION
By: /s/ Scott J. Reading
-------------------------------
Scott J. Reading
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Each person whose signature appears below hereby authorizes Robert H.
Lutz, Jr., Barry L. Edwards or Scott J. Reading and each of them, to file one or
more amendments (including post-effective amendments) to this Registration
Statement, which amendments may make such changes as any of such persons deems
appropriate, and each such person individually and in the capacity stated below,
hereby appoints each of such persons as attorney-in-fact to execute in his name
and on his behalf any such amendments to the Registration Statement.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Robert L. Adair, III
- ---------------------------- Chief Executive Officer and July 24, 1996
Robert L. Adair, III Director
/s/ Ronald B. Kirkland
- ---------------------------- Chief Financial Officer and July 24, 1996
Ronald B. Kirkland Chief Accounting Officer
/s/ M. Katheryn Boyle Director July 24, 1996
- ----------------------------
M. Katheryn Boyle
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant hereby certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Dallas, State of Texas, on the 24th day of July,
1996.
AMRESCO RESIDENTIAL SECURITIES
CORPORATION
By:
------------------------------
Scott J. Reading
Attorney-in-fact
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 4 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
Each person whose signature appears below hereby authorizes Robert H.
Lutz, Jr., Barry L. Edwards or Scott J. Reading and each of them, to file one or
more amendments (including post-effective amendments) to this Registration
Statement, which amendments may make such changes as any of such persons deems
appropriate, and each such person individually and in the capacity stated below,
hereby appoints each of such persons as attorney-in-fact to execute in his name
and on his behalf any such amendments to the Registration Statement.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Robert L. Adair, III
- --------------------- Chief Executive Officer and July 24, 1996
Director
Ronald B. Kirkland
- --------------------- Chief Financial Officer and July 24, 1996
Chief Accounting Officer
M. Katheryn Boyle Director July 24, 1996
- ---------------------
</TABLE>
<PAGE>
EXHIBIT INDEX
Location of Exhibit
Exhibit in Sequential
Number Description of Document Numbering System
------ ----------------------- ----------------
4.3 Form of Trust Agreement for Debt Securities. _____
4.4 Form of Trust Indenture for Debt Securities. _____
5.1 Opinion of Arter & Hadden regarding the
legality of the Certificates. _____
8.1 Opinion of Arter & Hadden regarding tax
matters. _____
8.2 Opinion of Arter & Hadden regarding tax
matters. _____
23.1 Consent of Arter & Hadden (included as part
of Exhibit 5.1, 8.1 and 8.2). _____
24.1 Powers of Attorney (included as part of
signature page). _____
-----------------------------------------------------------------------
TRUST AGREEMENT
AMONG
AMRESCO RESIDENTIAL SECURITIES CORPORATION
AMRESCO RESIDENTIAL MORTGAGE CORPORATION
DEPOSITORS
AND
---------------
OWNER TRUSTEE
DATED AS OF __________, 199__
------------------------------------------------------------------------
<PAGE>
TRUST AGREEMENT, dated as of _______________, 199__, among AMRESCO
RESIDENTIAL MORTGAGE CORPORATION, a Delaware corporation and AMRESCO RESIDENTIAL
SECURITIES CORPORATION, a Delaware corporation (collectively, the "Depositors"),
and ______________, a ___________________, not in its individual capacity but
solely as Owner Trustee (the "Owner Trustee").
The Depositors and the Owner Trustee hereby agree as follows:
ARTICLE I
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.1 Definitions. Certain capitalized terms used in this
Agreement shall have the respective meanings assigned them in Article I to the
Pooling and Servicing Agreement of even date herewith, among the Depositors, the
Servicers, and the Trust formed under this Agreement. All references herein to
"the Agreement" or "this Agreement" are to the Trust Agreement, and all
references herein to Articles, Sections and subsections are to Articles,
Sections and subsections of this Agreement unless otherwise specified.
ARTICLE II
ORGANIZATION
SECTION 2.1 Name. The Trust created hereby shall be known as "AMRESCO
Residential Securities Corporation Mortgage Loan Trust 199__-__", in which name
the Owner Trustee may conduct the business of the Trust, make and execute
contracts and other instruments on behalf of the Trust and sue and be sued on
behalf of the Trust.
SECTION 2.2 Office. The office of the Trust shall be in care of the
Owner Trustee at its Corporate Trust Office or at such other address in Delaware
as the Owner Trustee may designate by written notice to the Certificateholders
and the Depositors.
SECTION 2.3 Purpose and Powers. (a) The purpose of the Trust is to
engage in the following activities:
(i) to accept the transfer of, manage and hold or,
pursuant to the Pooling and Servicing Agreement, cause the Servicer to
manage, the Mortgage Loans;
(ii) to issue the Notes pursuant to the Indenture and
the Certificates pursuant to this Agreement, and to sell pursuant to
the Underwriting Agreement dated __________________, 199__ among the
Trust, the Depositors, ______________ and ___________ (hereinafter the
"Underwriting Agreement"), register the transfer of or exchange the
Notes and the Certificates;
(iii) to acquire certain property and assets from the
Depositors pursuant to the Pooling and Servicing Agreement, to make
payments to the Noteholders and the
<PAGE>
Certificateholders and to pay the organizational, start-up and
transactional expenses of the Trust;
(iv) to assign, grant, transfer, pledge, mortgage and
convey the Collateral pursuant to the terms of the Indenture and to
hold, manage and distribute to the Certificateholders pursuant to the
terms of this Agreement and the Pooling and Servicing Agreement any
portion of the assets of the Trust released from the lien of, and
remitted to the Trust pursuant to, the Indenture;
(v) to enter into and perform its obligations under the
Basic Documents to which it is to be a party and the Underwriting
Agreement;
(vi) to engage in those activities, including entering
into agreements, that are necessary, suitable or convenient to
accomplish the foregoing or are incidental thereto or connected
therewith; and
(vii) subject to compliance with the Basic Documents, to
engage in such other activities as may be required in connection with
conservation of the assets of the Trust and the making of distributions
to the Certificateholders and the Noteholders.
The Trust is hereby authorized to engage in the foregoing activities
and shall not engage in any activity other than in connection with the foregoing
or other than as required or authorized by the terms of this Agreement or the
Basic Documents.
SECTION 2.4 Appointment of Owner Trustee. The Depositors hereby appoint
the Owner Trustee as trustee of the Trust effective as of the date hereof, to
have all the rights, powers and duties set forth herein. The Owner Trustee
hereby accepts its appointment subject to the terms and conditions hereof.
SECTION 2.5 Initial Capital Contribution of Assets of the Trust. Each
of the Depositors hereby transfers to the Owner Trustee, as of the date hereof,
the sum of $1. The Owner Trustee hereby acknowledges receipt in trust from the
Depositors, as of the date hereof, of the foregoing contributions which shall
constitute the initial assets of the Trust and shall be deposited in the
Certificate Distribution Account. The Depositors shall pay organizational
expenses of the Trust as they may arise or shall, upon the request of the Owner
Trustee, promptly reimburse the Owner Trustee for any such expenses paid by the
Owner Trustee.
SECTION 2.6 Declaration of Trust. The Owner Trustee hereby declares
that it shall hold the assets of the Trust in trust upon and subject to the
conditions set forth herein for the use and benefit of the Certificateholders,
subject to the obligations of the Trust under the Basic Documents. The Owner
Trustee has, pursuant to authority in the Organizational Trust Agreement, filed
the Certificate of Trust. The Trust shall constitute a business trust under the
Business Trust Statute and this Agreement shall constitute the governing
instrument of such business trust. Solely for United States Federal and state
income tax purposes, the Depositors' contribution of $2 in the aggregate to the
Trust in exchange for interests in the trust and the relations created by the
arrangements between the Trust, the Servicer and the Depositors, is
2
<PAGE>
intended to constitute the formation of a partnership whose initial partners are
the Depositors. The sale by the Depositors of Class B-1 Certificates is intended
to effect a termination of that partnership under Code Section 708 and the
creation of a new tax partnership (the "Tax Partnership") whose partners are the
Class B-1 Certificateholders and the Class B-2 Certificateholders. The Tax
Partnership shall be governed as set forth in the Tax Partnership Agreement
attached hereto as Annex A.
SECTION 2.7 Liability of the Depositors and the Certificateholders.
------------------------------------------------------
(a) The Depositors shall be jointly and severally liable
directly to and shall indemnify any injured party for all losses,
claims, damages, liabilities and expenses of the Trust (including
Expenses (as defined in Section 6.9(b)), to the extent not paid out of
the assets of the Trust) to the extent that the Depositors would be
liable if the Trust were a partnership under the Uniform Limited
Partnership Act in which the Depositors were general partners;
provided, however, that the Depositors shall not be liable for (i) any
losses incurred by a Certificateholder or a Certificate Owner in its
capacity as an investor in the Certificates or by a Noteholder in its
capacity as an investor in the Notes or (ii) any losses, claims,
damages, liabilities and expenses arising out of the imposition by any
taxing authority of any federal, state or local income or franchise
taxes or any other taxes imposed on or measured by gross or net income,
gross or net receipts, capital, net worth and similar items (including
any interest, penalties or additions with respect thereto) upon the
Certificateholders, the Certificate Owners, the Noteholders, the Owner
Trustee or the Indenture Trustee (including any liabilities, costs or
expenses with respect thereto) with respect to the Mortgage Loans not
specifically indemnified against or represented to hereunder. In
addition, any third party creditors of the Trust (other than in
connection with the obligations described in the preceding sentence for
which the Depositors shall not be liable shall be deemed third party
beneficiaries of this subsection 2.7(a). The obligations of the
Depositors under this subsection 2.7(a) shall be evidenced by the Class
B-2 Certificates.
(b) No Certificate Owner or Certificateholder other than to
the extent set forth in subsection 2.7(a) with respect to the
Depositors, shall have any personal liability for any liability or
obligation of the Trust.
(c) If, at any time, subsequent to the formation of the Trust,
the income tax regulations under Section 7701 of the Code are amended
in a manner that permits an election to be made to treat the Trust as,
or automatically characterizes the Trust as, a partnership for federal
income tax purposes and any required election is made, the provisions
of Section 2.7(a) with reference to any liability of the Depositors
shall, to the extent legally permitted, terminate and have no further
effect.
SECTION 2.8. Title to Trust Property. Legal title to all of the assets
of the Trust shall be vested at all times in the Trust as a separate legal
entity except where applicable law in any jurisdiction requires title to any
part of the assets of the Trust to be vested in a trustee or trustees, in which
case title shall be deemed to be vested in the Owner Trustee, a co-trustee
and/or a separate trustee, as the case may be.
3
<PAGE>
SECTION 2.9 Situs of Trust. The Trust shall be located and administered
in the State of Delaware. All bank accounts maintained by the Owner Trustee on
behalf of the Trust shall be located in the State of Delaware or the State of
New York. The Trust shall not have any employees in any state other than
Delaware; provided, however, that nothing herein shall restrict or prohibit the
Owner-Trustee from having employees within or without the State of Delaware.
Payments shall be received by the Trust only in Delaware or New York, and
payments will be made by the Trust only from Delaware of New York. The only
office of the Trust shall be the Corporate Trust Office in Delaware.
SECTION 2.10 Representations and Warranties of the Depositors. Each
Depositor hereby represents and warrants to the Owner Trustee that:
(a) Such Depositor has been duly organized and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with power and authority to own its properties and to
conduct its business as such properties are presently owned and such
business is presently conducted and had at all relevant times, and now
has, power, authority and legal right to acquire and own the Mortgage
Loans.
(b) Such Depositor is duly qualified to do business as a
foreign corporation in good standing, and has obtained all necessary
licenses and approvals in all jurisdictions in which the ownership or
lease of property or the conduct of its business requires such
qualifications.
(c) Such Depositor has the power and authority to execute and
deliver this Agreement and to carry out its terms, such Depositor has
full power and authority to sell and assign the property to be sold and
assigned to and deposited with the Issuer as part of the Trust, and
such Depositor has duly authorized such sale and assignment to the
Issuer by all necessary corporate action; and the execution, delivery
and performance of this Agreement have been duly authorized by such
Depositor by all necessary corporate action.
(d) The consummation of the transactions contemplated by this
Agreement and the other Basic Documents to which it is a party and the
fulfillment of the terms of this Agreement do not conflict with, result
in any breach of any of the terms and provisions of or constitute (with
or without notice or lapse of time) a default under, the certificate of
incorporation or by-laws of such Depositor, or any indenture, agreement
or other instrument to which such Depositor is a party or by which it
is bound, or result in the creation or imposition of any Lien upon any
of its properties pursuant to the terms of any such indenture,
agreement or other instrument (other than pursuant to the Basic
Documents) or violate any law or, to the best of such Depositor's
knowledge, any order, rule or regulation applicable to the Depositor of
any court or of any federal or state regulatory body, administrative
agency or other governmental instrumentality having jurisdiction over
such Depositor or any of its properties.
4
<PAGE>
SECTION 2.11 Pledge by Class B-2 Certificateholders of Spread Account.
--------------------------------------------------------
(a) Each Class B-2 Certificateholder, by accepting a Class B-2
Certificate, acknowledges that it has pledged all of its rights, title
and interest in and to the Spread Account to the Indenture Trustee, for
the benefit of the Noteholders and the Class B-1 Certificateholders and
as security for certain of the Trust's obligations under the Basic
Documents, as set forth in Section 5.09(e) of the Pooling and Servicing
Agreement. The pledge contained herein shall be binding upon each Class
B-2 Certificateholder, and its successors and assigns.
(b) Each of the Class B-2 Certificateholders, by accepting a
Class B-2 Certificate, agrees to take or cause to be taken such further
actions, to execute, deliver and file or cause to be executed,
delivered and filed such further documents and instruments (including,
without limitation, any UCC financing statements or this Agreement), as
may be determined by the Indenture Trustee or the Insurer, in order to
perfect the interests created by this Section 2.11 and otherwise fully
to effectuate the purposes, terms and conditions of this Section 2.11.
In furtherance of this, the Class B-2 Certificateholders shall promptly
execute, deliver and file any financing statements, amendments,
continuation statements, assignments, certificates and other documents
with respect to such interests and perform all other acts as the
Indenture Trustee or the Insurer may deem necessary in order to perfect
or to maintain the perfection of the Indenture Trustee's security
interest in the Spread Account.
ARTICLE III
THE CERTIFICATES
SECTION 3.1 Initial Certificate Ownership. Upon the formation of the
Trust by the contribution by the Depositors pursuant to Section 2.5 the
Depositors shall be the initial beneficiaries of the Trust. Upon the execution
and the initial delivery of Certificates pursuant to Section 3.3 below, the
Depositors shall be the only Certificateholders.
SECTION 3.2 Form of the Certificates.
------------------------
(a) The Class B-1 Certificates and the Class B-2 Certificates
shall be substantially in the form set forth in Exhibits A-1 and A-2,
respectively, and the Class B-1 Certificates shall be issued in minimum
denominations of $1,000 and in integral multiples thereof. The
Certificates shall be executed on behalf of the Trust by manual or
facsimile signature of an authorized signatory of the Owner Trustee.
Certificates bearing the manual or facsimile signatures of individuals
who were, at the time when such signatures shall have been affixed,
authorized to sign on behalf of the Trust shall be valid and binding
obligations of the Trust, notwithstanding that such individuals or any
of them shall have ceased to be so authorized prior to the
authentication and delivery of such Certificates or did not hold such
offices at the date of authentication and delivery of such
Certificates.
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(b) The Definitive Certificates shall be typewritten, printed,
lithographed or engraved or produced by any combination of these
methods (with or without steel engraved borders) all as determined by
the authorized signatory of the Owner Trustee or the Owner Trustee's
authenticating agent executing such Certificates, as evidenced by their
execution of such Certificates.
(c) The terms of the Certificates set forth in Exhibits A-1
and A-2 shall form part of this Agreement.
SECTION 3.3 Execution, Authentication and Delivery. Concurrently with
the transfer of the Mortgage Loans to the Trust pursuant to the Pooling and
Servicing Agreement, the Owner Trustee shall execute, or cause its
authenticating agent to execute, (i) the Class B-1 Certificates in an aggregate
principal amount equal to the original Class B-1 Principal Balance and (ii) the
Class B-2 Certificates to be executed on behalf of the Trust, authenticated and
delivered to or upon the written order of each Depositor (with each Depositor
receiving a pro rata amount of such Certificates based on the aggregate
Principal Balance of its respective Mortgage Loans transferred to the Trust),
signed by a Responsible Officer of each of the Depositors, without further
corporate action by the Depositors, in Authorized Denominations. No Certificate
shall entitle its holder to any benefit under this Agreement, or shall be valid
for any purpose, unless there shall appear on such Certificate a certificate of
authentication substantially in the form set forth in Exhibit B, executed by the
Owner Trustee or Chemical Bank; as the Owner Trustee's authenticating agent, by
manual signature. Such authentication shall constitute conclusive evidence that
such Certificate shall have been duly authenticated and delivered hereunder. All
Certificates shall be dated the date of their authentication.
SECTION 3.4 Registration; Registration of Transfer and Exchange
---------------------------------------------------
of Certificates.
----------------
(a) The Certificate Registrar shall cause to be kept at its
office or agency in New York, New York, or at its designated agent, a
Certificate Register in which, subject to such reasonable regulations
as it may prescribe, it shall provide for the registration of
Certificates and of transfers and exchanges of Certificates as herein
provided. Upon any resignation of a Certificate Registrar, the Owner
Trustee shall promptly appoint a successor or, if it elects not to make
such an appointment, assume the duties of the Certificate Registrar.
Chemical Bank shall be the initial Certificate Registrar.
(b) The Class B-2 Certificates have not been registered or
qualified under the Securities Act of 1933, as amended (the "1933
Act"), or any state securities laws or "Blue Sky" laws. No transfer,
sale, pledge or other disposition of any Class B-2 Certificate shall be
made unless such disposition is made pursuant to the proviso set forth
in Section 3.10.
None of the Servicer, the Representative, the Depositors, the
Certificate Registrar nor the Owner Trustee is obligated under this Agreement to
register the Class B-2 Certificates under the 1933 Act or any other securities
law or to take any action not otherwise required under this Agreement to permit
the transfer or registration of transfer of Class B-2 Certificates without such
registration or qualification. Any such Class B-2 Certificateholder desiring to
effect such
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transfer shall, and does hereby agree to, promptly reimburse the Owner Trustee,
the Representative, each Depositor, the Certificate Registrar and the Servicer
for costs and expenses incurred in connection with any liability that results if
the transfer is not so exempt or it not made in accordance with such applicable
federal and state laws.
In addition to the restrictions set forth in Section 9.11, none of the
Trust, the Servicer, the Representative, any Depositor, the Administrator, any
Originator or any Subservicer shall be a Class B-1 Certificateholder; provided,
however, that the Depositors may hold Class B-1 Certificates upon receipt
thereof until such Class B-1 Certificates are sold pursuant to the Underwriting
Agreement. Any attempted or purported transfer in violation of the preceding
sentence shall be absolutely null and void and shall vest no rights in the
purported transferee. If any purported transferee shall become a Holder of a
Class B-1 Certificate in violation of such sentence, then the last preceding
Holder shall be restored to all rights as Holder thereof retroactive to the date
of registration of transfer of such Certificate. The Owner Trustee shall notify
the Servicer of any transfer in violation of that paragraph upon receipt of
written notice thereof. None of the Owner Trustee, the Certificate Registrar or
any Paying Agent shall be liable to any Person for any registration of transfer
of a Class B-1 Certificate not permitted by this paragraph or for making any
payments due on such Class B-1 Certificate to the Holder thereof or taking any
other action with respect to such Holder under the provisions of this Agreement
so long as the transfer was registered without such receipt. The Owner Trustee
shall be entitled, but not obligated, to recover from any Holder of a Class B-1
Certificate that was in fact not a permitted Holder under this paragraph, all
payments made on such Class B-1 Certificate at and after such time. Any such
payments so recovered by the Owner Trustee shall be paid and delivered by the
Owner Trustee to the last preceding Holder of such Class B-1 Certificate.
Subject to the preceding paragraphs, upon surrender for registration of
transfer of any Certificate at the office or agency of the Owner Trustee
maintained pursuant to Section 3.8, the Owner Trustee shall execute, and the
Owner Trustee or its authenticating agent shall authenticate and deliver in the
name of the designated transferee or transferees, a new Certificate of the same
Class and Percentage Interest and dated the date of authentication by the Owner
Trustee or such authenticating agent.
At the option of the Certificateholders, Certificates may be exchanged
for other Certificates of Authorized Denominations of a like aggregate
Percentage Interest, upon surrender of the Certificates to be exchanged at such
office. Whenever any Certificates are so surrendered for exchange, the Owner
Trustee or its Authenticating Agent shall execute, authenticate and deliver the
Certificates which the Certificateholder making the exchange is entitled to
receive.
No service charge shall be made for any registration of transfer or
exchange of Certificates, but the Owner Trustee may require payment of a sum
sufficient to cover any tax or governmental charge that may be imposed in
connection with any registration of transfer or exchange of Certificates.
All Certificates surrendered for registration of transfer or exchange
shall be marked "canceled" by the Owner Trustee.
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SECTION 3.5 Mutilated; Destroyed; Lost or Stolen Certificates.
-------------------------------------------------
(a) If (i) any mutilated Certificate is surrendered to the
Certificate Registrar, or the Certificate Registrar receives evidence
to its satisfaction of the destruction, loss or theft of any
Certificate, and (ii) there is delivered to the Certificate Registrar,
the Owner Trustee and the Trust such security or indemnity as may be
required by them to hold each of them harmless, then, in the absence of
notice to the Certificate Registrar or the Owner Trustee that such
Certificate has been acquired by a bona fide purchaser, the Owner
Trustee shall execute on behalf of the Trust and the Owner Trustee or
the Owner Trustee's Authenticating Agent shall authenticate and
deliver, in exchange for or in lieu of any such mutilated, destroyed,
lost or stolen Certificate, a replacement Certificate of a like class
and an aggregate principal amount; provided, however, that if any such
destroyed, lost or stolen Certificate, but not a mutilated Certificate,
shall have become or within seven days shall be due and payable, then
instead of issuing a replacement Certificate the Owner Trustee may pay
such destroyed, lost or stolen Certificate when so due or payable.
(b) If, after the delivery of a replacement Certificate or
payment in respect of a destroyed, lost or stolen Certificate pursuant
to subsection 3.5(a), a bona fide purchaser of the original Certificate
in lieu of which such replacement Certificate was issued presents for
payment such original Certificate, the Owner Trustee shall be entitled
to recover such replacement Certificate (or such payment) from the
Person to whom it was delivered or any Person taking such replacement
Certificate from such Person to whom such replacement Certificate was
delivered or any assignee of such Person, except a bona fide purchaser,
and shall be entitled to recover upon the security or indemnity
provided therefor to the extent of any loss, damage, cost or expense
incurred by the Owner Trustee in connection therewith.
(c) In connection with the issuance of any replacement
Certificate under this Section 3.5, the Owner Trustee or the
Certificate Registrar may require the payment by the Holder of such
Certificate of a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto and any other reasonable
expenses (including the fees and expenses of the Owner Trustee and the
Certificate Registrar) connected therewith.
(d) Any duplicate Certificate issued pursuant to this Section
3.5 in replacement of any mutilated, destroyed, lost or stolen
Certificate shall constitute an original additional contractual
obligation of the Trust, whether or not the mutilated, destroyed, lost
or stolen Certificate shall be found at any time or be enforced by
anyone, and shall be entitled to all the benefits of this Agreement
equally and proportionately with any and all other Certificates duly
issued hereunder.
(e) The provisions of this Section 3.5 are exclusive and shall
preclude (to the extent lawful) all other rights and remedies with
respect to the replacement or payment of mutilated, destroyed, lost or
stolen Certificates.
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SECTION 3.6 Persons Deemed Certificateholders. Prior to due
presentation of a Certificate for registration of transfer, the Owner Trustee,
the Certificate Registrar or any Paying Agent may treat the Person in whose name
any Certificate shall be registered in the Certificate Registrar as the
Certificateholder of such Certificate for the purpose of receiving distributions
pursuant to Article V and for all other purposes whatsoever, and neither the
Owner Trustee nor the Certificate Registrar shall be affected by any notice to
the contrary.
SECTION 3.7 Access to List of Certificateholders' Names and Addresses.
The Certificate Registrar shall furnish or cause to be furnished to the Insurer,
the Servicer and the Depositors, within 15 days after receipt by the Certificate
Registrar of a request therefor from the Insurer, the Servicer or either
Depositor in writing, a list, in such form as the Insurer, the Servicer or such
Depositor may reasonably require, of the names and addresses of the
Certificateholders as of the most recent Record Date. Each Holder, by receiving
and holding a Certificate, shall be deemed to have agreed not to hold any of the
Insurer, the Servicer, the Depositors, the Certificate Registrar or the Owner
Trustee accountable by reason of the disclosure of its name and address,
regardless of the source from which information was derived.
SECTION 3.8 Maintenance of Office For Surrenders. The Owner Trustee
shall maintain in the Borough of Manhattan, the City of New York, an office or
offices or agency or agencies where Certificates may be surrendered for
registration of transfer or exchange and where notices and demands to or upon
the Owner Trustee in respect of the Certificates and the Basic Documents may be
served. The Owner Trustee initially designates the offices of ___________,
_______________, New York, New York ____ ______________, as its principal office
for such purposes. The Owner Trustee shall give prompt written notice to the
Depositors and to the Certificateholders of any change in the location of the
Certificate Register or any such office or agency.
SECTION 3.9 Appointment of Paying Agent. The paying Agent shall make
distributions to Certificateholders from the Certificate Distribution Account
pursuant to Section 5.2 and shall report the amounts of such distributions to
the Owner Trustee and the Servicer. Any Paying Agent shall have the revocable
power to withdraw funds from the Certificate Distribution Account for the
purpose of making the distributions referred to above. The Owner Trustee may
revoke such power and remove the Paying Agent if the Owner Trustee determines in
its sole discretion that the Paying Agent shall have failed to perform its
obligations under this Agreement in any material respect. The Paying Agent shall
initially be ______________, and any co-paying agent chosen by ______________,
and acceptable to the Owner Trustee. ______________ shall be permitted to resign
as Paying Agent upon 30 days' written notice to the Owner Trustee and the
Insurer. If ____________ shall no longer be the Paying Agent, the Owner Trustee
shall appoint a successor to act as Paying Agent (which shall be a bank or trust
company acceptable to the Insurer and the Rating Agencies). The Owner Trustee
shall cause such successor Paying Agent or any additional Paying Agent appointed
by the Owner Trustee to execute and deliver to the Owner Trustee an instrument
in which such successor Paying Agent or additional Paying Agent shall agree with
the Owner Trustee that as Paying Agent, such successor Paying Agent or
additional Paying Agent shall hold all sums, if any, held by it for payment to
the Certificateholders in trust for the benefit of the Certificateholders
entitled thereto
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until such sums shall be paid to such Certificateholders. The Paying Agent shall
return all unclaimed funds to the Owner Trustee and upon removal of a Paying
Agent such Paying Agent shall also return all funds in its possession to the
Owner Trustee. The provisions of Article VI shall apply to the Owner Trustee
also in its role as Paying Agent, for so long as the Owner Trustee shall act as
Paying Agent and, to the extent applicable, to any other paying agent appointed
hereunder. Any reference in this Agreement to the Paying Agent shall include any
co-paying agent unless the context requires otherwise.
SECTION 3.10 Restriction on Transfers by Class B-2 Certificateholders.
The Class B-2 Certificateholders shall not sell, transfer, assign or dispose of
all or any portion of the Class B-2 Certificates; provided, that each of the
Class B-2 Certificateholders may, within ten Business Days of the Closing Date,
make a one-time transfer to the other or to a wholly-owned subsidiary of such
Class B-2 Certificateholder; provided that each Depositor shall retain at least
two percent of their original holdings in the Class B-2 Certificates and that in
the aggregate, the Depositors shall retain at least half of their original
holdings in the Class B-2 Certificates; and provided further, if the transferee
is a wholly-owned subsidiary, the transferee shall obtain no rights as a result
of the transfer other than rights to distributions and tax allocations. Upon
completion of such transfer, the Depositors shall certify to the Owner Trustee
as to compliance with this Section 3.10.
SECTION 3.11 Book-Entry Certificates. The Class B-1 Certificates, upon
original issuance, shall be issued in the form of a typewritten Certificate or
Certificates representing Book-Entry Certificates, to be delivered to the
Depository. Such Class B-1 Certificate or Certificates shall initially be
registered on the Certificate Register in the name of Cede & Co., the nominee of
the initial Depository and no Certificate Owner of a Class B-1 Certificate or
Certificates shall receive a definitive Class B-1 Certificate representing such
Certificate Owner's interest in such Class B-1 Certificate, except as provided
in Section 3.13. Unless and until definitive fully registered Class B-1
Certificates (the "Definitive Certificates") shall have been issued to
Certificate Owners pursuant to Section 3.13:
(a) the provisions of this Section 3.11 shall be in full force
and effect;
(b) the Certificate Registrar and the Owner Trustee shall be
entitled to deal with the Depository for all purposes of this Agreement
(including the payment of principal of and interest on the Certificates
and the giving of instructions or directions hereunder) as the sole
Holder of the Class B-1 Certificates, and shall have no obligation to
the Certificate Owners with respect thereto;
(c) to the extent that the provisions of this Section 3.11
conflict with any other provisions of this Agreement, the provisions of
this Section 3.11 shall control;
(d) the rights of the Certificate Owners with respect to the
Class B-1 Certificate or Certificates shall be exercised only through
the Depository and shall be limited to those established by law and
agreements between such Certificate Owners and the Depository and/or
the Depository participants. Pursuant to the Certificate Depository
Agreement in the form attached as Exhibit C, unless and until
Definitive Certificates are
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issued pursuant to Section 3.13, the initial Depository will make
book-entry transfers among the Depository Participants and receive and
transmit payments of principal of and interest on the Class B-1
Certificates to such Depository Participants;
(e) whenever this Agreement requires or permits actions to be
taken based upon instructions or directions of Holders to Certificates
evidencing a specified aggregate Percentage Interest, the Depository
shall be deemed to represent such percentage only to the extent that it
has received instructions to such effect from Certificate Owners and/or
Depository Participants owning or representing, respectively, such
required aggregate Percentage Interest of Class B-1 Certificates
(taking into account the proviso contained in the definition of
Certificateholder) and has delivered such instructions to the Owner
Trustee;
provided, however, that the provision of this Section 3.11 shall not be
applicable in respect of Class B-1 Certificates issued to the Depositors. The
Depositors or the Owner Trustee may set a record date for the purpose of
determining the identity of Holders of Class B-1 Certificates entitled to vote
or to consent to any action by vote as provided in this Agreement.
SECTION 3.12 Notices to Depository. Whenever a notice or other
communication to the Class B-1 Certificateholders is required under this
Agreement, the Indenture or the Pooling and Servicing Agreement, unless and
until Definitive Certificates shall have been issued to Certificate Owners
pursuant to Section 3.13, the Owner Trustee shall give all such notices and
communications specified herein to be given to Class B-1 Certificateholders to
the Depository and shall have no further obligation to the Certificate Owners of
the Class B-1 Certificates.
SECTION 3.13 Definitive Certificates. (a) The Class B-2 Certificates
shall be issued in the form of Definitive Certificates and (b) with respect to
the Class B-1 Certificates, if (i) the Administrator advises the Owner Trustee
in writing that the Depository is no longer willing or able to properly
discharge its responsibilities with respect to the Class B-1 Certificates, and
the Administrator is unable to locate a qualified successor; (ii) the
Administrator at its option advises the Owner Trustee in writing that it elects
to terminate the book-entry system through the Depository; or (iii) after the
occurrence of Servicer Default under the Pooling and Servicing Agreement, a
Majority in Voting Interest of the Class B-1 Certificates advise the Depository
in writing that the continuation of a book-entry system through the Depository
is no longer in the best interest of the Certificate Owners of the Class B-1
Certificates, then the Depository shall notify all Certificate Owners and the
Owner Trustee of the occurrence of any such event and of the availability of the
Definitive Certificates to Certificate Owners requesting the same. Upon
surrender to the Owner Trustee of the typewritten Certificate or Certificates
representing the Book-Entry Certificates by the Depository, accompanied by
registration instructions, the Owner Trustee shall execute and authenticate the
Definitive Certificates in accordance with the instructions of the Depository.
Neither the Certificate Registrar nor the Owner Trustee shall be liable for any
delay in delivery of such instructions and may conclusively rely on, and shall
be protected in relying on, such instructions. Upon the issuance of Definitive
Certificates, the Owner Trustee shall recognize the Holders of the Definitive
Certificates as Certificateholders.
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SECTION 3.14 Appointment of Authenticating Agent. At any time when any
of the Certificates remain outstanding the Owner Trustee may appoint an
authenticating agent or agents with respect to the Certificates which shall be
authorized to act on behalf of the Owner Trustee to authenticate Certificates
issued upon original issuance, exchange or registration of transfer. The Owner
Trustee may revoke such power and remove any authenticating agent at any time.
______________ shall initially be an authenticating agent hereunder.
If any authenticating agent is appointed hereunder, the Certificates
may have endorsed thereon, in addition to the Trustee's certificate of
authentication, an alternate certificate of authentication in the following
form:
This is one of the Certificates referred to in the within-mentioned
Trust Agreement.
___________, not in
its individual capacity but
solely as Owner Trustee
By:_____________________________
As Authenticating Agent
By:_____________________________
Authorized Signatory
ARTICLE IV
ACTIONS BY OWNER TRUSTEE
SECTION 4.1 Prior Notice to Certificateholders with Respect to Certain
Matters. The Owner Trustee shall not take action with respect to the following
matters, unless (i) the Owner Trustee shall have notified the Certificateholders
and the Insurer in writing of the proposed action at least 30 days before the
taking of such action, and (ii) the Majority in Voting Interest of the Class B-1
Certificateholders or the Insurer shall not have notified the Owner Trustee in
writing prior to the 30th day after such notice is given that such
Certificateholders or the Insurer have withheld consent or provided alternative
direction:
(a) the initiation of any claim or lawsuit by the Trust or the
Compromise of any action, claim or lawsuit brought by or against the
Trust;
(b) the election by the Trust to file an amendment to the
Certificate of Trust, a conformed copy of which is attached hereto as
Exhibit B; provided, however, that the Owner Trustee may, without
consent of any Certificateholder or the Insurer, amend the Certificate
of Trust to the extent it is required to do so under the Business Trust
Statute;
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(c) the amendment of the Indenture by a supplemental indenture
in circumstances where the consent of any Noteholder is required;
(d) the amendment of the Indenture by a supplemental indenture
in circumstances where the consent of any Noteholder is not required
and such amendment materially adversely affects the interest of the
Certificateholders;
(e) the amendment, change or modification of the
Administration Agreement, except to cure any ambiguity or to amend or
supplement any provision in a manner that would not materially
adversely affect the interests of the Certificateholders; or
(f) the appointment pursuant to the Indenture of a successor
Note Registrar, Paying Agent or Indenture Trustee or pursuant to this
Agreement of a successor Certificate Registrar or Paying Agent, or the
consent to the assignment by the Note Registrar, Paying Agent or
Indenture Trustee or Certificate Registrar of its obligations under the
Indenture of this Agreement, as applicable.
SECTION 4.2 Action by Certificateholders with Respect to Certain
Matters. The Owner Trustee shall not have the power, except upon the written
direction of the Majority in Voting Interest of the Class B-1 Certificates (with
the written consent of the Insurer) or the Insurer, to (a) remove the
Administrator under the Administration Agreement pursuant to Section 10 thereof,
(b) appoint a successor Administrator pursuant to Section 10 of the
Administration Agreement, (c) remove the Servicer under the Pooling and
Servicing Agreement pursuant to Section 9.01 thereof or (d) except as expressly
provided in the Basic Documents, sell the Mortgage Loans or any interest therein
after the termination of the Indenture. The Owner Trustee shall take the actions
referred to in the preceding sentence only upon written instructions signed by
the Majority in Voting Interest of the Class B-1 Certificates (with the written
consent of the Insurer) or the Insurer.
SECTION 4.3 Action by Certificateholders with Respect to Bankruptcy.
The Owner Trustee shall not have the power to commence a voluntary proceeding in
bankruptcy relating to the Trust without the unanimous prior approval of all
Class B-1 Certificateholders and the delivery to the Owner Trustee by each such
Certificateholder of a certificate certifying that such Certificateholder
reasonably believes that the Trust is insolvent.
SECTION 4.4 Restrictions on Certificateholders' Power. The
Certificateholders shall not direct the Owner Trustee to take or refrain from
taking any action if such action or inaction would be contrary to any obligation
of the Trust or the owner Trustee under this Agreement or any of the Basic
Documents or would be contrary to Section 2.3, nor shall the Owner Trustee be
obligated to follow any such direction, if given.
SECTION 4.5 Majority Control. Except as expressly provided herein any
action that may be taken or consent that may be given or withheld by the Class
B-1 Certificateholders under this Agreement or the Pooling and Servicing
Agreement may be taken, given or withheld by not less than a Majority in Voting
Interest of Class B-1 Certificates. Except as expressly
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provided herein, any written notice of the Class B-1 Certificateholders
delivered pursuant to this agreement shall be effective if signed by a Majority
in Voting Interest of Class B-1 Certificates.
ARTICLE V
APPLICATION OF ASSETS OF THE TRUST; CERTAIN DUTIES
SECTION 5.1 Establishment of Certificate Distribution Account.
-------------------------------------------------
(a) The Owner Trustee, for the benefit of the
Certificateholders, shall establish and maintain in the name of the
Owner Trustee an Eligible Account known as the "AMRESCO Residential
Securities Corporation Mortgage Loan Trust 199__-__ Certificate
Distribution Account" (the "Certificate Distribution Account"), bearing
an additional designation clearly indicating that the funds deposited
therein are held for the
benefit of the Certificateholders.
(b) The Owner Trustee (and the Insurer as subrogee) on behalf
of the Trust shall possess all right, title and interest in and to all
funds on deposit from time to time in the Certificate Distribution
Account and in all proceeds thereof. Except as otherwise provided
herein or in the Pooling and Servicing Agreement, the Certificate
Distribution Account shall be under the sole dominion and control of
the Owner Trustee for the benefit of the Certificateholders. If, at any
time, the Certificate Distribution Account ceases to be an Eligible
Account, the Owner Trustee (or the Administrator on behalf of the Owner
Trustee, if the Certificate Distribution Account is not then held by
the Owner Trustee or an Affiliate thereof) shall within 5 Business Days
(or such longer period, not to exceed 30 calendar days, as to which
each Rating Agency and the Insurer may consent) notify the Insurer,
establish a new Certificate Distribution Account as an Eligible Account
and transfer any cash and/or any investments to such new Certificate
Distribution Account.
SECTION 5.2 Application of Funds.
--------------------
(a) On each Payment Date, the Owner Trustee shall, based upon
the information contained in the Remittance Report delivered on the
related Determination Date pursuant to Section 5.07 of the Pooling and
Servicing Agreement, distribute:
(i) to the Class B-1 Certificateholders, all amounts
deposited into the Certificate Distribution Account on or
before such Payment Date (and not previously distributed to
the Class B-1 Certificateholders) constituting the Class B-1
Remittance amount; and
(ii) to the Class B-2 Certificateholders, all amounts
deposited into the Certificate Distribution Account on or
before such Payment Date (and not previously distributed to
the Class B-2 Certificateholders) pursuant to Sections 5.05(d)
(viii) and 5.09(b) (v) and (vii) of the Pooling and Servicing
Agreement.
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(b) If the Owner Trustee on any Determination Date receives
written notice from the Indenture pursuant to Section 5.05(e) of the
Pooling and Servicing Agreement that a Special Remittance shall occur
on the following Monthly Deposit Date (which shall be a "Special
Remittance Date"), notice of such remittance shall be given by the
Owner Trustee by first-class mail, postage prepaid, mailed not less
than five days prior to the applicable Special Remittance Date (or on
the related Determination Date, if later) to each Class B-1
Certificateholder of record on the related Special Record Date at such
Class B-1 Certificateholder's address appearing in the Certificate
Register. Each such notice by the Indenture Trustee to the Owner
Trustee and by the Owner Trustee to the Class B-1 Certificateholders
shall set forth: (i) the applicable Special Remittance Date; and (ii)
the Special Remittance Amount and the Special Remittance Amount per
$1,000 original denomination of Class B-1 Certificates.
Notice of such Special Remittance shall be given by the Owner Trustee
at the expense of the Administrator. Failure to give notice of any Special
Remittance, or any defect therein, to any Class B-1 Certificateholder shall not
impair or affect the validity of such Special Remittance.
(c) On each Special Remittance Date, the Owner Trustee shall,
based upon the information contained in the notice given to the Owner
Trustee by the Indenture Trustee pursuant to Section 5.2(b), distribute
to the Class B-1 Certificateholders all amounts deposited into the
Certificate Distribution Account constituting the Special Remittance
Amount on or before such Special Payment Date pursuant to Section
5.05(e) (ii) of the Pooling and Servicing Agreement.
(d) On each Payment Date, the Owner Trustee shall send to each
Certificateholder the statement provided to the Owner Trustee by the
Indenture Trustee pursuant to Section 5.07 of the Pooling and Servicing
Agreement with respect to such Payment Date.
(e) If the Indenture Trustee holds escheated funds for payment
to the Trust pursuant to Section 3.3(e) of the Indenture, the
Administrator shall, upon notice from the Indenture Trustee that such
funds exist, submit on behalf of the Trust an Issuer Order to the
Indenture Trustee pursuant to Section 3.3(e) of the Indenture
instructing the Indenture Trustee to pay such funds to or at the order
of the Depositors.
SECTION 5.3 Method of Payment. Subject to subsection 7.1(c),
distributions required to be made to Class B-1 Certificateholders on any Payment
Date or Special Payment Date shall be made to each Class B-1 Certificateholder
of record on the immediately preceding Record Date or Special Record Date, as
the case may be, either by wire transfer, in immediately available funds, to the
account of such Holder at a bank or other entity having appropriate facilities
therefor, if such Certificateholder shall have provided to the Certificate
Registrar appropriate written instructions at least five Business Days prior to
such Record Date or Special Record Date, as the case may be, and such Holder's
Certificates in the aggregate evidence a denomination of not less than
$1,000,000 or, if not, by check mailed to such Certificateholder at the address
of such Holder appearing in the Certificate Register. Such distributions will be
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made on a pro rata basis among such Class B-1 Certificateholders based on the
Percentage Interest represented by their respective Class B-1 Certificates.
Subject to subsection 7.1(c), distributions required to be made to the Class B-2
Certificateholders on any Payment Date shall be made to each Class B-2
Certificateholder or record on the immediately preceding Record Date by wire
transfer, in immediately available funds, to the account of each such Holder at
a bank or other entity having appropriate facilities thereof. Such distributions
will be made on a pro rata basis among such Class B-2 Certificateholders based
on the Percentage Interest represented by their respective Class B-2
Certificates.
ARTICLE VI
THE OWNER TRUSTEE
SECTION 6.1 Duties of Owner Trustee.
-----------------------
(a) The Owner Trustee undertakes to perform such duties, and
only such duties, as are specifically set forth in this Agreement and
the other Basic Documents, including the administration of the Trust in
the interest of the Certificateholders, subject to the Basic Documents
and in accordance with the provisions of this Agreement. No implied
covenants or obligations shall be read into this Agreement against the
Owner Trustee.
(b) Notwithstanding the foregoing, the Owner Trustee shall be
deemed to have discharged its duties and responsibilities hereunder and
under the Basic documents to the extent the Administrator has agreed in
the Administration Agreement to perform any act or to discharge any
duty of the Owner Trustee hereunder or under any Basic Document, and
the Owner Trustee shall not be liable for the default or failure of the
Administrator to carry out its obligations under the Administration
Agreement.
(c) In the absence of bad faith on its part, the Owner Trustee
may conclusively rely upon certificates or opinions furnished to the
Owner Trustee and conforming to the requirements of this Agreement in
determining the truth of the statements and the correctness of the
opinions contained therein; provided, however, that the Owner Trustee
shall have examined such certificates or opinions so as to determine
compliance of the same with the requirements of this Agreement.
(d) The Owner Trustee may not be relieved from liability for
its own negligent action, its own negligent failure to act or its own
bad faith or wilful misconduct, except that:
(i) this subsection 6.1(d) shall not limit the
effect of subsection 6.1(a) or (b);
(ii) the Owner Trustee shall not be liable for any
error of judgment made in good faith by a Responsible Officer
unless it is proved that the Owner Trustee was negligent in
ascertaining the pertinent facts; and
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(iii) the Owner Trustee shall not be liable with
respect to any action it takes or omits to take in good faith
in accordance with a direction received by it pursuant to
Section 4.1, 4.2 or 6.4.
(e) Subject to Sections 5.1 and 5.2, monies received by the
Owner Trustee hereunder need not be segregated in any manner except to
the extent required by law or the Pooling and Servicing Agreement and
may be deposited under such general conditions as may be prescribed by
law, and the Owner Trustee shall not be liable for any interest
thereon.
(f) The Owner Trustee shall not take any action that (i) is
inconsistent with the purposes of the Trust set forth in Section 2.3 or
(ii) would, to the actual knowledge of a Responsible Officer of the
Owner Trustee, result in the Trust's becoming taxable as a corporation
for federal, state or local income tax purposes. The Certificateholders
shall not direct the Owner Trustee to take action that would violate
the provisions of this Section 6.1.
SECTION 6.2 Additional Duties of Owner Trustee. The Owner Trustee is
authorized and directed to execute and deliver the Basic Documents to which it
or the Trust is a party, each certificate or other document attached as an
exhibit to or contemplated by the Basic Documents to which it or the Trust is to
be a party and the Underwriting Agreement, in each case in such form as the
Depositors shall approve as evidenced conclusively by the Owner Trustee's or the
Depositors' execution thereof. In addition to the foregoing, the Owner Trustee
is authorized, but shall not be obligated, to take all actions required of the
Trust pursuant to the Basic Documents. The Owner Trustee is further authorized
from time to time to take such action as the Administrator recommends with
respect to the Basic Documents and the Underwriting Agreement.
SECTION 6.3 Acceptance of Trusts and Duties. Except as otherwise
provided in this Article VI, in accepting the trusts hereby created Chemical
Bank Delaware acts solely as Owner Trustee hereunder and not in its individual
capacity and all Persons having any claim against the Owner Trustee by reason of
the transactions contemplated by this Agreement or any Basic Document shall look
only to the assets of the Trust for payment or satisfaction thereof. The Owner
Trustee accepts the trusts hereby created and agrees to perform its duties
hereunder with respect to such trusts but only upon the terms of this Agreement.
The Owner Trustee also agrees to disburse all moneys actually received by it
constituting part of the assets of the Trust upon the terms of the Basic
Documents and this Agreement. The Owner Trustee shall not be liable or
accountable hereunder or under any Basic Document under any circumstances,
except (i) for its own negligent action, its own negligent failure to act or its
own willful misconduct or (ii) in the case of the inaccuracy of any
representation or warranty contained in Section 6.6 and expressly made by the
Owner Trustee. In particular, but not by way of limitation (and subject to the
exceptions set forth in the preceding sentence):
(a) the Owner Trustee shall at no time have any responsibility
or liability for or with respect to the legality, validity and
enforceability of any Mortgage Loan, or the perfection and priority of
any security interest created by any Mortgage Loan in any
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Mortgaged Property or the maintenance of any such perfection and
priority, or for or with respect to the sufficiency of the assets of
the Trust or their ability to generate the payments to be distributed
to Certificateholders under this Agreement or the Noteholders under the
Indenture, including, without limitation: the existence, condition and
ownership of any Mortgaged Property; the existence and enforceability
of any insurance thereon; the existence and contents of any Mortgage
Loan on any computer or other record thereof; the validity of the
assignment of any Mortgage Loan to the Trust or of any intervening
assignment; the completeness of any Mortgage Loan; the performance or
enforcement of any Mortgage Loan; the compliance by the Depositors or
the Servicer with any warranty or representation made under any Basic
document or in any related document or the accuracy of any such
warranty or representation or any action of the Administrator, the
Indenture Trustee, the Custodian or the Servicer or any subservicer
taken in the name of the Owner Trustee.
(b) the Owner Trustee shall not be liable with respect to any
action taken or omitted to be taken by it in accordance with the
instructions of the Administrator, the Insurer or any
Certificateholder;
(c) no provision of this Agreement or any Basic Document shall
require the Owner Trustee to expend or risk funds or otherwise incur
any financial liability in the performance of any of its rights or
powers hereunder or under any Basic document, if the Owner Trustee
shall have reasonable grounds for believing that repayment of such
funds or adequate indemnity against such risk or liability is not
reasonably assured or provided to it;
(d) under no circumstances shall the Owner Trustee be liable
for indebtedness evidenced by or arising under any of the Basic
Documents, including the Note Principal Balance and the interest on the
Notes or the Class B-1 Certificate Balance of and interest on the
Certificates;
(e) the Owner Trustee shall not be responsible for or in
respect of any makes no representation as to the validity or
sufficiency of any provision of this Agreement or for the due execution
hereof by the Depositors or for the form, character, genuineness,
sufficiency, value or validity of any of the assets of the Trust or for
or in respect of the validity or sufficiency of the Basic documents,
the Underwriting Agreement, the Notes, the Certificates (other than the
certificate of authentication on the Certificates) or of any Mortgage
Loans or any related documents, and the Owner Trustee shall in no event
assume or incur any liability, duty or obligation to any Noteholder or
to any Certificateholder, other than as expressly provided for herein
and in the Basic Documents;
(f) the Owner Trustee shall not be liable for the default or
misconduct of the Administrator, the Indenture Trustee, the Custodian,
the Depositors or the Servicer under any of the Basic Documents or
otherwise and the Owner Trustee shall have no obligation or liability
to perform the obligations of the Trust under this Agreement or the
Basic Documents that are required to be performed by the Administrator
under the
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Administration Agreement, the Indenture Trustee under the Indenture,
the Custodian under the Custodial Agreement or the Servicer under the
Pooling and Servicing Agreement;
(g) the Owner Trustee shall be under no obligation to exercise
any of the rights or powers vested in it by this Agreement, or to
institute, conduct or defend any litigation under this Agreement or
otherwise or in relation to this agreement, the Underwriting Agreement
or any Basic Document, at the request, order or direction of any of the
Insurer or any of the Certificateholders, unless the Insurer or such
Certificateholders have offered to the Owner Trustee security or
indemnity satisfactory to it against the costs, expenses and
liabilities that may be incurred by the Owner Trustee therein or
thereby. The right of the Owner Trustee to perform any discretionary
act enumerated in this Agreement or in any Basic Document shall not be
construed as a duty, and the Owner Trustee shall not be answerable for
other than its negligence or willful misconduct in the performance of
any such act;
(h) The Owner Trustee shall have no responsibility for filing
any financing or continuation statement in any public office at any
time or to otherwise perfect or maintain the perfection of any security
interest or lien granted to it hereunder or the prepare, execute or
file any Securities and Exchange Commission filing or tax return for
the Trust or to record this Agreement or any Basic Document.
SECTION 6.4 Action upon Instruction by Certificateholders.
---------------------------------------------
(a) Subject to Section 4.4, the Certificateholders may by
written instruction direct the Owner Trustee in the management of the
Trust. such direction may be exercised at any time by written
instruction of the Certificateholders pursuant to Section 4.5.
(b) Notwithstanding the foregoing, the Owner Trustee shall not
be required to take any action hereunder or under any Basic Document if
the Owner Trustee shall have reasonably determined, or shall have been
advised by counsel, that such action is likely to result in liability
on the part of the Owner Trustee or is contrary to the terms hereof or
of any Basic Document or is otherwise contrary to law.
(c) Whenever the Owner Trustee is unable to decide between
alternative courses of action permitted or required by the terms of
this Agreement or any Basic Document, or is unsure as to the
application, intent, interpretation or meaning of any provision of this
agreement or the Basic Documents, the Owner Trustee shall promptly give
notice (in such form as shall be appropriate under the circumstances)
to the Insurer and the Certificateholders requesting instruction as to
the course of action to be adopted, and, to the extent the Owner
Trustee acts in good faith in accordance with any such instruction
received, the Owner Trustee shall not be liable on account of such
action to any Person. If the Owner Trustee shall not have received
appropriate instructions within ten days of such notice (or within such
shorter period of time as reasonably may be specified in such notice or
may be necessary under the circumstances) it may, but shall
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be under no duty to, take or refrain from taking such action which is
consistent, in its view, with this Agreement or the Basic Documents,
and as it shall deem to be the best interests of the
Certificateholders, and the Owner Trustee shall have no liability to
any Person for any such action or inaction.
SECTION 6.5 Furnishing of Documents. The Owner Trustee shall furnish
(a) to the Certificateholders, promptly upon receipt of a written request
therefor, duplicate or copies of all reports, notices, requests, demands,
certificates, financial statements and any other instruments furnished to the
Owner Trustee under the Basic Documents, and (b) to the Insurer, copies of any
reports, notices, requests, demands, certificates, financial statements, and any
other instruments relating to the Trust, the Certificates or the Notes in the
possession of the Owner Trustee, that the Insurer shall request in writing.
SECTION 6.6 Representations and Warranties of Owner Trustee. The Owner
Trustee hereby represents and warrants to the Depositors, for the benefit of the
Certificateholders and the Insurer, that:
(a) It is a banking corporation duly organized, validly
existing and in good standing under the laws of the state of its
incorporation.
(b) It has full power, authority and legal right to execute,
deliver and perform its obligations under this Agreement, and has taken
all necessary action to authorize the execution, delivery and
performance by it of this Agreement.
(c) The execution, delivery and performance by it of this
Agreement (i) shall not violate any provision of any law or regulation
governing the banking and trust powers of the Owner Trustee or any
order, writ, judgment or decree of any court, arbitrator or
governmental authority applicable to the Owner Trustee or any of its
assets, (ii) shall not violate any provision of the corporate charter
or by-laws of the Owner Trustee, or (iii) shall not violate any
provision of, or constitute, with or without notice or lapse of time, a
default under, or result in the creation or imposition of any lien on
any properties included in the Trust pursuant to the provisions of any
mortgage, indenture, contract, agreement or other undertaking to which
it is a party, which violation, default or lien could reasonably be
expected to have a materially adverse effect on the Owner Trustee's
performance or ability to perform its duties as owner Trustee under
this Agreement or on the transactions contemplated in this Agreement.
(d) This Agreement has been duly executed and delivered by the
Owner Trustee and constitutes the legal, valid and binding agreement of
the Owner Trustee, enforceable in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency,
reorganization, or other similar law affecting the enforcement of
creditors' rights in general and by general principles of equity,
regardless of whether such enforceability is considered in a proceeding
in equity or at law.
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SECTION 6.7 Reliance; Advice of Counsel.
---------------------------
(a) The Owner Trustee shall incur no liability to anyone in
acting upon any signature, instrument, notice, resolution, request,
consent, order, certificate, report, opinion, bond or other document or
paper believed by it to be genuine and believed by it to be signed by
the proper party or parties and need not investigate any fact or matter
in any such document. The Owner Trustee may accept a certified copy of
a resolution of the board of directors or other governing body of any
corporate party as conclusive evidence that such resolution has been
duly adopted by such body and that the same is in full force and
effect. As to any fact or matter the method of the determination of
which is not specifically prescribed herein, the Owner Trustee may for
all purposes hereof rely on a certificate, signed by the president or
any vice president or by the treasurer or other authorized officers of
the relevant party, as to such fact or matter, and such certificate
shall constitute full protection to the Owner Trustee for any action
taken or omitted to be taken by it in good faith in reliance thereon.
(b) In the exercise or administration of the trusts hereunder
and in the performance of its duties and obligations under this
Agreement or the Basic Documents, the Owner Trustee: (i) may act
directly or through its agents, attorneys, custodians or nominees
(including the granting of a power of attorney (x) to officers of
__________________ to execute and deliver any Basic Document,
Certificate, Note or other documents related thereto on behalf of the
Owner Trustee or (y) to the Administrator to execute any tax return of
the Trust or any document, report or other instrument to be filed with
the Securities and Exchange Commission or any state securities
commission or administration) pursuant to agreements entered into with
any of them, and the Owner Trustee shall not be liable for the conduct
or misconduct of such agents, attorneys, custodians or nominees if such
agents, attorneys, custodians or nominees shall have been selected by
the Owner Trustee with reasonable care and (ii) may consult with
counsel, accountants and other skilled professionals to be selected
with reasonable care and employed by it. The Owner Trustee shall not be
liable for anything done, suffered or omitted in good faith by it in
accordance with the opinion or advice of any such counsel, accountants
or other such Persons.
SECTION 6.8. Owner Trustee May Own Certificates and Notes. The Owner
Trustee in its individual or any other capacity may become the owner or pledgee
of Certificates or Notes and may deal with either Depositor, the Administrator,
the Indenture Trustee and the Servicer in transactions in the same manner and
with the same rights as it would have if it were not the Owner Trustee.
SECTION 6.9 Compensation and Indemnity. (a) The Owner Trustee shall
receive from the Depositors as compensation for its services hereunder such fees
as have been separately agreed upon before the date hereof between the
Depositors and the Owner Trustee, and the Owner Trustee shall be entitled to be
reimbursed by the Depositors for its other reasonable expenses hereunder,
including the reasonable compensation, expenses and disbursements of such
agents, custodians, nominees, representatives, experts and counsel as the Owner
Trustee may
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employ in connection with the exercise and performance of its rights and its
duties hereunder. The Servicer shall indemnify the Owner Trustee and its
successors, assigns, agents and servants in accordance with the provisions of
Section 8.01 of the Pooling and Servicing Agreement.
(b) The Depositors shall be jointly and severally liable as
primary obligors for, and shall indemnity the Owner Trustee and its
successors, assigns, agents and servants (collectively, the
"Indemnified Parties") from and against, any and all liabilities,
obligations, losses, damages, taxes, claims, actions and suits, and any
and all reasonable costs, expenses and disbursements (including
reasonable legal fees and expenses) of any kind and nature whatsoever
(collectively, "Expenses") which may at any time be imposed on,
incurred by, or asserted against the Owner Trustee or any Indemnified
Party in any way relating to or arising out of this Agreement, the
Basic Documents, the assets of the Trust, the administration of the
Trust or the action or inaction of the Owner Trustee hereunder, except
only that the Depositors shall not be liable for or required to
indemnify the Owner Trustee from and against Expenses arising or
resulting from the negligence or willful misconduct of the Owner
Trustee. The indemnities contained in this Section 6.9 shall survive
the resignation of the Owner Trustee, termination of the Trust or the
termination of this Agreement. Any amounts paid to the Owner Trustee
pursuant to this Article VI shall be deemed not to be a part of the
assets of the Trust immediately after such payment.
SECTION 6.10 Replacement of Owner Trustee.
-----------------------------
(a) The Owner Trustee may resign at any time and be discharged
from the trusts hereby created by giving 30 days' prior written notice
thereof to the Insurer and the Administrator. The Administrator shall
appoint a successor Owner Trustee with the consent of the Insurer by
delivering written instrument, in duplicate, to the resigning Owner
Trustee and the successor Owner Trustee. If no successor Owner Trustee
shall have been appointed and have accepted appointment within 30 days
after the giving of such notice of resignation, the resigning Owner
Trustee may petition any court of competent jurisdiction for the
appointment of a successor Owner Trustee. The Administrator shall
remove the Owner Trustee if:
(i) the Owner Trustee shall cease to be eligible in
accordance with the provisions of Section 6.13 and shall fail
to resign after written request therefor by the Administrator;
(ii) the Owner Trustee shall be adjudged bankrupt or
insolvent;
(iii) a receiver or other public officer shall be
appointed or take charge or control of the Owner Trustee or of
its property or affairs for the purposes of rehabilitation,
conservation or liquidation; or
(iv) the Owner Trustee shall otherwise be legally
incapable of acting.
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(b) If the Owner Trustee resigns or is removed or if a vacancy
exists in the office of Owner Trustee for any reason the Administrator
shall promptly appoint a successor Owner Trustee with the consent of
the Insurer by written instrument, in duplicate (one copy of which
instrument shall be delivered to the outgoing Owner Trustee so removed
and one copy to the successor Owner Trustee) and shall pay all fees and
other amounts owed to the outgoing Owner Trustee.
(c) Any resignation or removal of the Owner Trustee and
appointment of successor Owner Trustee pursuant to any of the
provisions of this Section 6.10 shall not become effective until a
written acceptance of appointment is delivered by the successor Owner
Trustee to the outgoing Owner Trustee and the Administrator and all
fees and expenses due to the outgoing Owner Trustee are paid. Any
successor Owner Trustee appointed pursuant to this Section 6.10 shall
be eligible to act in such capacity in accordance with Section 6.13
and, following compliance with the preceding sentence, shall become
fully vested with all the rights, powers, duties and obligations of its
predecessor under this Agreement, with like effect as originally named
as Owner Trustee. The Administrator shall provide notice of such
resignation or removal of the Owner Trustee to the Insurer and each of
the Rating Agencies.
(d) The predecessor Owner Trustee shall upon payment of its
fees and expenses deliver to the successor Owner Trustee all documents
and statements and monies held by it under this Agreement. The
Administrator and the predecessor Owner Trustee shall execute and
deliver such instruments and do such other things as may reasonably be
required for fully and certainly vesting the confirming in the
successor Owner Trustee all such rights, powers, duties and
obligations.
(e) Upon acceptance of appointment by a successor Owner
Trustee pursuant to this Section 6.10, the Administrator (or if the
Administrator fails to so notify, the successor Owner Trustee, at the
expense of the Administrator) shall mail notice of the successor of
such Owner Trustee to all Certificateholders, the Indenture Trustee,
the Noteholders, the Insurer and each of the Rating Agencies.
SECTION 6.11 Merger or Consolidation of Owner Trustee. Any corporation
into which the Owner Trustee may be merged or converted or with which it may be
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Owner Trustee shall be a party, or any corporation
succeeding to all or substantially all of the corporate trust business of the
Owner Trustee, shall be the successor of the Owner Trustee hereunder, provided
such corporation shall be eligible pursuant to Section 6.13, and without the
execution or filing of any instrument or any further act on the part of any of
the parties hereto; provided, however, that the Owner Trustee shall mail notice
of such merger or consolidation to the Insurer and each of the Rating Agencies.
SECTION 6.12 Appointment of Co-Trustee or Separate Trustee.
---------------------------------------------
(a) Notwithstanding any other provisions of this Agreement, at
any time, for the purpose of meeting any legal requirement of any
jurisdiction in which any part of the
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assets of the Trust or any Mortgaged Property may at the time be
located, the Administrator and the Owner Trustee (with the consent of
the Insurer) acting jointly shall have the power and shall execute and
deliver all instruments to appoint one or more Persons approved by the
Owner Trustee and the Insurer to act as co-trustee, jointly with the
Owner Trustee, or as separate trustee or trustees, of all or any part
of the assets of the Trust, and to vest in such Person, in such
capacity, such title to the Trust, or any part thereof, and, subject to
the other provisions of this Section 6.12, such powers, duties,
obligations, rights and trusts as the Administrator and the Owner
Trustee may consider necessary or desirable. If the Administrator shall
not have joined in such appointment within 15 days after the receipt by
it of a request so to do, the Owner Trustee (with the consent of the
Insurer) shall have the power to make such appointment. No co-trustee
or separate trustee under this Agreement shall be required to meet the
terms of eligibility as a successor trustee pursuant to Section 6.13
and no notice of the appointment of any co-trustee or separate trustee
shall be required pursuant to Section 6.10.
(b) Each separate trustee and co-trustee shall, to the extent
permitted by law, be appointed and act subject to the following
provisions and conditions:
(i) all rights, powers, duties and obligations
conferred or imposed upon the Owner Trustee shall be conferred
upon and exercised or performed by the Owner Trustee, and such
separate trustee or co-trustee jointly (it being understood
that such separate trustee or co-trustee is not authorized to
act separately without the Owner Trustee joining in such act),
except to the extent that under any law of any jurisdiction in
which any particular act or acts are to be performed, the
Owner Trustee shall be incompetent or unqualified to perform
such act or acts, in which event such rights, powers, duties
and obligations (including the holding of title to the Trust
or any portion thereof in any such jurisdiction) shall be
exercised and performed singly by such separate trustee or
co-trustee, but solely at the direction of the Owner Trustee;
(ii) no trustee under this Agreement shall be
personally liable by reason of any act or omission of any
other trustee under this Agreement; and
(iii) the Administrator and the Owner Trustee acting
jointly may at any time accept the resignation of or remove
any separate trustee or co-trustee; provided, however, that if
the Administrator is in default under the Administration
Agreement, the Owner Trustee acting alone may accept the
resignation of or remove any separate trustee or co-trustee.
(c) Any notice, request or other writing given to the Owner
Trustee shall be deemed to have been given to each of the then separate
trustees and co-trustees, as effectively as if given to each of them.
Every instrument appointing any separate trustee or co-trustee shall
refer to this Agreement and the conditions of this Article. Each
separate trustee and co-trustee, upon its acceptance of the trusts
conferred, shall be
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vested with the estates or property specified in its instrument of
appointment, either jointly with the Owner Trustee or separately, as
may be provided therein, subject to all the provisions of this
Agreement, specifically including every provision of this Agreement
relating to the conduct of, affecting the liability of, or affording
protection to, the Owner Trustee. Each such instrument shall be filed
with the Owner Trustee and a copy thereof given to the Administrator
and the Insurer.
(d) Any separate trustee or co-trustee may at any time appoint
the Owner Trustee as its agent or attorney-in-fact with full power and
authority, to the extent not prohibited by law, to do any lawful act
under or in respect of this Agreement on its behalf and in its name. If
any separate trustee or co-trustee shall die, become incapable of
acting, resign or be removed, all of its estates, properties, rights,
remedies and trusts shall vest in and be exercised by the Owner
Trustee, to the extent permitted by law, without the appointment of a
new or successor trustee.
SECTION 6.13 Eligibility Requirements for Owner Trustee. The Owner
Trustee shall at all times: (a) be a corporation satisfying the provisions of
Section 3807(a) of the Business Trust Statute; (b) be authorized to exercise
corporate trust powers; (c) have a combined capital and surplus of at least
$50,000,000 and be subject to supervision or examination by federal or state
authorities; and (d) have (or have a parent which has) a long-term unsecured
debt rating of at least BBB by Standard & Poor's Corporation and at least Baa2
by Moody's Investors Service, Inc. and be acceptable to the Insurer. If such
corporation shall publish reports of condition at least annually, pursuant to
law or to the requirements of the aforesaid supervising or examining authority,
then for the purpose of this Section 6.13, the combined capital and surplus of
such corporation shall be deemed to be its combined capital and surplus as set
forth in its most recent report of condition so published. If at any time the
Owner Trustee shall cease to be eligible in accordance with the provisions of
this Section 6.13, the Owner Trustee shall resign immediately in the manner and
with the effect specified in Section 6.10.
SECTION 6.14 Underwriting Agreement. For purposes of this Article VI,
the term "Basic Document" shall be deemed to include the Underwriting Agreement.
ARTICLE VII
TERMINATION OF TRUST AGREEMENT
SECTION 7.1 Termination of Trust Agreement.
------------------------------
(a) This Agreement (other than Article VI) and the Trust shall
terminate and be of no further force or effect on the earlier of: (i)
the final distribution by the Owner Trustee of all moneys or other
property or proceeds of the assets of the Trust in accordance with the
terms of the Indenture, the Pooling and Servicing Agreement (including
the exercise of the Class B-2 Certificateholder(s) of its option to
purchase the Mortgage Loans pursuant to Section 10.01 of the Pooling
and Servicing Agreement) and Article V or (ii) at the time provided in
Section 7.2. The bankruptcy, liquidation, dissolution, death or
incapacity of any Certificateholder, other than a Depositor as
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described in Section 7.2, shall not (x) operate to terminate this
Agreement or the Trust, nor (y) entitle such Certificateholder's legal
representatives or heirs to claim an accounting or to take any action
or proceeding in any court for a partition or winding up of all or any
part of the Trust or the assets of the Trust or (z) otherwise affect
the rights, obligations and liabilities of the parties hereto.
(b) Except as provided in Section 7.1(a), neither any
Depositor nor any Certificateholder shall be entitled to revoke or
terminate the Trust.
(c) Notice of any termination of the Trust, specifying the
Payment Date upon which the Certificateholders shall surrender their
Certificates to the Paying Agent for payment of the final distribution
and cancellation, shall be given by the Owner Trustee by letter to the
Insurer and the Certificateholders mailed within five Business Days of
receipt of notice of such termination from the Servicer given pursuant
to subsection 10.01 of the Pooling and Servicing Agreement, stating:
(i) the Payment Date upon or with respect to which final payment of the
Certificates shall be made upon presentation and surrender of the
Certificates at the office of the Paying Agent therein designated; (ii)
the amount of any such final payment; and (iii) that the Record Date
otherwise applicable to such Payment Date is not applicable, payments
being made only upon presentation and surrender of the Certificates at
the office of the Paying Agent therein specified. The Owner Trustee
shall give such notice to the Certificate Registrar (if other than the
Owner Trustee) and the Paying Agent at the time such notice is given to
Certificateholders. Upon presentation and surrender of the
Certificates, the Paying Agent shall cause to be distributed to
Certificateholders amounts distributable on such Payment Date pursuant
to Section 5.2.
(d) If all of the Certificateholders shall not surrender their
Certificates for cancellation within six months after the date
specified in the above mentioned written notice, the Owner Trustee
shall give a second written notice to the remaining Certificateholders
to surrender their Certificates for cancellation and receive the final
distribution with respect thereto. If within one year after the second
notice all the Certificates shall not have been surrendered for
cancellation, the Owner Trustee may take appropriate steps, or may
appoint an agent to take appropriate steps, to contact the remaining
Certificateholders concerning surrender of their Certificates, and the
cost thereof shall be paid out of the funds and other assets that shall
remain subject to this Agreement. Subject to applicable law with
respect to escheat of funds, any funds remaining in the Trust after
exhaustion of such remedies in the preceding sentence shall be deemed
property of the Depositors and distributed by the Owner Trustee to the
Depositors.
(e) Each Certificateholder is required, and hereby agrees, to
return to the Owner Trustee, any Certificate with respect to which the
Owner Trustee has made the final distribution due thereon. Any such
Certificate as to which the Owner Trustee has made the final
distribution thereon shall be deemed canceled and shall no longer be
outstanding for any purpose of this Agreement, whether or not such
Certificate is ever returned to the Owner Trustee.
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(f) Upon the winding up of the Trust and its termination, the
Owner Trustee shall cause the Certificate or Trust to be canceled by
filing a certificate of cancellation with the Secretary of State in
accordance with the provisions of Section 3810 of the Business Trust
Statute.
SECTION 7.2 Dissolution upon Bankruptcy of either Depositor. This
Agreement shall be terminated in accordance with Section 7.1 90 days after the
occurrence of an Insolvency Event with respect to either Depositor, unless,
before the end of such 90 day period, the Owner Trustee shall have received
written instructions from (a) each of the Certificateholders (other than the
Depositor with respect to which an Insolvency Event has occurred) and (b) each
of the Noteholders, to the effect that each such party disapproves of the
liquidation of the Mortgage Loans and termination of the Trust. Promptly after
the occurrence of any Insolvency Event with respect to either Depositor: (i)
such Depositor shall give the Insurer, the Indenture Trustee, the Rating
Agencies and the Owner Trustee written notice of such Insolvency Event; (ii) the
Owner Trustee shall, upon the receipt of such written notice from such
Depositor, give prompt written notice to the Certificateholders and the
Indenture Trustee of the occurrence of such event and (iii) the Indenture
Trustee shall, upon receipt of written notice of such Insolvency Event from the
Owner Trustee or such Depositor, give prompt written notice to the Noteholders
of the occurrence of such event; provided, however, that any failure to give a
notice required by this sentence shall not prevent or delay in any manner a
termination of the Trust pursuant to the first sentence of this Section 7.2.
Upon a termination pursuant to this Section 7.2, the Owner Trustee shall direct
the Indenture Trustee promptly to sell the assets of the Trust (other than the
Accounts and the Certificate Distribution Account) in a commercially reasonable
manner and on commercially reasonable terms. The proceeds of any such sale,
disposition or liquidation of the assets of the Trust shall be treated as
collections on the Mortgage Loans and deposited in the Principal and Interest
Account pursuant to Section 4.03 of the Pooling and Servicing Agreement.
ARTICLE VIII
AMENDMENTS
SECTION 8.1 Amendments Without Consent of Certificateholders or
Noteholders. This Agreement may be amended by each Depositor and the Owner
Trustee without the consent of any of the Noteholders or the Certificateholders
(but with the prior written consent of the Insurer and prior notice to each of
the Rating Agencies and the Administrator), to (i) cure any ambiguity, (ii)
correct or supplement any provision in this Agreement that may be defective or
inconsistent with any other provision in this Agreement, (iii) add or supplement
any credit enhancement for the benefit of the Noteholders or the
Certificateholders (provided that if any such addition shall affect any class of
Certificateholders differently than any other class of Certificateholders, then
such addition shall not, as evidenced by an Opinion of Counsel, adversely affect
in any material respect the interests of any class of Certificateholders), (iv)
add to the covenants, restrictions or obligations of the Depositors or the Owner
Trustee, (v) evidence and provide for the acceptance of the appointment of a
successor trustee with respect to the assets of the Trust and add to or change
any provisions as shall be necessary to facilitate the administration of the
trusts hereunder by more than one trustee pursuant to Article VI, and (vi) add,
change or eliminate any other provision of this Agreement in any manner that
shall not, as
27
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evidenced by an Opinion of Counsel, adversely affect in any material respect the
interests of the Noteholders or the Certificateholders.
SECTION 8.2 Amendments With Consent of Certificateholders and
Noteholders. This Agreement may be amended from time to by the Depositors and
the Owner Trustee with the consent of the Insurer and a Majority in Voting
Interest of Outstanding Notes and a Majority in Voting Interest of Class B-1
Certificates (which consent, whether given pursuant to this Section 8.2(b) or
pursuant to any other provision of this Agreement, shall be conclusive and
binding on such Person and on all future holders of such Notes or Certificates
and of any Notes or Certificates issued upon the transfer thereof or in exchange
thereof or in lieu thereof whether or not notation of such consent is made upon
the Notes or Certificates) and the consent of the Insurer for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of this Agreement, or of modifying in any manner the rights of the
Noteholders or the Certificateholders; provided, however, that no such amendment
shall (a) increase or reduce in any manner the amount of, or accelerate or delay
the timing of, collections of payments on Mortgage Loans or distributions that
shall be required to be made on any Note or Certificate, the Note Interest Rate
or the Class B-1 Pass Through Rate or (b) reduce the aforesaid percentage
required to consent to any such amendment, without the consent of the Holders of
all Outstanding Notes and all of the Certificates then outstanding; provided,
further, that Annex A hereto may only be amended pursuant to Section 11 thereof.
Each Depositor shall furnish written notice to each of the Rating Agencies prior
to obtaining consent to any proposed amendment under this Section 8.2.
SECTION 8.3 Form of Amendments.
------------------
(a) Promptly after the execution of any amendment, supplement
or consent pursuant to Section 8.1 or 8.2, each Depositor shall furnish
written notification of the substance of such amendment or consent to
each Certificateholder, the Indenture Trustee, the Insurer and each
Rating Agency.
(b) It shall not be necessary for the consent of
Certificateholders, the Noteholders or the Indenture Trustee pursuant
to Section 8.2 to approve the particular form of any proposed amendment
or consent, but it shall be sufficient if such consent shall approve
the substance thereof. The manner of obtaining such consents (and any
other consents of Certificateholders provided for in this Agreement or
in any other Basic Document) and of evidencing the authorization of the
execution thereof by Certificateholders shall be subject to such
reasonable requirements as the Owner Trustee may prescribe.
(c) Promptly after the execution of any amendment to the
Certificate of Trust, the Owner Trustee shall cause the filing os such
amendment with the Secretary of State.
(d) Prior to the execution of any amendment to this Agreement
or the Certificate of Trust, the Owner Trustee shall be entitled to
receive and rely upon an Opinion of Counsel stating that the execution
of such amendment is authorized or permitted by this Agreement and that
all conditions precedent to the execution and
28
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delivery of such amendment have been satisfied. The Owner Trustee may,
but shall not be obligated to, enter into any such amendment which
affects the Owner Trustee's own rights, duties or immunities under this
Agreement or otherwise.
ARTICLE IX
MISCELLANEOUS
SECTION 9.1 No Legal Title to Trust Assets. The Certificateholders
shall not have legal title to any part of the assets of the Trust. The
Certificateholders shall be entitled to receive distributions with respect to
their undivided ownership interest therein only in accordance with Articles V
and VII. No transfer, by operation of law or otherwise, of any right, title, and
interest of the Certificateholders to and in their ownership interest in the
assets of the Trust shall operate to terminate This Agreement or the trusts
hereunder or entitle any transferee to an accounting or to the transfer to it of
legal title to any part of the assets of the Trust.
SECTION 9.2 Limitations on Rights of Others. Except for Section 2.7,
the provisions of this Agreement are solely for the benefit of the Insurer, the
Owner Trustee, the Depositors, the Certificateholders, the Administrator and, to
the extent expressly provided herein, the Indenture Trustee and the Noteholders,
and nothing in this Agreement, whether express or implied, shall be construed to
give to any other Person any legal or equitable right, remedy or claim in the
assets of the Trust or under or in respect of this Agreement or any covenants,
conditions or provisions contained herein.
SECTION 9.3 Notices.
-------
(a) All demands, notices and communications hereunder shall be
in writing and shall be deemed to have been duly given if personally
delivered at or mailed by overnight mail, certified mail or registered
mail, postage prepaid, to (i) in the case of the Servicers,
_____________________________________________, Attention: _________
_______________, or such other addresses as may hereafter be furnished
to the Certificateholders and the Noteholders in writing by the
Servicers, (ii) in the case of each Depositor, c/o AMRESCO Residential
Mortgage Corporation, ___________________
______________________________, Attention: _______________
_______________, or such other addresses as may hereafter be furnished
to the Certificateholders and the Noteholders in writing by such
Depositor, (iii) Owner Trustee, _______________, Attention: AMRESCO
Residential Securities Corporation Mortgage Loan Trust 199__- __, (iv)
in the case of the Certificateholders, as set forth in the Certificate
Register, (vi) in the case of the Indenture Trustee, _____________,
Attention: AMRESCO Residential Securities Corporation Mortgage Loan
Trust 199__-__, (v) in the case of the Noteholders, as set forth in the
Note Register, (vi) in the case of Moody's, 99 Church Street, New York,
New York 10007, Attention: Home Equity Monitoring Group, (vii) in the
case of S&P, 26 Broadway, New York, New York 10004, Attention:
__________, (viii) in the case of the Insurer,
_____________________________________________, _______________,
_______________, _______________ _______________ , Attention: AMRESCO
Residential Securities Corporation Mortgage Loan Trust 199__-__ and
(ix)
29
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in the case of the Account Party, at the address specified by such
Account Party. Any such notices shall be deemed to be effective with
respect to any party hereto upon the receipt of such notice by such
party, except that notices to the Certificateholders or Noteholders
shall be effective upon mailing or personal delivery.
(b) Any notice required or permitted to be given to a
Certificateholder or Noteholder shall be given by first-class mail,
postage prepaid, at the address of such Holder as shown in the
Certificate Register or Note Register, as the case may be. Any notice
so mailed within the time prescribed in this Agreement shall be
conclusively presumed to have been duly given, whether or not the
Certificateholder receives such notice.
SECTION 9.4 Severability. If any one or more of the covenants,
agreements, provisions or terms of this Agreement shall be for any reason
whatsoever held invalid, then such covenants, agreements, provisions or terms
shall be deemed severable from the remaining covenants, agreements, provisions
or terms of this Agreement and shall in no way affect the validity or
enforceability of the other provisions of this Agreement or of the Certificates
or the rights of the holders thereof.
SECTION 9.5 Counterparts. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument.
SECTION 9.6 Successors and Assigns. All covenants and agreements
contained herein shall be binding upon, and inure to the benefit of, the
Depositors, the Owner Trustee and each Certificateholder and their respective
successors and permitted assigns, all as herein provided. Any request, notice,
direction, consent, waiver or other instrument or action by a Certificateholder
shall bind the successors and assigns of such Certificateholder.
SECTION 9.7 No Petition Covenant. Notwithstanding any prior termination
of this Agreement, the Trust (or the Owner Trustee on behalf of the Trust), each
Certificateholder or Certificate Owner, the Indenture Trustee and each
Noteholder or Note Owner shall not acquiesce, petition or otherwise invoke or
cause any Depositor or the Trust to invoke the process of any court or
governmental authority for the purpose of commencing or sustaining a case
against such Depositor or the Trust under any federal or state bankruptcy,
insolvency or similar law or appointing a receiver, liquidator, assignee,
trustee, custodian, sequestrator or other similar official of such Depositor or
the Trust or any substantial part of its property, or ordering the winding up or
liquidation of the affairs of such Depositor or the Trust.
SECTION 9.8 No Recourse. Each Certificateholder by accepting a
Certificate acknowledges that such Certificateholder's Certificates represent
beneficial interests in the Trust only and do not represent interests in or
obligations of the Depositors, the Servicer, the Representative, the
Administrator, the Owner Trustee, the Indenture Trustee or any Affiliate thereof
and no recourse may be had against such parties or their assets, except as may
be expressly set forth or contemplated in this Agreement, the Certificates or
the Basic Documents.
30
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SECTION 9.9 Headings. The headings of the various Articles and Sections
herein are for convenience of reference only and shall not define or limit any
of the terms or provisions hereof.
SECTION 9.10 Governing Law. THIS AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REFERENCE TO ITS
CONFLICT OF LAW PROVISIONS, AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE
PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS.
SECTION 9.11 Certificate Transfer Restrictions. Neither the Class B-1
Certificates nor the Class B-2 Certificates may be acquired by or for the
account of (i) an employee benefit plan (as defined in Section 3(3) of ERISA)
that is subject to the provisions of Title I of ERISA, (ii) a plan described in
Section 4975(e)(1) of the Code or (iii) any entity whose underlying assets
include plan assets by reason of a plan's investment in the entity (each, a
"Benefit Plan"). By accepting and holding Certificate, the Holder thereof and
the Certificate Owner shall each be deemed to have represented and warranted
that it is not a Benefit Plan and, if requested in writing to do os by the
Depositors, with a copy to the Certificate Registrar and the Owner Trustee, the
Certificateholder and the Certificate Owner shall execute and deliver to the
Certificate Registrar an Undertaking Letter in the form set forth in Exhibit D.
The Class B-1 Certificates are also subject to the minimum denomination
specified in Section 3.4(c).
SECTION 9.12 The Insurer. Any right conferred to the Issuer hereunder
shall be suspended during any period in which the Insurer is in default in its
payment obligations under the Insurance Policy, and its rights hereunder during
such period shall vest in the Majority in Voting Interest of the Class B-1
Certificates. The Servicer shall give the Owner Trustee notice of such event. At
such time as the Notes are no longer outstanding under the Indenture and the
Class B-1 Certificates are no longer outstanding hereunder, and no amounts owned
to the Insurer under any Basic Document remain unpaid, the Insurer's rights
hereunder shall terminate. The Insurer is an intended third party beneficiary of
this Agreement.
31
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IN WITNESS WHEREOF, the parties hereto have caused this Trust Agreement
to be duly executed by their respective officers hereunto duly authorized, as of
the day and year first above written.
____________________,
as Owner Trustee
By:_____________________________
Name:
Title:
DEPOSITORS
__________
AMRESCO RESIDENTIAL SECURITIES CORPORATION
By:_____________________________
Name:
Title:
AMRESCO RESIDENTIAL MORTGAGE CORPORATION
By:_____________________________
Name:
Title
Acknowledged and Accepted:
_____________________________
as Servicer
By:_____________________________
Name:
Title:
_____________________________
as Administrator
By:_____________________________
Name:
Title:
<PAGE>
EXHIBIT B
CERTIFICATE OF TRUST OF
AMRESCO Residential Securities Corporation Mortgage Loan Trust 199__-__
-----------------------------------------------------------------------
THIS Certificate of Trust of AMRESCO Residential Securities Corporation Mortgage
Loan Trust 199__-__ (the "Trust") dated as of ___________________ 1, 199__, is
being duly executed and filed by _______________, a ______________, as trustee,
to form a business trust under the Delaware Business Trust Act (12 Del. Code,
ss.3801 et seq.).
1. Name. The name of the business trust formed hereby is
AMRESCO Residential Securities Corporation Mortgage Loan Trust 199__-__.
2. Delaware Trustee. The name and business address of the trustee of the Trust
in the State of Delaware is _________________________________, Attention:
__________________.
3. This Certificate of Trust shall be effective as of its
filing. IN WITNESS WHEREOF, the undersigned, being the sole trustee of the
Trust, has executed this Certificate of Trust as of the date first above
written.
_____________,
not in its individual capacity
but solely as Owner Trustee
By:_____________________________
Name:
Title:
------------------------------------------------------------------------
_____% MORTGAGE LOAN BACKED NOTES DUE ____________________
INDENTURE
between
AMRESCO RESIDENTIAL SECURITIES CORPORATION
MORTGAGE LOAN TRUST 199_-_
______________________________
AS OWNER TRUSTEE
______________________________
AS INDENTURE TRUSTEE
Dated as of _______________, 199__
AMRESCO RESIDENTIAL SECURITIES CORPORATION
MORTGAGE LOAN TRUST 199_-_
------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
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<S> <C>
ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE............................................................ 2
SECTION 1.1 Definitions.......................................................................... 2
SECTION 1.2 Incorporation by Reference of Trust Indenture Act.................................... 2
ARTICLE II THE NOTES............................................................................................ 3
SECTION 2.1 Form................................................................................. 3
SECTION 2.2 Execution, Authentication and Delivery............................................... 3
SECTION 2.3 Temporary Notes...................................................................... 4
SECTION 2.4 Registration; Registration of Transfer and Exchange of Notes......................... 4
SECTION 2.5 Mutilated, Destroyed, Lost or Stolen Notes........................................... 5
SECTION 2.6 Persons Deemed Noteholders........................................................... 6
SECTION 2.7 Payment of Principal and Interest.................................................... 7
SECTION 2.8 Cancellation of Notes................................................................ 8
SECTION 2.9 Release of Collateral................................................................ 8
SECTION 2.10 Book-Entry Notes..................................................................... 8
SECTION 2.11 Notices to Depository................................................................ 9
SECTION 2.12 Definitive Notes..................................................................... 9
SECTION 2.13 Depositors or Affiliates as Noteholder............................................... 10
SECTION 2.14 Tax Treatment........................................................................ 10
ARTICLE III COVENANTS........................................................................................... 10
SECTION 3.1 Note Payment Account; Payment of Principal and Interest.............................. 10
SECTION 3.2 Maintenance of Agency Office......................................................... 11
SECTION 3.3 Money for Payments To Be Held in Trust............................................... 11
SECTION 3.4 Existence............................................................................ 12
SECTION 3.5 Protection of the Assets of the Trust: Acknowledgment of Pledge...................... 13
SECTION 3.6 Opinions as to Trust Assets.......................................................... 13
SECTION 3.7 Performance of Obligations: Servicing of Mortgage Loans.............................. 14
SECTION 3.8 Negative Covenants................................................................... 15
SECTION 3.9 Annual Statement as to Compliance.................................................... 16
SECTION 3.10 Consolidation, Merger, etc., of Issuer; Disposition of Trust Assets.................. 16
SECTION 3.11 Successor or Transferee.............................................................. 18
SECTION 3.12 No Other Business.................................................................... 18
SECTION 3.13 No Borrowing......................................................................... 18
SECTION 3.14 Guarantees, Loans, Advances and Other Liabilities.................................... 19
SECTION 3.15 Servicer's Obligations............................................................... 19
SECTION 3.16 Capital Expenditures................................................................. 19
SECTION 3.17 Removal of Administrator............................................................. 19
SECTION 3.18 Restricted Payments.................................................................. 19
SECTION 3.19 Notice of Events of Default and Other Events......................................... 20
SECTION 3.20 Further Instruments and Acts......................................................... 20
SECTION 3.21 Representations and Warranties by the Issuer to the Indenture Trustee................ 20
ARTICLE IV SATISFACTION AND DISCHARGE........................................................................... 20
SECTION 4.1 Satisfaction and Discharge of Indenture.............................................. 20
SECTION 4.2 Application of Trust Money........................................................... 22
SECTION 4.3 Repayment of Moneys Held by Paying Agent............................................. 22
SECTION 4.4 Duration of Appointment of Indenture Trustee......................................... 22
<PAGE>
ARTICLE V DEFAULT AND REMEDIES.................................................................................. 22
SECTION 5.1 Events of Default.................................................................... 22
SECTION 5.2 Acceleration of Maturity; Rescission and Annulment................................... 23
SECTION 5.3 Collection of Indebtedness and Suits for Enforcement by Indenture Trustee............ 24
SECTION 5.4 Remedies; Priorities................................................................. 26
SECTION 5.5 Optional Preservation of the Assets of the Trust..................................... 28
SECTION 5.6 Limitation of Suits.................................................................. 28
SECTION 5.7 Unconditional Rights of Noteholders To Receive Principal and Interest................ 29
SECTION 5.8 Restoration of Rights and Remedies................................................... 29
SECTION 5.9 Rights and Remedies Cumulative....................................................... 29
SECTION 5.10 Delay or Omission Not a Waiver....................................................... 29
SECTION 5.11 Control by the Insurer............................................................... 30
SECTION 5.12 Waiver of Past Defaults.............................................................. 30
SECTION 5.13 Undertaking for Costs................................................................ 31
SECTION 5.14 Waiver of Stay or Extension Laws..................................................... 31
SECTION 5.15 Action on Notes...................................................................... 31
SECTION 5.16 Performance and Enforcement of Certain Obligations................................... 32
ARTICLE VI THE INDENTURE TRUSTEE................................................................................ 33
SECTION 6.1 Duties of Indenture Trustee.......................................................... 33
SECTION 6.2 Certain Matters Affecting the Indenture Trustee...................................... 35
SECTION 6.3 Indenture Trustee Not Liable for Notes or Mortgage Loans............................. 36
SECTION 6.4 Indenture Trustee May Own Notes...................................................... 36
SECTION 6.5 Indenture Trustee's Fees and Expenses................................................ 37
SECTION 6.6 Eligibility; Disqualification........................................................ 37
SECTION 6.7 Resignation and Removal of the Indenture Trustee..................................... 38
SECTION 6.8 Successor Trustee.................................................................... 38
SECTION 6.9 Merger or Consolidation of Indenture Trustee......................................... 39
SECTION 6.10 Appointment of Co-Indenture Trustee or Separate Indenture Trustee.................... 39
SECTION 6.11 Protection of Trust Assets........................................................... 40
SECTION 6.12 Notice of Defaults................................................................... 41
SECTION 6.13 Reports to Holders................................................................... 41
SECTION 6.14 Preferential Collection of Claims Against Issuer..................................... 42
SECTION 6.15 Representations and Warranties of Indenture Trustee.................................. 42
SECTION 6.16 Indenture Trustee May Enforce Claims Without Possession of Notes..................... 42
SECTION 6.17 Suit for Enforcement................................................................. 43
SECTION 6.18 Appointment of Custodians............................................................ 43
ARTICLE VII NOTEHOLDERS' LISTS AND REPORTS...................................................................... 43
SECTION 7.1 Issuer To Furnish Indenture Trustee Names and Addresses of Noteholders............... 43
SECTION 7.2 Preservation of Information, Communications to Noteholders........................... 43
SECTION 7.3 Reports by Issuer.................................................................... 44
SECTION 7.4 Reports by Trustee................................................................... 44
ARTICLE VIII ACCOUNTS, DISBURSEMENTS AND RELEASES............................................................... 45
SECTION 8.1 Collection of Money.................................................................. 45
SECTION 8.2 Accounts............................................................................. 45
SECTION 8.3 General Provisions Regarding Accounts................................................ 46
SECTION 8.4 Release of Trust Assets.............................................................. 47
SECTION 8.5 Opinion of Counsel................................................................... 47
ARTICLE IX SUPPLEMENTAL INDENTURES.............................................................................. 47
SECTION 9.1 Supplemental Indentures Without Consent of Noteholders............................... 47
SECTION 9.2 Supplemental Indentures With Consent of the Noteholders.............................. 49
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SECTION 9.3 Execution of Supplemental Indentures................................................. 50
SECTION 9.4 Effect of Supplemental Indenture..................................................... 50
SECTION 9.5 Conformity with Trust Indenture Act.................................................. 51
SECTION 9.6 Reference in Notes to Supplemental Indentures........................................ 51
ARTICLE X REDEMPTION OF NOTES................................................................................... 51
SECTION 10.1 Redemption........................................................................... 51
SECTION 10.2 Form of Redemption Notice............................................................ 52
SECTION 10.3 Notes Payable on Payment Date and Special Redemption Date............................ 52
ARTICLE XI MISCELLANEOUS........................................................................................ 53
SECTION 11.1 Compliance Certificates and Opinions, etc............................................ 53
SECTION 11.2 Form of Documents Delivered to Indenture Trustee..................................... 54
SECTION 11.3 Acts of Noteholders.................................................................. 55
SECTION 11.4 Notices.............................................................................. 56
SECTION 11.5 Notices to Noteholders; Waiver....................................................... 56
SECTION 11.6 Alternate Payment and Notice Provisions.............................................. 57
SECTION 11.7 Conflict with Trust Indenture Act.................................................... 57
SECTION 11.8 Effect of Headings and Table of Contents............................................. 57
SECTION 11.9 Successors and Assigns............................................................... 57
SECTION 11.10 Separability......................................................................... 58
SECTION 11.11 Benefits of Indenture................................................................ 58
SECTION 11.12 Legal Holidays....................................................................... 58
SECTION 11.13 GOVERNING LAW........................................................................ 58
SECTION 11.14 Counterparts......................................................................... 58
SECTION 11.15 Recording of Indenture............................................................... 58
SECTION 11.16 No Recourse.......................................................................... 59
SECTION 11.17 No Petition.......................................................................... 59
SECTION 11.18 Inspection........................................................................... 59
SECTION 11.19 The Insurer.......................................................................... 60
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INDENTURE, dated as of ___________, 199__, between AMRESCO RESIDENTIAL
SECURITIES CORPORATION MORTGAGE LOAN TRUST 199__-__, a Delaware business trust
(the "Issuer") and _______________________________________, a national banking
association, as trustee and not in its individual capacity (the "Indenture
Trustee").
Each party agrees as follows for the benefit of the other party and for
the equal and ratable benefit of the Holders of the Issuer's ______% Mortgage
Loan Backed Notes due _____________________ (the "Notes"):
GRANTING CLAUSE
The Issuer hereby Grants to the Indenture Trustee at the Closing Date,
as trustee for the benefit of the Noteholders and (only to the extent expressly
provided herein) the Certificateholders, all of the Issuer's right, title and
interest in, to and under: (a) the Mortgage Loans (other than any principal and
interest payments due thereon on or prior to the Cut-Off Date on any Mortgage
Loan that is current as of the Cut-Off Date) listed in Schedules ____ and ____
to this Agreement which the Depositor is causing to be delivered to the Trustee
herewith (and all substitutions therefor), together with the related Mortgage
Loan documents and the Depositor's interest in any Property which secured a
Mortgage Loan but which has been acquired by foreclosure or deed in lieu of
foreclosure, and all payments thereon and proceeds of the conversion, voluntary
or involuntary, of the foregoing; (b) such amounts as may be held by the Trustee
in the Certificate Account, the Pre-Funding Account and the Capitalized Interest
Account together with investment earnings on such amounts and such amounts as
may be held in the name of the Trustee in the Principal and Interest Account, if
any, exclusive of investment earnings thereon (except as otherwise provided
herein), whether in the form of cash, instruments, securities or other
properties (including any Eligible Investments held by the Servicers); (c) the
Certificate Insurance Policy issued under the Insurance Agreement; (d) proceeds
of all the foregoing (including, but not by way of limitation, all proceeds of
any mortgage insurance, hazard insurance and title insurance policy relating to
the Mortgage Loans, cash proceeds, accounts, accounts receivable, notes, drafts,
acceptances, chattel paper, checks, deposit accounts, rights to payment of any
and every kind, and other forms of obligations and receivables which at any time
constitute all or part of or are included in the proceeds of any of the
foregoing) to pay the Owners and the Certificate Insurer as specified herein;
and (e) certain of the Seller's rights under the Transfer Agreements and Interim
Servicing Agreements that are being assigned to the Trust hereunder ((a)-(e)
above shall be collectively referred to herein as the "Collateral").
The foregoing Grant is made in trust to secure the payment of principal
of and interest on, and any other amounts owing in respect of, the Notes,
equally and ratably without prejudice, priority or distinction, and to secure
compliance with the provisions of this Indenture, all as provided in this
Indenture.
The Indenture Trustee, as trustee on behalf of the Noteholders,
acknowledges such Grant and the pledge and assignment to it of the Spread
Account pursuant to Section _________ of the Pooling and Servicing Agreement,
and thereby accepts the trusts under this Indenture in accordance with the
provisions of this Indenture. In furtherance of such Grant, the Indenture
1
<PAGE>
Trustee acknowledges delivery and receipt of the Mortgage Files, including each
of the Mortgage Loan documents set forth in Sections ______ and ______ of the
Pooling and Servicing Agreement, which provisions are incorporated by reference
as if more particularly set forth herein. The Indenture Trustee shall execute
and deliver on the Closing Date an acknowledgement of receipt of, for each
Mortgage Loan, the items listed in Section ______, ______, ______ and ______ of
the Pooling and Servicing Agreement, in the form attached as Exhibit A to the
Pooling and Servicing Agreement, and declares that it will hold such documents
and any amendments, replacements or supplements thereto, as well as any other
assets delivered to it in trust upon and subject to the conditions of the
Indenture for the benefit of the Noteholders and, to the extent set forth in the
Pooling and Servicing Agreement and herein, for the benefit of the
Certificateholders.
ARTICLE I
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.1 Definitions. Certain capitalized terms used in this
Indenture shall have the respective meanings assigned them in Article I of the
Pooling and Servicing Agreement dated as of _________________, 199__ (the
"Pooling and Servicing Agreement") among the Issuer, the Servicers, AMRESCO
Residential Mortgage Corporation and AMRESCO Residential Securities Corporation,
as Depositors (the "Depositors"). All references in this Indenture to Articles,
Sections, subsections and exhibits are to the same contained in or attached to
this Indenture unless otherwise specified. All terms defined in this Indenture
shall have the defined meanings when used in any certificate, notice, Note or
other document made or delivered pursuant hereto unless otherwise defined
therein.
SECTION 1.2 Incorporation by Reference of Trust Indenture Act. Whenever
this Indenture refers to a provision of the TIA, such provision is incorporated
by reference in and made a part of this Indenture. The following TIA terms used
in this Indenture have the following meanings:
"Commission" means the Securities and Exchange Commission.
"indenture securities" means the Notes.
"indenture trustee" means the Indenture Trustee.
"obligor" on the indenture securities means the Issuer and any other
obligor on the indenture securities.
All other TIA terms used in this Indenture that are defined by the TIA,
defined by TIA reference to another statute or defined by a Commission rule have
the respective meanings assigned to them by such definitions.
2
<PAGE>
ARTICLE II
THE NOTES
SECTION 2.1 Form.
----
(a) The Notes with the Indenture Trustee's certificate of
authentication, shall be in substantially the form set forth in Exhibit B, with
such appropriate insertions, omissions, substitutions and other variations as
are required or permitted by this Indenture and may have such letters, numbers
or other marks of identification and such legends or endorsements placed thereon
as may, consistently herewith, be determined by the officers executing such
Notes, as evidenced by their execution of the Notes. Any portion of the text of
any Note may be set forth on the reverse thereof, with an appropriate reference
thereto on the face of the Note.
(b) The Definitive Notes shall be typewritten, printed, lithographed or
engraved or produced by any combination of these methods (with or without steel
engraved borders) all as determined by the officers executing such Notes, as
evidenced by their execution of such Notes.
(c) The terms of the Notes set forth in Exhibit B are part of the terms
of this Indenture.
SECTION 2.2 Execution, Authentication and Delivery.
--------------------------------------
(a) The Notes shall be dated the date of their authentication, and
shall be issuable as registered Notes in minimum denominations of $1,000 and in
integral multiples thereof.
(b) The Notes shall be executed on behalf of the Issuer by any of its
Responsible Officers. The signature of any such Responsible Officer on the Notes
may be manual or facsimile.
(c) Notes bearing the manual or facsimile signature of individuals who
were at any time Responsible Officers of the Issuer shall bind the Issuer,
notwithstanding that such individuals or any of them have ceased to hold such
office prior to the authentication and delivery of such Notes or did not hold
such office at the date of such Notes.
(d) The Indenture Trustee, in exchange for the Mortgage Loans and the
other components of the Trust and the pledge and assignment to it of the Spread
Account, simultaneously with the assignment and transfer to the Indenture
Trustee of the Mortgage Loans, and the delivery to the Indenture Trustee of the
Mortgage Files and the other components and assets of the Trust and the Spread
Account, together with an Opinion of Counsel to the Issuer (which may be counsel
to the Depositors) relating to the issuance of the Notes and the lien of the
Indenture Trustee hereunder and an Officer's Certificate relating to the same,
shall, upon the order of the Issuer cause the Notes to be authenticated and
delivered for original issue in an aggregate principal amount equal to the
Original Note Principal Balance. The aggregate principal amount of Notes
outstanding at any time may not exceed that amount except as provided in Section
2.5.
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(e) No Notes shall be entitled to any benefit under this Indenture or
be valid or obligatory for any purpose, unless there appears on such Note a
certificate of authentication substantially in the form set forth in Exhibit B
hereto, executed by the Indenture Trustee by the manual signature of one of its
Responsible Officers, and such certificate upon any Note shall be conclusive
evidence, and the only evidence, that such Note has been duly authenticated and
delivered hereunder.
SECTION 2.3 Temporary Notes.
---------------
(a) Pending the preparation of Definitive Notes, if any, the Issuer may
execute, and upon receipt of any Issuer Order the Indenture Trustee shall
authenticate and deliver, Temporary Notes which are printed, lithographed,
typewritten, mimeographed or otherwise produced, of the tenor of the Definitive
Notes in lieu of which they are issued and with such variations as are
consistent with the terms of this Indenture as the officers executing such Notes
may determine, as evidenced by their execution of such Notes.
(b) If Temporary Notes are issued, the Issuer shall cause Definitive
Notes to be prepared without unreasonable delay. After the preparation of
Definitive Notes, the Temporary Notes shall be exchangeable for Definitive Notes
upon surrender of the Temporary Notes at the Agency Office of the Issuer to be
maintained as provided in Section 3.2, without charge to the Noteholder. Upon
surrender for cancellation of any one or more Temporary Notes, the Issuer shall
execute and the Indenture Trustee shall, at the Administrator's cost and
expense, authenticate and deliver in exchange therefor a like principal amount
of Definitive Notes of authorized denominations. Until so delivered in exchange,
the Temporary Notes shall in all respects be entitled to the same benefits under
this Indenture as Definitive Notes.
SECTION 2.4 Registration; Registration of Transfer and Exchange
---------------------------------------------------
of Notes.
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(a) The Issuer shall cause to be kept the Note Register, in which,
subject to such reasonable regulations as it may prescribe, the Issuer shall
provide for the registration of the Notes. The Indenture Trustee shall initially
be the Note Registrar for the purpose of registering the Notes and transfers of
the Notes as herein provided. Upon any resignation of any Note Registrar, the
Issuer shall promptly appoint a successor or, if it elects not to make such an
appointment assume the duties of the Note Registrar.
(b) If a Person other than the Indenture Trustee is appointed by the
Issuer as Note Registrar, the Issuer will give the Indenture Trustee and the
Insurer prompt written notice of the appointment of such Note Registrar and of
the location, and any change in the location, of the Note Register. The
Indenture Trustee and the Insurer shall have the right ti inspect the Note
Register at all reasonable times and to obtain copies thereof. The Indenture
Trustee shall have the right to rely upon a certificate executed on behalf of
the Note Registrar by a Responsible Officer thereof as to the names and
addresses of the Noteholders and the principal amounts and number of such Notes.
(c) Upon surrender for registration of transfer of any Note at the
Corporate Trust Office of the Indenture Trustee or the Agency Office of the
Issuer (and following the delivery,
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in the former case, of such Notes to the Issuer by the Indenture Trustee) the
Issuer shall execute, the Indenture Trustee shall authenticate and the
Noteholder shall obtain from the Indenture Trustee, in the name of the
designated transferee or transferees, one or more new Notes in any authorized
denominations, of a like aggregate principal amount.
(d) At the option of the Noteholder, Notes may be exchanged for other
Notes in any authorized denominations, of a like aggregate principal amount,
upon surrender of the Notes to be exchanged at the Corporate Trust Office of the
Indenture Trustee or the Agency Office; provided, however, that in the latter
case the Issuer agrees that such surrendered Notes shall be promptly delivered
to the Indenture Trustee. Whenever any Notes are so surrendered for exchange,
the Issuer shall execute, and the Indenture Trustee shall, at the
Administrator's cost and expense, authenticate and the Noteholder shall obtain
from the Indenture Trustee, the Notes which the Noteholder making the exchange
is entitled to receive.
(e) All Notes issued upon any registration of transfer or exchange of
Notes shall be the valid obligations of the Issuer, evidencing the same debt,
and entitled to the same benefits under this Indenture, as the Notes surrendered
upon such registration of transfer or exchange.
(f) Every Note presented or surrendered for registration of transfer or
exchange shall be duly endorsed by, or be accompanied by a written instrument of
transfer in form satisfactory to the Indenture Trustee and the Note Registrar,
duly executed by the Holder thereof or such Holder's attorney duly authorized in
writing, with such signature guaranteed by a commercial bank or trust company
located, or having a correspondent located, in the City of New York or the city
in which the Corporate Trust Office of the Indenture Trustee is located, or by a
member firm of a national securities exchange, and such other documents as the
Indenture Trustee may require.
(g) No service charge shall be made to a Noteholder for any
registration of transfer or exchange of Notes, but the Issuer or Indenture
Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in connection with any registration of
transfer or exchange of Notes, other than exchanges pursuant to Sections 2.3 or
9.6 not involving any transfer.
(h) The preceding provisions of this Section 2.4 notwithstanding, the
Issuer shall not be required to transfer or make exchanges, and the Note
Registrar need not register transfers or exchanges, of Notes that: (i) have been
selected for redemption pursuant to Article X; or (ii) are due for repayment
within 15 days of submission to the Corporate Trust Office or the Agency Office.
SECTION 2.5 Mutilated, Destroyed, Lost or Stolen Notes.
------------------------------------------
(a) If (i) any mutilated Note is surrendered to the Indenture Trustee,
or the Indenture Trustee receives evidence to its satisfaction of the
destruction, loss or theft of any Note, and (ii) there is delivered to the
Indenture Trustee such security or indemnity as may be required by it to hold
the Issuer, the Insurer and the Indenture Trustee harmless, then, in the absence
of notice to the Issuer, the Note Registrar or the Indenture Trustee that such
Note has been acquired by
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a bona fide purchaser, the Issuer shall execute and upon the Issuer's request
the Indenture Trustee shall authenticate and deliver, in exchange for or in lieu
of any such mutilated, destroyed, lost or stolen Note, a replacement Note of a
like aggregate principal amount; provided, however, that if any such destroyed,
lost or stolen Note, but not a mutilated Note, shall have become or within seven
days shall be due and payable, or shall have been called for redemption, instead
of issuing a replacement Note, the Issuer may pay to the Holder of such
destroyed, lost or stolen Note when so due or payable or upon the Payment Date
or Special Redemption Date without surrender thereof.
(b) If, after the delivery of a replacement Note or payment in respect
of a destroyed, lost or stolen Note pursuant to subsection (a), a bona fide
purchaser of the original Note in lieu of which such replacement Note was issued
presents for payment such original Note, the Issuer, the Insurer and the
Indenture Trustee shall be entitled to recover such replacement Note (or such
payment) from (i) any Person to whom it was delivered, (ii) the Person taking
such replacement Note from the Person to whom such replacement Note was
delivered; or (iii) any assignee of such Person, except a bona fide purchaser,
and the Issuer, the Insurer and the Indenture Trustee shall be entitled to
recover upon the security or indemnity provided therefor to the extent of any
loss, damage, cost or expense incurred by the Issuer, the Insurer or the
Indenture Trustee in connection therewith.
(c) In connection with the issuance of any replacement Note under this
Section 2.5, the Issuer may require the payment by the Holder of such Note of a
sum sufficient to cover any tax or other governmental charge that may be imposed
in relation thereto and any other reasonable expenses (including all fees and
expenses of the Indenture Trustee) connected therewith.
(d) Any duplicate Note issued pursuant to this Section 2.5 in
replacement for any mutilated, destroyed, lost or stolen Note shall constitute
an original additional contractual obligation of the Issuer, whether or not the
mutilated, destroyed, lost or stolen Note shall be found at any time or be
enforced by any Person, and shall be entitled to all the benefits of this
Indenture equally and proportionately with any and all other Notes duly issued
hereunder.
(e) The provisions of this Section 2.5 are exclusive and shall preclude
(to the extent lawful) all other rights and remedies with respect to the
replacement or payment of mutilated, destroyed, lost or stolen Notes.
SECTION 2.6 Persons Deemed Noteholders. Prior to due presentment for
registration of transfer of any Note, the Issuer, the Insurer, the Indenture
Trustee and any agent of the Issuer, the Insurer or the Indenture Trustee may
treat the Person in whose name any Note is registered (as of the day of
determination) as the Noteholder for the purpose of receiving payments of
principal of and interest on such Note and for all other purposes whatsoever,
whether or not such Note be overdue, and neither the Issuer, the Indenture
Trustee nor any agent of the Issuer, the Insurer, or the Indenture Trustee shall
be affected by notice to the contrary.
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SECTION 2.7 Payment of Principal and Interest.
---------------------------------
(a) Interest on the Notes shall accrue at the Note Interest Rate as
provided in the form of such Note set forth in Exhibit B and such interest shall
be payable on each Payment Date as specified therein. Any installment of
interest payable on any Note which is punctually paid or duly provided for by a
deposit by or at the direction of the Issuer into the Note Payment Account on
the applicable Payment Date shall be paid to the Person in whose name such Note
(or one or more Predecessor Notes) is registered on the applicable Record Date,
by check mailed first-class, postage prepaid to such Person's address as it
appears on the Note Register on such Record Date or, in the case of a Holder
owning Notes in aggregate denominations of at least $1,000,000, by wire transfer
in immediately available funds to the account notified by such Holder to the
Indenture Trustee at least five days prior to such Record Date; provided,
however, that, unless and until Definitive Notes have been issued pursuant to
Section 2.12, with respect to Notes registered on the applicable Record Date in
the name of the Depository, payment shall be made by wire transfer in
immediately available funds to the account designated by the Depository.
(b) (i) Prior to the occurrence of an Event of Default and a
declaration in accordance with Section 5.2 that the Notes have become
immediately due and payable, the principal of each Note unless earlier redeemed
as set forth herein, shall be payable in installments on each Payment Date, as
provided in the form of Note set forth in Exhibit B, until paid in full. All
principal payments (including by redemption) shall be made pro rata to the
Noteholders entitled thereto. Any installment of principal payable on, or any
Special Redemption Price of any Note which is punctually paid or duly provided
for by a deposit by or at the direction of the Issuer into the Note Payment
Account on the applicable Payment Date or Special Payment Date, as applicable,
shall be paid to the Person in whose name such Note (or one or more Predecessor
Notes) is registered on the applicable Record Date or Special Record Date, by
check mailed first-class, postage prepaid to such Person's address as it appears
on the Note Register on such Record Date or Special Record Date; or, in the case
of a Holder owning Notes in aggregate denominations of at least $1,000,000, by
wire transfer in immediately available funds to the account notified by such
Holder to the Indenture Trustee at least five days prior to such Record Date or
Special Record Date; provided, however, that, unless and until Definitive Notes
have been issued pursuant to Section 2.12, with respect to Notes registered on
the Record Date or Special Record Date in the name of the Depository, payment
shall be made by wire transfer in immediately available funds to the account
designated by the Depository, except for the final installment of principal with
respect to a Note on the Maturity Date or earlier redemption, which shall be
payable as provided herein. The funds represented by any such checks in respect
of interest or principal returned undelivered shall be held in accordance with
Section 3.3.
(c) The entire unpaid principal amount of the Notes shall be due and
payable, if not previously paid, if:
(i) an Event of Default shall have occurred and be
continuing; and
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(ii) the Indenture Trustee, at the direction or with the
consent of the Insurer, or at the direction of Noteholders representing
not less than a Majority in Voting Interest of the Notes, with the
consent of the Insurer, have declared the Notes to be immediately due
and payable in the manner provided in Section 5.2.
(d) Following an Event of Default and the acceleration of the Notes as
aforesaid, all principal payments shall be allocated among the Holders of all of
the Notes pro rata on the basis of their respective unpaid principal balances.
(e) The Indenture Trustee shall notify each Noteholder of record as of
the Record Date for a Payment Date of the fact that the final installment of
principal of and interest on such Note is to be paid on such Payment Date. Such
notice shall be sent (i) on such Record Date by facsimile, if Book-Entry Notes
are outstanding; or (ii) not later than three Business Days after such Record
Date in accordance with Section 11.5(a) if Definitive Notes are outstanding, and
shall specify that such final installment shall be payable only upon
presentation and surrender of such Note and shall specify the place where such
Note may be presented and surrendered for payment of such installment. Notices
in connection with redemptions of Notes shall be mailed to Noteholders as
provided in Section 10.2.
SECTION 2.8 Cancellation of Notes. All Notes surrendered for payment,
redemption, exchange or registration of transfer shall, if surrendered to any
Person other than the Indenture Trustee, be delivered to the Indenture Trustee
and shall be promptly canceled by the Indenture Trustee. The Issuer may at any
time deliver to the Indenture Trustee for cancellation Notes previously
authenticated and delivered hereunder which the Issuer may have acquired in any
manner whatsoever, and all Notes so delivered shall be promptly canceled by the
Indenture Trustee. No Notes shall be authenticated in lieu of or in exchange for
any Notes canceled as provided in this Section 2.8, except as expressly
permitted by this Indenture. All canceled Notes may be held or disposed of by
the Indenture Trustee in accordance with its standard retention or disposal
policy as in effect at the time unless the Issuer shall direct by an Issuer
Order that they be destroyed or returned to it; provided, however, that such
Issuer Order is timely and the Notes have not been previously disposed of by the
Indenture Trustee.
SECTION 2.9 Release of Collateral. Subject to Section 11.1, the
Indenture Trustee shall release property from the lien of this Indenture only
upon receipt of an Issuer Request accompanied by an Officers' Certificate, an
Opinion of Counsel and Independent Certificates in accordance with TIA
ss.ss.314(c) and 314(d)(1) or an Opinion of Counsel in lieu of such Independent
Certificates to the effect that the TIA does not require any such Independent
Certificates.
SECTION 2.10 Book-Entry Notes. The Notes, upon original issuance, shall
be issued in the form of a typewritten Note or Notes representing the Book-Entry
Notes, to be delivered to the Depository. Such Note or Notes shall be registered
on the Note Register in the name of the Depository, and no Note Owner shall
receive a Definitive Note representing such Note Owner's interest in such Note,
except as provided in Section 2.12. Unless and until the Definitive Notes have
been issued to Note Owners pursuant to Section 2.12:
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(a) the provisions of this Section 2.10 shall be in full force
and effect;
(b) the Note Registrar and the Indenture Trustee shall be
entitled to deal with the Depository for all purposes of this Indenture
(including the payment of principal of and interest on the Notes and
the giving of instructions or directions hereunder) as the sole holder
of the Notes and shall have no obligation to the Note Owners;
(c) to the extent that the provisions of this Section 2.10
conflict with any other provisions of this Indenture, the provisions of
this Section 2.10 shall control;
(d) the rights of the Note Owners shall be exercised only
through the Depository and shall be limited to those established by law
and agreements between such Note Owners and the Depository and/or the
Depository Participants. Unless and until Definitive Notes are issued
pursuant to Section 2.12, the initial Depository shall make book-entry
transfers between the Depository Participants and receive and transmit
payments of principal of and interest on the Notes to such Depository
Participants, pursuant to the Note Depository Agreement; and
(e) whenever this Indenture or any other Basic Document
requires or permits actions to be taken based upon instructions or
directions of Holders of Outstanding Notes evidencing a specified
Percentage Interest of the Notes, the Depository shall be deemed to
represent such percentage only to the extent that it has (i) received
instructions to such effect from Note Owners and/or Depository
Participants owning or representing, respectively, such required
percentage of the beneficial interest in the Notes; and (ii) has
delivered such instructions to the Indenture Trustee.
SECTION 2.11 Notices to Depository. Whenever a notice or other
communication to the Noteholders is required under this Indenture, unless and
until Definitive Notes shall have been issued to Note Owners pursuant to Section
2.12, the Indenture Trustee shall give all such notices and communications
specified herein to be given to Noteholders to the Depository and shall have no
obligation to the Note Owners.
SECTION 2.12 Definitive Notes.
----------------
If (i) the Depositor or the Depository advises the Indenture
Trustee in writing that the Depository is no longer willing or able to properly
discharge its responsibilities with respect to the Notes and the Issuer is
unable to locate a qualified successor; (ii) the Depositor, at its option,
advises the Indenture Trustee in writing that it elects to terminate the
book-entry system through the Depository; or (iii) after the occurrence of a
Servicer Default, Note Owners representing beneficial interests aggregating at
least a Majority in Voting Interest of the Notes advise the Depository in
writing that the continuation of a book-entry system through the Depository is
no long in the best interests of the Note Owners, then the Depository shall
notify all Note Owners and the Indenture Trustee of the occurrence of any such
event and of the availability of Definitive Notes to Note Owners requesting the
same. Upon surrender to the Indenture Trustee of the typewritten Note or Notes
representing the Book-Entry Notes by the Depository, accompanied by registration
instructions, the Issuer shall, at the Administrator's cost
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and expense, execute and the Indenture Trustee shall authenticate the Definitive
Notes in accordance with the instructions of the Depository. None of the Issuer,
the Note Registrar or the Indenture Trustee shall be liable for any delay in
delivery of such instructions and may conclusively rely on, and shall be
protected in relying on, such instructions. Upon the issuance of Definitive
Notes, the Indenture Trustee shall recognize the Holders of the Definitive Notes
as Noteholders.
SECTION 2.13 Depositors or Affiliates as Noteholder. None of
the Issuer, the Servicer, the Representative, the Administrator, any Originator,
any Depositor or any Subservicer shall be a Noteholder. Any attempted or
purported transfer in violation of the preceding sentence shall be absolutely
null and void and shall vest no rights in the purported transferee. If any
purported transferee shall become a Noteholder in violation of such sentence,
then the last preceding Noteholder shall be restored to all rights as Holder
thereof retroactive to the date of registration of transfer of such Note. The
Indenture Trustee shall notify the Administrator of any violation of this
Section 2.13 upon receipt of written notice thereof. The Indenture Trustee shall
be under no liability to any Person for any registration of transfer of a Note
not permitted in this Section 2.13 or for making payments due on such Note to
the Holder thereof or taking any other action with respect to such Holder under
the provisions of this Indenture so long as the transfer was registered without
receipt. The Indenture Trustee shall be entitled, but not obligated, to recover
from any holder of a Note all payments made on such Note at and after such time.
Any such payments so recovered by the Indenture Trustee shall be paid and
delivered by the Indenture Trustee to the last preceding Holder of such Note.
SECTION 2.14 Tax Treatment. The Issuer and the Indenture
Trustee, by entering into this Indenture, and the Noteholders, by acquiring any
Note or interest therein, (i) express their intention that the Notes qualify
under applicable tax law as indebtedness secured by the Collateral, and (ii)
unless otherwise required by appropriate taxing authorities, agree to treat the
Notes as indebtedness secured by the Collateral for the purpose of federal
income taxes, state and local income and franchise taxes and any other taxes
imposed upon, measured by or based upon gross or net income.
ARTICLE III
COVENANTS
SECTION 3.1 Note Payment Account; Payment of Principal and
Interest. (a) The Indenture Trustee, for the benefit of the Noteholders, shall
establish and maintain in the name of the Indenture Trustee an Eligible Account
known as the "AMRESCO Residential Securities Corporation Mortgage Loan Trust
199__-__ Note Payment Account" (the "Note Payment Account"), bearing an
additional designation clearly indicating that the funds deposited therein are
held for the benefit of the Noteholders.
(b) The Issuer shall duly and punctually pay the principal of
and interest on the Notes in accordance with the terms of the Notes and this
Indenture. On each Payment Date and on each Special Redemption Date, the Issuer
shall cause all amounts on deposit in the Note Payment Account to be distributed
to the Noteholders in accordance with Section 8.2, less amounts properly
withheld under the Code by any Person from a payment to any Noteholder of
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interest and/or principal. Any amounts so withheld shall be considered as having
been paid by the Issuer to such Noteholder for all purposes of this Indenture.
SECTION 3.2 Maintenance of Agency Office. As long as any of
the Notes remains outstanding, the Issuer shall maintain in the borough of
Manhattan, the City of New York an office ( the "Agency Office") being an office
or agency where Notes may be surrendered to the Issuer for registration of
transfer or exchange, and where notices and demands to or upon the Issuer in
respect of the Notes and this Indenture may be served. The Issuer hereby
initially appoints [________________] to serve as its agent for the foregoing
purposes. The Issuer shall give prompt written notice to the Indenture Trustee
of the location, and of any change in the location, of any such office or
agency. If at any time the Issuer shall fail to maintain any such office or
agency or shall fail to furnish the Indenture Trustee with the address thereof,
such surrenders, notices and demands may be made or served at the Corporate
Trust Office of the Indenture Trustee, and the Issuer hereby appoints the
Indenture Trustee as its agency to receive all such surrenders, notices and
demands.
SECTION 3.3 Money for Payments To Be Held in Trust.
--------------------------------------
(a) As provided in Section 8.2(a) and (b), all payments of
amounts due and payable with respect to any Notes that are to be made from
amounts withdrawn from the Note Payment Account pursuant to Section 8.2(c) shall
be made on behalf of the Issuer by the Indenture Trustee or by another Paying
Agent, and no amounts so withdrawn from the Note Payment Account for payments of
Notes shall be paid over to the Issuer except as provided in this Section 3.3.
(b) On each Payment Date and Special Redemption Date, the
Issuer shall deposit or cause to be deposited in the Note Payment Account an
aggregate sum sufficient to pay the amounts then becoming due, such sum to be
held in trust for the benefit of the Persons entitled thereto and (unless the
Paying Agent is the Indenture Trustee) shall promptly notify the Indenture
Trustee of its action or failure so to act.
(c) The Issuer shall cause each Paying Agent other than the
Indenture Trustee, to execute and deliver to the Indenture Trustee (with a copy
to the Insurer) an instrument in which such Paying Agent shall agree with the
Indenture Trustee (and if the Indenture Trustee acts as Paying Agent, it hereby
so agrees), subject to the provisions of this Section 3.3, that such Paying
Agent shall:
(i) hold all sums held by it for the payment of amounts
due with respect to the Notes in trust for the benefit of the
persons entitled thereto until such sums shall be paid to such
Persons or otherwise disposed of as herein provided and pay
such sums to such persons as herein provided;
(ii) give the Indenture Trustee and the Insurer notice
of any default by the Issuer of which it has actual knowledge
(or any other obligor upon the Notes) in the making of any
payment required to be made with respect to the Notes;
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(iii) at any time during the continuance of any such
default, upon the written request of the Indenture Trustee or
the Insurer, forthwith pay to the Indenture Trustee all sums
so held in trust by such Paying Agent;
(iv) immediately resign as a Paying Agent and forthwith
pay to the Indenture Trustee all sums held by it in trust for
the payment of Notes if at any time it ceases to meet the
standards required to be met by a Paying Agent in effect at
the time of determination; and
(v) comply with all requirements of the Code with
respect to the withholding from any payments made by it on any
Notes of any applicable withholding taxes imposed thereon and
with respect to any applicable reporting requirements in
connection therewith.
(d) The Issuer may at any time, for the purpose of obtaining
the satisfaction and discharge of this Indenture or for any other purpose, by
Issuer Order direct any Paying Agent to pay to the Indenture Trustee all sums
held in trust by such Paying Agent, such sums to be held by the Indenture
Trustee upon the same trusts as those upon which the sums were held by such
Paying Agent; and upon such payment by any Paying Agent to the Indenture
Trustee, such Paying Agent shall be released from all further liability with
respect to such money.
(e) Subject to applicable laws with respect to escheat of
funds, any money held by the Indenture Trustee or any Paying Agent in trust for
the payment of any amount due with respect to any Note and remaining unclaimed
for one year after such amount has become due and payable shall be discharged
from such trust and be paid to the Issuer on Issuer Request; and the Holder of
such Note shall thereafter, as an unsecured general creditor, look only to the
Issuer for payment thereof (but only to the extent of the amounts so paid to the
Issuer) and all liability of the Indenture Trustee, the Insurer or such Paying
Agent with respect to such trust money shall thereupon cease; provided, however,
that the Indenture Trustee or such Paying Agent, before being required to make
any such repayment, may at the expense of the Issuer cause to be published once,
in a newspaper published in the English language, customarily published on each
Business Day and of general circulation in the City of New York, notice that
such money remains unclaimed and that, after a date specified therein, which
shall not be less than 30 days from the date of such publication, any unclaimed
balance of such money then remaining shall be repaid to the Issuer. The
Indenture Trustee may also adopt and employ, at the expense of the Issuer, any
other reasonable means of notification of such repaying (including, but not
limited to, mailing notice of such repayment to Holders whose Notes have been
called but have not been surrendered for redemption or whose right to or
interest in moneys due and payable but not claimed is determinable from the
records of the Indenture Trustee or of any Paying Agent, at the last address of
record for each such Holder).
SECTION 3.4 Existence. The Issuer shall keep in full effect
its existence, rights and franchises as a business trust under the laws of the
State of Delaware (unless it becomes, or any successor Issuer hereunder is or
becomes, organized under the laws of any other State or of the United States of
America, in which case the Issuer shall keep in full effect its existence,
rights and franchises under the laws of such other jurisdiction) and shall
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obtain and preserve its qualification to do business in each jurisdiction in
which such qualification is or shall be necessary to protect the validity and
enforceability of this Indenture, the Notes, the Collateral and each other
instrument or agreement included in the assets of the Trust.
SECTION 3.5 Protection of the Assets of the Trust:
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Acknowledgment of Pledge.
------------------------
(a) The Issuer shall from time to time execute and deliver all
such supplements and amendments hereto and all such financing statements,
continuation statements, instruments of further assurance and other instruments,
and shall take such other action necessary or advisable to:
(i) maintain or preserve the lien and security
interest (and the priority thereof) of this Indenture or carry
out more effectively the purposes hereof;
(ii) perfect, publish notice of or protect the
validity of any Grant made or to be made by this Indenture;
(iii) enforce any of the Collateral; or
(iv) preserve and defend title to the assets of the
Trust and the rights of the Indenture Trustee and the
Noteholders in such assets of the Trust and in the Spread
Account against the claims of all persons and parties, and the
Issuer hereby designates the Indenture Trustee its agent and
attorney-in-fact to execute any financing statement,
continuation statement or other instrument required by the
Indenture Trustee pursuant to this Section 3.5.
(b) The Indenture Trustee acknowledges the pledge by the Class
B-2 Certificateholders to the Indenture Trustee pursuant to Section _____ of the
Pooling and Servicing Agreement and Section 2.11 of the Trust Agreement of all
of the Class B-2 Certificateholder's right, title and interest in and to the
Spread Account and all proceeds of the foregoing, including, without limitation,
all other accounts and investments held from time to time in the Spread Account
(whether in the form of deposit accounts, physical property, book-entry
securities, uncertificated securities or otherwise) in order to provide for the
prompt payment to the Noteholders, the Certificateholders and the Servicer in
accordance with _____ of the Pooling and Servicing Agreement, to assure
availability of the amounts maintained therein for the benefit of the
Noteholders, the Certificateholders and the Servicer, and as security for the
performance by the Issuer of its obligations under the Basic Documents.
SECTION 3.6 Opinions as to Trust Assets.
---------------------------
(a) On the Closing Date, the Issuer shall furnish to the
Indenture Trustee an Opinion of Counsel either stating that, in the opinion of
such counsel, such action has been taken with respect to the recording and
filing of this Indenture, any indentures supplemental hereto and any other
requisite documents, and with respect to the execution and filing or recording
of any
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financing statements and continuation statements and other documents as are
necessary to perfect and make effective the lien and security interest of this
Indenture and reciting the details of such action, or stating that, in the
opinion of such counsel, no such action is necessary to make such lien and
security interest effective.
(b) On or before the last day of the fourth month following
the end of the Issuer's fiscal year, which currently ends on December 31, in
each calendar year, beginning with the fiscal year ending December 31, 199__,
the Issuer shall furnish to the Indenture Trustee and the Insurer an Opinion of
Counsel either stating that, in the opinion of such counsel, such action has
been taken with respect to the recording, filing, re-recording and refiling of
this Indenture, any indentures supplemental hereto and any other requisite
documents and with respect to the execution and filing or recording of any
financing statements, continuation statements and other documents as is
necessary to maintain the lien and security interest created by this Indenture
and reciting the details of such action or stating that in the opinion of such
counsel no such action is necessary to maintain the lien and security interest
created by this Indenture. Such Opinion of Counsel shall also describe the
recording, filing, re-recording and refiling to this Indenture, any indentures
supplemental hereto and any other requisite documents and the execution and
filing of any financing statements and continuation statements that will, in the
opinion of such counsel, be required to maintain the lien and security interest
of this Indenture until the last day of the fourth month following the end of
the Issuer's next fiscal year.
SECTION 3.7 Performance of Obligations: Servicing of
----------------------------------------
Mortgage Loans.
--------------
(a) The Issuer shall not take any action and shall use its
best efforts not to permit any action to be taken by others that would release
any Person from any of such Person's material covenants or obligations under any
instrument or agreement included in the assets of the Trust or that would result
in the amendment, hypothecation subordination, termination or discharge of, or
impair the validity or effectiveness of, any such instrument or any other Basic
Document.
(b) The Issuer may contract with other Persons to assist it in
performing its duties under this Indenture, and any performance of such duties
by a Person identified to the Indenture Trustee in any Officers' Certificate of
the Issuer shall be deemed to be action taken by the Issuer. Initially, the
Issuer has contracted with the Servicer and the Administrator to assist the
Issuer in performing its duties under this Indenture.
(c) The Issuer shall punctually perform and observe all of its
obligations and the agreements contained in this Indenture, the Basic Documents
and in the instruments and agreements included in the assets of the Trust,
including but not limited to filing or causing to be filed all UCC financing
statements and continuation statements required to be filed by the terms of this
Indenture and the Pooling and Servicing Agreement in accordance with and within
the time periods provided for herein and therein.
(d) If the Issuer shall have knowledge of the occurrence of a
Servicer Default or of an Event of Default hereunder, the Issuer shall promptly
notify the Indenture Trustee, the Insurer and the Rating Agencies thereof, and
shall specify in such notice the response or action,
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if any, the Issuer has taken or is taking with respect of such default. If a
Servicer Default or an Event of Default shall arise from the failure of the
Servicer to perform any of its duties or obligations under the Pooling and
Servicing Agreement with respect to the Mortgage Loans, the Issuer and the
Indenture Trustee shall take all reasonable steps available to them pursuant to
the Pooling and Servicing Agreement to remedy such failure.
(e) Without derogating from the absolute nature of the
assignment granted to the Indenture Trustee under this Indenture or the rights
of the Indenture Trustee hereunder, the Issuer agrees that, except as set forth
in the Pooling and Servicing Agreement, it shall not, without the prior written
consent of the Insurer and the Indenture Trustee or a Majority in Voting
Interest of the Notes, amend, modify, waive, supplement, terminate or surrender,
or agree to any amendment, modification, supplement, termination, waiver or
surrender of, the terms of any Collateral or the Basic Documents, or waive
timely performance or observance by the Servicer or the Depositors under the
Pooling and Servicing Agreement, the Administrator under the Pooling and
Servicing Agreement, the Administrator under the Administration Agreement or the
Representative or the Originators under the Transfer Agreement. If any such
amendment, modification, supplement or waiver shall be so consented to by the
Insurer and the Indenture Trustee or such Holders, as applicable, the Issuer
agrees, promptly following a request by the Indenture Trustee or the Insurer to
do so, to execute and deliver, in its own name and at its own expense, such
agreements, instruments, consents and other documents as the Indenture Trustee
or the Insurer may deem necessary or appropriate in the circumstances.
SECTION 3.8 Negative Covenants. So long as any Notes are
outstanding, the Issuer shall not (except as expressly permitted herein or in
the Pooling and Servicing Agreement):
(a) Sell, transfer, exchange or otherwise dispose of
any of the properties or assets of the Issuer, except in
accordance with Section 3.10(b) or Section 10.1(a) of this
Indenture or Section _____ of the Pooling and Servicing
Agreement;
(b) claim any credit on, or make any deduction from
the principal or interest payable in respect of the Notes
(other than amounts properly withheld from such payments under
the Code or applicable state law) or assert any claim against
any present or former Noteholder by reason of the payment of
the taxes levied or assessed upon any part of the assets of
the Trust;
(c) voluntarily commence any insolvency, readjustment
of debt, marshalling of assets and liabilities or other
proceeding, or apply for an order by a court or agency or
supervisory authority for the winding-up or liquidation of its
affairs or any other event specified in Section 5.1(e); or
(d) either (i) permit the validity or effectiveness
of this Indenture to be impaired, or permit the lien of this
Indenture to be amended, hypothecated, subordinated,
terminated or discharged, or permit any Person to be released
from any covenants or obligations with respect to the Notes
under this Indenture
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except as may be expressly permitted hereby: (ii) permit any
lien, charge, excise, claim, security interest, mortgage or
other encumbrance (other than the lien of this Indenture) to
be created on or extend to or otherwise arise upon or burden
the assets of the Trust or any part thereof or any interest
therein or the proceeds thereof (other than tax liens,
mechanics' liens and other liens that arise by operation of
law, in each case on a Mortgaged Property and arising solely
as a result of an action or omission of the related Obligor);
or (iii) permit the lien of this Indenture not to constitute a
valid first priority security interest in the assets of the
Trust.
SECTION 3.9 Annual Statement as to Compliance. The Issuer
shall deliver to the Indenture Trustee and the Insurer, on or before the last
day of the fourth month following the end of the Issuer's fiscal year, which
currently ends on December 31, beginning with the fiscal year ending on December
31, 199__, an Officer's Certificate signed by a Responsible Officer of the
Issuer, dated as of the last day of such fiscal year, stating that:
(a) a review of the activities of the Issuer during such
fiscal year and of performance under this Indenture has been made under
such Responsible Officer's supervision; and
(b) to the best of such Responsible Officer's knowledge, based
on such review, the Issuer has fulfilled all of its obligations under
this Indenture throughout such year, or, if there has been a default in
the fulfillment of any such obligation, specifying each such default
known to such Responsible Officer and the nature and status thereof. A
copy of such certificate may be obtained by any Noteholder by a request
in writing to the Issuer addressed to the Corporate Trust Office of the
Indenture Trustee.
SECTION 3.10 Consolidation, Merger, etc., of Issuer;
---------------------------------------
Disposition of Trust Assets.
---------------------------
(a) The Issuer shall not consolidate or merge with or into any
other Person, unless:
(i) the Person (if other than the Issuer) formed by or
surviving such consolidation or merger shall be a Person organized and
existing under the laws of the United States of America, or any State
and shall expressly assume, by an indenture supplemental hereto,
executed and delivered to the Indenture Trustee, in form satisfactory
to the Indenture Trustee, the due and punctual payment of the principal
of and interest on all Notes and the performance or observance of every
agreement and covenant of this Indenture on the part of the Issuer to
be performed or observed, all as provided herein;
(ii) immediately after giving effect to such merger or
consolidation, no Default or Event of Default shall have occurred and
be continuing;
(iii) the Insurer shall have consented to such transaction;
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(iv) any action as is necessary to maintain the lien and
security interest created by this Indenture shall have been taken; and
(v) the Issuer shall have delivered to the Indenture Trustee
an Officer's Certificate and an Opinion of Counsel addressed to the
Issuer, each stating:
(A) that such consolidation or merger and such
supplemental indenture comply with this Section 3.10;
(B) that such consolidation or merger and such
supplemental indenture shall have no material adverse tax
consequence to the Trust or any Noteholder or
Certificateholder; and
(C) that all conditions precedent herein provided for
relating to such transaction have been complied with
(including any filing required by the Exchange Act).
(b) Except as expressly permitted by this Indenture or the
other Basic Documents, the Issuer shall not sell, convey, exchange, transfer or
otherwise dispose of any of its properties or assets, including those included
in the assets of the Trust, to any Person, unless:
(i) the Person that acquires such properties or assets of the
Issuer (A) shall be a United States citizen or a Person organized and
existing under the laws of the United States of America or any State
and (B) by an indenture supplemental hereto, executed and delivered to
the Indenture Trustee, in form satisfactory to the Indenture Trustee:
(1) expressly assumes the due and punctual payment of
the principal of and interest on all Notes and the performance
or observance of every agreement and covenant of this
Indenture on the part of the Issuer to be performed or
observed, all as provided herein;
(2) expressly agrees that all right, title and
interest so sold, conveyed, exchanged, transferred or
otherwise disposed of shall be subject and subordinate to the
rights of Noteholders;
(3) unless otherwise provided in such supplemental
indenture, expressly agrees to indemnify, defend and hold
harmless the Issuer against and from any loss, liability or
expense arising under or related to this Indenture and the
Notes; and
(4) expressly agrees that such Person (or if a group
of Persons, then one specified Person) shall make all filings
with the Commission (and any other appropriate Person)
required by the Exchange Act in connection with the Notes;
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(ii) immediately after giving effect to such transaction, no
Default or Event of Default shall have occurred and be continuing;
(iii) the Insurer shall have consented to such transaction;
(iv) any action as is necessary to maintain the lien and
security interest created by this Indenture shall have been taken; and
(v) the Issuer shall have delivered to the Indenture Trustee
an Officer's Certificate and an Opinion of Counsel addressed to the
Issuer, each stating that:
(A) such sale, conveyance, exchange, transfer or
disposition and such supplemental indenture comply with this
Section 3.10;
(B) such sale, conveyance, exchange, transfer or
disposition and such supplemental indenture has no material
adverse tax consequence to the Trust or to any Noteholders or
Certificateholders; and
(C) that all conditions precedent herein provided for
relating to such transaction have been complied with
(including any filing required by the Exchange Act).
SECTION 3.11 Successor or Transferee.
-----------------------
(a) Upon any consolidation or merger of the Issuer in
accordance with Section 3.10(a), the Person formed by or surviving such
consolidation or merger (if other than the Issuer) shall succeed to, and be
substituted for, and may exercise every right and power of, the Issuer under
this Indenture with the same effect as if such Person had been named as the
Issuer herein.
(b) Upon a conveyance or transfer of all the assets and
properties of the Issuer pursuant to Section 3.10(b), the Issuer shall be
released from every covenant and agreement of this Indenture to be observed or
performed on the part of the Issuer with respect to the Notes immediately upon
the delivery of written notice to the Indenture Trustee from the Person
acquiring such assets and properties stating that the Issuer is to be so
released.
SECTION 3.12 No Other Business. The Issuer shall not engage in
any business or activity other than (i) acquiring, holding and managing the
Mortgage Loans and the other assets of the Trust and the proceeds therefrom in
the manner contemplated by the Basic Documents, (ii) issuing the Notes and the
Certificates, (iii) making payments on the Notes and the Certificates and (iv)
such other activities that are necessary, suitable or convenient to accomplish
the foregoing or are incidental thereto, as set forth in Section 2.3 of the
Trust Agreement.
SECTION 3.13 No Borrowing. The Issuer shall not issue, incur,
assume, guarantee or otherwise become liable, directly or indirectly, for any
indebtedness for money
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borrowed other than indebtedness for money borrowed in respect of the Notes or
in accordance with the Basic Documents.
SECTION 3.14 Guarantees, Loans, Advances and Other
Liabilities. Except as expressly permitted by this Indenture or the other Basic
Documents, the Issuer shall not make any loan or advance or credit to, or
guarantee (directly or indirectly or by an instrument having the effect of
assuring another's payment or performance on any obligation or capability of so
doing or otherwise) endorse or otherwise become contingently liable, directly or
indirectly, in connection with the obligations, stocks or dividends of, or own,
purchase, repurchase or acquire (or agree contingently to do so) any stock,
obligations, assets or securities of, or any other interest in, or make any
capital contribution to, any other Person.
SECTION 3.15 Servicer's Obligations. The Issuer shall use its
best efforts to cause the Servicer to comply with its obligations under the
Pooling and Servicing Agreement.
SECTION 3.16 Capital Expenditures. The Issuer shall not make
any expenditure (by long-term or operating lease or otherwise) for capital
assets (either realty or personalty).
SECTION 3.17 Removal of Administrator. So long as any Notes
are Outstanding, the Issuer shall not remove the Administrator without cause
unless the Insurer shall have consented to such removal.
SECTION 3.18 Restricted Payments. Except for payments of
principal or interest on or redemption of the Notes, so long as any Notes are
Outstanding, the Issuer shall not, directly or indirectly:
(a) pay any dividend or make any distribution (by reduction of
capital or otherwise) whether in cash, property, securities or a
combination thereof, to the Owner Trustee or any owner of a beneficial
interest in the Issuer or otherwise, in each case with respect to any
ownership or equity interest or similar security in or of the Issuer or
to the Servicer;
(b) redeem, purchase, retire or otherwise acquire for value
any such ownership or equity interest or similar security (other than
investments of funds in the Accounts in Permitted Investments); or
(c) set aside or otherwise segregate any amounts for any such
purpose;
provided, however, that the Issuer may make, or cause to be made, (i)
distributions to the Servicer, the Owner Trustee, the Indenture Trustee and the
Certificateholders as permitted by, and to the extent funds are available for
such purpose under, the Pooling and Servicing Agreement or the Trust Agreement
(including without limitation proceeds from initial sale of the Notes
distributed to the Class B-2 Certificateholders pursuant to Section 2.06 of the
Pooling and Servicing Agreement), and (ii) payments to the Indenture Trustee
pursuant to the Administration
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Agreement payments to or distributions from the Collection Account except in
accordance with the Basic Documents.
SECTION 3.19 Notice of Events of Default and Other Events. The
Issuer agrees to give the Indenture Trustee, the Insurer and the Rating Agencies
prompt written notice of each Event of Default hereunder, each Servicer Default,
any Insolvency Event with respect to either Depositor, each default on the part
of either Depositor of its obligations under the Pooling and Servicing Agreement
and each default on the part of the Representative and the Originators of their
respective obligations under the Transfer Agreement and the other Basic
Documents.
SECTION 3.20 Further Instruments and Acts. Upon request of the
Indenture Trustee, the Issuer shall execute and deliver such further instruments
and do such further acts as may be reasonably necessary or proper to carry out
more effectively the purpose of this Indenture.
SECTION 3.21 Representations and Warranties by the Issuer to
the Indenture Trustee. The Issuer hereby represents and warrants to the
Indenture Trustee and the Insurer as follows:
(a) Good Title. No Mortgage Loan has been sold, transferred,
assigned or pledged by the Trust to any Person other than the Indenture Trustee;
immediately prior to the conveyance of the Mortgage Loans pursuant to this
Indenture, the Trust had good and marketable title thereto, free of any Lien;
and, upon execution and delivery of this Indenture by the Trust, and the
endorsement of the Mortgage Notes to the order of and the delivery of the
Mortgage Notes to the Indenture Trustee, as set forth in Section _____ of the
Pooling and Servicing Agreement, the Indenture Trustee shall have all of the
right, title and interest of the Trust in, to and under the Mortgage Loans, the
unpaid indebtedness evidenced thereby and the collateral security therefor, free
of any Lien; and
(b) All Filings Made. All filings, recordings or other actions
necessary in any jurisdiction to give the Indenture Trustee a first perfected
security interest in the Mortgage Loans, the other assets of the Trust and the
Spread Account shall have been made.
ARTICLE IV
SATISFACTION AND DISCHARGE
SECTION 4.1 Satisfaction and Discharge of Indenture. This
Indenture shall cease to be of further effect with respect to the Notes except
as to: (i) rights of registration of transfer and exchange; (ii) substitution of
mutilated, destroyed, lost or stolen Notes; (iii) rights of Noteholders to
receive payments of principal thereof and interest thereon; (iv) Sections 3.3,
3.4, 3.5, 3.8, 3.10, 3.12, 3.13, 3.19 and 3.21; (v) the rights, obligations and
immunities of the Indenture Trustee hereunder (including the rights of the
Indenture Trustee under Section 6.5 and the obligations of the Indenture Trustee
under Section 4.2 and 4.4); (vi) the rights of Noteholders as beneficiaries
hereof with respect to the property so deposited with the Indenture Trustee
payable to all or any of them; and (vii) the rights of the Insurer to
subrogation in respect
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of any Insured Payments, and the Indenture Trustee, on demand of and at the
expense of the Issuer, shall execute proper instruments acknowledging
satisfaction and discharge of this Indenture with respect to the Notes, if:
(a) either:
(1) all Notes theretofore authenticated and delivered (other
than (A) Notes that have been destroyed, lost or stolen and that have
been replaced or paid as provided in Section 2.5 and (B) Notes for
whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Issuer and thereafter repaid to the
Issuer or discharged from such trust, as provided in Section 3.3) have
been delivered to the Indenture Trustee for cancellation; or
(2) all Notes not theretofore delivered to the Indenture
Trustee for cancellation:
(A) have become due and payable,
(B) shall become due and payable on the Maturity
Date, within one year, or
(C) are to be called for redemption within one year
under arrangements satisfactory to the Indenture Trustee for
the giving of notice of redemption by the Indenture Trustee in
the name, and at the expense, of the Issuer.
and the Insurer has been reimbursed for all amounts owed to it in
respect of Monthly Premiums and Insured Payments, and the Issuer, in
the case of (A), (B) or (C) of subsection 4.1(a)(2) above, has
irrevocably deposited or caused to be irrevocably deposited with the
Indenture Trustee cash or direct obligations of or obligations
guaranteed by the United States of America (which will mature prior to
the date such amounts are payable), in trust for such purpose, in an
amount sufficient (as evidenced by an Independent Certificate) to pay
and discharge the entire unpaid principal and accrued interest on such
Notes not theretofore delivered to the Indenture Trustee for
cancellation when due to the Maturity Date or Payment Date on which the
Notes shall have been called for redemption pursuant to Section
10.1(a), as the case may be;
(b) the Issuer has paid or caused to be paid all other sums
payable hereunder by the Issuer; and
(c) the Issuer has delivered to the Indenture Trustee an
Officer's Certificate, Opinion of Counsel and (if required by the TIA or the
Indenture Trustee) an Independent Certificate from a firm of certified public
accountants, each meeting the applicable requirements of Section 11.1(a) and
each stating that all conditions precedent herein provided for relating to the
satisfaction and discharge of this Indenture have been complied with.
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SECTION 4.2 Application of Trust Money. All moneys deposited
with the Indenture Trustee pursuant to Section 4.1 shall be held in trust in a
segregated account and applied by it, in accordance with the provisions of the
Notes and this Indenture, to the payment, either directly or through any Paying
Agent, as the Indenture Trustee may determine, to the Holders of the particular
Notes for the payment or redemption of which such moneys have been deposited
with the Indenture Trustee, of all sums due and to become due thereon for
principal and interest.
SECTION 4.3 Repayment of Moneys Held by Paying Agent. In
connection with the satisfaction and discharge of this Indenture with respect to
the Notes, all moneys then held by any Paying Agent other than the Indenture
Trustee under the provisions of this Indenture with respect to such Notes shall,
upon demand of the Issuer, be paid to the Indenture Trustee to be held and
applied according to Section 3.3 and thereupon such Paying Agent shall be
released from all further liability with respect to such moneys.
SECTION 4.4 Duration of Appointment of Indenture Trustee.
Notwithstanding the earlier payment in full of all principal and interest due to
the Noteholders under the terms of the Notes and the cancellation of the Notes
pursuant to Section 3.1, the Indenture Trustee shall continue to act in the
capacity as Indenture Trustee hereunder and, for the benefit of the
Certificateholders, shall comply with all of its obligations under the Pooling
and Servicing Agreement, as appropriate, until such time as all payments
allocable to principal of the Certificates and interest due to the
Certificateholders have been paid in full.
ARTICLE V
DEFAULT AND REMEDIES
SECTION 5.1 Events of Default. For the purposes of this
Indenture, "Event of Default" wherever used herein, means any one of the
following events:
(a) failure to pay any interest on any Note as and when the
same becomes due and payable, and such default shall continue for a
period of five (5) days; or
(b) except as set forth in Section 5.1(c), failure to pay any
installment of the principal of any Note as and when the same becomes
due and payable, and such default shall continue for a period of thirty
(30) days after there shall have been given, by registered or certified
mail, to the Insurer, the Depositors and the Servicer by the Insurer or
the Indenture Trustee (with the consent of the Insurer) or to the
Issuer, the Depositors and the Servicer and the Indenture Trustee by
the Holders representing an aggregate Percentage Interest of at least
25% of Outstanding Notes (with the consent of the Insurer); or
(c) failure to pay in full the outstanding Note Principal
Balance on the Maturity Date; or
(d) default in the observance or performance in any material
respect of any covenant or agreement of the Issuer made in this
Indenture (other than a covenant or
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agreement, a default in the observance or performance of which is
elsewhere specifically addressed in this Section 5.1) which failure
materially and adversely affects the rights of the Noteholders, and
such default shall continue or not be cured, for a period of 30 days
after there shall have been given, by registered or certified mail, to
the Issuer and the Depositors (or the Servicer, as applicable) by the
Insurer or by the Indenture Trustee (with the consent of the Insurer)
or to the Issuer, the Depositors and the Servicer and the Indenture
Trustee by the Holders representing aggregate Percentage Interest of at
least 25% of Outstanding Notes (with the consent of the Insurer), a
written notice specifying such default and requiring it to be remedied
and stating that such notice is a "Notice of Default" hereunder; or
(e) the filing of a decree or order for relief by a court
having jurisdiction in the premises in respect of the Issuer or any
substantial part of the assets of the Trust in an involuntary case
under any applicable federal or state bankruptcy, insolvency or other
similar law now or hereafter in effect, or appointing a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar
official of the Issuer or for any substantial part of the assets of the
Trust, or ordering the winding-up or liquidation of the Issuer's
affairs, and such decree or order shall remain unstayed and in effect
for a period of 90 consecutive days; or
(f) the commencement by the Issuer of a voluntary case under
any applicable federal or state bankruptcy, insolvency or other similar
law now or hereafter in effect, or the consent by the Issuer to the
entry of an order for relief in an involuntary case under any such law,
or the consent by the Issuer to the appointment or taking possession by
a receiver, liquidator, assignee, custodian, trustee, sequestrator or
similar official of the Issuer or for any substantial part of the
assets of the Trust, or the making by the Issuer of any general
assignment for the benefit of creditors, or the failure by the Issuer
generally to pay its debts as such debts become due, or the taking of
action by the Issuer in furtherance of any of the foregoing.
The Issuer shall deliver to the Indenture Trustee and the Insurer, within five
Business Days after learning of the occurrence thereof, written notice in the
form of an Officer's Certificate of any event which with the giving of notice
and the lapse of time would become an Event of Default under Section 5.1(b), its
status and what action the Issuer is taking or proposes to take with respect
thereto.
SECTION 5.2 Acceleration of Maturity; Rescission and
----------------------------------------
Annulment.
---------
(a) If an Event of Default should occur and be continuing
hereunder, then and in every such case, unless the principal amount of the Notes
shall have already become due and payable, the Indenture Trustee at the
direction of the Insurer, or either the Indenture Trustee or the Majority in
Voting Interest of Notes, in both cases with the consent of the Insurer, may
declare all the Notes to be immediately due and payable, by a notice in writing
to the Issuer (and to the Indenture Trustee and the Insurer if given by the
Noteholders) setting forth the Event or Events of Default, and upon any such
declaration the unpaid principal amount of such Notes,
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together with accrued and unpaid interest thereon through the date of
acceleration, shall become immediately due and payable.
(b) At any time after such declaration of acceleration of
maturity has been made and before a judgment or decree for payment of the money
due has been obtained by the Indenture Trustee as hereinafter provided in this
Article V, the Indenture Trustee, at the direction of the Insurer or the
Majority in Voting Interest of Notes, with the consent of the Insurer, by
written notice to the Issuer and the Indenture Trustee, may waive all Defaults
set forth in the notice delivered pursuant to Section 5.2(a), and rescind and
annul such declaration and its consequences; provided, however, that no such
rescission and annulment shall extend to or affect any subsequent default or
impair any right consequent thereto; and provided, further, that if the
Indenture Trustee shall have proceeded to enforce any right under this Indenture
and such proceedings shall have been discontinued or abandoned because of such
rescission and annulment or for any other reason, or shall have been determined
adversely to the Indenture Trustee, then and in every such case, the Indenture
Trustee, the Issuer and the Noteholders, as the case may be, shall be restored
respectively to their former positions and rights hereunder, and all rights,
remedies and powers of the Indenture Trustee, the Issuer and the Noteholders, as
the case may be, shall continue as though no such proceedings had been taken.
SECTION 5.3 Collection of Indebtedness and Suits for
----------------------------------------
Enforcement by Indenture Trustee.
--------------------------------
(a) The Issuer covenants that if:
(i) default is made in the payment of any installment of
interest on any Note when the same becomes due and payable, and such
default continues unremedied for a period of five days after receipt by
the Servicer of notice thereof from the Insurer or the Indenture
Trustee or receipt by the Servicer and the Indenture Trustee of notice
thereof from the Insurer or the Holders representing an aggregate
Percentage Interest of at least 25% of Outstanding Notes (with the
consent of the Insurer); or
(ii) default is made in the payment of the principal of or any
installment of the principal of any Note when the same becomes due and
payable, and such default continues unremedied for a period of thirty
(30) days after receipt by the Servicer of notice thereof from the
Insurer or the Indenture Trustee or receipt by the Servicer and the
Indenture Trustee of notice thereof from the Insurer or the Holders
representing an aggregate Percentage Interest of at least 25% of
Outstanding Notes (with the consent of the Insurer);
the Issuer shall, upon demand of the Indenture Trustee, pay to the Indenture
Trustee, for the ratable benefit of the Noteholders, the whole amount then due
and payable on such Notes for principal and interest, with interest upon the
overdue principal, at the rate borne by the Notes and in addition thereto such
further amount as shall be sufficient to cover the costs and expenses of
collection, including the reasonable compensation, expenses, disbursements and
advances of the Indenture Trustee and its agents and counsel.
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(b) If the Issuer shall fail forthwith to pay such amounts
upon such demand, the Insurer or the Indenture Trustee (with the consent of the
Insurer), in its own name and as trustee of an express trust, may institute a
Proceeding for the collection of the sums so due and unpaid, and may prosecute
such Proceeding to judgment or final decree, and may enforce the same against
the Issuer or other obligor upon such Notes and collect in the manner provided
by law out of the property of the Issuer or other obligor upon such Notes,
wherever situated, the moneys adjudged or decreed to be payable.
(c) If an Event of Default occurs and is continuing, the
Insurer or the Indenture Trustee (with the consent of the Insurer) may, as more
particularly provided in Section 5.4, in its discretion, proceed to protect and
enforce the rights of the Indenture Trustee, the Insurer, and the Noteholders,
by such appropriate Proceedings as the Indenture Trustee shall deem most
effective to protect and enforce any such rights, whether for the specific
enforcement of any covenant or agreement in this Indenture or in aid of the
exercise of any power granted herein, or to enforce any other proper remedy or
legal or equitable right vested in the Insurer or the Indenture Trustee by this
Indenture or by law.
(d) If there shall be pending, relative to the Issuer or any
other obligor upon the Notes or any Person having or claiming an ownership
interest in the assets of the Trust, proceedings under Title 11 of the United
States Code or any other applicable federal or state bankruptcy, insolvency or
other similar law, or if a receiver, assignee or trustee in bankruptcy or
reorganization, liquidator, sequestrator or similar official shall have been
appointed for or taken possession of the Issuer or its property or such other
obligor or Person, or in case of any other comparable judicial Proceedings
relative to the Issuer or other obligor upon the Notes, or to the creditors or
property of the Issuer or such other obligor, the Indenture Trustee,
irrespective of whether the principal of any Notes shall then be due and payable
as therein expressed or by declaration or otherwise and irrespective of whether
the Indenture Trustee shall have made any demand pursuant to the provisions of
this Section 5.3, shall be entitled and empowered to (and shall at the direction
of the Insurer), by intervention in such Proceedings or otherwise:
(i) file and prove a claim or claims for the whole amount of
principal and interest owing and unpaid in respect of the Notes and to
file such other papers or documents as may be necessary or advisable in
order to have the claims of the Indenture Trustee or the Insurer
(including any claim for reasonable compensation to the Indenture
Trustee and each predecessor Indenture Trustee or the Insurer, and
their respective agents, attorneys and counsel, and for reimbursement
of all expenses and liabilities incurred, and all advances made, by the
Indenture Trustee and each predecessor Indenture Trustee, except as a
result of negligence or bad faith) and of the Noteholders allowed in
such Proceedings;
(ii) unless prohibited by applicable law and regulations, vote
on behalf of the Noteholders in any election of a trustee, a standby
trustee or Person performing similar functions in any Proceedings;
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(iii) collect and receive any moneys or other property payable
or deliverable on any such claims and to distribute all amounts
received with respect to the claims of the Noteholders, the Insurer and
of the Indenture Trustee on their behalf; and
(iv) file such proofs of claim and other papers or documents
as may be necessary or advisable in order to have the claims of the
Indenture Trustee, the Insurer or the Holders of Notes allowed in any
judicial proceedings relative to the Issuer, its creditors and its
property;
and any trustee, receiver, liquidator, custodian or other similar official in
any such Proceeding is hereby authorized by each of such Noteholders to make
payments to the Indenture Trustee or the Insurer, as applicable, and, if the
Indenture Trustee shall consent to the making of payments directly to such
Noteholders, to pay to the Indenture Trustee such amounts as shall be sufficient
to cover reasonable compensation to the Indenture Trustee, each predecessor
Indenture Trustee and their respective agents, attorneys and counsel, and all
other expenses and liabilities incurred, and all advances made, by the Indenture
Trustee and each predecessor Indenture Trustee except as a result of negligence
or bad faith.
(e) Nothing herein contained shall be deemed to authorize the
Indenture Trustee to authorize or consent to or vote for or accept or adopt on
behalf of any Noteholder any plan of reorganization, arrangement, adjustment or
composition affecting the Notes or the rights of any Holder thereof or to
authorize the Indenture Trustee to vote in resect of the claim of any Noteholder
in any such proceeding except, as aforesaid, to vote for the election of a
trustee in bankruptcy or similar Person.
(f) All rights of action and of asserting claims under this
Indenture, or under any of the Notes, may be enforced by the Indenture Trustee
without the possession of any of the Notes or the production thereof in any
trial or other Proceedings relative thereto, and any such Proceedings instituted
by the Indenture Trustee shall be brought in its own name as trustee of an
express trust, and any recovery of judgment, subject to the payment of the
expenses, disbursements and compensation of the Indenture Trustee, each
predecessor Indenture Trustee, the Insurer and their respective agents and
attorneys, shall be for the ratable benefit of the Noteholders.
(g) In any Proceedings brought by the Indenture Trustee (and
also any Proceedings involving the interpretation of any provision of this
Indenture to which the Indenture Trustee shall be a party) the Indenture Trustee
shall be held to represent all the Noteholders, and it shall not be necessary to
make any Noteholder a party to any such Proceedings.
SECTION 5.4 Remedies; Priorities.
--------------------
(a) If an Event of Default shall have occurred and be
continuing, the Indenture Trustee shall, at the direction of the Insurer and
may, with the consent of the Insurer, do one or more of the following (subject
to Section 5.5):
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(i) institute Proceedings in its own name and as trustee of an
express trust for the collection of all amounts then payable on the
Notes or under this Indenture with respect thereto, whether by
declaration or otherwise, enforce any judgment obtained, and collect
from the Issuer and any other obligor upon such Notes moneys adjudged
due;
(ii) institute Proceedings from time to time for the complete
or partial foreclosure of this Indenture with respect to the assets of
the Trust;
(iii) exercise any remedies of a secured party under the UCC
and take any other appropriate action to protect and enforce the rights
and remedies of the Indenture Trustee, the Insurer and the Noteholders;
and
(iv) sell the assets of the Trust or any portion thereof or
rights or interest therein, at one or more public or private sales
called and conducted in any manner permitted by law;
provided, however, that the Indenture Trustee may not sell or otherwise
liquidate the assets of the Trust following an Event of Default, unless
(A)(1) the Holders of all of the Outstanding Notes consent thereto, (2)
the proceeds of such sale or liquidation distributable to the
Noteholders are sufficient to discharge in full the principal of and
the accrued interest on the Notes at the date of such sale or
liquidation or (3) the Indenture Trustee determines that the assets of
the Trust will not continue to provide sufficient funds for the payment
of principal of and interest on the Notes as they would have become due
if the Notes had not been declared due and payable, and (B) the
Indenture Trustee obtains the consent of the Insurer. In determining
such sufficiency or insufficiency with respect to clauses (A)(2) and
(A)(3) of this provision, the Indenture Trustee may, but need not,
obtain and rely upon an opinion of an Independent investment banking or
accounting firm of national reputation as to the feasibility of such
proposed action and as to the sufficiency of the assets of the Issuer
for such purpose.
(b) If the Indenture Trustee collects any money or property
pursuant to this Article V, it shall pay out the money or property in the
following order:
FIRST: to the Indenture Trustee for amounts due under
Section 6.5;
SECOND: to Noteholders (including the Insurer as subrogee)
for amounts due and unpaid on the Notes for interest, ratably among all
Noteholders, without preference or priority of any kind, according to
the amounts due and payable on all the Notes for interest;
THIRD: to Noteholders (including the Insurer as subrogee)
for amounts due and unpaid on the Notes for principal, ratably among
all Noteholders, without preference or priority of any kind, according
to the amounts due and payable on all the Notes for principal; and
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FOURTH: to the Owner Trustee for deposit to the
Certificate Distribution Account for distribution to the
Certificateholders (including the Insurer as subrogee).
The Indenture Trustee may fix a record date and payment date
for any payment to Noteholders pursuant to this Section 5.4. At least 15 days
before such record date, the Indenture Trustee shall mail to each Noteholder,
the Insurer and the Indenture Trustee a notice that states the record date, the
payment date and the amount to be paid.
SECTION 5.5 Optional Preservation of the Assets of the Trust.
If the Notes have been declared to be due and payable under Section 5.2
following an Event of Default and such declaration and its consequences have not
been rescinded and annulled, the Indenture Trustee may (with the consent of the
Issuer), but need not, unless directed to do so by the Insurer, elect to take
and maintain possession of the assets of the Issuer. It is the desire of the
parties hereto and the Noteholders that there be at all times sufficient funds
for the payment of principal of and interest on the Notes, and the Indenture
Trustee shall take such desire into account when determining whether or not to
take and maintain possession of the assets of the Issuer. In determining whether
to take and maintain possession of the assets of the Issuer, the Indenture
Trustee may, but need not, obtain and rely upon an opinion of any Independent
investment banking or accounting firm of national reputation as to the
feasibility of such proposed action and as to the sufficiency of the assets of
the Issuer for such purpose.
SECTION 5.6 Limitation of Suits. No Holder of any Note shall
have any right to institute any Proceeding, judicial or otherwise, with respect
to this Indenture, or for the appointment of a receiver or trustee, or for any
other remedy hereunder, unless:
(i) such Holder has previously given written notice to the
Indenture Trustee and the Insurer of a continuing Event of Default;
(ii) the Holders of Outstanding Notes representing an
aggregate Percentage Interest of at least 25% (with the consent of the
Insurer) or the Insurer have made written request to the Indenture
Trustee to institute such Proceeding in respect of such Event of
Default in its own name as Indenture Trustee hereunder;
(iii) such Holder or Holders have offered to the Indenture
Trustee reasonable indemnity against the costs, expenses and
liabilities to be incurred in complying with such request;
(iv) the Indenture Trustee for 60 days after its receipt of
such notice, request and offer of indemnity has failed to institute
such Proceedings; and
(v) no direction inconsistent with such written request has
been given to the Indenture Trustee during such 60-day period by the
Holders, Insurer or by the Majority in Voting Interest of the Notes;
and
(vi) such Holder has obtained the written consent of the
Insurer.
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it being understood and intended that no one or more Holders of Notes shall have
any right in any manner whatever by virtue of, or by availing of, any provision
of this Indenture to affect, disturb or prejudice the rights of any other
Holders of Notes or to obtain or to seek to obtain priority or preference over
any other Holders of Notes or to enforce any right under this Indenture, except
in the manner herein provided and for the equal, ratable and common benefit of
all Holders of Notes. For the protection and enforcement of the provisions of
this Section 5.6, each and every Noteholder shall be entitled to such relief as
can be given either at law or in equity.
If the Indenture Trustee shall receive conflicting or
inconsistent requests and indemnity from the Insurer and one or more groups of
Holders of Notes, each representing less than a Majority in Voting Interest of
the Notes, the directions of the Insurer shall prevail notwithstanding any other
provisions of this Indenture.
SECTION 5.7 Unconditional Rights of Noteholders To Receive
Principal and Interest. Notwithstanding any other provisions in this Indenture,
the Holder of any Note shall have the right, which is absolute and
unconditional, to receive payment of the principal of and interest, on such Note
on or after the respective due dates thereof expressed in such Note or in this
Indenture (or, in the case of redemption, on or after the Special Payment Date
or the applicable Payment Date pursuant to Section 10.01 of the Pooling and
Servicing Agreement) and to institute suit for the enforcement of any such
payment, and such right shall not be impaired without the consent of such
Holder.
SECTION 5.8 Restoration of Rights and Remedies. If the
Indenture Trustee, the Insurer or any Noteholder has instituted any Proceeding
to enforce any right or remedy under this Indenture and such Proceeding has been
discontinued or abandoned for any reason or has been determined adversely to the
Indenture Trustee, the Insurer or to such Noteholder, then and in every such
case the Issuer, the Indenture Trustee, the Insurer and the Noteholders shall,
subject to any determination in such Proceeding, be restored severally and
respectively to their former positions hereunder, and thereafter all rights and
remedies of the Indenture Trustee, the Insurer and the Noteholders shall
continue as though no such Proceeding had been instituted.
SECTION 5.9 Rights and Remedies Cumulative. No right or remedy
herein conferred upon or reserved to the Indenture Trustee, the Insurer or to
the Noteholders is intended to be exclusive of any other right or remedy, and
every right and remedy shall, to the extent permitted by law, be cumulative and
in addition to every other right and remedy given hereunder or now or hereafter
existing at law or in equity or otherwise. The assertion or employment of any
right or remedy hereunder, or otherwise, shall not prevent the concurrent
assertion or employment of any other appropriate right or remedy.
SECTION 5.10 Delay or Omission Not a Waiver. No delay or
omission of the Indenture Trustee, the Insurer or any Holder of any Note to
exercise any right or remedy accruing upon any Default or Event of Default shall
impair any such right or remedy or constitute a waiver of any such Default or
Event of Default or an acquiescence therein. Every right and remedy given by
this Article V or by law to the Indenture Trustee, the Insurer or to
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the Noteholders may be exercised from time to time, and as often as may be
deemed expedient, by the Indenture Trustee, the Insurer or by the Noteholders,
as the case may be.
SECTION 5.11 Control by the Insurer. The Insurer or the
Majority in Voting Interest of the Notes (with the consent of the Insurer)
shall, subject to provision being made for indemnification against costs,
expenses and liabilities in a form satisfactory to the Indenture Trustee, have
the right to direct the time, method and place of conducting any Proceeding for
any remedy available to the Indenture Trustee with respect to the Notes or
exercising any trust or power conferred on the Indenture Trustee; provided,
however, that:
(i) such direction shall not be in conflict with any rule of
law or with this Indenture;
(ii) subject to the express terms of Section 5.4, any
direction to the Indenture Trustee to sell or liquidate the assets of
the Trust shall be by the Insurer (so long as the Insurance Policy is
in full force and effect), or by the Holders representing an aggregate
Percentage Interest of at least 100% of Outstanding Notes (with the
consent of the Insurer);
(iii) if the conditions set forth in Section 5.5 have been
satisfied and the Indenture Trustee elects to retain the assets of the
Trust pursuant to Section 5.5, then any direction to the Indenture
Trustee by Holders representing an aggregate Percentage Interest less
than 100% of Outstanding Notes without the consent of the Insurer to
sell or liquidate the assets of the Trust shall be of no force and
effect; and
(iv) the Indenture Trustee may take any other action deemed
proper by the Indenture Trustee that is not inconsistent with such
direction;
provided, however, that subject to Section 6.1, the Indenture Trustee need not
take any action it determines might cause it to incur any liability or might
materially adversely affect the rights of any Noteholders not consenting to such
action.
SECTION 5.12 Waiver of Past Defaults.
-----------------------
(a) Prior to the declaration of the acceleration of the
maturity of the Notes as provided in Section 5.2, the Insurer or note less than
a Majority in Voting Interest of the Notes (with the consent of the Insurer) may
waive any past Default or Event of Default and its consequences except a Default
(i) in the payment of principal of or interest on any of the Notes or (ii) in
respect of a covenant or provision hereof which cannot be modified or amended
without the consent of the Holder or each Note. In the case of any such waiver,
the Issuer, the Indenture Trustee and the Noteholders shall be restored to their
former positions and rights hereunder, respectively; but no such waiver shall
extend to any subsequent or other Default or impair any right consequent
thereto.
(b) Upon any such waiver, such Default shall cease to exist
and be deemed to have been cured and not to have occurred, and any Event of
Default arising therefrom shall
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be deemed to have been cured and not to have occurred, for every purpose of this
Indenture; but no such waiver shall extend to any subsequent or other Default or
Event of Default or impair any right consequent thereto.
SECTION 5.13 Undertaking for Costs. All parties to this
Indenture agree, and each Holder of any Note by such Holder's acceptance thereof
shall be deemed to have agreed, that any court may in its discretion require, in
any Proceeding for the enforcement of any right or remedy under this Indenture,
or in any Proceeding against the Indenture Trustee for any action taken,
suffered or omitted by it as Indenture Trustee, the filing by any party litigant
in such proceeding of an undertaking to pay the costs of such proceeding, and
that such court may in its discretion assess reasonable costs, including
reasonable attorneys fees, against any party litigant in such proceeding, having
due regard to the merits and good faith of the claims or defenses made by such
party litigant; but the provisions of this Section 5.13 shall not apply to:
(a) any proceeding instituted by the Indenture Trustee or the
Insurer;
(b) any proceeding instituted by any Noteholder, or group of
Noteholders, in each case holding in the aggregate Notes representing an
aggregate Percentage Interest of at least 10% of Outstanding Notes; or
(c) any proceeding instituted by any Noteholder for the
enforcement of the payment of principal of or interest on any Note on or after
the respective due dates expressed in such Note and in this Indenture (or, in
the case of redemption, on or after the Special Payment Date or the applicable
Payment Date pursuant to Section 10.01 of the Pooling and Servicing Agreement).
SECTION 5.14 Waiver of Stay or Extension Laws. The Issuer
covenants (to the extent that it may lawfully do so) that it shall not at any
time insist upon, or plead or in any manner whatsoever, claim or take the
benefit or advantage of, any stay or extension law wherever enacted, now or at
any time hereafter in force, that may affect the covenants or the performance of
this Indenture. The Issuer (to the extent that it may lawfully do so) hereby
expressly waives all benefit or advantage of any such law, and covenants that it
shall not hinder, delay or impede the execution of any power herein granted to
the Indenture Trustee or the Insurer, but shall suffer and permit the execution
of every such power as though no such law had been enacted.
SECTION 5.15 Action on Notes. The Indenture Trustee's right to
seek and recover judgment on the Notes or under this Indenture shall not be
affected by the seeking, obtaining or application of any other relief under or
with respect to this Indenture. Neither the lien of this Indenture nor any
rights or remedies of the Indenture Trustee, the Insurer or the Noteholders
shall be impaired by the recovery of any judgment by the Indenture Trustee
against the Issuer or by the levy of any execution under such judgment upon any
portion of the assets of the Trust or upon any of the assets of the Issuer.
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SECTION 5.16 Performance and Enforcement of Certain
--------------------------------------
Obligations.
-----------
(a) Promptly following a request from the Indenture Trustee or
the Insurer to do so and at the Administrator's expense, the Issuer agrees to
take all such lawful action as the Indenture Trustee or the Insurer may request
to compel or secure the performance and observance by the Depositors and the
Servicer, as applicable, of their respective obligations under or in connection
with the Pooling and Servicing Agreement or by the Originators of their
obligations under or in connection with the Transfer Agreement in accordance
with the terms thereof, and to exercise any and all rights, remedies, powers and
privileges lawfully available to the Issuer under or in connection with the
Pooling and Servicing Agreement to the extent and in the manner directed by the
Indenture Trustee, including the transmission of notices of default on the part
of the Depositors or the Servicer thereunder and the institution of legal or
administrative actions or proceedings to compel or secure performance by the
Depositors or the Servicer of each of their obligations under the Pooling and
Servicing Agreement.
(b) If an Event of Default has occurred and is continuing, the
Indenture Trustee may, and, at the direction (which direction shall be in
writing or by telephone (confirmed in writing promptly thereafter)) of the
Insurer or the Holders representing an aggregate Percentage Interest of at least
66-2/3% of Outstanding Notes (with the consent of the Insurer) shall, exercise
all rights, remedies, powers, privileges and claims of the Issuer against the
Depositors or the Issuer under or in connection with the Pooling and Servicing
Agreement, including the right or power to take any action to compel or secure
performance or observance by the Depositors or the Servicer of each of their
obligations to the Issuer thereunder and to give any consent, request, notice,
direction, approval, extension or waiver under the Pooling and Servicing
Agreement, and any right of the Issuer to take such action shall be suspended.
(c) Promptly following a request from the Indenture Trustee
(with the consent of the Insurer) or the Insurer to do so and at the
Administrator's expense, the Issuer agrees to take all such lawful action as the
Indenture Trustee may request to compel or secure the performance and observance
by the Representative and the Originators of each of their respective
obligations to the Depositors under or in connection with the Transfer Agreement
in accordance with the terms thereof, and to exercise any and all rights,
remedies, powers and privileges lawfully available to the Issuer under or in
connection with the Transfer Agreement to the extent and in the manner directed
by the Indenture Trustee, including the transmission of notices of default on
the part of the Depositors thereunder and the institution of legal or
administrative actions or proceedings to compel or secure performance by the
Representative and the Originators of each of their respective obligations under
the Transfer Agreement.
(d) If an Event of Default has occurred and is continuing, the
Indenture Trustee may, and, at the direction (which direction shall be in
writing or by telephone (confirmed in writing promptly thereafter)) of the
Insurer or Holders representing an aggregate Percentage Interest of at least
66-2/3% of Outstanding Notes (with the consent of the Insurer) shall, exercise
all rights, remedies, powers, privileges and claims of the Depositors against
the Representative and the Originators under or in connection with the Transfer
Agreement, including the right or power to take any action to compel or secure
performance or observance
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by the Representative and the Originators of each of their respective
obligations to the Depositors thereunder and to give any consent, request,
notice, direction, approval, extension or waiver under the Transfer Agreement,
and any right of the Depositors to take such action shall be suspended.
ARTICLE VI
THE INDENTURE TRUSTEE
SECTION 6.1 Duties of Indenture Trustee.
---------------------------
The Indenture Trustee, prior to the occurrence of an Event of
Default and after the curing of all Events of Default which may have occurred,
undertakes to perform such duties and only such duties to be performed by it as
are specifically set forth in this Indenture. If an Event of Default has
occurred and has not bee cured or waived, the Indenture Trustee shall exercise
such of the rights and powers vested in it by this Indenture, and use the same
degree of care and skill in its exercise as a prudent person would exercise or
use under the circumstances in the conduct of such person's own affairs. The
Indenture Trustee is hereby authorized to acknowledge and accept the Pooling and
Servicing Agreement, and by so doing the Indenture Trustee undertakes to perform
the duties to be performed by the Indenture Trustee as set forth therein.
The Indenture Trustee, upon receipt of all resolutions,
certificates, statements, opinions, reports, documents, orders or other
instruments furnished to the Indenture Trustee which are specifically required
to be furnished pursuant to any provision of this Indenture, shall examine them
to determine whether they conform to the requirements of this Indenture;
provided, however, that the Indenture Trustee shall not be responsible for the
accuracy or content of any resolution, certificate, statement, opinion, report,
document, order or other instrument furnished by the Issuer, the Servicer, the
Representative, the Administrator, any Depositor or any Originator hereunder or
under any Basic Document. If any such instrument is found not to conform to the
requirements of this Indenture or thereunder, the Indenture Trustee shall notify
the Insurer and request written instructions as to the action it deems
appropriate to have the instrument corrected, and if the instrument is not so
corrected, the Indenture Trustee will provide notice thereof to the Insurer who
shall then direct the Indenture Trustee as to the actions, if any, to be taken.
No provisions of this Indenture shall be construed to relieve
the Indenture Trustee from liability for its own negligent action, its own
negligent failure to act or its own willful misconduct; provided, however, that:
(i) Prior to the occurrence of an Event of Default, and after
the curing of all such Events of Default which may have occurred, the
duties and obligations of the Indenture Trustee shall be determined
solely by the express provisions of this Indenture, the Indenture
Trustee shall not be liable except for the performance of such duties
and obligations as are specifically set forth in this Indenture, no
implied covenants or obligations shall be read into this Indenture
against the Indenture Trustee and, in the absence of bad faith on the
part of the Indenture Trustee, the Indenture Trustee may
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conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon any certificates or
opinions furnished to the Indenture Trustee and conforming to the
requirements of this Indenture;
(ii) The Indenture Trustee shall not be personally liable for
an error of judgment made in good faith by a Responsible Officer or
other officers of the Indenture Trustee, unless it shall be proved that
the Indenture Trustee was negligent in ascertaining the pertinent
facts;
(iii) The Indenture Trustee shall not be personally liable
with respect to any action taken, suffered or omitted to be taken by it
in good faith in accordance with the direction of the Insurer or the
Noteholders, relating to the time, method and place of conducting any
Proceeding for any remedy available to the Indenture Trustee, or
exercising any trust or power conferred upon the Indenture Trustee,
under this Indenture;
(iv) The Indenture Trustee shall not be required to take
notice or be deemed to have notice or knowledge of any Default or Event
of Default unless a Responsible Officer of the Indenture Trustee shall
have received notice thereof. In the absence of receipt of such notice,
the Indenture Trustee may conclusively assume that there is no Default
or Event of Default;
(v) The Indenture Trustee shall not be required to expend or
risk its own funds or otherwise incur financial liability for the
performance of any of its duties hereunder or the exercise of any of
its rights or powers if there is reasonable ground for believing that
the repayment of such funds or adequate indemnity against such risk or
liability is not reasonably assured to it and none of the provisions
contained in this Indenture shall in any event require the Indenture
Trustee to perform, or be responsible for the manner of performance of,
any of the obligations of the Issuer under this Indenture or the
Servicer under the Pooling and Servicing Agreement, except during such
time, if any, as the Indenture Trustee shall be the successor to, and
be vested with the rights, duties, powers and privileges of, the Issuer
in accordance with the terms of this Indenture or the Servicer in
accordance with the terms of the Pooling and Servicing Agreement;
(vi) Subject to the other provisions of this Indenture and
without limiting the generality of this Section, the Indenture Trustee
shall have no duty (A) to see to any recording, filing, or depositing
of this Indenture or any agreement referred to herein or any financing
statement or continuation statement evidencing a security interest, or
to see to the maintenance of any such recording or filing or depositing
or to any rerecording, refiling or redepositing of any thereof, (B) to
see to any insurance, (C) to see to the payment or discharge of any
tax, assessment, or other governmental charge or any lien or
encumbrance of any kind owing with respect to, assessed or levied
against, any part of the assets of the Trust, (D) to confirm or verify
the contents of any reports or certificates of the Issuer delivered to
the Indenture Trustee pursuant to this Indenture believed by the
Indenture Trustee to be genuine and to have been signed or presented by
the proper party or parties;
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(vii) The Indenture Trustee shall not be deemed a fiduciary
for the Insurer in its capacity as such, except to the extent the
Insurer has made an Insured Payment and is thereby subrogated to the
rights of the Noteholders with respect thereto; and
(viii) Money held in trust by the Indenture Trustee need not
be segregated from other funds except to the extent required by law or
the terms of this Indenture or the Pooling and Servicing Agreement or
the Trust Agreement.
(ix) Every provision of this Indenture relating to the
Indenture Trustee shall be subject to this Section 6.1 and to the
provisions of the TIA.
SECTION 6.2 Certain Matters Affecting the Indenture
---------------------------------------
Trustee.
-------
Except as otherwise provided in Section 6.1:
(i) The Indenture Trustee may rely and shall be protected in
acting or refraining from acting upon any resolution, Officers'
Certificate, Opinion of Counsel, certificate of auditors or any other
certificate, statement, instrument, opinion, report, notice, request,
consent, order, appraisal, bond or other paper or document believed by
it to be genuine and to have been signed or presented by the proper
party or parties;
(ii) The Indenture Trustee may consult with counsel and any
Opinion of Counsel shall be full and complete authorization and
protection in respect of any action taken or suffered or omitted by it
hereunder in good faith, in the absence of negligence, and in
accordance with such Opinion of Counsel;
(iii) The Indenture Trustee shall be under no obligation to
exercise any of the trusts or powers vested in it by this Indenture or
to institute, conduct or defend by litigation hereunder or in relation
hereto at the request, order or direction of the Insurer or any of the
Noteholders, pursuant to the provisions of this Indenture, unless such
Noteholders or the Insurer, as applicable, shall have offered to the
Indenture Trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred therein or thereby;
nothing contained herein shall, however, relieve the Indenture Trustee
of the obligation, upon the occurrence of an Event of Default (which
has not been cured), to exercise such of the rights and powers vested
in it by this Indenture, and to use the same degree of care and skill
in its exercise as a prudent person would exercise or use under the
circumstances in the conduct of such person's own affairs;
(iv) The Indenture Trustee shall not be personally liable for
any action taken, suffered or omitted by it in good faith, in the
absence of negligence, and believed by it to be authorized or within
the discretion or rights or powers conferred upon it by this Indenture;
(v) Prior to the occurrence of an Event of Default hereunder
and after the curing of all Events of Default which may have occurred,
the Indenture Trustee shall not
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be bound to make any investigation into the facts or matters stated in
any resolution, certificate, statement, instrument, opinion, report,
notice, request, consent, order, approval, bond or other paper or
document, unless requested in writing to do so by the Insurer or
Holders evidencing a Percentage Interest aggregating not less than 25%
of Outstanding Notes or any Account Party; provided, however, that if
the payment within a reasonable time to the Indenture Trustee of the
costs, expenses or liabilities likely to be incurred by it in the
making of such investigation is, in the opinion of the Indenture
Trustee, not reasonably assured to the Indenture Trustee by the
security afforded to it by the terms of this Indenture, the Indenture
Trustee may require reasonable indemnity against such expense or
liability as a condition to taking any such action. The reasonable
expense of every such examination shall be paid by the Administrator
or, if paid by the Indenture Trustee, shall be repaid by the
Administrator upon demand from the Administrator's own funds;
(vi) The right of the Indenture Trustee to perform any
discretionary act enumerated in this Indenture shall not be construed
as a duty, and the Indenture Trustee shall not be answerable for other
than its negligence or willful misconduct in the performance of such
act;
(vii) The Indenture Trustee shall not be required to give any
bond or surety in respect of the execution of the Trust created hereby
or the powers granted hereunder; and
(viii) The Indenture Trustee may execute any of the trusts or
powers hereunder or perform any duties hereunder either directly or by
or through agents or attorneys.
SECTION 6.3 Indenture Trustee Not Liable for Notes or
-----------------------------------------
Mortgage Loans.
--------------
The recitals contained herein and in the Notes (other than the
certificate of authentication on the Notes) shall be taken as the statements of
the Issuer, and the Indenture Trustee assumes no responsibility for their
correctness. The Indenture Trustee makes no representations as to the validity
or sufficiency of this Indenture or of the Notes or of any Mortgage Loan or any
other Basic Document. The Indenture Trustee shall not be accountable for the use
or application by the Issuer of any of the Notes or of the proceeds of such
Notes, or for the use of application of any funds paid to the Issuer in respect
of the Pooling and Servicing Agreement or deposited in or withdrawn from the
Principal and Interest Account by the Issuer. In the absence of bad faith,
negligence or willful misconduct, the Indenture Trustee shall not be responsible
for the legality or validity of the Indenture or the validity, priority,
perfection or sufficiency of the security for the Notes issued or intended to be
issued hereunder.
SECTION 6.4 Indenture Trustee May Own Notes.
-------------------------------
The Indenture Trustee in its individual or any other capacity
may become the owner or pledgee of Notes with the same rights it would have if
it were not Indenture Trustee, and may otherwise deal with the parties hereto.
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SECTION 6.5 Indenture Trustee's Fees and Expenses.
-------------------------------------
The Issuer has caused the Servicer under the Pooling and
Servicing Agreement to covenant and agree to pay to the Indenture Trustee from
time to time, and the Indenture Trustee shall be entitled to, reasonable
compensation (which shall not be limited by any provision of law in regard to
the compensation of a trustee of an express trust) for all services rendered by
it in the execution of the trusts hereby created and in the exercise and
performance of any of the powers and duties hereunder of the Indenture Trustee,
and the Servicer will pay or reimburse the Indenture Trustee upon its request
for all reasonable expenses, disbursements and advances incurred or made by the
Indenture Trustee in accordance with any of the provisions of this Indenture
(including the reasonable compensation, expenses and disbursements of its
counsel and of all persons not regularly in its employ) except any such expense,
disbursement or advance as may arise from its negligence or bad faith, provided
that the Indenture Trustee shall have no lien on the assets of the Trust for the
payment of its fees and expenses. Failure by the Issuer to cause any such fees
or other expenses to be paid shall not relieve the Indenture Trustee of its
obligations hereunder. The Indenture Trustee and any director, officer, employee
or agent of the Indenture Trustee caused to be indemnified by the Servicer and
held harmless against any loss, liability or expense (i) incurred in connection
with any legal action relating to this Indenture or the Notes, other than any
loss, liability or expense incurred by reason of willful misfeasance, bad faith
or negligence in the performance of duties hereunder or by reason of reckless
disregard of obligations and duties hereunder, and (ii) resulting from any error
in any tax or information return prepared by or on behalf of the Servicer. The
obligations of the Issuer and the Servicer under this Section 6.5 shall survive
payment of the Notes, and shall extend to any co-trustee appointed pursuant to
this Article VI. The compensation due to the Indenture Trustee pursuant to this
Section 6.5 shall be paid by the Servicer from its own funds.
SECTION 6.6 Eligibility; Disqualification. The Indenture
Trustee shall at all times satisfy the requirements of TIA ss.310(a) and be
reasonably acceptable to the Insurer. The Indenture Trustee shall have a
combined capital and surplus of at least $50,000,000 as set forth in its most
recent published annual report of condition and it shall have a long term
deposit rating of at least "BBB" by S&P and "Baa2" by Moody's. The Indenture
Trustee shall comply with TIA ss.310(b); provided, however, that there shall be
excluded from the operation of TIA ss.310(b)(1) any indenture or indentures
under which other securities of the Issuer are outstanding if the requirements
for such exclusion set forth in TIA ss.310(b)(1) are met. If such banking
association publishes reports of condition at least annually, pursuant to law or
to the requirements of the aforesaid supervising or examining authority, then
for the purposes of this Section 6.6 its combined capital and surplus shall be
deemed to be as set forth in its most recent report of condition so published.
In case at any time the Indenture Trustee shall cease to be eligible in
accordance with the provisions of this Section 6.6, the Indenture Trustee shall
give notice of such ineligibility to the Insurer and any Account Party and shall
resign, upon the request of the Insurer or the Majority in Voting Interest of
the Notes (with the consent of the Insurer), in the manner and with the effect
specified in Section 6.7.
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SECTION 6.7 Resignation and Removal of the Indenture
----------------------------------------
Trustee.
-------
The Indenture Trustee may at any time resign and be discharged
from the trusts hereby created by giving written notice thereof to the Issuer,
the Insurer, each Account Party, the Owner Trustee, the Servicer and to all
Noteholders. Upon receiving such notice of resignation, the Issuer (or the
Administrator on behalf of the Issuer) shall, with the consent of the Insurer,
promptly appoint a successor trustee who satisfied the requirements of Section
6.6 by written instrument, in duplicate, which instrument shall be delivered to
the resigning Indenture Trustee and to the successor trustee. A copy of such
instrument shall be delivered to the Noteholders by the Issuer. Unless a
successor trustee shall have been so appointed and have accepted appointment
within 60 days after the giving of such notice of resignation, the resigning
Indenture Trustee may petition any court of competent jurisdiction for the
appointment of a successor trustee.
If at any time the Indenture Trustee shall cease to be
eligible in accordance with the provisions of Section 6.6 and shall fail to
resign after written request therefor by the Administrator, the Insurer or the
Majority in Voting Interest of the Notes, or if at any time the Indenture
Trustee shall become incapable of acting, or shall be adjudged bankrupt or
insolvent, or a receiver of the Indenture Trustee or of its property shall be
appointed, or any public officer shall take charge or control of the Indenture
Trustee or of its property or affairs for the purpose of rehabilitation,
conservation or liquidation, then the Servicer may remove the Indenture Trustee
and shall, within 30 days after such removal, appoint, subject to the approval
of the Insurer, which approval shall not be unreasonably withheld, a successor
trustee by written instrument, in duplicate, which instrument shall be delivered
to the Indenture Trustee so removed and to the success trustee. A copy of such
instrument shall be delivered to the Insurer, the Noteholders, the Owner Trustee
and each Account Party by the Issuer.
The Majority in Voting Interest of the Notes (with the consent
of the Insurer) or, if the Indenture Trustee fails to perform in accordance with
this Indenture, the Insurer, may remove the Indenture Trustee and appoint a
successor trustee by written instrument or instruments, in triplicate, signed by
such Noteholders or their attorneys-in-fact duly authorized, or by the Insurer,
as the case may be, one complete set of such instruments shall be delivered to
the Issuer, one complete set to the Indenture Trustee so removed and one
complete set to the successor Indenture Trustee so appointed. A copy of such
instruments shall also be provided to the Insurer, the Owner Trustee, the
Administrator and the Servicer.
Any resignation or removal of the Indenture Trustee and
appointment of a successor trustee pursuant to any of the provisions of this
Section shall become effective upon acceptance of appointment by the successor
trustee as provided in Section 6.8.
SECTION 6.8 Successor Trustee.
-----------------
Any successor trustee appointed as provided in Section 6.7
shall execute, acknowledge and deliver to the Issuer and to its predecessor
trustee an instrument accepting such appointment hereunder, and thereupon the
resignation or removal of the predecessor trustee shall
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become effective and such successor trustee, without any further act, deed or
conveyance, shall become fully vested with all the rights, powers, duties and
obligations of its predecessor hereunder, with the like effect as if originally
named as trustee herein. The predecessor trustee shall deliver to the successor
trustee all Trustee's Mortgage Files and related documents and statements held
by it hereunder, and the Issuer and the predecessor trustee shall execute and
deliver such instruments and do such other things as may reasonably be required
for more fully and certainly vesting and confirming in the successor trustee all
such rights, powers, duties and obligations.
No successor trustee shall accept appointment as provided in
this Section unless at the time of such acceptance such successor trustee shall
be eligible under the provisions of Section 6.6.
Upon acceptance of appointment by a successor trustee as
provided in this Section, the Issuer shall mail notice of the succession of such
trustee hereunder to all Noteholders, to the Insurer and to the Rating Agencies.
If the Issuer fails to mail such notices within ten days after acceptance of
appointment by the successor trustee, the successor trustee shall cause such
notice to be mailed at the expense of the Issuer.
SECTION 6.9 Merger or Consolidation of Indenture
------------------------------------
Trustee.
-------
Any Person into which the Indenture Trustee may be merged or
converted or with which it may be consolidated or any corporation or national
banking association resulting from any merger, conversion or consolidation to
which the Indenture Trustee shall be a party, or any corporation or national
banking association succeeding to the business of the Indenture Trustee, shall
be the successor of the Indenture Trustee hereunder, provided such corporation
or national banking association shall be eligible under the provisions of
Section 6.6, without the execution or filing of any paper or any further act on
the part of any of the parties hereto, anything herein to the contrary
notwithstanding.
SECTION 6.10 Appointment of Co-Indenture Trustee or
--------------------------------------
Separate Indenture Trustee.
--------------------------
Notwithstanding any other provisions hereof, at any time, for
the purpose of meeting any legal requirements of any jurisdiction in which any
part of the assets of the Trust or property securing the same may at the time be
located, the Issuer and the Indenture Trustee acting jointly shall have the
power and shall execute and deliver all instruments to appoint one or more
Persons approved by the Indenture Trustee and the Insurer to act as co-trustee
or co-trustees, jointly with the Indenture Trustee, or separate trustee or
separate trustees, of all or any part of the assets of the Trust, and to vest in
such Person or Persons, in such capacity, such title to the assets of the Trust,
or any part thereof, and, subject to the other provisions of this Section 6.10,
such powers, duties, obligations, rights and trusts as the Issuer and the
Indenture Trustee may consider necessary or desirable. If the Issuer shall not
have joined in such appointment within 15 days after the receipt by it of a
request so to do, or in case an Event of Default shall have occurred and be
continuing, the Indenture Trustee alone (with the consent of the Insurer) shall
have the power to make such appointment. No co-trustee or separate trustee
hereunder
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shall be required to meet the terms of eligibility as a successor trustee under
Section 6.6 hereunder and no notice to Holders of Notes of the appointment of
co-trustee(s) or separate trustee(s) shall be required under Section 6.8 hereof.
In the case of any appointment of a co-trustee or separate
trustee pursuant to this Section 6.10, all rights, powers, duties and
obligations conferred or imposed upon the Indenture Trustee shall be conferred
or imposed upon and exercised or performed by the Indenture Trustee and such
separate trustee or co-trustee jointly, except to the extent that under any law
of any jurisdiction in which any particular act or acts are to be performed
(whether as Indenture Trustee hereunder or as successor to the Issuer
hereunder), the Indenture Trustee shall be incompetent or unqualified to perform
such act or acts, in which event such rights, powers, duties and obligations
(including the holding of title to the assets of the Trust or any portion
thereof in any such jurisdiction) shall be exercised and performed by such
separate trustee or co-trustee at the direction of the Indenture Trustee.
Any notice, request or other writing given to the Indenture
Trustee shall be deemed to have been given to each of the then separate trustees
and co-trustees, as effectively as if given to each of them. Every instrument,
appointing any separate trustee or co-trustee shall refer to this Indenture and
the conditions of this Article VI. Each separate trustee and co-trustee, upon
its acceptance of the trusts conferred, shall be vested with the estates or
property specified in its instrument of appointment, either jointly with the
Indenture Trustee or separately, as may be provided therein, subject to all the
provisions of this Indenture, specifically including every provision of this
Indenture relating to the conduct of, affecting the liability of, or affording
protection to, the Indenture Trustee. Every such instrument shall be filed with
the Indenture Trustee.
Any separate trustee or co-trustee may, at any time,
constitute the Indenture Trustee, its agent or attorney-in-fact, with full power
and authority, to the extent not prohibited by law, to do any lawful act under
or in respect to this Indenture on its behalf and in its name. The Indenture
Trustee shall not be responsible for any action or inaction of any such separate
trustee or co-trustee. If any separate trustee or co-trustee shall die, become
incapable of acting, resign or be removed, all of its estates, properties,
rights, remedies and trusts shall vest in and be exercised by the Indenture
Trustee, to the extent permitted by law, without the appointment of a new or
successor trustee.
SECTION 6.11 Protection of Trust Assets.
--------------------------
(a) The Indenture Trustee will hold the assets of the Trust
and the Spread Account in trust for the benefit of the Noteholders, the
Certificateholders (to the extent set forth in the Pooling and Servicing
Agreement) and the Insurer and, upon request of the Insurer, or, with the
consent of the Insurer, at the request of the Issuer or any Account Party, will
from time to time execute and deliver all such supplements and amendments hereto
pursuant to Section 9.1 and all instruments of further assurance and other
instruments, and will take such other action upon such request to:
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(i) more effectively hold in trust all or any portion of the
assets of the Trust and the Spread Account;
(ii) perfect, publish notice of, or protect the validity of
any grant made or to be made by this Indenture;
(iii) enforce any of the Mortgage Loans; or
(iv) preserve and defend title to the assets of the Trust, the
lien on the Spread Account and the rights of the Indenture Trustee, and
the interests of the Noteholders represented thereby, in such Trust and
the Spread Account against the claims of all Persons and parties.
The Indenture Trustee shall send copies of any request
received from any Account Party, the Insurer, the Owner Trustee or the Issuer to
take any action pursuant to this Section 6.11 to the others.
(b) Subject to Article V hereof, the Indenture Trustee shall
have the power to enforce, and shall enforce the obligations of the other
parties to this Indenture, of any Letter of Credit Bank and of the Insurer, by
action, suit or proceeding at law or equity, and shall also have the power to
enjoin, by action or suit in equity, any acts or occurrences which may be
unlawful or in violation of the rights of the Noteholders; provided, however,
that nothing in this Section 6.11 shall require any action by the Indenture
Trustee unless the Indenture Trustee shall first (i) have been furnished
indemnity satisfactory to it and second (ii) when required by this Indenture,
have been requested to take such action by the Majority in Voting Interest of
the Notes, the Insurer, the Issuer or any Account Party in accordance with the
terms of this Indenture.
(c) the Indenture Trustee shall execute any instrument
required pursuant to this Section 6.11 so long as such instrument does not
conflict with this Indenture or with the Indenture Trustee's fiduciary duties.
SECTION 6.12 Notice of Defaults. If an Default occurs and is
continuing and if it is known to a Responsible Officer of the Indenture Trustee,
the Indenture Trustee shall mail to each Noteholder notice of the Default within
90 days after it occurs. Except in the case of the Default in payment of
principal of or interest on any Note (including payments pursuant to the
mandatory redemption provisions of such Note), the Indenture Trustee may
withhold the notice if and so long as a committee of its Responsible Officers in
good faith determines that withholding the notice is in the interests of
Noteholders.
SECTION 6.13 Reports to Holders. The Indenture Trustee shall
deliver to each Noteholder the information and documents set forth in Article
VII, and, in addition, the Indenture Trustee shall deliver to each Noteholder
all such information with respect to the Notes as may be required to enable such
holder to prepare its federal and state income tax returns supplied to it by the
Servicer pursuant to Section 5.07 of the Pooling and Servicing Agreement.
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SECTION 6.14 Preferential Collection of Claims Against Issuer.
The Indenture Trustee shall comply with TIA ss.311(a), excluding any creditor
relationship listed in TIA ss.311(b). A trustee who has resigned or been removed
shall be subject to TIA 311(a) to the extent indicated.
SECTION 6.15 Representations and Warranties of Indenture
Trustee. The Indenture Trustee represents and warrants as of the Closing Date
that:
(a) the Indenture Trustee is a national association duly
organized, validly existing and in good standing under the laws of the United
States of America;
(b) the Indenture Trustee has full power, authority and legal
right to execute, deliver and perform this Indenture, and has taken all
necessary action to authorize the execution, delivery and performance by it of
this Indenture;
(c) the execution, delivery and performance by the Indenture
Trustee of this Indenture (i) shall not violate any provision of any law or
regulation governing the banking and trust powers of the Indenture Trustee or
any order, writ, judgment or decree of any court, arbitrator, or governmental
authority applicable to the Indenture Trustee or any of its assets, (ii) shall
not violate any provision of the corporate charter or by-laws of the Indenture
Trustee, or (iii) shall not violate any provision of, or constitute, with or
without notice or lapse of time, a default under, or result in the creation or
imposition of any lien on any properties included in the Trust pursuant to the
provisions of any mortgage, indenture, contract, agreement or other undertaking
to which it is a party, which violation, default or lien could reasonably be
expected to have a materially adverse effect on the Indenture Trustee's
performance or ability to perform its duties under this Indenture or on the
transactions contemplated in this Indenture;
(d) the execution, delivery and performance by the Indenture
Trustee of this Indenture shall not require the authorization, consent or
approval of, the giving of notice to, the filing or registration with, or the
taking of any other action in respect of, any governmental authority or agency
regulating the banking and corporate trust activities of the Indenture Trustee;
and
(e) this Indenture has been duly executed and delivered by the
Indenture Trustee and constitutes the legal, valid and binding agreement of the
Indenture Trustee, enforceable in accordance with its terms.
SECTION 6.16 Indenture Trustee May Enforce Claims Without
Possession of Notes. All rights of action and claims under this Indenture or the
Notes may be prosecuted and enforced by the Indenture Trustee without the
possession of any of the Notes or the production thereof in any proceeding
relating thereto, and any such proceeding instituted by the Indenture Trustee
shall be brought in its own name as Indenture Trustee. Any recovery of judgment
shall, after provision for the payment of the reasonable compensation, expenses,
disbursements and advances of the Indenture Trustee, its agents and counsel, be
for the ratable benefit of the Noteholders in respect of which such judgment has
been obtained.
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SECTION 6.17 Suit for Enforcement. If an Event of Default
shall occur and be continuing, the Indenture Trustee, in its discretion may,
subject to the provisions of Section 6.1, proceed to protect and enforce its
rights and the rights of the Noteholders under this Indenture by proceeding
whether for the specific performance of any covenant or agreement contained in
this Indenture or in aid of the execution of any power granted in this Indenture
or for the enforcement of any other legal, equitable or other remedy as the
Indenture Trustee, being advised by counsel, shall deem most effectual to
protect and enforce any of the rights of the Indenture Trustee or the
Noteholders.
SECTION 6.18 Appointment of Custodians. The Indenture Trustee
may, with the consent of the Servicer and notice to the Insurer and Moody's,
appoint one or more Custodians acceptable to the Insurer to hold all or a
portion of the Mortgage Files as agent for the Indenture Trustee, by entering
into a Custodial Agreement. ___________________________________ is initially
appointed as Custodian. Subject to this Article XVI, the Indenture Trustee
agrees to comply with the terms of each Custodial Agreement and to enforce the
terms and provisions thereof against the Custodian for the benefit of the
Noteholders and the Insurer. The Indenture Trustee shall be liable for the fees
of any Custodian appointed hereunder. Each Custodian shall be a deposit
institution subject to supervision by federal or state authorities and shall be
qualified to do business in the jurisdiction in which it holds any Mortgage
File.
ARTICLE VII
NOTEHOLDERS' LISTS AND REPORTS
SECTION 7.1 Issuer To Furnish Indenture Trustee Names and
Addresses of Noteholders. The Issuer shall furnish or cause to be furnished by
the Servicer to the Indenture Trustee (a) not more than five days before each
Payment Date or Special Payment Date, a list, in such form as the Indenture
Trustee may reasonably require, of the names and addresses of the Holders of
Notes as of the close of business on the immediately preceding Record Date or
Special Record Date, as the case may be, and (b) at such other times as the
Indenture Trustee may request in writing, within 14 days after receipt by the
Issuer of any such request, a list of similar form and content as of a date not
more than 10 days prior to the time such list is furnished; provided, however,
that so long as the Indenture Trustee is the Note Registrar, no such list shall
be required to be furnished.
SECTION 7.2 Preservation of Information, Communications
-------------------------------------------
to Noteholders.
--------------
(a) The Indenture Trustee shall preserve, in as current a form
as is reasonably practicable, the names and addresses of the Holders of Notes
contained in the most recent list furnished to the Indenture Trustee as provided
in Section 7.1 and the names and addresses of Holders of Notes received by the
Indenture Trustee in its capacity as Note Registrar. The Indenture Trustee may
destroy any list furnished to it as provided in such Section 7.1 upon receipt of
a new list so furnished.
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(b) Noteholders may communicate pursuant to TIA ss.312(b) with
other Noteholders with respect to their rights under this Indenture or under the
Notes.
(c) The Issuer, the Indenture Trustee and the Note Registrar
shall have the protection of TIA ss.312(c).
SECTION 7.3 Reports by Issuer.
-----------------
(a) The Issuer shall:
(i) file with the Indenture Trustee, within 15 days after the
Issuer is required to file the same with the Commission, copies of the
annual reports and of the information, documents and other reports (or
copies of such portions of any of the foregoing as the Commission may
from time to time by rules and regulations prescribe) which the Issuer
may be required to file with the Commission pursuant to Section 13 or
15(d) of the Exchange Act;
(ii) file with the Indenture Trustee and the Commission in
accordance with rules and regulations prescribed from time to time by
the Commission such additional information, documents and reports with
respect to compliance by the issuer with the conditions and covenants
of this Indenture as may be required from time to time by such rules
and regulations; and
(iii) supply to the Indenture Trustee (and the Indenture
Trustee shall transmit by mail to all Noteholders described in TIA
ss.313(c)) such summaries of any information, documents and reports
required to be filed by the Issuer pursuant to clauses (i) and (ii) of
this Section 7.3(a) as may be required by rules and regulations
prescribed from time to time by the Commission.
(iv) supply copies of each of the foregoing to the Indenture
Trustee and the Insurer.
(b) Unless the Issuer otherwise determines, the fiscal year of
the Issuer shall end on December 31 of each year.
SECTION 7.4 Reports by Trustee.
------------------
(a) If required by TIA ss.313(a), within 60 days after each
March 1, beginning with March 1, 1994, the Indenture Trustee shall mail to each
Noteholder, in the manner required by TIA ss.313(c), a brief report dated as of
such date that complies with TIA ss.313(a). The Indenture Trustee also shall
comply with TIA ss.313(b). A copy of any report delivered pursuant to this
Section 7.4(a) shall, at the time of its mailing to Noteholders, be filed by the
Indenture Trustee with the Commission and each stock exchange, if any, on which
the Notes are listed. The Issuer shall notify the Indenture Trustee if and when
the Notes are listed on any stock exchange and provided to the Insurer.
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(b) On each Payment Date, the Indenture Trustee shall include
with each payment to each Noteholder a copy of the statement for the Due Period
applicable to such Payment Date as required pursuant to Section 5.07 of the
Pooling and Servicing Agreement.
ARTICLE VIII
ACCOUNTS, DISBURSEMENTS AND RELEASES
SECTION 8.1 Collection of Money. Except as otherwise expressly
provided herein, the Indenture Trustee may demand payment or delivery of, and
shall receive and collect, directly and without intervention or assistance of
any fiscal agent of other intermediary, all money and other property payable to
or receivable by the Indenture Trustee pursuant to this Indenture. The Indenture
Trustee shall apply all such money received by it as provided in this Indenture
and in the Pooling and Servicing Agreement. Except as otherwise expressly
provided in this Indenture, if any default
occurs in the making of any payment
or performance under any agreement or instrument that is part of the assets of
the Trust, the Indenture Trustee may take such action as may be appropriate to
enforce such payment or performance, including the institution and prosecution
of appropriate Proceedings. Any such action shall be without prejudice to any
right to claim a Default or an Event of Default under this Indenture and any
right to proceed thereafter as provided in Article V.
SECTION 8.2 Accounts.
--------
(a) On or prior to the Closing Date, the Indenture Trustee
shall establish and maintain, in the name of the Indenture Trustee, for the
benefit of the Noteholders and the Certificateholders, the Accounts as provided
in Article V of the Pooling and Servicing Agreement.
(b) (i) On or before each Monthly Deposit Date, the portion of
the Available Payment Amount that is net of Advances and any amounts required to
be paid by the Servicer in connection with losses or investments of amounts in
the Accounts shall be deposited into the Collection Account as provided in
Section _____ of the Pooling and Servicing Agreement. On or before each Monthly
Deposit Date that is a Special Redemption Date, the Special Redemption Price
with respect to such Special Redemption Date shall be transferred from the
Collection Account to the Note Payment Account as provided in Section
5.02(a)(iv) of the Pooling and Servicing Agreement.
(ii) On each Special Redemption Date, the Indenture
Trustee shall call for redemption Notes in an amount equal to the Special
Redemption Price and shall pay to Noteholders such Special Redemption Price,
until the Note Principal Balance is paid in full.
(c) (i) On or before each Payment Date, (i) the portion of the
Available Payment Amount that is net of Advances, any amounts required to be
paid by the Servicer in connection with losses on investments of amounts in
Accounts, any Advances, amounts transferred from the Spread Account, and Insured
Payments shall be deposited into the Collection Account as provided in Section
_____ of the Pooling and Servicing Agreement. On or before each Payment Date,
the Note Payment Amount shall be transferred from the Collection
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Account to the Note Payment Account as provided in Sections _______________ and
_______________ of the Pooling and Servicing Agreement.
(ii) On each Payment Date, the Indenture Trustee shall pay to
Noteholders all amounts on deposit in the Note Payment Account in respect of the
Notes to the extent of amounts due and unpaid on the Notes for principal and
interest in the following order of priority:
(i) to accrued and unpaid interest on the Notes; provided,
however, that if there are not sufficient funds in the Note Payment
Account to pay the entire amount of accrued and unpaid interest then
due on the Notes, the amount in the Note Payment Account shall be
applied to the payment of such interest on the Notes pro rata on the
basis of the total such interest due on the Notes;
(ii) to principal of the Notes until the Note Principal
Balance is paid in full.
SECTION 8.3 General Provisions Regarding Accounts.
-------------------------------------
(a) Pursuant and subject to the provisions of Section _____ of
the Pooling and Servicing Agreement, all or a portion of the funds in the
Accounts shall be invested in Eligible Investments and reinvested by the
Indenture Trustee as directed in writing by the Servicer. The Servicer shall not
direct the Indenture Trustee to make any investment of any funds or to sell any
investment held in any of the Accounts unless the security interest granted and
perfected in such account shall continue to be perfected in such investment or
the proceeds of such sale, in either case without any further action by any
Person, and, in connection with any direction to the Indenture Trustee to make
any such investment or sale, if requested by the Indenture Trustee, the Issuer
shall deliver to the Indenture Trustee an Opinion of Counsel, acceptable to the
Indenture Trustee, to such effect.
(b) Subject to Section 6.1, the Indenture Trustee shall not in
any way be held liable by reason of any insufficiency in any of the Accounts
resulting from any loss on any Eligible Investment included therein except for
losses attributable to the Indenture Trustee's failure to make payments on such
Eligible Investments issued by the Indenture Trustee, in its commercial capacity
as principal obligor and not as trustee, in accordance with their terms.
(c) If (i) the Servicer, on behalf of the Issuer, shall have
failed to give investment directions for any funds on deposit in the Accounts to
the Indenture Trustee by 11:00 a.m., New York City Time (or such other time as
may be agreed by the Issuer and the Indenture Trustee) on any Business Day; or
(ii) an Default or Event of Default shall have occurred and be continuing with
respect to the Notes but the Notes shall not have been declared due and payable
pursuant to Section 5.2, or, if such Notes shall have been declared due and
payable following an Event of Default, amounts collected or receivable from the
assets of the Trust are being applied in accordance with Section 5.5 as if there
had not been such a declaration; then the Indenture Trustee shall, to the
fullest extent practicable, invest and reinvest funds in the Accounts in one or
more Eligible Investments selected by the Indenture Trustee.
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SECTION 8.4 Release of Trust Assets.
-----------------------
(a) Subject to the payment of its fees and expenses pursuant
to Section 6.5 and the provisions of Section 8.5, the Indenture Trustee may, and
when required by the provisions of this Indenture shall, execute instruments to
release property from the lien of this Indenture, or convey the Indenture
Trustee's interest in the same, in a manner and under circumstances that are
consistent with the provisions of this Indenture. No party relying upon an
instrument executed by the Indenture Trustee as provided in this Article VIII
shall be bound to ascertain the Indenture Trustee's authority, inquire into the
satisfaction of any conditions precedent or see to the application of any
moneys.
(b) The Indenture Trustee shall, at such time as there are no
Notes Outstanding and all sums due to the Indenture Trustee pursuant to Section
6.5 have been paid, release any remaining portion of the assets of the Trust
that secured the Notes from the lien of this Indenture and release to the Issuer
or any other Person entitled thereto any funds then on deposit in the Accounts.
The Indenture Trustee shall release property from the lien of this Indenture
pursuant to this Section 8.4(b) only upon receipt of an Issuer Request
accompanied by an Officer's Certificate, an Opinion of Counsel and (if required
by the TIA) Independent Certificates in accordance with TIA ss.ss.314(c) and
314(d)(1) meeting the applicable requirements of Section 11.1.
SECTION 8.5 Opinion of Counsel. The Indenture Trustee shall
receive at least seven days' notice when requested by the Issuer to take any
action pursuant to Section 8.4(a), accompanied by copies of any instruments
involved, and the Indenture Trustee shall also require as a condition to such
action, an Opinion of Counsel, in form and substance satisfactory to the
Indenture Trustee, stating the legal effect of any such action, outlining the
steps required to complete the same, and concluding that all conditions
precedent to the taking of such action have been complied with and such action
shall not materially and adversely impair the security for the Notes or the
rights of the Noteholders in contravention of the provisions of this Indenture;
provided, however, that such Opinion of Counsel shall not be required to express
an opinion as to the fair value of the assets of the Trust. Counsel rendering
any such opinion may rely, without independent investigation, on the accuracy
and validity of any certificate or other instrument delivered to the Indenture
Trustee in connection with any such action.
ARTICLE IX
SUPPLEMENTAL INDENTURES
SECTION 9.1 Supplemental Indentures Without Consent of
------------------------------------------
Noteholders.
-----------
(a) Without the consent of the Holders of any Notes but with
the prior written consent of the Insurer and upon prior notice to the Rating
Agencies, the Issuer and the Indenture Trustee, when authorized by an Issuer
Order, at any time and from time to time, may enter into one or more indentures
supplemental hereto (which shall conform to the provisions of the Trust
Indenture Act as in force at the date of the execution thereof) in form
satisfactory to the Indenture Trustee, for any of the following purposes:
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(i) to correct or amplify the description of any property at
any time subject to the lien of this Indenture, or better to assure,
convey and confirm unto the Indenture Trustee any property subject or
required to be subjected to the lien of this Indenture, or to subject
to additional property to the lien of this Indenture;
(ii) to evidence the succession, in compliance with Section
3.10 and the applicable provisions hereof, of another person to the
Issuer, and the assumption by any such successor of the covenants of
the Issuer contained herein and ni the Notes contained;
(iii) to add to the covenants of the Issuer, for the benefit
of the Noteholders, or to surrender any right or power herein conferred
upon the Issuer;
(iv) other than in connection with the substitution of
Mortgage Loans pursuant to Sections 2.05 and 3.03 of the Pooling and
Servicing Agreement, to convey, transfer, assign, mortgage or pledge
any property to or with the Indenture Trustee;
(v) to cure any ambiguity, to correct or supplement any
provision herein or in any supplemental indenture which may be
inconsistent with any other provision herein or in any supplemental
indenture;
(vi) to evidence and provide for the acceptance of the
appointment hereunder by a successor trustee with respect to the Notes
and to add to or change any of the provisions of this Indenture as
shall be necessary to facilitate the administration of the trusts
hereunder by more than one trustee, pursuant to the requirements of
Article VI; or
(vii) to modify, eliminate or add to the provisions of this
Indenture to such extent as shall be necessary to effect the
qualification of this Indenture under the TIA or under any similar
federal statute hereafter enacted and to add to this Indenture such
other provisions as may be expressly required by the TIA, and the
Indenture Trustee is hereby authorized to join in the execution of any
such supplemental indenture and to make any further appropriate
agreements and stipulations that may be therein contained.
(b) The Issuer and the Indenture Trustee, when authorized by
an Issuer Order, may, also without the consent of any of the Noteholders but
with the prior written consent of the Insurer and upon prior notice to the
Rating Agencies, at any time and from time to time enter into one or more
indentures supplemental hereto for the purpose of adding any provisions to,
changing in any manner, or eliminating any of the provisions of, this Indenture
or modifying in any manner the rights of the Noteholders under this Indenture;
provided, however, that such action shall not, as evidenced by an Opinion of
Counsel, adversely affect in any material respect the interests of any
Noteholder.
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SECTION 9.2 Supplemental Indentures With Consent
------------------------------------
of the Noteholders.
------------------
(a) The Issuer and the Indenture Trustee, when authorized by
an Issuer Order, also may, with the prior written consent of the Insurer and
upon prior notice to the Rating Agencies and with the consent of the Holders of
not less than a Majority in Voting Interest of the Notes, enter into an
indenture or indentures supplemental hereto for the purpose of adding any
provisions to, changing in any manner, or eliminating any of the provisions of,
this Indenture or of modifying in any manner the rights of the Noteholders under
this Indenture; provided, however, that no such supplemental indenture shall,
without the consent of the Holder of each Outstanding Note affected thereby:
(i) change the date of payment of any installment of
principal of or interest on any Note, or reduce the principal amount
thereof, the interest rate applicable thereto, the Special Redemption
Price, or the Termination Price, the provision of this Indenture
relating to the application of collections on, or the proceeds of the
sale of, the assets of the Trust to payment of principal of or interest
on the Notes, or change any place of payment where, or the coin or
currency in which, any Note or the interest thereon is payable, or
impair the right to institute suit for the enforcement of the
provisions of this Indenture requiring the application of funds
available therefor, as provided in Article V, to the payment of any
such amount due on the Notes on or after the respective due dates
thereof on the Notes on or after the respective due dates thereof (or,
in the case of a redemption, on or after the Special Redemption Date or
Termination Date, as applicable);
(ii) reduce the percentage of the Outstanding Notes,
the consent of the Holders of which is required for any such
supplemental indenture, or the consent of the Holders of which is
required for any waiver of compliance with certain provisions of this
Indenture or certain defaults hereunder and their consequences provided
for in this Indenture;
(iii) modify or alter the provisions of the proviso
to the definition of the term "Outstanding";
(iv) reduce the percentage of the Outstanding Notes
required to direct the Indenture Trustee to direct the Issuer to sell
or liquidate the assets of the Trust pursuant to Section 5.4 if the
proceeds of such sale would be insufficient to pay the principal amount
of and accrued but unpaid interest on the Outstanding Notes;
(v) modify any provision of this Section 9.2 except
to increase any percentage specified herein in favor of the
Noteholders, or to provide that certain additional provisions of this
Indenture or the Basic Documents cannot be modified or waived without
the consent of the Holder of each outstanding Note affected thereby;
(vi) modify any of the provisions of this Indenture
in such manner as to affect the calculation of the amount of any
payment of interest or principal due on any
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Note on any Payment Date (including the calculation of any of the
individual components of such calculation) or to affect the rights of
the Holders of Notes to the benefit of any provisions for the mandatory
redemption of the Notes contained herein or in Article X of the Pooling
and Servicing Agreement; or
(vii) permit the creation of any Lien ranking prior
to or on a parity with the lien of this Indenture with respect to any
part of the assets of the Trust or, except as otherwise permitted or
contemplated herein, terminate the lien of this Indenture on any
property at any time subject hereto or deprive the Holder of any Note
of the security provided by the lien of this Indenture or by the
Insurance Policy.
(b) The Indenture Trustee may in its discretion determine
whether or not any Notes would be affected (such that the consent of each would
be required) by any supplemental Indenture proposed pursuant to this Section 9.2
and any such determination shall be conclusive upon the Holders of all Notes,
whether authenticated and delivered thereunder before or after the date upon
which such supplemental indenture become effective. The Indenture Trustee shall
not be liable for any such determination made in good faith.
(c) It shall be sufficient if a Majority in Voting Interest of
the Notes approves the substance, but not the form, of any proposed supplemental
indenture.
(d) Promptly after the execution by the Issuer and the
Indenture Trustee of any supplemental indenture pursuant to this Section 9.2,
the Indenture Trustee shall mail to the Noteholders to which such amendment or
supplemental indenture relates a notice setting forth in general terms the
substance of such supplemental indenture. Any failure of the Indenture Trustee
to mail such notice, or any defect therein, shall not, however, in any way
impair or affect the validity of any such supplemental indenture.
SECTION 9.3 Execution of Supplemental Indentures. In
executing, or permitting the additional trusts created by, any supplemental
indenture permitted by this Article IX or the modifications thereby of the
trusts created by this Indenture, the Indenture Trustee shall be entitled to
receive, and subject to Sections 6.1 and 6.2, shall be fully protected in
relying upon, an Opinion of Counsel stating that the execution of such
supplemental indenture is authorized or permitted by this Indenture. The
Indenture Trustee may, but shall not be obligated to, enter into any such
supplemental indenture that affects the Indenture Trustee's own rights, duties,
liabilities or immunities under this Indenture or otherwise.
SECTION 9.4 Effect of Supplemental Indenture. Upon the
execution of any supplemental indenture pursuant to the provisions hereof, this
Indenture shall be and be deemed to be modified and amended in accordance
therewith with respect to the Notes affected thereby, and the respective rights,
limitations of rights, obligations, duties, liabilities and immunities under
this Indenture of the Indenture Trustee, the Issuer and the Noteholders shall
thereafter be determined, exercised and enforced hereunder subject in all
respects to such modifications and amendments, and all the terms and conditions
of any such supplemental indenture, shall be and be deemed to be part of the
terms and conditions of this Indenture for any and all purposes.
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SECTION 9.5 Conformity with Trust Indenture Act. Every
amendment of this Indenture and every supplemental indenture executed pursuant
to this Article IX shall conform to the requirements of the TIA as then in
effect so long as this Indenture shall then be qualified under the TIA.
SECTION 9.6 Reference in Notes to Supplemental Indentures.
Notes authenticated and delivered after the execution of any supplemental
Indenture pursuant to this Article IX may, and if required by the Indenture
Trustee shall, bear a notation in form approved by the Indenture Trustee as to
any matter provided for in such supplemental indenture. If the Issuer or the
Indenture Trustee shall so determine, new Notes so modified as to conform, in
the opinion of the Indenture Trustee and the Issuer, to any such supplemental
indenture may be prepared and executed by the Issuer and authenticated and
delivered by the Indenture Trustee in exchange for Outstanding Notes.
ARTICLE X
REDEMPTION OF NOTES
SECTION 10.1 Redemption.
----------
(a) The Notes are subject to redemption in whole, but not in
part, upon the exercise by the Holders of the Class B-2 Certificates of their
option to cause the Issuer to sell the Mortgage Loans pursuant to Section _____
of the Pooling and Servicing Agreement. Such redemption shall occur on the
applicable Payment Date as specified in Section 10.01 of the Pooling and
Servicing Agreement. Upon such redemption, the Noteholders shall receive an
amount equal to 100% of the Note Principal Balance plus accrued interest thereon
to the date of redemption. The Issuer shall furnish the Insurer and the Rating
Agencies notice of such redemption on the date the Mortgage Loans are sold. If
the Notes are to be redeemed pursuant to this Section 10.1(a), the Issuer shall
furnish notice thereof to the Indenture Trustee not later than the Determination
Date with respect to the Payment Date on which the Notes are to be redeemed and
the Issuer shall deposit into the Collection Account, on or before three
Business Days prior to the applicable Payment Date, the Termination Price,
whereupon all Notes shall be due and payable on such Payment Date.
(b) If, in accordance with the provisions of Section _____ of
the Pooling and Servicing Agreement, the Indenture Trustee determines that a
Special Redemption shall be made on a Monthly Deposit Date (which shall be a
"Special Redemption Date"), the Indenture Trustee shall notify the Noteholders
thereof at least 5 days (or by the related Determination Date, if later) prior
to such Special Redemption Date pursuant to Section 10.2. The Indenture Trustee
shall withdraw the Special Redemption Price from the Collection Account on or
before the applicable Special Redemption Date pursuant to Section
_______________ of the Pooling and Servicing Agreement and, on such Special
Payment Date, the Notes shall be redeemed, pro rata in accordance with their
respective Percentage Interests, pursuant to Section 8.2(c) hereof and Section
_____ of the Pooling and Servicing Agreement. Payment of the Special Redemption
Price shall be made to Noteholders of record as of the related Special Record
Date.
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(c) If the assets of the Trust are sold pursuant to Section
7.2 of the Trust Agreement, all amounts on deposit in the Note Payment Account
shall be paid to the Noteholders. If amounts are to be paid to Noteholders
pursuant to this Section 10.1(c), the Servicer or the Issuer shall, to the
extent practicable, furnish notice of such event to the Indenture Trustee and
the Insurer pursuant to Section 10.2.
SECTION 10.2 Form of Redemption Notice.
-------------------------
(a) Notice of redemption under Sections 10.1(a), (b) and (c)
shall be given by the Indenture Trustee by first-class mail, postage prepaid,
mailed not less than five days prior to the applicable Payment Date or Special
Redemption Date to each Noteholder of record at such Noteholder's address
appearing in the Note Register.
(b) All notices of redemption shall state:
(i) the applicable Payment Date or Special
Redemption Date;
(ii) the principal amount of Notes to be redeemed
and the principal amount of Notes per $1,000 original denomination to
be redeemed; and
(iii) in the case of a redemption pursuant to Section
10.1(a) hereof, the place where such Notes are to be surrendered for
final payment (which shall be the Agency Office of the Indenture
Trustee to be maintained as provided in Section 3.2).
(c) Notice of redemption of the Notes shall be given by the
Indenture Trustee in the name and at the expense of the Administrator. Failure
to give notice of redemption, or any defect therein, to any Holder of any Note
shall not impair or affect the validity of the redemption of any other Note.
SECTION 10.3 Notes Payable on Payment Date and
---------------------------------
Special Redemption Date.
-----------------------
The Notes or portions thereof to be redeemed shall, following
notice of redemption as required by Section 10.2 (in the case of redemption
pursuant to Section 10.1(a) or 10.1(b) on the applicable Payment Date or Special
Redemption Date, as the case may be, cease to be Outstanding for purposes of
this Indenture and shall thereafter represent only the right to receive the
redemption price, and (unless the Issuer shall default in the payment of the
principal amount of Notes to be redeemed) no interest shall accrue on the
redemption price, for any period after the date to which accrued interest is
calculated for purposes of calculating the redemption price, as the case may be.
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ARTICLE XI
MISCELLANEOUS
SECTION 11.1 Compliance Certificates and Opinions,
-------------------------------------
etc.
---
(a) Upon any application or request by the Issuer to the
Indenture Trustee to take any action under any provision of this Indenture, the
Issuer shall furnish to the Indenture Trustee: (i) an Officer's Certificate
stating that all conditions precedent, if any, provided for in this Indenture
relating to the proposed action have been complied with, (ii) an Opinion of
Counsel stating that in the opinion of such counsel all such conditions
precedent, if any, have been complied with and (iii) (if required by the TIA) an
Independent Certificate from a firm of certified public accountants meeting the
applicable requirements of this Section 11.1, except that, in the case of any
such application or request as to which the furnishing of such documents is
specifically required by any provision of this Indenture, no additional
certificate or opinion need be furnished. Every certificate or opinion with
respect to compliance with a condition or covenant provided for in this
Indenture shall include:
(i) a statement that each signatory of such certificate or
opinion has read or has caused to be read such covenant or condition
and the definitions herein relating thereto;
(ii) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions contained in
such certificate or opinion are based;
(iii) a statement that, in the judgment of each such
signatory, such signatory has made such examination or investigation as
is necessary to enable such signatory to express an informed opinion as
to whether or not such covenant or condition has been complied with;
and
(iv) a statement as to whether, in the opinion of each such
signatory, such condition or covenant has been complied with.
(b) (i) Prior to the deposit with the Indenture Trustee of any
Collateral or other property or securities that is to be made the basis for the
release of any property or securities subject to the lien of this Indenture, the
Issuer shall, in addition to any obligation imposed in Section 11.1(a) or
elsewhere in this Indenture, furnish to the Indenture Trustee an Officers'
Certificate certifying or stating the opinion of each person signing such
certificate as to the fair value (within 90 days of such deposit) to the Issuer
of the Collateral or other property or securities to be so deposited.
(ii) Whenever the Issuer is required to furnish to the
Indenture Trustee an Officers' Certificate certifying or stating the
opinion of any signer thereof as the matters described in clause (b)(i)
above, the Issuer shall also deliver to the Indenture Trustee an
Independent Certificate as to the same matters, if the fair value to
the Issuer of the
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securities to be so deposited and of all other such securities made the
basis of any such withdrawal or release since the commencement of the
then current fiscal year of the Issuer, as set forth in the
certificates delivered pursuant to clause (i) above and this clause
(b)(ii) is 10% or more of the Note Principal Balance then outstanding,
but such a certificate need not be furnished with respect to any
securities so deposited, if the fair value thereof to the Issuer as set
forth in the related Officers' Certificate is less than $25,000 or less
than one percent of the Note Principal Balance then outstanding.
(iii) Other than with respect to the release of any Mortgage
Loans to be purchased pursuant to Sections _____ and _____ of the
Pooling and Servicing Agreement, whenever any property or securities
are to be released from the lien of this Indenture, the Issuer shall
also furnish to the Indenture Trustee an Officer's Certificate
certifying or stating the opinion of each Person signing such
certificate as to the fair value (within 90 days of such release) of
the property or securities proposed to be released and stating that in
the opinion of such person the proposed release will not impair the
security under this Indenture in contravention of the provisions
hereof.
(iv) Whenever the Issuer is required to furnish to the
Indenture Trustee an Officer's Certificate certifying or stating the
opinion of any signatory thereof as to the matters described in clause
(b)(iii) above, the Issuer shall also furnish to the Indenture Trustee
an Independent Certificate as to the same matters if the fair value of
the property or securities and of all other property, other than
Mortgage Loans to be purchased pursuant to Sections _____ and _____ of
the Pooling and Servicing Agreement, or securities released from the
lien of this Indenture since the commencement of the then current
calendar year, as set forth in the certificates required by clause
(b)(iii) above and this clause (b)(iv) equals 10% or more of the Note
Principal Balance then outstanding, but such certificate need not be
furnished in the case of any release of property or securities if the
fair value thereof as set forth in the related Officer's Certificate is
less than $25,000 or less than one percent of the Note Principal
Balance then outstanding.
(v) Notwithstanding Section 2.9 or any other provision of this
Section 11.1, the Issuer may (A) collect, liquidate, sell or otherwise
dispose of Mortgage Loans as and to the extent permitted or required by
the Basic Documents and (B) make cash payments out of the Accounts as
and to the extent permitted or required by the Basic Documents.
SECTION 11.2 Form of Documents Delivered to
------------------------------
Indenture Trustee.
-----------------
(a) In any case where several matters are required to be
certified by, or covered by an opinion of, any specified Person, it i not
necessary that all such matters be certified by, or covered by the opinion of,
only one document, but one such Person may certify or give an opinion with
respect to some matters and one or more other such Persons as to other matters,
and any such Person may certify or give an opinion as to such matters in one or
several documents.
(b) Any certificate or opinion of an Responsible Officer of
the Issuer may be based, insofar as it relates to legal matters, upon a
certificate or opinion of, or representations
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by, counsel, unless such officer knows, or in the exercise of reasonable care
should know, that the certificate or opinion or representations with respect to
the matters upon which his certificate or opinion is based are erroneous. Any
such certificate of an Responsible Officer or Opinion of Counsel may be based,
insofar as it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Servicer, the Depositors, the
Issuer or the Administrator, stating that the information with respect so such
factual matters is in the possession of the Servicer, the Depositors, the Issuer
or the Administrator, unless such counsel knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to such matters are erroneous.
(c) Where any Person is required to make, give or execute two
or more applications, requests, consents, certificates, statements, opinions or
other instruments under this Indenture, they may, but need not, be consolidated
and form one instrument.
(d) Whenever in this Indenture, in connection with any
application or certificate or report to the Indenture Trustee, it is provided
that the Issuer shall deliver any document as a condition of the granting of
such application, or as evidence of the Issuer's compliance with any term
hereof, it is intended that the truth and accuracy, at the time of the granting
of such report (as the case may be), of the facts and opinions stated in such
document shall in such case be conditions precedent to the right of the Issuer
to have such application granted or to the sufficiency of such certificate or
report. The foregoing shall not, however, be construed to affect the Indenture
Trustee's right to rely upon the truth and accuracy of any statement or opinion
contained in any such document as provided in Article VI.
SECTION 11.3 Acts of Noteholders.
-------------------
(a) Any request, demand, authorization, direction, notice,
consent, waiver or other action provided by this Indenture or the Pooling and
Servicing Agreement to be given or taken by Noteholders or a class of
Noteholders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Noteholders in person or by agents
duly appointed in writing; and except as herein otherwise expressly provided
such action shall become effective when such instrument or instruments are
delivered to the Indenture Trustee, and, where it is hereby expressly required,
to the Issuer. Such instrument or instruments (and the action embodied therein
and evidenced thereby) are herein sometimes referred to as the "Act" of the
Noteholders signing such instrument or instruments. Proof of execution of any
such instrument or of a writing appointing any such agent shall be sufficient
for any purpose of this Indenture and (subject to Section 6.1) conclusive in
favor of the Indenture Trustee and the Issuer, if made in the manner provided in
this Section 11.3.
(b) The fact and date of the execution by any person of any
such instrument or writing may be proved in any manner that the Indenture
Trustee deems sufficient.
(c) The ownership of Notes shall be proved by the Note
Register.
(d) Any request, demand, authorization, direction, notice,
consent, waiver or other action by the Holder of any Notes shall bind the Holder
of every Note issued upon the
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registration thereof or in exchange therefor or in lieu thereof, in respect of
anything done, omitted or suffered to be done by the Indenture Trustee or the
Issuer in reliance thereon, whether or not notation of such action is made upon
such Note.
SECTION 11.4 Notices. (a) All demands, notices and
communications hereunder shall be in writing and shall be deemed to have been
duly given if personally delivered at or mailed by overnight mail, certified
mail or registered mail, postage prepaid, to (i) in the case of the Servicers,
_____________________________________________, Attention: _________
_______________, or such other addresses as may hereafter be furnished to the
Certificateholders and the Noteholders in writing by the Servicers, (ii) in the
case of each Depositor, c/o AMRESCO Residential Mortgage Corporation,
___________________ ______________________________, Attention: _______________
_______________, or such other addresses as may hereafter be furnished to the
Certificateholders and the Noteholders in writing by such Depositor, (iii) Owner
Trustee, _______________, Attention: AMRESCO Residential Securities Corporation
Mortgage Loan Trust 199__-__, (iv) in the case of the Certificateholders, as set
forth in the Certificate Register, (vi) in the case of the Indenture Trustee,
_____________, Attention: AMRESCO Residential Securities Corporation Mortgage
Loan Trust 199__-__, (v) in the case of the Noteholders, as set forth in the
Note Register, (vi) in the case of Moody's, 99 Church Street, New York, New York
10007, Attention: Home Equity Monitoring Group, (vii) in the case of S&P, 26
Broadway, New York, New York 10004, Attention: __________, (viii) in the case of
the Insurer, _____________________________________________, _______________,
_______________, _______________ _______________ , Attention: AMRESCO
Residential Securities Corporation Mortgage Loan Trust 199__-__ and (ix) in the
case of the Account Party, at the address specified by such Account Party. Any
such notices shall be deemed to be effective with respect to any party hereto
upon the receipt of such notice by such party, except that notices to the
Certificateholders or Noteholders shall be effective upon mailing or personal
delivery.
(b) Any notice required or permitted to be given to a
Certificateholder or Noteholder shall be given by first-class mail, postage
prepaid, at the address of such Holder as shown in the Certificate Register or
Note Register, as the case may be. Any notice so mailed within the time
prescribed in this Agreement shall be conclusively presumed to have been duly
given, whether or not the Certificateholder receives such notice.
SECTION 11.5 Notices to Noteholders; Waiver.
------------------------------
(a) Where this Indenture provides for notice to Noteholders of
any event, such notice shall be sufficiently given (unless otherwise herein
expressly provided) if it is in writing and mailed, first-class, postage prepaid
to each Noteholder affected by such event, at such Person's address as it
appears on the Note Register, not later than the latest date, and not earlier
than the earliest date, prescribed for the giving of such notice. If notice to
Noteholders is given by mail, neither the failure to mail such notice nor any
defect in any notice so mailed to any particular Noteholder shall affect the
sufficiency of such notice with respect to other Noteholders, and any notice
that is mailed in the manner herein provided shall conclusively be presumed to
have been duly given regardless of whether such notice is in fact actually
received.
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(b) Where this Indenture provides for notice in any manner,
such notice may be waived in writing by any Person entitled to receive such
notice, either before or after the event, and such waiver shall be the
equivalent of such notice. Waivers of notice by Noteholders shall be filed with
the Indenture Trustee but such filing shall not be a condition precedent to the
validity of any action taken in reliance upon such a waiver.
(c) In case, by reason of the suspension of regular mail
service as a result of a strike, work stoppage or similar activity, it shall be
impractical to mail notice of any event of Noteholders when such notice is
required to be given pursuant to any provision of this Indenture, then any
manner of giving such notice as shall be satisfactory to the Indenture Trustee
shall be deemed to be a sufficient giving of such notice.
(d) Where this Indenture provides for notice to the Rating
Agencies, failure to give such notice shall not affect any other rights or
obligations created hereunder, and shall not under any circumstances constitute
an Event of Default.
SECTION 11.6 Alternate Payment and Notice Provisions.
---------------------------------------
Notwithstanding any provision of this Indenture or any of the
Notes to the contrary, the Issuer may enter into any agreement with any Holder
of a Note providing for a method of payment, or notice by the Indenture Trustee
or any Paying Agent to such Holder, that is different from the methods provided
for in this Indenture for such payments or notices. The Issuer shall furnish to
the Indenture Trustee a copy of each such agreement and the Indenture Trustee
shall cause payments to be made and notices to be given in accordance with such
agreements.
SECTION 11.7 Conflict with Trust Indenture Act.
---------------------------------
(a) If any provision hereof limits, qualifies or conflicts
with another provision hereof that is required to be included in this Indenture
by any of the provisions of the TIA, such required provision shall control.
(b) The provisions of TIA ss.ss.310 through 317 that impose
duties on any Person (including the provisions automatically deemed included
herein unless expressly excluded by this Indenture) are a part of and govern
this Indenture, whether or not physically contained herein.
SECTION 11.8 Effect of Headings and Table of Contents.
----------------------------------------
The Article and Section headings herein and the Table of
Contents are for convenience only and shall not affect the construction hereof.
SECTION 11.9 Successors and Assigns.
----------------------
(a) All covenants and agreements in this Indenture and the
Notes by the Issuer shall bind its successors and assigns, whether so expressed
or not.
57
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(b) All covenants and agreements of the Indenture Trustee in
this Indenture shall bind its successors and assigns, whether so expressed or
note.
SECTION 11.10 Separability.
------------
In case any provision in this Indenture or in the Notes shall
be invalid, illegal or unenforceable, the validity, legality, and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.
SECTION 11.11 Benefits of Indenture.
---------------------
Nothing in this Indenture or in the Notes, express or implied,
shall give to any Person, other than the Insurer, the parties hereto and their
successors hereunder, and the Noteholders, and any other party secured
hereunder, and any other Person with an ownership interest in any part of the
assets of the Trust, any benefit or any legal or equitable right, remedy or
claim under this Indenture. The Insurer is an intended third-party beneficiary
under the Indenture.
SECTION 11.12 Legal Holidays.
--------------
If the date on which any payment is due shall not be a
Business Day, then (notwithstanding any other provision of the Notes or this
Indenture) payment need not be made on such date, but may be made on the next
succeeding Business Day with the same force and effect as if made on the date on
which nominally due, and no interest shall accrue for the period from and after
any such nominal date.
SECTION 11.13 GOVERNING LAW.
-------------
THIS INDENTURE SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF NEW YORK, WITHOUT REFERENCE TO ITS CONFLICT OF LAW PROVISIONS,
AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE
DETERMINED IN ACCORDANCE WITH SUCH LAWS.
SECTION 11.14 Counterparts.
------------
This Indenture may be executed in any number of counterparts,
each of which so executed shall be deemed to be an original, but all such
counterparts shall together constitute but one and the same instrument.
SECTION 11.15 Recording of Indenture.
----------------------
If this Indenture is subject to recording in any appropriate
public recording offices, such recording is to be effected by the Issuer and at
its expense accompanied by an Opinion of Counsel (which may be counsel to the
Indenture Trustee or any other counsel reasonably acceptable to the Indenture
Trustee) to the effect that such recording is necessary
58
<PAGE>
either for the protection of the Noteholders or any other Person secured
hereunder or for the enforcement of any right or remedy granted to the Indenture
Trustee under this Indenture.
SECTION 11.16 No Recourse.
-----------
No recourse may be taken, directly or indirectly, with respect
to the obligations of the Issuer, the Owner Trustee or the Indenture Trustee on
the Notes or under this Indenture or any certificate or other writing delivered
in connection herewith or therewith, against:
(i) the Indenture Trustee or the Owner Trustee in its
individual capacity;
(ii) any Certificateholder or other owner of a beneficial
interest in the Issuer; or
(iii) any Certificateholder or other partner, owner,
beneficiary, agent, officer, director, employee or agent of the
Indenture Trustee or the Owner Trustee in its individual capacity, any
holder of a beneficial interest in the Issuer, the Owner Trustee or the
Indenture Trustee or of any successor or assign of the Indenture
Trustee or the Owner Trustee in its individual capacity, except as any
such Person may have expressly agreed (it being understood that the
Indenture Trustee and the Owner Trustee have no such obligations in
their individual capacity) and except that any such partner, owner or
beneficiary shall be fully liable, to the extent provided by applicable
law, for any unpaid consideration for stock, unpaid capital
contribution or failure to pay any installment or call owing to such
entity. For all purposes of this Indenture, in the performance of any
duties or obligations of the Issuer hereunder, the Owner Trustee shall
be subject to, and entitled to the benefits of, the terms and
provisions of Articles VI, VII and VIII of the Trust Agreement.
SECTION 11.17 No Petition.
-----------
The Indenture Trustee, by entering into this Indenture, and
each Noteholder, by accepting a Note issued hereunder, hereby covenant and agree
that they shall not, prior to the date which is one year and one day after the
termination of this Indenture with respect to the Trust pursuant to Section 4.1,
acquiesce, petition or otherwise invoke or cause the Depositors or the Trust to
invoke the process of any court or government authority for the purpose of
commencing or sustaining a case against the Depositors or the Trust under any
federal or state bankruptcy, insolvency or similar law or appointing a receiver,
liquidator, assignee, trustee, custodian, sequestrator or other similar official
of the Depositors or the Trust or any substantial part of its property, or
ordering the winding up or liquidation of the affairs of the Depositors or the
Trust.
SECTION 11.18 Inspection.
----------
The Issuer agrees that, on reasonable prior notice, it shall
permit any representative of the Indenture Trustee or the Insurer, during the
Issuer's normal business hours, to examine all the books of account, records,
reports, and other papers of the Issuer, to make
59
<PAGE>
copies and extracts therefrom, to cause such books to be audited by Independent
certified public accountants, and to discuss the Issuer's affairs, finances and
accounts with the Issuer's officers, employees and Independent certified public
accountants, all at such reasonable times and as often as may be reasonably
requested. The Indenture Trustee shall and shall cause its representatives to
hold in confidence all such information except to the extent disclosure may be
required by law (and all reasonable applications for confidential treatment are
unavailing) and except to the extent that the Indenture Trustee may reasonably
determine that such disclosure is consistent with its obligations hereunder.
SECTION 11.19 The Insurer
-----------
Any right conferred to the Insurer hereunder shall be
suspended during any period in which the Insurer is in default in its payment
obligations under the Insurance Policy, and its rights during such period shall
vest in the Majority in Voting Interest of the Notes. At such time as the Notes
are no longer outstanding under the Indenture and the Class B-1 Certificates are
no longer outstanding under the Trust Agreement, and no amounts owed to the
Insurer hereunder remain unpaid, the Insurer's rights hereunder shall terminate.
The Indenture Trustee shall receive, as attorney-in-fact of
each Holder of a Note, any Insured Payment from the Insurer and disburse the
same to each Holder of a Note in accordance with the provisions of Article 8.
Insured Payments disbursed by the Indenture Trustee from proceeds of the
Insurance Policy shall not be considered payment by the Trust nor shall such
payments discharge the obligation of the Trust with respect to such Notes, and
the Insurer shall become the owner of such unpaid amounts due from the Trust in
respect of Notes. The Indenture Trustee hereby agrees on behalf of each Holder
of a Note for the benefit of the Insurer that it recognizes that to the extent
the Insurer makes Insured Payments, either directly or indirectly (as by paying
through the Indenture Trustee), to the Noteholders, the Insurer will be
subrogated to the rights of the Noteholders with respect to such Insured
Payment, shall be deemed to the extent of payments so made to be a registered
Noteholder and shall receive all future distributions until all such Insured
Payments by the Insurer, together with interest thereon at the interest rate
borne by the Notes, have been dully reimbursed. To evidence such subrogation,
the Indenture Trustee shall, or shall cause the Note Registrar to, note the
Insurer's rights as subrogee on the registration books maintained by the
Indenture Trustee or the Note Registrar upon receipt from the Insurer of proof
of payment of any Insured Payment.
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IN WITNESS WHEREOF, the Issuer and the Indenture Trustee have
caused this Indenture to be duly executed by their respective officers,
thereunto duly authorized and duly attested, all as of the day and year first
above written.
AMRESCO RESIDENTIAL SECURITIES
CORPORATION MORTGAGE LOAN TRUST
199__-__
,
______________________________,
as Owner Trustee,
By:____________________________
Name:
Title:
_______________________________
_________,as Indenture Trustee,
By:____________________________
Name:
Title:
ACKNOWLEDGED AND ACCEPTED:
__________________________________
as Servicer
By:_______________________________
Name:
Title:
__________________________________
as Administrator
By:_______________________________
Name:
Title:
<PAGE>
STATE OF DELAWARE )
) ss.:
COUNTY OF NEW CASTLE )
BEFORE ME, the undersigned authority, a Notary Public in and
for said county and state, on this day personally appeared
_______________________, known to me to be the person and officer whose name is
subscribed to the foregoing instrument and acknowledged to me that the same was
the act of the said AMRESCO Residential Securities Corporation Mortgage Loan
Trust 199__--__, a Delaware business trust, and that he executed the same as the
act of said business trust for the purpose and consideration therein expressed,
and in the capacities therein stated.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the _____ the day
of _______________ 199__.
________________________________
Notary Public in and for the
State of________________.
[Seal]
My commission expires:
<PAGE>
STATE OF )
) ss.:
COUNTY OF )
BEFORE ME, the undersigned authority, a Notary Public in and
for said county and state, on this day personally appeared
_______________________, known to me to be the person and officer whose name is
subscribed to the foregoing instrument and acknowledged to me that the same was
the act of the said __________________________________, a national association,
and that he executed the same as the act of said corporation for the purpose and
consideration therein stated.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the _____ the day
of _______________ 199__.
________________________________
Notary Public in and for the
State of New York.
[Seal]
My commission expires:
____________________________________
<PAGE>
EXHIBIT A
[Form of Note Depository Agreement]
Exhibit 5.1
July 24, 1996
AMRESCO Residential Securities Corporation
700 N. Pearl Street, Suite 2400
Dallas, Texas 75201
Re: AMRESCO Residential Securities Corporation
Mortgage Loan Asset-Backed Pass-Through Certificates, Series 1996-5
Registration Statement on Form S-3 No. 333-
-------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to AMRESCO Residential Securities Corporation
(the "Depositor") in connection with the preparation and filing of the
registration statement on Form S-3 (such registration statement, the
"Registration Statement") filed with the Securities and Exchange Commission
pursuant to the Securities Act of 1933, as amended (the "Act"), in respect of
Mortgage Loan Asset-Backed Pass-Through Certificates (the "Certificates") which
you plan to offer in series, each series to be issued under a separate pooling
and servicing agreement (a "Pooling and Servicing Agreement"), in substantially
the form set forth as an exhibit to the Registration Statement, among the
Depositor, AMRESCO Residential Mortgage Company (the "Seller"), one or more
servicers named therein (the "Servicers"), and a trustee (the "Trustee") to be
identified in the prospectus supplement for such series of Certificates.
We have examined and relied on the originals or copies certified or
otherwise identified to our satisfaction of all such documents and records of
the Depositor and such other instruments and other certificates of public
officials, officers and representatives of the Depositor and such other persons,
and we have made such investigations of law, as we deemed appropriate as a basis
for the opinions expressed below.
The opinions expressed below are subject to bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting creditors'
rights generally and to general equity principles.
<PAGE>
This opinion is limited to matters involving the Federal laws of the
United States of America, the laws of the State of New York, and to the extent
relevant to the opinions expressed herein, the General Corporation Law of the
State of Delaware. All opinions expressed herein are based on laws, regulations
and policy guidelines currently in force and may be affected by future
regulations.
Based upon the foregoing, we are of the opinion that:
1. When, in respect of a series of Certificates, a Pooling and
Servicing Agreement has been duly authorized by all necessary action and duly
executed and delivered by the Depositor, the Seller, the Servicers and the
Trustee for such series, such Pooling and Servicing Agreement, will be a valid
and legally binding obligation of the Depositor; and
2. When a Pooling and Servicing Agreement for a series of Certificates
has been duly authorized by all necessary action and duly executed and delivered
by the Depositor, the Seller, the Servicers and the Trustee for such series, and
when the Certificates of such series have been duly executed and authenticated
in accordance with the provisions of the Pooling and Servicing Agreement, and
issued and sold as contemplated in the Registration Statement and the
prospectus, as amended or supplemented, delivered pursuant to Section 5 of the
Act in connection therewith, such Certificates will be legally and validly
issued, fully paid and nonassessable, and the holders of such Certificates will
be entitled to the benefits of such Pooling and Servicing Agreement.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to this firm in the Registration
Statement and the related prospectus under the heading "Legal Matters".
This opinion is furnished by us as counsel to the company and is solely
for the benefit of the addressee thereof. It may not be relied upon by any other
person or for any other purpose without our prior written consent.
Very truly yours,
/s/ Arter & Hadden
2
Exhibit 8.1
July 24, 1996
Re: AMRESCO Residential Securities Corporation
Mortgage Loan Asset-Backed Pass-Through Certificates, Series 1996-5
Registration Statement on Form S-3 No. 333-
-------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to AMRESCO Residential Securities Corporation
in connection with the preparation and filing of the registration statement on
Form S-3 (such registration statement, the "Registration Statement") being filed
today with the Securities and Exchange Commission pursuant to the Securities Act
of 1933, as amended (the "Act"), in respect of Mortgage Loan Asset-Backed
Pass-Through Certificates, (the "Certificates") which you plan to offer in
series. Our opinions formed the basis for the description of federal income tax
consequences appearing under the heading "Federal Income Tax Consequences" in
the prospectus supplement contained in the Registration Statement. Assuming
issuance of Certificates of a series and assuming the federal income tax
characterization of those Certificates as REMIC interests, standard interests,
stripped interests or partnership interests at that time, we confirm that the
description under "Federal Income Tax Consequences" in the prospectus of the
federal income tax consequences with respect to a series of Certificates
presents our opinion of the material tax issues relating to an investment in
those Certificates.
We hereby consent to the filing of this letter as Exhibit 8.1 to the
Registration Statement and to the reference to this firm in the Registration
Statement and related prospectus supplement under the heading "Federal Income
Tax Consequences."
Very truly yours,
/s/ Arter & Hadden
Exhibit 8.2
July 24, 1996
Re: AMRESCO Residential Securities Corporation
Mortgage Loan Asset-Backed Pass-Through Certificates, Series 1996-5
Registration Statement on Form S-3 No. 333-
-------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to AMRESCO Residential Securities Corporation
in connection with the preparation and filing of the registration statement on
Form S-3 (such registration statement, the "Registration Statement") being filed
today with the Securities and Exchange Commission pursuant to the Securities Act
of 1933, as amended (the "Act"), in respect of Mortgage Loan Asset-Backed
Pass-Through Certificates, Series 1996-5 (the "Certificates") which you plan to
offer in series. Our advice formed the basis for the description of federal
income tax consequences appearing under the heading "Certain Federal Income Tax
Consequences" in the prospectus supplement contained in the Registration
Statement. Such description does not purport to discuss all possible federal
income tax consequences of an investment in Certificates but with respect to
those tax consequences which are discussed, it is our opinion that the
description is accurate. In addition, assuming (i) REMIC electives made, (ii)
the Pooling and Servicing Agreement is fully executed, delivered and enforceable
against the parties thereto in accordance with its terms, (iii) the transaction
described in the prospectus supplement is completed on substantially the terms
and conditions set forth therein and (iv) compliance with the Pooling and
Servicing Agreement, it is our opinion that for federal income tax purposes the
Trust Estate (other than the Pre-Funding Account and the Capitalized Interest
Account) will be treated as a REMIC, the Class A Certificates will be treated as
"regular interests" in the REMIC and the Class R Certificates will be the sole
"residual interests" in the REMIC.
We hereby consent to the filing of this letter as Exhibit 8.2 to the
Registration Statement and to the reference to this firm in the Registration
Statement and related prospectus supplement under the heading "Certain Federal
Income Consequences."
Very truly yours,
/s/Arter & Hadden
