PROSPECTUS SUPPLEMENT
(To Prospectus Dated July 28, 1996)
================================================================================
$700,000,000
AMRESCO Residential Securities Corporation Mortgage Loan Trust 1996-5
$42,200,000 6.425% Class A-1 Certificates
$29,000,000 6.275% Class A-2 Certificates
$16,500,000 6.400% Class A-3 Certificates
$17,000,000 6.575% Class A-4 Certificates
$15,000,000 6.700% Class A-5 Certificates
$15,900,000 6.925% Class A-6 Certificates
$14,400,000 7.075% Class A-7 Certificates*
$550,000,000 Class A-8 Adjustable Rate Certificates*
------------------
Advanta Mortgage Corp. USA
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 1996-5 (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, Class A-7
Certificates (collectively, the "Fixed Rate Group Certificates"), (ii) the Class
A-8 Adjustable Rate Certificates (the "Adjustable Rate Group Certificates," and
together with the Fixed Rate Group Certificates, the "Class A Certificates"),
(iii) the Class S Interest-Only Certificates, (iv) one or more classes of
subordinate interest-only Certificates and (v) 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.
The Pass-Through Rate on each Class of the Fixed Rate Group Certificates will be
fixed rates as set forth above. The Pass-Through Rate on the Class A-8
Certificates is an adjustable rate, which initially will be 5.7875% per annum.
[LOGO]MBIA
On or before the issuance of the Certificates, the Depositor will obtain
from MBIA Insurance Corporation (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 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 1996-5 (the "Trust" ). The Fixed Rate Group Certificates
will represent undivided ownership interests in the Mortgage Loans in the Fixed
Rate Group and the Pre-Funding Account (as defined herein) solely. The
Adjustable Rate Group Certificates will represent undivided ownership interests
in the Mortgage Loans in the Adjustable Rate Group 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 December 1,
1996 (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-46 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.
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 $698,070,180, plus accrued interest
on the Fixed Rate Group Certificates at the applicable Pass-Through Rate from
December 1, 1996 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 December 18, 1996. The Class A Certificates will be offered in Europe and
the United States of America.
- ----------
* The Pass-Through Rates on the Class A-7 and Class A-8 Certificates are subject
to adjustment, as described in the Summary of Terms herein.
Prudential Securities Incorporated
CS First Boston
Goldman, Sachs & Co.
Morgan Stanley & Co.
Incorporated
- --------------------------------------------------------------------------------
The date of this Prospectus Supplement is December 4, 1996.
<PAGE>
(Continued from the previous page)
The Trust will be created pursuant to a Pooling and Servicing Agreement
(the "Pooling and Servicing Agreement") to be dated as of December 1, 1996,
among the Depositor, AMRESCO Residential Capital Markets, Inc., as Seller, the
Servicers and The Chase Manhattan Bank, 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 March 10, 1997 from funds on deposit in
the Pre-Funding Account. Each Subsequent Mortgage Loan so acquired by the Trust
will be assigned to one of the Mortgage Loan Groups. On the Closing Date,
aggregate cash amounts of approximately $32,917,298 and $108,865,023 will be
deposited with the Trustee in the Pre-Funding Account to be used to acquire
Subsequent Mortgage Loans for the Fixed Rate Group and the Adjustable Rate
Group, respectively.
It is a condition to issuance of the Class A Certificates that the Class A
Certificates be rated "AAA" by Standard & Poor's Rating Services, a Division of
The McGraw-Hill Companies and Fitch Investors Service, L.P. and "Aaa" by Moody's
Investors Service, Inc.
The Class A Certificates initially will be represented by certificates
registered in the name of Cede & Co., as nominee of The Depository Trust Company
("DTC"), as further described herein. The interests of beneficial owners of the
Class A Certificates will be represented by book entries on the records of
participating members of DTC. Definitive certificates will be available for the
Class A Certificates only under the limited circumstances described herein. See
"Description of the Class A Certificates--Book-Entry Registration of the Class A
Certificates" herein.
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 January 27, 1997. 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"). The
Pass-Through Rate for the Adjustable Rate Group 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 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.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE CLASS A
CERTIFICATES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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 July 28, 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 (the
"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 and electronically
through the Commissions's Electronic Data Gathering Analysis and Retrieval
system at the Commission's Web site (http:\\www.sec.gov).
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-15
THE PORTFOLIO OF MORTGAGE LOANS......................................... S-18
General............................................................ S-18
Underwriting Guidelines............................................ S-19
Prepayment Penalties............................................... S-23
Representations Relating to the Mortgage Loans..................... S-23
The Servicers...................................................... S-24
USE OF PROCEEDS......................................................... S-29
THE DEPOSITOR........................................................... S-30
THE SELLER.............................................................. S-30
THE MORTGAGE LOAN POOLS................................................. S-30
General............................................................ S-30
Initial Mortgage Loans -- Fixed Rate Group......................... S-31
Initial Mortgage Loans -- Adjustable Rate Group.................... S-36
Conveyance of Subsequent Mortgage Loans............................ S-45
PREPAYMENT AND YIELD CONSIDERATIONS..................................... S-46
General............................................................ S-46
Mandatory Prepayment............................................... S-47
Prepayment and Yield Scenarios for Class A Certificates............ S-47
Payment Lag Feature of Fixed Rate Group Certificates............... S-54
THE ORIGINATORS......................................................... S-54
FORMATION OF THE TRUST AND TRUST PROPERTY............................... S-54
ADDITIONAL INFORMATION.................................................. S-55
DESCRIPTION OF THE CLASS A CERTIFICATES................................. S-55
General............................................................ S-55
Payment Dates...................................................... S-55
Distributions...................................................... S-56
Overcollateralization Provisions................................... S-59
Crosscollateralization Provisions.................................. S-60
Final Payments..................................................... S-61
Pre-Funding Account................................................ S-61
Capitalized Interest Account....................................... S-61
Calculation of One-Month LIBOR..................................... S-61
Book Entry Registration of the Class A Certificates................ S-62
Assignment of Rights............................................... S-65
THE CERTIFICATE INSURANCE POLICIES AND THE CERTIFICATE INSURER.......... S-65
THE POOLING AND SERVICING AGREEMENT..................................... S-69
Covenant of the Seller to Take Certain Actions with Respect to the
Mortgage Loans in Certain Situations............................. S-69
Assignment of Mortgage Loans....................................... S-70
Servicing.......................................................... S-71
Removal and Resignation of a Servicer.............................. S-75
Reporting Requirements............................................. S-76
Removal of Trustee for Cause....................................... S-77
Governing Law...................................................... S-78
Amendments......................................................... S-78
Termination of the Trust........................................... S-78
Optional Termination............................................... S-78
CERTAIN FEDERAL INCOME TAX CONSEQUENCES................................. S-79
REMIC Election..................................................... S-79
ERISA CONSIDERATIONS.................................................... S-80
RATINGS................................................................. S-81
LEGAL INVESTMENT MATTERS................................................ S-81
UNDERWRITING............................................................ S-82
REPORT OF EXPERTS....................................................... S-83
CERTAIN LEGAL MATTERS................................................... S-83
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES.....................................Annex I
INDEX TO LOCATION OF PRINCIPAL
DEFINED TERMS........................................................A-1
Prospectus
Page
----
SUMMARY OF PROSPECTUS..................................................... 1
RISK FACTORS.............................................................. 7
DESCRIPTION OF THE SECURITIES............................................. 10
General.............................................................. 11
Classes of Securities................................................ 11
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............................................ 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............................................ 30
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........................................................... 34
THE DEPOSITOR............................................................. 34
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...................................... 53
Treatment of Certain Items of REMIC Income and Expense............... 55
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.......................... 59
Liquidation of the REMIC Pool........................................ 60
Administrative Matters............................................... 60
Limitations on Deduction of Certain Expenses......................... 61
Taxation of Certain Foreign Investors................................ 61
Backup Withholding................................................... 62
Reporting Requirements............................................... 62
Federal Income Tax Consequences for Securities as to Which No REMIC
Election Is Made................................................... 63
Standard Securities.................................................. 64
Premium and Discount................................................. 64
Stripped Securities.................................................. 66
Reporting Requirements and Backup Withholding........................ 68
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
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<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 1996-5 (the "Trust").
Certificates Offered: $700,000,000 Mortgage Loan Pass-Through
Certificates, Series 1996-5 to be issued in the
following Classes (each, a "Class"):
<TABLE>
<CAPTION>
Initial Certificate Pass-Through
Principal Balance Rate(1) Class
----------------- ------- -----
<S> <C> <C>
$ 42,200,000 6.425% Class A-1 Certificates
$ 29,000,000 6.275% Class A-2 Certificates
$ 16,500,000 6.400% Class A-3 Certificates
$ 17,000,000 6.575% Class A-4 Certificates
$ 15,000,000 6.700% Class A-5 Certificates
$ 15,900,000 6.925% Class A-6 Certificates
$ 14,400,000 7.075% (2) Class A-7 Certificates
$550,000,000 (3) Class A-8 Certificates
</TABLE>
(1) The Pass-Through Rate with respect to each
Class of the Fixed Rate Group Certificates (other
than the Class A-7 Certificates) shall be the
lesser of (x) the Pass-Through Rate shown above
and (y) the weighted average of the Coupon Rates
of the Mortgage Loans in the Fixed Rate Group,
less 0.65% per annum (the "Fixed Rate Group
Available Funds Cap"). The weighted average of
the Coupon Rates on the Initial Mortgage Loans in
the Fixed Rate Group as of the Statistical
Calculation Date is 11.284%.
(2) The Pass-Through Rate with respect to the
Class A-7 Certificates shall be the lesser of (i)
as of any Payment Date which occurs on or prior
to the Clean-Up Call Date (as defined herein),
7.075% per annum and for any Payment Date
thereafter, 7.575% per annum and (ii) 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 0.225% per annum
(and for any Payment Date thereafter, One-Month
LIBOR plus 0.450% per annum) and (ii) the
Adjustable Rate Group Available Funds Cap (as
defined herein). The weighted average of the
Coupon Rates on the Initial Mortgage Loans in the
Adjustable Rate Group as of the Statistical
Calculation Date is 10.135%.
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 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 Capital Markets, Inc. (the
"Seller"), a Delaware corporation.
Servicers: Advanta Mortgage Corp. USA ("Advanta"), with
principal executive offices located at 16875 West
Bernardo Drive, San Diego, CA 92127 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").
- --------------------------------------------------------------------------------
S-1
<PAGE>
- --------------------------------------------------------------------------------
Trustee: The Chase Manhattan Bank, a New York banking
corporation (the "Trustee"). The corporate trust
office of the Trustee is located at 450 West 33rd
Street, New York, New York 10001.
Custodian: Bankers Trust Company of California, N.A., a
national banking association (the "Custodian").
The Custodian's principal executive offices are
located at 3 Park Plaza, 16th Floor, Irvine,
California 92714.
Cut-Off Date: As of the close of business on December 1, 1996.
Statistical
Calculation Date: November 19, 1996.
Closing Date: On or about December 18, 1996.
Description of
the Certificates: The Mortgage Loan Pass-Through Certificates,
Series 1996-5 (the "Certificates") will consist
of the Class A Certificates, a Class of
interest-only Certificates (the "Class S
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 December
1, 1996, 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 $141,782,321 (approximately
$32,917,298 and $108,865,023 of which shall be
allocated to the Fixed Rate Group and the
Adjustable Rate Group, 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 March 10, 1997 from funds on deposit in
the Pre-Funding Account. Each Subsequent Mortgage
Loan so acquired by the Trust will be assigned to
one of the Mortgage Loan Groups. As a result, the
aggregate principal balance of the Mortgage Loans
in each Mortgage Loan 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 on the Certificates attributable to the
provisions allowing for purchases of Subsequent
Mortgage Loans during the Funding Period (as
described under "Pre-Funding Account").
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: Unless otherwise noted, all statistical
percentages in this Prospectus Supplement are
approximate and are measured by the aggregate
Loan Balance of the related Mortgage Loans (the
"Mortgage Loans"), in relation to the Initial
Mortgage Loans in the applicable Mortgage Loan
Group or of all of the Initial Mortgage Loans in
the Trust (the "Original Aggregate Loan Balance")
in each case as of the Statistical Calculation
Date. The statistical characteristics of the
Mortgage Loans will vary upon the transfer into
the Fixed Rate Group and the Adjustable Rate
- --------------------------------------------------------------------------------
S-2
<PAGE>
- --------------------------------------------------------------------------------
Group of Subsequent Mortgage Loans. See
"Additional Information" herein.
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 47 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 Statistical Calculation
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 applicable Certificate Insurance
Policy. See "Credit Enhancement" herein. The
Mortgage Loans are not guaranteed by the Seller
or any affiliate thereof.
Fixed Rate Group. As of the Statistical
Calculation Date, the average Loan Balance of the
Initial Mortgage Loans in the Fixed Rate Group
was $65,999; the interest rates (the "Coupon
Rates") of such Initial Mortgage Loans ranged
from 7.000% to 17.800% per annum; the weighted
average Loan-to-Value Ratio of such Initial
Mortgage Loans was 65.771%; the weighted average
Coupon Rate of such Initial Mortgage Loans was
11.284% per annum; and the weighted average
remaining term to maturity of such Initial
Mortgage Loans was 318 months. The remaining
terms to maturity as of the Statistical
Calculation Date of the Initial Mortgage Loans in
the Fixed Rate Group ranged from 58 months to 359
months. The maximum Loan Balance of the Initial
Mortgage Loans in the Fixed Rate Group as of the
Statistical Calculation Date was $599,580.
Initial Mortgage Loans in the Fixed Rate Group
requiring "balloon" payments represented not more
than 8.41% of the Original Aggregate Loan Balance
of the Initial Mortgage Loans in the Fixed Rate
Group. No Initial Mortgage Loan in the Fixed Rate
Group will mature later than November 1, 2026. As
a percentage of the Original Aggregate Loan
Balance of the Initial Mortgage Loans in the
Fixed Rate Group, 82.46% were secured by
mortgages on single-family dwellings, 10.05% by
mortgages on two- to four-family dwellings, 2.73%
by mortgages on condominiums, 3.98% by mortgages
on planned unit developments, 0.36% by mortgages
on manufactured homes, 0.28% by mortgages on
townhouses and 0.14% by mortgages on other
dwellings. See "The Initial Mortgage Loan Pools
-- Initial Mortgage Loans -- Fixed Rate Group"
herein.
89.20% of the Initial Mortgage Loans in the Fixed
Rate Group (the "Fixed Rate Loans") bear interest
at a fixed rate for the life of such Initial
Mortgage Loans. 36.35%, 21.35%, 18.03% and 15.82%
of the Initial Mortgage Loans in the Fixed Rate
Group were originated by Quality Mortgage USA,
Inc. ("Quality"), Option One, BNC Mortgage, Inc.
("BNC") and New Century Mortgage Corporation
("New Century"), respectively. In addition, 8.45%
of the Initial Mortgage Loans in the Fixed Rate
Group were originated by two other Originators.
10.54% of the Initial Mortgage Loans in the Fixed
Rate Group (the "5/25 Loans") bear interest at a
fixed rate for a period of five 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 (defined below) generally
are subject to a 1.0% period rate adjustment cap
and substantially all of which have a lifetime
- --------------------------------------------------------------------------------
S-3
<PAGE>
- --------------------------------------------------------------------------------
reset cap of 6.5% to 7.0%. The 5/25 Loans consist
of Initial Mortgage Loans aggregating
$12,344,809.
0.26% of the Mortgage Loans in the Fixed Rate
Group (the "7/23 Loans") bear interest at a fixed
rate for a period of seven 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 1.0% period
rate adjustment cap and a lifetime reset cap of
6.5%. The 7/23 Loans consist of Initial Mortgage
Loans aggregating $302,585.
Adjustable Rate Group. As of the Statistical
Calculation Date, the average Loan Balance of the
Initial Mortgage Loans in the Adjustable Rate
Group was $97,532; the Coupon Rates of such
Initial Mortgage Loans ranged from 4.990% to
17.880% per annum; the weighted average
Loan-to-Value Ratio of such Initial Mortgage
Loans was 70.693%; the weighted average Coupon
Rate of such Initial Mortgage Loans was 10.135%
per annum; and the weighted average remaining
term to maturity of such Initial Mortgage Loans
was 354 months. The remaining terms to maturity
as of the Statistical Calculation Date of the
Initial Mortgage Loans in the Adjustable Rate
Group ranged from 174 months to 359 months. The
maximum Loan Balance of the Initial Mortgage
Loans in the Adjustable Rate Group as of the
Statistical Calculation Date was $734,285. None
of the Initial Mortgage Loans in the Adjustable
Rate Group contain "balloon" payments. No Initial
Mortgage Loan in the Adjustable Rate Group will
mature later than November 1, 2026. As a
percentage of the Original Aggregate Loan Balance
of the Initial Mortgage Loans in the Adjustable
Rate Group, 82.71% were secured by mortgages on
single-family dwellings, 4.24% by mortgages on
condominiums, 6.22% by mortgages on planned unit
developments, 6.16% by mortgages on two- to
four-family dwellings, 0.31% by mortgages on
manufactured homes, 0.15% on townhouses and 0.21%
by mortgages on other dwellings. See "The
Mortgage Loan Pools -- Initial Mortgage Loans
--Adjustable Rate Group" herein.
All of the Initial Mortgage Loans in the
Adjustable Rate Group have maximum Coupon Rates.
The weighted average maximum Coupon Rate of the
Initial Mortgage Loans in the Adjustable Rate
Group is 16.547% per annum, with maximum Coupon
Rates that range from approximately 11.990% to
24.800% per annum. The Initial Mortgage Loans in
the Adjustable Rate Group have a weighted average
gross margin as of the Statistical Calculation
Date of 6.136%. The gross margin for the Initial
Mortgage Loans in the Adjustable Rate Group
ranges from 3.950% to 11.630%. The minimum Coupon
Rates for the Initial Mortgage Loans in the
Adjustable Rate Group range from 4.990% to
17.800%.
47.96% of the Initial Mortgage Loans in the
Adjustable Rate Group (the "Six-Month LIBOR
Loans") bear interest at rates that adjust, along
with the related monthly payments, semiannually
based on Six-Month LIBOR. 75.05% of the Six-Month
LIBOR Loans have a semiannual reset cap of 1%
substantially all of which have a lifetime reset
cap of 6.0% to 7.0%. 24.95% of the Six-Month
LIBOR Loans have a semiannual reset cap of 1.5%,
substantially all of which have a lifetime reset
cap of 7%0. The Six-Month LIBOR Loans consist of
Initial Mortgage Loans aggregating $211,573,283.
34.41% of the Initial Mortgage Loans in the
Adjustable Rate Group (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. 98.60% of the 2/28
Loans have a periodic rate adjustment cap of 1.0%
and substantially all of which have a lifetime
reset cap of 6.5% to 7.0%. 1.40% of the 2/28
Loans have a periodic rate adjustment cap of 1.5%
and generally have a lifetime reset cap of 7%0.
The 2/28 Loans consist of Initial Mortgage Loans
aggregating $151,793,694.
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17.63% of the Initial Mortgage Loans in the
Adjustable Rate Group (the "3/27 Loans") bear
interest at a fixed rate of interest for a period
of three 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 1.0%
periodic rate adjustment cap and substantially
all of which have a lifetime reset cap of 6.0% to
6.5%. The 3/27 Loans consist of Initial Mortgage
Loans aggregating $77,768,000.
36.00%, 24.53%, 16.79% and 16.40% of the Initial
Mortgage Loans in the Adjustable Rate Group were
originated by Option One, Quality, BNC and
Weyerhaeuser Mortgage Company ("Weyerhaeuser"),
respectively. In addition, 6.28% of the Initial
Mortgage Loans in the Adjustable Rate Group were
originated by five other Originators.
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. To the extent that the aggregate
Certificate Principal Balance of the Class A-7 or
Class A-8 Certificates has not been reduced to
zero on the Final Scheduled Payment Date
therefor, the Certificate Insurer will include as
an Insured Payment to the Owners of such
Certificates on such Payment Date an amount which
shall be sufficient to reduce such related
Certificate Principal Balance to zero (any such
payment, the "Insured Final Payment"). See
"Prepayment and Yield Considerations,"
"Description of the Class A Certificates-Final
Payments" and "The Certificate Insurance Policies
and the Certificate Insurer" herein.
Month and Year of
Final Scheduled
Payment Date
------------
Class A-1 Certificates: August 2011
Class A-2 Certificates: April 2018
Class A-3 Certificates: October 2020
Class A-4 Certificates: September 2022
Class A-5 Certificates: March 2024
Class A-6 Certificates: June 2025
Class A-7 Certificates: November 2026
Class A-8 Certificates: November 2026
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 January 27, 1997 (each
such day being a "Payment Date"), the Trustee
will be required to distribute to the Owners of
the Fixed Rate Group 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
Adjustable Rate Group 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 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 Adjustable Rate Group
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
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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
will be made on the basis of a 360-day year
assumed to consist of twelve 30-day months.
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.
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.
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
(ii) Second, to the Owners of the related Class
of Class A Certificates (A) the Principal
Distribution Amount (as defined below) applicable
to the Fixed Rate Group 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 the
Adjustable Rate Group shall be distributed to the
Owners of the Adjustable Rate Group Certificates,
until the Class A-8 Certificate Principal Balance
has been reduced to zero.
See "Description of the Class A
Certificates--Distributions," "--Overcollateral-
ization Provisions" and "--Crosscollateralization
Provisions" herein for a discussion of all
transfers and disbursements 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 at the applicable Pass-Through Rate
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
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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 for the Accrual Period
related to such Payment Date.
The Class A-1, Class A-2, Class A-3, Class A-4,
Class A-5, Class A-6 and Class A-7 Certificates
are "sequential pay" Classes such that the Owners
of each such Class of Certificates will receive
no payments of principal until the Certificate
Principal Balance of each Class having a lower
numerical designation has been reduced to zero.
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 Mortgage Loan 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;
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(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;
(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 Mortgage Loan
Group, any moneys released from the Pre-Funding
Account as a prepayment of the related Class of
Class A Certificates on the Pre-Funding Payment
Date; 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
January 1997. 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 December 2, 1996 and end on January 15, 1997).
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,
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if any, on deposit in the Pre-Funding Account as
of the close of business on the 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 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 overcollateral- ization 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 principal of the Class A
Certificates. This acceleration feature creates,
with respect to each Mortgage Loan Group,
overcollateralization (i.e., the excess of the
aggregate 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
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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
or Classes 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 crosscollateralization 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 "Descrip-
tion of the Class A Certificates--Cross
collateralization Provisions" herein and "Credit
Enhancement" in the Prospectus.
Certificate Insurance Policies. MBIA Insurance
Corporation (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
Payment 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 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 in the case of the Class A-7 Certificates
and the Class A-8 Certificates on the Class A-7
Termination Date and the Class A-8 Termination
Date, respectively. See "Description of the Class
A Certificates - Final Payments" herein.
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 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
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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 the Fixed Rate Group and the
Adjustable Rate Group. With respect to each
Mortgage Loan Group, 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
with respect to the related Mortgage Loan Group
is less than $100,000, and (ii) March 10, 1997,
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 Mortgage Loan Group will be
distributed to the Owners of the related Class of
Class A Certificates then entitled to receive
distributions of principal on a special payment
date, March 17, 1997 (the "Pre- Funding Payment
Date") 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
Pre-Funding Payment Date in an amount equal to
the Pre-Funded Amount with respect to the related
Mortgage Loan Group remaining at the end of the
applicable 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
at the weighted average Pass-Through Rate of the
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Fixed Rate Group Certificates and the weighted
average Pass-Through Rate of the Adjustable Rate
Group Certificates on the amount by which the
aggregate Class A Certificate Principal Balance
of the related Class(es) of Class A Certificates
exceeds the aggregate Loan Balance of the
Mortgage Loans in the related Mortgage Loan Group
plus the Trustee Fee 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 the Payment Dates in
January and February and on the Pre-Funding
Payment Date 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 applicable
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 applicable
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
Pre-Funding Payment Date in an amount equal to
the portion of the Original Pre-Funded Amount
remaining and allocable to the related Mortgage
Loan 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 date on which
the Outstanding Certificate Principal Balance has
declined to less than 10% of the original
Certificate Principal Balance (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
Monthly 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
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 Central 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 effected by DTC
through Citibank N.A. ("Citibank") or The Chase
Manhattan Bank ("Chase", 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
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(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
Rating Services, 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."
The ratings issued by the Rating Agencies on the
payment of principal and interest on the Class
A-8 Certificates do not cover the payment of the
Available Funds Cap Carry-Forward Amounts. 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.
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 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
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S-13
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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 Consideration: 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 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 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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S-14
<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 related Servicer, will result in prepayment of such
Mortgage Loans. Furthermore, the Seller may 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 (including the 5/25 Loans and the 7/23
Loans), such as the Mortgage Loans in the Fixed Rate Group, and 2/28 Loans and
3/27 Loans, which are or will be a part of the Adjustable Rate Group, are
sensitive to prevailing interest rates. Generally, if prevailing interest rates
fall significantly below the interest rates on the Mortgage Loans in the Fixed
Rate Group or the applicable rates on the 2/28 Loans and 3/27 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 in the Fixed Rate
Group or the applicable rates on the 2/28 Loans and 3/27 Loans. Conversely, if
prevailing interest rates rise significantly above the interest rates on the
Mortgage Loans in the Fixed Rate Group or the applicable rates on the 2/28 Loans
and the 3/27 Loans, 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 and the method of
allocating such payments among the Class A Certificates. 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.
The Subsequent Mortgage Loans and the Pre-funding Account. If the
principal amount of eligible Subsequent Mortgage Loans available during the
applicable 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. 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 applicable
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
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<PAGE>
Account on the Pre-Funding 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.
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 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 from that 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.
Effect of Mortgage Loan Yield on Adjustable Rate Group Certificates
Pass-through Rate; Basis Risk. The calculation of the Pass-Through Rate on the
Adjustable Rate Group Certificates 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 the Adjustable Rate Group
(Six-Month LIBOR) as described under "The Mortgage Loan Pool -- Initial Mortgage
Loans -- Adjustable Rate Group" 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 the Adjustable Rate Group, less 0.65% per annum during the first six
Remittance Periods and 1.15% per annum thereafter. 47.96% of the Initial
Mortgage Loans in the Adjustable Rate Group adjust semiannually based upon the
London interbank offered rate for Six-Month United States dollar deposits
("Six-Month LIBOR"), whereas the Class A-8 Pass-Through Rate 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. Consequently, the Class A-8
Pass-Through Rate for any Payment Date may not equal the Class A-8 Formula
Pass-Through Rate (as defined herein) during the related Accrual Period. 34.41%
of the Initial Mortgage Loans in the Adjustable Rate Group are 2/28 Loans that
provide for a fixed interest rate for a period of approximately two years
following origination. 17.63% of the Initial Mortgage Loans in the Adjustable
Rate Group are 3/27 Loans that provide for a fixed interest rate for a period of
approximately three 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 the Adjustable Rate
Group adjust less frequently, with the result that the Adjustable Rate Group
Available Funds Cap may be lower than the Class A-8 Formula Pass- Through Rate
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<PAGE>
for extended periods in a rising interest rate environment. In addition, the
Initial Mortgage Loans in the Adjustable Rate Group are subject to periodic
(i.e., semiannual) adjustment caps and maximum rate caps, and the weighted
average margin is subject to change based upon prepayment experience, 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 the
Adjustable Rate Group 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
the Adjustable Rate Group (net of the sum of the Servicing Fee, the Premium
Amount, the Trustee Fee and a 0.50% per annum protected excess cash amount
required by the Certificate Insurer related to the Adjustable Rate Group) 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 market value of the
Adjustable Rate Group Certificates may be temporarily or permanently reduced. It
is anticipated that Subsequent Mortgage Loans in the Adjustable Rate Group will
have features similar to the Initial Mortgage Loans in the Adjustable Rate
Group, resulting in the same limitations on the Class A-8 Pass-Through Rate as
are described above.
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
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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.
It is possible that some of the Mortgage Loans will be subject to the
Riegle Community Development and Regulatory Improvement Act of 1994 (the "Riegle
Act") which incorporates the Home Ownership and Equity Protection Act of 1994.
The Riegle Act adds certain additional provisions to Regulation Z, the
implementing regulation of the Truth-In-Lending Act. These provisions impose
additional disclosure and other requirements on creditors with respect to
non-purchase money mortgage loans with high interest rates or high upfront fees
and charges. In general, mortgage loans within the purview of the Riegle Act
have annual percentage rates over 10% greater than the yield on Treasury
Securities of comparable maturity and/or fees and points which exceed the
greater of 8% of the total loan amount or $400. The provisions of the Riegle Act
apply on a mandatory basis to all mortgage loans originated on or after October
1, 1995. These provisions can impose specific statutory liabilities upon
creditors who fail to comply with their provisions and may affect the
enforceability of the related loans. In addition, any assignee of the creditor
would generally be subject to all claims and defenses that the consumer could
assert against the creditor, including, without limitation, the right to rescind
the mortgage loan.
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 25.04% 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 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 or its
credit rating is lowered, 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.
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Each Originator (or other responsible party) 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 may be required to repurchase such Mortgage Loan from the Trust.
Underwriting Guidelines
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"). 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 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.
S-19
<PAGE>
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 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 $350,000. Mortgage loans may, however, be
originated generally up to $500,000, provided the loan-to-value ratio 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 loan-to-value ratios at origination of generally up to 90%, depending on,
among other things, the purpose of the mortgage loan, the 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 loan-to-value ratio 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 loan-to-value
ratio 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.
S-20
<PAGE>
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 loan-to-value ratio 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 years of
established credit with five 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 loan-to-value ratio 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
prospective mortgagor should have approximately three years of
established credit with three 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.
S-21
<PAGE>
Seller's PAG III
----------------
The maximum loan-to-value ratio 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
prospective mortgagor should have approximately two years of
established credit with two 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 loan-to-value ratio 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
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,
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 loan-to-value ratio 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 9.85%, 43.55%, 17.73%, 9.33% and 19.50% of the Initial
Fixed Rate Group Mortgage Loans and 7.08%, 44.38%, 21.67%, 8.69% and 18.11% of
the Initial Adjustable Rate Group Mortgage Loans are in the Seller's PAG I, PAG
II, PAG III, PAG IV, and PAG V, categories, respectively.
Approximately 55.20%, 16.01% and 28.76% of the Initial Fixed Rate Group
Mortgage Loans and 53.32%, 20.97% and 25.72% of the Initial Adjustable Rate
Group Mortgage Loans are in the Full Documentation, Limited Documentation and
Stated Income Documentation programs, respectively.
S-22
<PAGE>
Prepayment Penalties
Any Mortgage Loan may be prepaid in full or in part at any time;
however, approximately 63.58% of the Initial Mortgage Loans in the Fixed Rate
Group and 56.55% of the Initial Mortgage Loans in the Adjustable Rate Group
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 may 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 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 Coupon 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 Pooling and Servicing 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 Closing
Date).
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
S-23
<PAGE>
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. In the
event that any Originator (other than Option One) fails to cure such breach or
honor its repurchase or substitution obligations, the Seller shall be obligated
to cure such breach or purchase or substitute for the related Mortgage Loan. 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 any 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 September 30, 1996 in excess of $5.6 billion.
Advanta Parent, through its subsidiaries (including Advanta) managed
assets (including mortgage loans) in excess of $18.3 billion as of September 30,
1996.
As of September 30, 1996, Advanta and its subsidiaries were servicing
approximately 40,000 mortgage loans in the Owned and Managed Servicing Portfolio
representing an aggregate outstanding principal balance of approximately $2.3
billion, and approximately 42,000 mortgage loans in the Third-Party Servicing
Portfolio representing an aggregate outstanding principal balance of
approximately $2.1 billion.
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 September 30, 1996, and for each of the four prior
years. In addition to the Owned and Managed Servicing Portfolio, Advanta
serviced as of September 30, 1996, approximately 42,000 mortgage loans with an
aggregate principal balance as of such date of approximately $2.1 billion; 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-24
<PAGE>
DELINQUENCY AND FORECLOSURE EXPERIENCE OF
ADVANTA'S OWNED AND MANAGED SERVICING PORTFOLIO
OF MORTGAGE LOANS
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------------------------------------------------------------------------------
Nine Months Ending
1992 1993 1994 1995 September 30, 1996
---------------------------------------------------------------------------------------------------------------------
By By By By By
Dollar Dollar Dollar Dollar Dollar
By No. Amount By No. Amount By No. Amount By No. Amount By No. Amount
of 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 40,403 $2,334,295
Delinquency
percentage(1)
30-59 days 2.71% 2.59% 2.43% 2.22% 2.01% 1.57% 2.67% 2.44% 2.05% 1.93%
60-89 days 0.64 0.64 0.77 0.63 0.57 0.45 0.72 0.71 0.57 0.64
90 days or more 1.52 1.69 2.19 2.12 1.85 1.51 1.69 1.23 1.52 1.33
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total 4.87% 4.92% 5.39% 4.97% 4.43% 3.53% 5.08% 4.38% 4.14% 3.90%
Foreclosure 2.13% 2.78% 1.32% 1.62% 1.35% 1.38% 1.29% 1.53% 1.30% 1.48%
rate(2)
REO 0.35% -- 0.42% -- 0.47% -- 0.52% -- 0.44% --
properties(3)
</TABLE>
- ---------------
(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.
LOAN LOSS EXPERIENCE
OF ADVANTA'S OWNED AND MANAGED SERVICING PORTFOLIO
OF MORTGAGE LOANS*
<TABLE>
<CAPTION>
Year Ending December 31,
-----------------------------------------------------------------------
Nine Months
ending
September
1992 1993 1994 1995 30, 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 $2,277,935
Gross losses(2) $6,069 $14,115 $20,886 $13,978 $10,741
Recoveries(3) $145 $123 $179 $148 $79
Net losses(4) $5,924 $13,992 $20,707 $13,830 $10,661
Net losses as a percentage of
average amount outstanding 0.75% 1.33% 1.69% 0.90% 0.62%(5)
</TABLE>
- -------------
(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
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
S-25
<PAGE>
net losses during such period was negatively impacted by the performance of 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.
Collection Procedures.
Advanta employs a variety of collection techniques during the various
stages of delinquency. The primary purpose of all collection efforts performed
by Advanta is to bring a delinquent mortgage loan current in as short a time as
possible. Phone calls are used as the principal form of contacting a mortgagor.
Advanta utilizes a predictive dialing system for the effective management of
collection calling activity. Prior to initiating foreclosure proceedings,
Advanta makes every reasonable effort to determine the reason for the default;
whether the delinquency is a temporary or permanent condition; and the
mortgagor's attitude toward the obligation. Advanta will take action to
foreclose a mortgage only once every reasonable effort to cure the default has
been made and a projection of the ultimate gain or loss on REO sale is
determined. Foreclosures are processed within individual state guidelines and in
accordance with the provisions of the mortgage and state law.
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, 1995 and
September 30, 1996, 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 by Option One (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-26
<PAGE>
Delinquencies and Foreclosures
(Dollars in Thousands)
<TABLE>
<CAPTION>
At December 31, At December 31, At December 31, At September 30
1993 1994 1995 1996
------------------------------ -------------------------- ------------------------------ ---------------------------
Per- Per-
By cent Percent By Percent Percent By Percent Percent By Cent Percent
No. By By No By No. By By No. By No. By By No. By No. By By No. By
of Dollar of Dollar of Dollar of Dollar of Dollar of Dollar of Dollar of Dollar
Loans Amount Loans Amount Loan Amount Loan Amount Loan Amount Loan Amount Loan Amount Loan Amount
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <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 16,100 $1,424,042 N/A N/A
Period of
Delinquency:
31 - 59 days... 2 251 .16 .17 32 3,247 .52 .53 126 11,364 .99 .99 268 23,441 1.66 1.64
60 - 89 days... 3 265 .24 .18 17 1,637 .28 .27 87 8,138 .69 .71 126 11,082 .78 .78
90 days or more 2 282 .16 .19 28 3,556 .46 .58 294 28,982 2.32 2.51 531 44,629 3.30 3.12
- --- --- --- -- ----- --- --- --- ------ ---- ---- --- ------ ---- ----
Total Delinquent
Loans........... 7 798 .56 .54 77 8,440 1.26 1.38 507 48,484 4.00 4.21 925 79,152 5.74 5.5
Loans in
Foreclosure*.... 4 415 .32 .28 50 5,328 .82 .87 301 28,874 2.37 2.50 496 41,669 3.08 2.92
</TABLE>
- --------------
* Loans in foreclosure are also included under the heading "Total
Delinquent Loans."
Real Estate Owned
(Dollars in Thousands)
<TABLE>
<CAPTION>
At December 31, At December 31, At December 31, At September 30,
1993 1994 1995 1996
------------------------- ------------------------ --------------------- ---------------------
By Dollar By Dollar By Dollar By Dollar
By No. Amount By No. Amount By No. Amount By No. Amount
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>
Total Portfolio............ 1,233 $146,352 6,115 $615,488 12,686 $1,153,199 16,100 $1,429,042
Foreclosed Loans(1)........ 0 0 12 1,512 80 7,634 177 17,379
Foreclosed Ratio(2)........ 0 .00 .20 .25 .63 .66 1.10 1.22
</TABLE>
- -----------
(1) For the purposes of these tables, Foreclosed Loans means the principal
balance of mortgage loans secured by mortgaged properties the title to
which has been acquired by 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.
Loan Loss Experience on
Option One's Servicing Portfolio
of Mortgage Loans
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------------------------------------------------
Nine Months Ended
September 30,
1993 1994 1995 1996
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Portfolio (1) $146,352 $615,488 $1,153,199 $1,429,042
Gross Losses (2) $0 $17 $1,291 $2,249
Recoveries (3) $0 $0 $0 $0
Net Losses (4) $0 $17 $1,291 $2,249
Net Losses as a Percentage of Total
Portfolio (5) 0.00% 0.00% 0.11% 0.19%
</TABLE>
- ----------------
(1) "Total Portfolio" on the date stated above is the principal balances of the
mortgage loans outstanding on the last day of the period.
(2) "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."
(5) For the Nine Months Ending September 30, 1996, "Net Losses as a Percentage
of Total Portfolio" was annualized by multiplying "Net Losses" by 1.33
before calculating the Percentage of "Net Losses as a Percentage of Total
Portfolio."
S-27
<PAGE>
The following tables set forth, as of December 31, 1993, 1994, 1995 and
September 30, 1996 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 by
Option One 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, At September 30
1993 1994 1995 1996
------------------------------ -------------------------- ------------------------------ ---------------------------
Per- Per-
By cent Percent By Percent Percent By Percent Percent By Cent Percent
No. By By No By No. By By No. By No. By By No. By No. By By No. By
of Dollar of Dollar of Dollar of Dollar of Dollar of Dollar of Dollar of Dollar
Loans Amount Loans Amount Loan Amount Loan Amount Loan Amount Loan Amount Loan Amount Loan Amount
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <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 17,763 $1,614,210 N/A N/A
Period of
Delinquency:
31 - 59 days... 2 251 .16 .17 32 3,247 .52 .53 161 16,501 1.10 1.21 302 28,320 1.70 1.75
60 - 89 days... 3 265 .24 .18 17 1,637 .28 .27 104 10,117 .71 .74 150 14,392 .84 .89
90 days or more 2 282 .16 .19 28 3,556 .46 .58 388 40,275 2.65 2.95 636 58,583 3.58 3.63
- --- --- --- -- ----- --- --- --- ------ ---- ---- ---- ------- ---- ----
Total Delinquent 7 798 .56 .54 77 8,440 1.26 1.38 653 66,893 4.46 4.90 1,088 101,285 6.12 6.27
Loans...........
Loans in 4 415 .32 .28 50 5,328 .82 .87 388 38,985 2.65 2.85 604 54,874 3.40 3.40
Foreclosure*....
</TABLE>
- ------------
* Loans in foreclosure are also included under the heading "Total Delinquent
Loans."
<TABLE>
<CAPTION>
Real Estate Owned
(Dollars in Thousands)
At December 31, At December 31, At December 31, At September 30,
1993 1994 1995 1996
------------------------- ------------------------ --------------------- ---------------------
By Dollar By Dollar By Dollar By Dollar
By No. Amount By No. Amount By No. Amount By No. Amount
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>
Total Portfolio ........... 1,233 $146,352 6,115 $615,488 14,625 $1,367,031 17,763 $1,614,210
Foreclosed Loans(1) ....... 0 0 12 1,512 100 9,632 268 27,186
Foreclosed Ratio(2) ....... 0 .00 .20 .25 .68 .70 1.51 1.68
</TABLE>
- ---------------
(1) For the purposes of these tables, Foreclosed Loans means the principal
balance of mortgage loans secured by mortgaged properties the title to
which has been acquired by 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.
S-28
<PAGE>
Loan Loss Experience on
Option One's Servicing Portfolio
of Mortgage Loans
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ending December 31,
-----------------------------------------------------
Nine Months Ended
September 30,
1993 1994 1995 1996
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Portfolio (1) $146,352 $615,488 $1,367,031 $1,614,210
Gross Losses (2) $0 $17 $1,506 $3,002
Recoveries (3) $0 $0 $0 $0
Net Losses (4) $0 $17 $1,506 $3,002
Net Losses as a Percentage of Total
Portfolio (5) 0.00% 0.00% 0.11% 0.19%
</TABLE>
- ----------------
(1) "Total Portfolio" on the date stated above is the principal balances of the
mortgage loans outstanding on the last day of the period.
(2) "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."
(5) For the Nine Months Ending September 30, 1996, "Net Losses as a Percentage
of Total Portfolio" was annualized by multiplying "Net Losses" by 1.33
before calculating the Percentage of "Net Losses as a Percentage of Total
Portfolio."
General
There can be no assurance that the delinquency experience of the
Mortgage Loans originated by Option One (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 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 Underwriting Guidelines and is unable to
predict the delinquencies and foreclosures that might be expected with respect
to the Option One Loans. See "Risk Factors -- Risk of Higher Delinquencies
Associated with Underwriting 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. Notwithstanding anything to
the contrary herein, Option One makes no representation as to accuracy of any
information contained herein except for the information provided under the
heading "The Servicers-Option One Mortgage Corporation."
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 Original
Pre-Funded Amount in the Pre-Funding Account and to the deposit of certain
S-29
<PAGE>
amounts to the Capitalized Interest Account. Such net proceeds less the Original
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, 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, formerly known as AMRESCO Residential Mortgage Corporation,
was incorporated in the State of Delaware on October 13, 1995 and is a
wholly-owned subsidiary of AMRESCO, INC. The Seller changed its name on
September 25, 1996. The Seller maintains its principal offices at 700 N. Pearl,
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 Statistical Calculation 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 March 10, 1997 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 Statistical Calculation 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 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 Statistical Calculation 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 (other than
the 5/25 Loans and the 7/23 Loans which bear fixed rates for five and seven
years, respectively from origination and then bear adjustable interest rates),
in the case of the Fixed Rate Group, and Mortgage Loans which bear adjustable
interest rates (including 2/28 Loans and 3/27 Loans) only, in the case of the
Adjustable Rate Group. The Fixed Rate Group Certificates represent undivided
ownership interests in all Mortgage Loans contained in the Fixed Rate Group, and
distributions on the Fixed Rate Group Certificates will be based primarily on
amounts available for distribution in respect of Mortgage Loans in the Fixed
Rate Group. The Adjustable Rate Group Certificates represent undivided ownership
interests in all Mortgage Loans contained in the Adjustable Rate Group, and
distributions on the Adjustable Rate Group Certificates will be based primarily
on amounts available for distribution in respect of Mortgage Loans in the
Adjustable Rate Group.
S-30
<PAGE>
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.
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.
Initial Mortgage Loans -- Fixed Rate Group
The information set forth with respect to the Fixed Rate Group 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 Statistical Calculation Date, the average Loan Balance of the
Initial Mortgage Loans in the Fixed Rate Group was $65,999; the weighted average
Loan-to-Value Ratio of the Initial Mortgage Loans in the Fixed Rate Group was
65.711%; the weighted average remaining term to maturity was 318 months; the
weighted average original term to maturity was 321 months. The remaining terms
to maturity as of the Statistical Calculation Date of the Initial Mortgage Loans
in the Fixed Rate Group ranged from 58 months to 359 months. The minimum and
maximum Loan Balances of Initial Mortgage Loans in the Fixed Rate Group as of
the Statistical Calculation Date were $9,928 and $599,580, respectively. Balloon
Mortgage Loans represent not more than 8.41% of the Original Aggregate Loan
Balance of the Initial Mortgage Loans in the Fixed Rate Group. No Initial
Mortgage Loan in the Fixed Rate Group will mature later than November 1, 2026.
89.20% of the Initial Mortgage Loans in the Fixed Rate Group bear
interest at a fixed rate for the life of the related Mortgage Loans. The Initial
Mortgage Loans in the Fixed Rate Group consist of Mortgage Loans aggregating
$117,082,702. The Coupon Rates of the Initial Mortgage Loans in the Fixed Rate
Group ranged from 7.000% per annum to 17.800% per annum. The weighted average
Coupon Rate of the Initial Mortgage Loans in the Fixed Rate Group was 11.284%
per annum.
10.54% of the Initial Mortgage Loans in the Fixed Rate Group bear
interest at a fixed rate of interest for a period of approximately five 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
generally are subject to a 1.0% periodic rate adjustment cap and substantially
all of which have a lifetime reset cap of 6.5% to 7.0%. The 5/25 Loans consist
of Initial Mortgage Loans aggregating $12,344,809.
0.26% of the Initial Mortgage Loans in the Fixed Rate Group bear
interest at a fixed rate of interest for a period of approximately seven 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 1.0% periodic rate adjustment cap and a lifetime reset cap of 6.5%.
The 7/23 Loans consist of Initial Mortgage Loans aggregating $302,585.
S-31
<PAGE>
Geographic Distribution of Mortgaged Properties --
Initial Fixed Rate Group Mortgage Loans
The geographic distribution of Initial Mortgage Loans in the Fixed Rate
Group by state, as of the Statistical Calculation Date, was as follows:
<TABLE>
<CAPTION>
Number of Fixed Rate Aggregate Fixed Rate % of Aggregate
Group Group Fixed Rate Group
Geographic Area Mortgage Loans Loan Balance Loan Balance
- --------------- -------------- ------------ ------------
<S> <C> <C> <C>
Alabama 1 $ 47,941.71 0.04%
Arizona 27 1,716,390.78 1.47
Arkansas 15 531,614.76 0.45
California 356 32,488,905.23 27.75
Colorado 69 4,847,123.03 4.14
Connecticut 4 201,855.00 0.17
Delaware 5 503,061.62 0.43
District of Columbia 14 1,248,559.02 1.07
Florida 172 9,152,393.57 7.82
Georgia 35 1,870,202.76 1.60
Hawaii 54 9,971,480.59 8.52
Idaho 13 676,342.35 0.58
Illinois 166 9,174,127.41 7.84
Indiana 77 2,980,360.09 2.55
Iowa 1 40,946.28 0.03
Kansas 4 121,244.09 0.10
Kentucky 17 682,304.21 0.58
Louisiana 32 1,048,454.80 0.90
Maine 2 125,843.51 0.11
Maryland 34 2,795,295.02 2.39
Massachusetts 36 2,977,130.41 2.54
Michigan 40 1,800,597.66 1.54
Minnesota 15 1,062,933.21 0.91
Mississippi 9 310,827.06 0.27
Missouri 29 996,282.95 0.85
Nebraska 9 353,173.40 0.30
Nevada 14 1,138,809.28 0.97
New Hampshire 1 76,920.85 0.07
New Jersey 12 1,536,309.32 1.31
New Mexico 6 344,490.91 0.29
New York 11 969,809.94 0.83
North Carolina 33 1,251,771.85 1.07
Ohio 86 3,948,236.94 3.37
Oklahoma 7 301,933.19 0.26
Oregon 54 3,749,093.63 3.20
Pennsylvania 31 1,080,393.05 0.92
Rhode Island 9 630,958.51 0.54
South Carolina 26 827,692.79 0.71
Tennessee 32 1,005,803.39 0.86
Texas 75 3,411,252.47 2.91
Utah 33 2,603,761.97 2.22
Virginia 38 2,426,599.01 2.07
Washington 44 2,883,482.31 2.46
West Virginia 6 198,889.74 0.17
Wisconsin 17 738,665.61 0.63
Wyoming 3 232,436.86 0.20
----- ---------- ----
To1al 1,774 $117,082,702.14 100.00%
===== =============== =======
</TABLE>
S-32
<PAGE>
Original Loan-to-Value Ratios -- Initial Fixed Rate Group Mortgage Loans
The original loan-to-value ratios as of the date of origination of the
Initial Mortgage Loans in the Fixed Rate Group (based upon appraisals made at
the time of origination thereof) (the "Loan-to-Value Ratios") as of the
Statistical Calculation Date were distributed as follows:
<TABLE>
<CAPTION>
Number of Fixed Rate Aggregate Fixed Rate % of Aggregate
Range of Group Group Fixed Rate Group
Original LTVs Mortgage Loans Loan Balance Loan Balance
- ------------- -------------- ------------ ------------
<S> <C> <C> <C>
* 1 $ 19,840.26 0.02%
0.01 - 5.00% 1 43,693.19 0.04
10.01 - 15.00 3 73,727.39 0.06
15.01 - 20.00 7 243,084.23 0.21
20.01 - 25.00 24 838,056.41 0.72
25.01 - 30.00 31 1,163,735.51 0.99
30.01 - 35.00 43 2,031,166.70 1.73
35.01 - 40.00 46 2,509,331.52 2.14
40.01 - 45.00 59 2,599,709.12 2.22
45.01 - 50.00 113 5,601,773.89 4.78
50.01 - 55.00 112 5,687,404.82 4.86
55.01 - 60.00 211 11,521,142.88 9.84
60.01 - 65.00 287 19,265,509.13 16.45
65.01 - 70.00 299 19,958,849.36 17.05
70.01 - 75.00 335 28,190,588.91 24.08
75.01 - 80.00 151 12,743,084.34 10.88
80.01 - 85.00 37 3,412,493.17 2.91
85.01 - 90.00 14 1,179,511.31 1.01
--- --------------- ------
Total: 1,774 $117,082,702.14 100.00%
===== =============== =======
</TABLE>
- ------------
* Original Loan-to-Value Ratio is unknown.
S-33
<PAGE>
Statistical Calculation Date Coupon Rates --
Initial Fixed Rate Group Mortgage Loans
The Coupon Rates borne by the Notes relating to the Initial Mortgage
Loans in the Fixed Rate Group were distributed as follows as of the Statistical
Calculation Date:
<TABLE>
<CAPTION>
Number of Fixed Rate Aggregate Fixed Rate % of Aggregate
Range of Group Group Fixed Rate Group
Original LTVs Mortgage Loans Loan Balance Loan Balance
- ------------- -------------- ------------ ------------
<S> <C> <C> <C>
6.501 - 7.000 1 $ 21,322.26 0.02%
7.001 - 7.500 1 164,753.84 0.14
7.501 - 8.000 4 367,176.62 0.31
8.001 - 8.500 7 469,362.75 0.40
8.501 - 9.000 52 5,661,168.94 4.84
9.001 - 9.500 86 10,120,244.68 8.64
9.501 - 10.000 172 16,758,438.02 14.31
10.001 - 10.500 137 10,865,172.99 9.28
10.501 - 11.000 197 15,119,565.90 12.91
11.001 - 11.500 164 10,381,359.69 8.87
11.501 - 12.000 201 11,931,872.63 10.19
12.001 - 12.500 152 8,481,978.11 7.24
12.501 - 13.000 197 9,188,664.73 7.85
13.001 - 13.500 139 6,031,442.50 5.15
13.501 - 14.000 95 4,411,155.07 3.77
14.001 - 14.500 69 2,969,735.84 2.54
14.501 - 15.000 63 2,530,190.48 2.16
15.001 - 15.500 27 1,295,209.63 1.11
15.501 - 16.000 7 232,064.04 0.20
16.501 - 17.000 1 35,985.58 0.03
17.501 - 18.000 2 45,837.84 0.04
----- --------------- ------
Total 1,774 $117,082,702.14 100.00%
===== =============== ======
</TABLE>
Statistical Calculation Date Loan Balances --
Initial Fixed Rate Group Mortgage Loans
The distribution of the outstanding principal amounts of the Initial
Mortgage Loans in the Fixed Rate Group as of the Statistical Calculation Date
was as follows:
<TABLE>
<CAPTION>
Number of Fixed Rate Aggregate Fixed Rate % of Aggregate
Group Group Fixed Rate Group
Range of Loan Balances Mortgage Loans Loan Balance Loan Balance
- ---------------------- -------------- ------------ ------------
<S> <C> <C> <C>
$0.01 - $ 50,000.00 889 $29,093,438.40 24.85%
50,000.01 - 100,000.00 600 43,035,688.06 36.76
100,000.01 - 150,000.00 184 21,856,867.58 18.67
150,000.01 - 200,000.00 53 9,229,457.11 7.88
200,000.01 - 250,000.00 20 4,449,242.44 3.80
250,000.01 - 300,000.00 12 3,234,009.86 2.76
300,000.01 - 350,000.00 6 2,008,941.66 1.72
350,000.01 - 400,000.00 6 2,264,992.75 1.93
400,000.01 - 450,000.00 3 1,310,484.65 1.12
550,000.01 - 600,000.00 1 599,579.63 0.51
----- --------------- ------
Total 1,774 $117,082,702.14 100.00%
===== =============== =======
</TABLE>
S-34
<PAGE>
Types of Mortgaged Properties -- Initial Fixed Rate Group Mortgage Loans
The Mortgaged Properties securing the Initial Mortgage Loans in the
Fixed Rate Group as of the Statistical Calculation Date were of the property
types as follows:
<TABLE>
<CAPTION>
Number of Fixed Rate Aggregate Fixed Rate % of Aggregate
Group Group Fixed Rate Group
Property Types Mortgage Loans Loan Balance Loan Balance
- ---------------------- -------------- ------------ ------------
<S> <C> <C> <C>
Single-family 1,501 $96,541,563.38 82.46%
PUD 44 4,658,779.44 3.98
Townhouses 4 326,968.15 0.28
Condominiums 48 3,199,571.42 2.73
Manufactured Home 9 425,637.57 0.36
Two-to-Four Family 165 11,771,242.57 10.05
Other 3 158,939.61 0.14
----- ---------- ----
Total 1,774 $117,082,702.14 100.00%
===== =============== =======
</TABLE>
Months Elapsed Since Origination -- Initial Fixed Rate Group Mortgage Loans
The distribution of the number of months since the date of origination
of the Initial Mortgage Loans in the Fixed Rate Group as of the Statistical
Calculation Date was as follows:
<TABLE>
<CAPTION>
Number of Fixed Rate Aggregate Fixed Rate % of Aggregate
Months Elapsed Group Group Fixed Rate Group
Since Origination Mortgage Loans Loan Balance Loan Balance
- ---------------------- -------------- ------------ ------------
<S> <C> <C> <C>
0 - 6 1,756 $115,307,936.25 98.48%
7 - 12 17 1,746,073.60 1.49
13 - 18 1 28,692.29 0.02
----- --------------- ------
Total 1,774 $117,082,702.14 100.00%
===== =============== =======
</TABLE>
Remaining Term to Maturity -- Initial Fixed Rate Group Mortgage Loans
The distribution of the number of months remaining to maturity of the
Initial Mortgage Loans in the Fixed Rate Group as of the Statistical Calculation
Date was as follows:
<TABLE>
<CAPTION>
Number of Fixed Rate Aggregate Fixed Rate % of Aggregate
Months Remaining Group Group Fixed Rate Group
to Maturity Mortgage Loans Loan Balance Loan Balance
- ---------------------- -------------- ------------ ------------
<S> <C> <C> <C>
48 - 60 1 $ 29,237.48 0.02%
168 - 180 478 24,584,747.33 21.00
228 - 240 20 834,576.73 0.71
336 - 348 1 28,692.29 0.02
349 - 360 1,274 91,605,448.31 78.24
----- -------------- ------
Total 1,774 $117,082,702.14 100.00%
===== =============== =======
</TABLE>
S-35
<PAGE>
Occupancy Status -- Initial Fixed Rate Group Mortgage Loans
The occupancy status of the Mortgaged Properties securing the Initial
Mortgage Loans in the Fixed Rate Group as of the Statistical Calculation Date
was as follows based on representations by the Mortgagors at the time of
origination of such Mortgage Loans:
<TABLE>
<CAPTION>
Number of Fixed Rate Aggregate Fixed Rate % of Aggregate
Group Group Fixed Rate Group
Occupancy Status Mortgage Loans Loan Balance Loan Balance
- ---------------------- -------------- ------------ ------------
<S> <C> <C> <C>
Owner Occupied 1,499 $102,360,510.14 87.43%
Non-Owner Occupied 274 14,693,500.85 12.55
Unknown 1 28,691.15 0.02
----- --------- ----
Total 1,774 $117,082,702.14 100.00%
===== =============== ======
</TABLE>
Initial Mortgage Loans -- Adjustable Rate Group
The information set forth with respect to the Adjustable Rate Group 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 Statistical Calculation Date, the average Loan Balance of the
Initial Mortgage Loans in the Adjustable Rate Group was $97,532; the Coupon
Rates of the Initial Mortgage Loans in the Adjustable Rate Group ranged from
4.990% per annum to 17.800% per annum; the weighted average Loan-to-Value Ratio
of the Initial Mortgage Loans in the Adjustable Rate Group was 70.693%; the
weighted average Coupon Rate of the Initial Mortgage Loans in the Adjustable
Rate Group was 10.135% per annum; the weighted average remaining term to
maturity was 354 months; and the weighted average original term to maturity was
358 months. The remaining terms to maturity as of the Statistical Calculation
Date of the Initial Mortgage Loans in the Adjustable Rate Group ranged from 174
months to 359 months. The minimum and maximum Loan Balances of Initial Mortgage
Loans in the Adjustable Rate Group as of the Statistical Calculation Date were
$11,878 and $734,286, respectively. None of the Initial Mortgage Loans in the
Adjustable Rate Group provided for "balloon" payments. No Initial Mortgage Loan
in the Adjustable Rate Group will mature later than November 1, 2026.
All of the Initial Mortgage Loans in the Adjustable Rate Group have
maximum Coupon Rates. The weighted average maximum Coupon Rate of the Initial
Mortgage Loans in the Adjustable Rate Group was 16.547% per annum, with maximum
Coupon Rates that range from 11.990% per annum to 24.800% per annum. The
weighted average minimum Coupon Rate of the Initial Mortgage Loans in the
Adjustable Rate Group was 10.102% per annum, with minimum Coupon Rates that
range from 4.990% per annum to 17.800% per annum. The Initial Mortgage Loans in
the Adjustable Rate Group have a weighted average gross margin as of the
Statistical Calculation Date of 6.136%. The gross margin for the Initial
Mortgage Loans in the Adjustable Rate Group range from 3.950% to 11.630%.
47.96% of the Initial Mortgage Loans in the Adjustable Rate Group are
Six-Month LIBOR Loans that bear interest at rates that adjust, along with the
related monthly payments, semiannually based on Six-Month LIBOR. 75.05% of the
Six-Month LIBOR Loans have a semiannual reset cap of 1%, substantially all of
which have a lifetime reset cap of 6.0% to 7.0%. 24.95% of the Six-Month LIBOR
Loans have a semiannual reset cap of 1.5%, substantially all of which have a
lifetime reset cap of 7%. The Six-Month LIBOR Loans consist of Initial Mortgage
Loans aggregating $211,573,283.
34.41% of the Initial Mortgage Loans in the Adjustable Rate Group are
2/28 Loans that bear interest at a fixed rate of interest for a period of
approximately 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. 98.60% of the 2/28 Loans have a periodic rate
adjustment cap of 1.0% and substantially all of which have a lifetime reset cap
of 6.5% to 7.0%. 1.40% of the 2/28 Loans have a periodic rate adjustment cap of
1.5% and generally have a lifetime reset cap of 7%. The 2/28 Loans consist of
Initial Mortgage Loans aggregating $151,793,694.
S-36
<PAGE>
17.63% of the Initial Mortgage Loans in the Adjustable Rate Group are
3/27 Loans that bear interest at a fixed rate of interest for a period of
approximately three 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 1.0% periodic rate adjustment cap and
substantially all of which have a lifetime reset cap of 6.0% to 6.5%. The 3/27
Loans consist of Initial Mortgage Loans aggregating $77,768,000.
S-37
<PAGE>
Geographic Distribution of Mortgaged Properties --
Initial Adjustable Rate Group Mortgage Loans
The geographic distribution of Initial Mortgage Loans in the Adjustable
Rate Group by state, as of the Statistical Calculation Date, was as follows:
<TABLE>
<CAPTION>
Number of Adjustable Rate Aggregate Adjustable Rate % of Aggregate
Group Group Adjustable Rate Group
Geographic Area Mortgage Loans Loan Balance Loan Balance
- --------------- -------------- ------------ ------------
<S> <C> <C> <C>
Alabama 2 $ 164,374.68 0.04%
Arizona 106 10,395,867.20 2.36
Arkansas 14 1,167,414.32 0.26
California 810 107,291,155.15 24.32
Colorado 161 15,249,959.46 3.46
Connecticut 84 9,121,270.19 2.07
Delaware 7 902,669.21 0.20
District of Columbia 15 1,194,305.42 0.27
Florida 249 20,454,287.24 4.64
Georgia 111 10,935,393.76 2.48
Hawaii 113 22,981,152.51 5.21
Idaho 53 4,508,256.50 1.02
Illinois 495 45,571,212.14 10.33
Indiana 64 3,403,263.04 0.77
Iowa 6 557,119.12 0.13
Kansas 15 759,107.74 0.17
Kentucky 29 1,568,075.08 0.36
Louisiana 9 543,761.25 0.12
Maine 11 654,854.66 0.15
Maryland 94 9,035,546.28 2.05
Massachusetts 163 18,520,760.19 4.20
Michigan 114 8,117,304.58 1.84
Minnesota 66 4,580,150.65 1.04
Mississippi 3 333,076.65 0.08
Missouri 102 4,464,954.11 1.01
Montana 5 411,256.91 0.09
Nebraska 5 285,517.47 0.06
Nevada 67 7,363,428.03 1.67
New Hampshire 44 3,511,246.43 0.80
New Jersey 55 6,916,383.51 1.57
New Mexico 38 3,129,562.05 0.71
New York 22 3,748,432.21 0.85
North Carolina 118 7,112,328.18 1.61
Ohio 149 9,164,456.18 2.08
Oklahoma 20 1,447,422.60 0.33
Oregon 179 15,988,696.98 3.62
Pennsylvania 90 6,127,020.59 1.39
Rhode Island 55 4,231,677.95 0.96
South Carolina 35 2,307,747.89 0.52
Tennessee 12 688,008.43 0.16
Texas 148 12,526,172.71 2.84
Utah 138 13,795,239.10 3.13
Vermont 3 394,587.14 0.09
Virginia 114 11,377,259.45 2.58
Washington 175 18,938,100.02 4.29
West Virginia 6 320,274.41 0.07
Wisconsin 146 8,654,899.15 1.96
Wyoming 3 219,968.16 0.05
----- -------------- ------
Total 4,523 $441,134,976.68 100.00%
===== =============== =======
</TABLE>
S-38
<PAGE>
Original Loan-to-Value Ratios -- Initial Adjustable Rate Group Mortgage Loans
The original Loan-to-Value Ratios of the Initial Mortgage Loans in the
Adjustable Rate Group were distributed as follows:
<TABLE>
<CAPTION>
Number of Adjustable Rate Aggregate Adjustable Rate % of Aggregate
Range of Group Group Adjustable Rate Group
Original LTVs Mortgage Loans Loan Balance Loan Balance
- ------------- -------------- ------------ ------------
<S> <C> <C> <C>
* 5 $ 149,376.65 0.03%
5.01 - 10.00% 2 206,984.39 0.05
10.01 - 15.00 1 32,952.17 0.01
15.01 - 20.00 7 268,140.36 0.06
20.01 - 25.00 11 518,463.55 0.12
25.01 - 30.00 25 1,431,078.79 0.32
30.01 - 35.00 30 2,028,689.75 0.46
35.01 - 40.00 63 3,972,485.49 0.90
40.01 - 45.00 73 5,320,250.50 1.21
45.01 - 50.00 145 9,235,713.56 2.09
50.01 - 55.00 220 16,808,696.86 3.81
55.01 - 60.00 353 26,513,944.82 6.01
60.01 - 65.00 692 58,618,542.26 13.29
65.01 - 70.00 902 83,691,012.87 18.97
70.01 - 75.00 989 109,191,320.35 24.75
75.01 - 80.00 746 89,164,631.62 20.21
80.01 - 85.00 142 18,735,440.29 4.25
85.01 - 90.00 117 15,247,252.40 3.46
----- --------------- ------
Total 4,523 $441,134,976.68 100.00%
===== =============== =======
</TABLE>
- -----------------
* Original Loan-to-Value Ratios are unknown.
S-39
<PAGE>
Statistical Calculation Date Coupon Rates --
Initial Adjustable Rate Group Mortgage Loans
The Coupon Rates borne by the Notes relating to the Initial Mortgage
Loans in the Adjustable Rate Group were distributed as follows as of the
Statistical Calculation Date:
<TABLE>
<CAPTION>
Number of Adjustable Rate Aggregate Adjustable Rate % of Aggregate
Range of Group Group Adjustable Rate Group
Coupon Rates Mortgage Loans Loan Balance Loan Balance
- ------------ -------------- ------------ ------------
<S> <C> <C> <C>
4.501 - 5.000% 1 $ 64,642.58 0.01%
5.001 - 5.500 2 138,545.47 0.03
5.501 - 6.000 6 914,874.14 0.21
6.001 - 6.500 14 1,575,148.77 0.36
6.501 - 7.000 35 4,480,479.32 1.02
7.001 - 7.500 48 6,170,996.06 1.40
7.501 - 8.000 122 15,608,432.86 3.54
8.001 - 8.500 232 28,585,759.75 6.48
8.501 - 9.000 412 47,748,699.36 10.82
9.001 - 9.500 443 52,461,318.66 11.89
9.501 - 10.000 611 69,652,279.43 15.79
10.001 - 10.500 526 52,573,631.95 11.92
10.501 - 11.000 616 57,400,602.59 13.01
11.001 - 11.500 433 34,907,728.37 7.91
11.501 - 12.000 340 25,745,137.81 5.84
12.001 - 12.500 214 14,306,683.30 3.24
12.501 - 13.000 173 11,388,681.28 2.58
13.001 - 13.500 112 6,479,023.45 1.47
13.501 - 14.000 96 6,134,137.92 1.39
14.001 - 14.500 51 3,059,374.49 0.69
14.501 - 15.000 21 1,120,033.91 0.25
15.001 - 15.500 5 249,517.42 0.06
15.501 - 16.000 6 246,995.00 0.06
16.001 - 16.500 3 104,759.47 0.02
16.501 - 17.500 1 17,493.32 0.00
---- --------------- ------
Total 4,523 $441,134,976.68 100.00%
===== =============== =======
</TABLE>
S-40
<PAGE>
Statistical Calculation Date Loan Balances -- Initial Adjustable
Rate Group Mortgage Loans
The distribution of the outstanding principal amounts of the Initial
Mortgage Loans in the Adjustable Rate Group as of the Statistical Calculation
Date was as follows:
<TABLE>
<CAPTION>
Number of Adjustable Aggregate Adjustable Rate % of Aggregate
Rate Group Group Adjustable Rate Group
Range of Loan Balances Mortgage Loans Loan Balance Loan Balance
- ---------------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
$ 0.01 - $ 50,000.00 1,105 $ 39,236,463.81 8.89%
50,000.01 - 100,000.00 1,863 138,118,206.02 31.31
100,000.01 - 150,000.00 864 104,824,217.70 23.76
150,000.01 - 200,000.00 342 59,242,461.00 13.43
200,000.01 - 250,000.00 161 36,004,853.91 8.16
250,000.01 - 300,000.00 83 22,722,553.56 5.15
300,000.01 - 350,000.00 50 16,229,344.46 3.68
350,000.01 - 400,000.00 25 9,374,819.48 2.13
400,000.01 - 450,000.00 7 3,008,395.58 0.68
450,000.01 - 500,000.00 14 6,690,688.40 1.52
500,000.01 - 550,000.00 1 549,498.19 0.12
550,000.01 - 600,000.00 1 569,559.47 0.13
600,000.01 - 650,000.00 5 3,171,417.18 0.72
650,000.01 - 700,000.00 1 658,212.77 0.15
700,000.01 - 750,000.00 1 734,285.15 0.17
----- --------------- ------
Total 4,523 $441,134,976.68 100.00%
===== =============== =======
</TABLE>
Types of Mortgaged Properties -- Initial Adjustable Rate Group Mortgage Loans
The Mortgaged Properties securing the Initial Mortgage Loans in the
Adjustable Rate Group as of the Statistical Calculation Date were of the
property types as follows:
<TABLE>
<CAPTION>
Number of Adjustable Rate Aggregate Adjustable Rate % of Aggregate
Group Group Adjustable Rate Group
Property Types Mortgage Loans Loan Balance Loan Balance
- -------------- -------------- ------------ ------------
<S> <C> <C> <C>
Single Family 3,761 $364,882,267.68 82.71%
PUD 192 27,445,148.17 6.22
Townhouses 6 648,245.42 0.15
Manufactured Housing 19 1,366,762.96 0.31
Condominiums 217 18,701,447.52 4.24
Two-to-Four Family 319 27,186,100.62 6.16
Other 9 905,004.31 0.21
----- --------------- ------
Total 4,523 $441,134,976.68 100.00%
===== =============== =======
</TABLE>
S-41
<PAGE>
Months Since Origination -- Initial Adjustable Rate Group Mortgage Loans
The distribution of the number of months since the date of origination of
the Initial Mortgage Loans in the Adjustable Rate Group as of the Statistical
Calculation Date was as follows:
<TABLE>
<CAPTION>
Number of Adjustable Rate Aggregate Adjustable Rate % of Aggregate
Months Elapsed Group Group Adjustable Rate Group
Since Origination Mortgage Loans Loan Balance Loan Balance
- ----------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
0 - 6 4,430 $429,580,573.66 97.38%
7 - 12 72 8,541,145.91 1.94
13 - 18 16 2,165,624.59 0.49
19 - 24 5 847,632.52 0.19
----- --------------- ------
Total 4,523 $441,134,976.68 100.00%
===== =============== =======
</TABLE>
Remaining Term to Maturity -- Initial Adjustable Rate Group Mortgage Loans
The distribution of the number of months remaining to maturity of the
Initial Mortgage Loans in the Adjustable Rate Group as of the Statistical
Calculation Date was as follows:
<TABLE>
<CAPTION>
Number of Adjustable Rate Aggregate Adjustable Rate % of Aggregate
Months Remaining Group Group Adjustable Rate Group
to Maturity Mortgage Loans Loan Balance Loan Balance
- ----------- -------------- ------------ ------------
<C> <C> <C> <C> <C>
168 - 180 114 $6,103,351.53 1.38%
324 - 336 1 205,918.20 0.05
337 - 348 23 3,115,279.15 0.71
349 - 360 4,385 431,710,427.80 97.86
------
----- ---------------
Total 4,523 $441,134,976.68 100.00%
===== =============== =======
</TABLE>
Occupancy Status Initial -- Adjustable Rate Group Mortgage Loans
The occupancy status of the Mortgaged Properties securing the Initial
Mortgage Loans in the Adjustable Rate Group as of the Statistical Calculation
Date was as follows based on representations by the mortgagors at the time of
origination of such Mortgage Loans:
<TABLE>
<CAPTION>
Number of Adjustable Rate Aggregate Adjustable Rate % of Aggregate
Group Group Adjustable Rate Group
Occupancy Status Mortgage Loans Loan Balance Loan Balance
- ---------------- -------------- ------------ ------------
<S> <C> <C> <C>
Owner Occupied 3,935 $401,776,357.46 91.08%
Non Owner Occupied 586 39,235,275.01 8.89
Unknown 2 123,344.21 0.03
----- --------------- ------
Total 4,523 $441,134,976.68 100.00%
===== =============== =======
</TABLE>
S-42
<PAGE>
Margins -- Initial Adjustable Rate Group Mortgage Loans
The margins borne by the Notes relating to the Initial Mortgage Loans in
the Adjustable Rate Group as of the Statistical Calculation Date was as follows:
<TABLE>
<CAPTION>
Number of Adjustable Rate Aggregate Adjustable Rate % of Aggregate
Group Group Adjustable Rate Group
Margins Mortgage Loans Loan Balance Loan Balance
------- -------------- ------------ ------------
<S> <C> <C> <C>
3.501 - 4.000% 2 $ 208,818.07 0.05%
4.001 - 4.500 122 13,899,395.90 3.15
4.501 - 5.000 386 40,470,231.14 9.17
5.001 - 5.500 714 75,229,156.92 17.05
5.501 - 6.000 837 90,411,372.63 20.50
6.001 - 6.500 835 84,333,341.62 19.12
6.501 - 7.000 732 69,127,925.05 15.67
7.001 - 7.500 481 38,724,649.42 8.78
7.501 - 8.000 238 16,865,537.53 3.82
8.001 - 8.500 102 6,915,828.89 1.57
8.501 - 9.000 47 3,556,934.22 0.81
9.001 - 9.500 15 668,080.13 0.15
9.501 - 10.000 7 559,712.65 0.13
10.001 - 10.500 3 102,538.56 0.02
10.501 - 11.000 1 17,493.32 0.00
11.501 - 12.000 1 43,960.63 0.01
----- --------------- ------
Total 4,523 $441,134,976.68 100.00%
===== =============== =======
</TABLE>
S-43
<PAGE>
Maximum Coupon Rates -- Initial Adjustable Rate Group Mortgage Loans
The maximum Coupon Rates borne by the Notes relating to the Initial
Mortgage Loans in the Adjustable Rate Group as of the Statistical Calculation
Date was as follows:
<TABLE>
<CAPTION>
Number of Adjustable Rate Aggregate Adjustable Rate % of Aggregate
Maximum Group Group Adjustable Rate Group
Coupon Rates Mortgage Loans Loan Balance Loan Balance
- ------------ -------------- ------------ ------------
<S> <C> <C> <C>
11.501 - 12.000% 2 $ 536,197.67 0.12%
12.001 - 12.500 3 220,386.42 0.05
12.501 - 13.000 14 1,786,341.17 0.40
13.001 - 13.500 34 4,379,051.08 0.99
13.501 - 14.000 75 8,853,717.34 2.01
14.001 - 14.500 106 14,290,963.74 3.24
14.501 - 15.000 279 34,959,135.17 7.92
15.001 - 15.500 376 44,092,787.03 10.00
15.501 - 16.000 584 70,554,359.97 15.99
16.001 - 16.500 553 59,829,751.00 13.56
16.501 - 17.000 646 61,922,447.72 14.04
17.001 - 17.500 483 43,040,576.23 9.76
17.501 - 18.000 388 32,027,927.43 7.26
18.001 - 18.500 305 22,267,263.59 5.05
18.501 - 19.000 209 14,678,438.09 3.33
19.001 - 19.500 143 8,688,724.75 1.97
19.501 - 20.000 116 6,955,650.84 1.58
20.001 - 20.500 101 6,229,007.46 1.41
20.501 - 21.000 57 3,353,790.46 0.76
21.001 - 21.500 24 1,337,245.98 0.30
21.501 - 22.000 14 750,118.61 0.17
22.001 - 22.500 4 123,419.59 0.03
22.501 - 23.000 3 135,422.55 0.03
23.001 - 23.500 3 104,759.47 0.02
24.501 - 25.000 1 17,493.32 0.00
----- --------------- ------
Total 4,523 $441,134,976.68 100.00%
===== =============== =======
</TABLE>
S-44
<PAGE>
Next Rate Adjustment Date -- Initial Adjustable Rate Group Mortgage Loans
Next rate adjustment date for each of the Notes relating to the Initial
Mortgage Loans in the Adjustable Rate Group as of the Statistical Calculation
Date was as follows:
<TABLE>
<CAPTION>
Number of Adjustable Rate Aggregate Adjustable Rate % of Aggregate
Date of Next Group Group Adjustable Rate Group
Rate Adjustment Date Mortgage Loans Loan Balance Loan Balance
-------------------- -------------- ------------ ------------
<S> <C> <C> <C>
January 1, 1997 115 $ 11,920,472.77 2.70%
February 1, 1997 580 60,877,318.16 13.80
March 1, 1997 740 76,734,280.69 17.39
April 1, 1997 463 48,184,816.32 10.92
May 1, 1997 140 13,748,376.58 3.12
June 1, 1997 13 1,228,856.62 0.28
January 1, 1998 2 134,804.19 0.03
February 1, 1998 3 274,107.67 0.06
March 1, 1998 6 886,859.39 0.20
April 1, 1998 8 1,005,495.45 0.23
May 1, 1998 22 2,011,125.10 0.46
June 1, 1998 19 1,244,478.44 0.28
July 1, 1998 48 4,031,835.26 0.91
August 1, 1998 278 29,638,683.78 6.72
September 1, 1998 497 44,544,345.79 10.10
October 1, 1998 494 49,583,875.16 11.24
November 1, 1998 199 18,084,431.58 4.10
April 1, 1999 1 197,800.17 0.04
May 1, 1999 2 182,798.07 0.04
June 1, 1999 10 740,062.73 0.17
July 1, 1999 164 13,897,247.39 3.15
August 1, 1999 297 26,430,378.17 5.99
September 1, 1999 390 33,482,107.18 7.59
October 1, 1999 32 2,070,420.02 0.47
----- --------------- ------
Total 4,523 $441,134,976.68 100.00%
===== =============== =======
</TABLE>
Conveyance of Subsequent Mortgage Loans
The Pooling and Servicing Agreement permits the Trust to acquire
approximately $32,917,298 and $108,865,023 in aggregate principal balance of
Subsequent Mortgage Loans for addition to the Fixed Rate Group and the
Adjustable Rate Group, respectively. Accordingly, the statistical
characteristics of the Mortgage Loan Pool and each Mortgage Loan 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 5.00%; 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 7.00% for the Fixed Rate Group and 5.00% for the
Adjustable Rate Group; (b) will have a weighted average Loan-to-Value Ratio of
not more than 66.00% for the Fixed Rate Group and 71.00% for the Adjustable Rate
Group; (c) will not have Balloon Loans with a principal balance in excess of
8.50% and 0% of the Original Aggregate Loan Balance of the Mortgage Loans in the
Fixed Rate Group and the Adjustable Rate Group, respectively; (d) will not have
a weighted average remaining term to stated maturity of more than 319 months for
the Fixed Rate Group and 355 for the Adjustable Rate Group; (e) will have no
Mortgage Loan with a principal balance in excess of $599,580 for the Fixed Rate
Group and $734,286 for the Adjustable Rate Group; and (f) will have a fixed rate
of interest if such Mortgage Loan is to be included in the Fixed Rate Group. In
addition, the Certificate Insurer shall have the right to review and approve
each Subsequent Mortgage Loan.
S-45
<PAGE>
PREPAYMENT AND YIELD CONSIDERATIONS
General
The weighted average life of, and, if purchased at other than par
(disregarding, for purposes of this dis- cussion, 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 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 the Fixed Rate
Group (other than the 5/25 Loans and the 7/23 Loans) 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 the Adjustable Rate Group 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 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.
The prepayment behavior of the 2/28 Loans and 3/27 Loans may differ from
that of the other Mortgage Loans in the Adjustable Rate Group and the prepayment
behavior of the 5/25 Loans and the 7/23 Loans may differ from that of the other
Mortgage Loans in the Fixed Rate Group. As a 2/28 Loan, 3/27 Loan, 5/25 Loan or
7/23 Loan approaches its initial adjustment date, the borrower may become more
likely to refinance such loan to avoid an increase in the Coupon Rate, even if
fixed rate loans are only available at rates that are slightly lower or higher
than the Coupon Rate before adjustment. The existence of the applicable periodic
rate cap, lifetime cap and lifetime floor also may affect the likelihood of
prepayments resulting from refinancings. In addition, the delinquency and loss
experience on the Mortgage Loans in the Adjustable Rate Group may differ from
that on the Mortgage Loans in the Fixed Rate Group because the amount of the
monthly payments on the Mortgage Loans in the Adjustable Rate Group are subject
to adjustment on each adjustment date. If such difference in experience were to
occur, the prepayment experience on the Adjustable Rate Group Certificates may
differ from that on the other Classes of Class A Certificates.
The prepayment experience on non-conventional mortgage loans may differ
from that on conventional first mortgage loans, primarily due to the credit
quality of the typical borrower. Because the credit histories of many
non-conventional borrowers may preclude them from other traditional sources of
financing, such borrowers may be less likely to refinance due to a decline in
market interest rates. Non-conventional mortgage loans may experience more
prepayments in a rising interest rate environment as the borrowers' finances are
stressed to the point of default. Prepayments may also affect the yield to the
Owners of the Adjustable Rate Group Certificates, if the weighted average
margins are reduced.
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.
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
S-46
<PAGE>
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.
Balloon Loans. The ability of mortgagors to make payments of Balloon
Payments will normally depend on the mortgagor's ability to obtain refinancing
of their Balloon Loans. The ability to obtain refinancing will depend on a
number of factors prevailing at the time refinancing is required, including,
without limitation, real estate values, the mortgagor's financial situation and
prevailing mortgage loan interest rates. Although the Originators sometimes
provide refinancing of Balloon Loans and may refinance any Mortgage Loan, they
are under no obligation to do so, and make no representation or warranty that
they will do so in the case of any Mortgage Loan. Delinquencies, if any, in the
payment of Balloon Payments may delay the date on which the Class A Certificate
Principal Balance of one or more Classes of the Fixed Rate Group Certificates is
reduced to zero, and may increase the weighted average lives of such
Certificates. Although a low interest rate environment may facilitate the
refinancing of a Balloon Loan, the receipt and reinvestment by Owners of the
proceeds in such an environment may produce a lower return than that previously
received in respect of the related Balloon Loan. Conversely, a high interest
rate environment may make it more difficult for the mortgagor to accomplish a
refinancing and may result in delinquencies or defaults.
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 for either
the Fixed Rate Group or the Adjustable Rate Group then the related Class(es) of
Class A Certificates then entitled to receive payments of principal will receive
a partial prepayment on the Pre-Funding Payment Date in an amount equal to 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 on or before the Pre-Funding Payment Date.
Prepayment and Yield Scenarios 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 will occur in the following months and years: Class A-1, August
2011, Class A-2, April 2018, Class A-3, October 2020, Class A-4, September 2022,
Class A-5, March 2024 and Class A-6, June 2025, respectively, which are the
dates on which the Initial Certificate Principal Balance would be reduced to
zero assuming, among other things, that no Prepayments are received on the
Mortgage Loans in the Fixed Rate Group, that no Total Monthly Excess Spread is
used to make accelerated payments of principal to holders of the related Class A
Certificates, that scheduled monthly payments of principal and interest on the
Mortgage Loans are timely received and that no optional termination or mandatory
termination is exercised. The Final Scheduled Payment Date for the Class A-7 and
Class A-8 Certificates is November 2026, notwithstanding that certain Mortgage
Loans in both Groups of Mortgage Loans have scheduled payment dates after such
Final Scheduled Payment Date. 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) Total Monthly Excess Spread is likely to be used to
make accelerated payments of principal to holders of the related Class A
Certificates, (iii) 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 (iv) the
Servicers (or the Certificate Insurer if the Servicers do not so elect) may each
purchase all Mortgage Loans serviced by them and either one or more of the
Servicers or the Certificate Insurer may purchase all of the Mortgage Loans,
S-47
<PAGE>
thereby causing a termination of the Trust, when the outstanding Certificate
Principal Balance is less than 5% of the original Certificate Principal 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).
Each Accrual Period for the Adjustable Rate Group Certificates will consist
of the actual number of days elapsed from the 25th day of the month preceding
the month of the applicable Payment Date (or, in the case of the first Accrual
Period, from the Closing Date) through the 24th day of the month of such Payment
Date. After the initial Accrual Period, the Class A-8 Pass-Through Rate will be
adjusted by reference to changes in the level of One-Month LIBOR, subject to the
effects of the applicable limitation described herein.
The Class A-8 Pass-Through Rate may be calculated by reference to the
Coupon Rates on the Mortgage Loans in the Adjustable Rate Group. Although the
Coupon Rates on the Mortgage Loans in the Adjustable Rate Group are subject to
adjustment, the Coupon Rates adjust less frequently than the Class A-8
Pass-Through Rate which adjusts by reference to One-Month LIBOR. Changes in
One-Month LIBOR may not correlate with changes in Six-Month LIBOR and either may
not correlate with prevailing interest rates. It is possible that an increased
level of One-Month LIBOR could occur simultaneously with a lower level of
prevailing interest rates, which would be expected to result in faster
prepayments, thereby reducing the weighted average life of the Adjustable Rate
Group Certificates.
Certain of the Mortgage Loans in the Adjustable Rate Group, including the
2/28 Loans and the 3/27 Loans, were originated with initial Coupon Rates that
were based on competitive conditions. As a result, the Coupon Rates on such
Mortgage Loans in the Adjustable Rate Group are more likely to adjust on their
first, and possibly subsequent adjustment dates subject to the effects of the
applicable periodic rate cap and lifetime cap. Because the Class A-8
Pass-Through Rate is limited by the Adjustable Rate Group Available Funds Cap on
each Payment Date, limits on changes in the Coupon Rates of the Mortgage Loans
in the Adjustable Rate Group may limit changes in the Class A-8 Pass-Through
Rate. In addition, the Coupon Rates for the 2/28 Loans will not adjust until
approximately the date on which the 24th scheduled monthly payment is due and
the Coupon Rates for the 3/27 Loans will not adjust until approximately the date
on which the 36th scheduled monthly payment is due.
The Adjustable Rate Group Available Funds Cap on a Payment Date will
depend, in part, on the weighted average of the then-current Coupon Rates of the
outstanding Mortgage Loans in the Adjustable Rate Group. If the Mortgage Loans
in the Adjustable Rate Group bearing higher Coupon Rates were to prepay, the
weighted average Coupon Rate of the Mortgage Loans in the Adjustable Rate Group,
and consequently the Adjustable Rate Group Available Funds Cap, would be lower
than otherwise would be the case.
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard. 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 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. HEP 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 HEP 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
S-48
<PAGE>
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 December 18,
1996, (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 January 1997 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, (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, without regard to any delinquency and loss triggers, (viii)
the Pre-Funded Amount is used to acquire Subsequent Mortgage Loans on January 1,
1997 and February 1, 1997 and prior to such dates, the Pre-Funded Amount accrues
interest at a rate equal to the Net Coupon Rate set out in the table below, (ix)
the Coupon Rate for each Mortgage Loan in the Adjustable Rate Group 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 5.543% per annum, with respect to Six-Month LIBOR 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 generally equal the initial coupon)), (x) the Class A-8
Pass-Through Rate remains constant at 5.7875% per annum, (xi) all Mortgage Loans
pay on their respective due dates in accordance with their respective terms,
(xii) the Initial Certificate Principal Balance and Pass-Through Rate of each
Class of Certificates is as set forth and under "Summary of Terms --
Certificates Offered" herein.
S-49
<PAGE>
Initial Fixed Rate Group Mortgage Loans
<TABLE>
<CAPTION>
Initial Subsequent
Principal Gross Net Coupon Gross Net Life Periodic Periodic
Balance Coupon Rate Rate Margin Cap Rate Cap Rate Cap
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$12,647,394.14 10.451 9.951 6.395% 16.598% 1.002% 1.002%
14,607,237.16 11.514 11.014 N/A N/A N/A N/A
79,987,229.23 11.301 10.801 N/A N/A N/A N/A
9,840,841.61 11.872 11.372 N/A N/A N/A N/A
<CAPTION>
Remaining Remaining
Months Rate Amortization Original Term Term to
Principal to Next Change Term to Maturity Maturity
Balance Reset Frequency (in months) (in months) (in months) Index
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$12,647,394.14 58 6 355 357 355 Six-Month LIBOR
14,607,237.16 N/A N/A 177 180 177 N/A
79,987,229.23 N/A N/A 356 359 356 N/A
9,840,841.61 N/A N/A 356 360 176 N/A
</TABLE>
Subsequent Fixed Rate Group Mortgage Loans
<TABLE>
<CAPTION>
Initial Subsequent
Principal Gross Net Coupon Gross Net Life Periodic Periodic
Balance Coupon Rate Rate Margin Cap Rate Cap Rate Cap
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
*$14,141,612.89 11.122% 10.622% N/A N/A N/A N/A
**14,141,612.89 11.122 10.622 N/A N/A N/A N/A
*2,317,036.04 10.235 9.735 6.057% 16.235% 1.000% 1.000%
**2,317,036.04 10.235 9.735 6.057 16.235 1.000 1.000
<CAPTION>
Remaining Remaining
Months Rate Amortization Original Term Term to
Principal to Next Change Term to Maturity Maturity
Balance Reset Frequency (in months) (in months) (in months) Index
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
*$14,141,612.89 N/A N/A 347 347 347 N/A
**14,141,612.89 N/A N/A 347 347 347 N/A
*2,317,036.04 58 6 360 360 360 Six-Month LIBOR
58 6 360 360 360 Six-Month LIBOR
**2,317,036.04
</TABLE>
- ----------------------
* Mortgage loans are pre-funded for one month.
** Mortgage loans are pre-funded for two months.
S-50
<PAGE>
Initial Adjustable Rate Group Mortgage Loans
<TABLE>
<CAPTION>
Initial Subsequent
Principal Gross Net Coupon Gross Net Life Periodic Periodic
Balance Coupon Rate Rate Margin Cap Rate Cap Rate Cap
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$11,920,472.77 10.029% 9.529% 5.980% 15.960% 1.201% 1.201%
60,877,318.16 9.636 9.136 5.928 15.493 1.149 1.149
76,734,280.69 9.545 9.045 6.065 15.454 1.135 1.135
48,184,816.32 9.402 8.902 6.454 15.437 1.074 1.074
13,748,376.58 9.649 9.149 6.776 15.918 1.067 1.067
1,228,856.62 10.112 9.612 5.507 15.799 1.119 1.119
1,295,771.25 11.446 10.946 6.923 17.314 2.416 1.000
1,005,495.45 11.425 10.925 7.080 17.412 3.000 1.112
2,011,125.10 11.752 11.252 6.709 17.715 2.517 1.000
1,244,478.44 12.051 11.551 6.395 18.051 1.852 1.000
4,031,835.26 11.175 10.675 6.387 17.160 1.637 1.000
29,638,683.78 10.464 9.964 6.324 16.387 1.613 1.007
44,544,345.79 10.640 10.140 6.455 16.651 1.565 1.009
49,583,875.16 10.481 9.981 6.514 16.626 2.014 1.007
18,084,431.58 10.083 9.583 6.527 16.377 1.633 1.000
1,120,660.90 10.592 10.092 5.740 16.176 3.190 1.000
13,897,247.39 10.984 10.484 5.409 16.496 5.689 1.000
26,430,378.17 10.904 10.404 5.449 16.417 5.719 1.000
33,482,107.18 10.829 10.329 5.440 16.343 5.815 1.000
2,070,420.02 10.928 10.428 5.493 16.428 6.000 1.000
<CAPTION>
Remaining
Months Rate Original Term Term to
Principal to Next Change to Maturity Maturity
Balance Reset Frequency (in months) (in months) Index
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$11,920,472.77 1 6 358 352 Six-Month LIBOR
60,877,318.16 2 6 357 353 Six-Month LIBOR
76,734,280.69 3 6 358 355 Six-Month LIBOR
48,184,816.32 4 6 357 355 Six-Month LIBOR
13,748,376.58 5 6 360 358 Six-Month LIBOR
1,228,856.62 6 6 357 343 Six-Month LIBOR
1,295,771.25 15 6 360 351 Six-Month LIBOR
1,005,495.45 16 6 360 352 Six-Month LIBOR
2,011,125.10 17 6 360 353 Six-Month LIBOR
1,244,478.44 18 6 360 354 Six-Month LIBOR
4,031,835.26 19 6 358 353 Six-Month LIBOR
29,638,683.78 20 6 359 355 Six-Month LIBOR
44,544,345.79 21 6 357 354 Six-Month LIBOR
49,583,875.16 22 6 359 357 Six-Month LIBOR
18,084,431.58 23 6 357 356 Six-Month LIBOR
1,120,660.90 29 6 360 353 Six-Month LIBOR
13,897,247.39 31 6 350 345 Six-Month LIBOR
26,430,378.17 32 6 358 354 Six-Month LIBOR
33,482,107.18 33 6 358 355 Six-Month LIBOR
2,070,420.02 34 6 351 349 Six-Month LIBOR
</TABLE>
Subsequent Adjustable Rate Group Mortgage Loans
<TABLE>
<CAPTION>
Initial Subsequent
Principal Gross Net Coupon Gross Net Life Periodic Periodic
Balance Coupon Rate Rate Margin Cap Rate Cap Rate Cap
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
9.525% 9.025% 6.482% 15.565% 1.000% 1.000%
9.525 9.025 6.482 15.565 1.000 1.000
10.719 10.219 6.225 16.532 1.000 1.000
10.719 10.219 6.225 16.532 1.000 1.000
<CAPTION>
Remaining
Months Rate Original Term Term to
Principal to Next Change to Maturity Maturity
Balance Reset Frequency (in months) (in months) Index
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
*$21,675,896.86 5 6 360 359 Six-Month LIBOR
**21,675,896.85 5 6 360 359 Six-Month LIBOR
*32,756,614.84 22 6 360 359 Six-Month LIBOR
**32,756,614.84 22 6 360 359 Six-Month LIBOR
</TABLE>
- ----------------------
* Mortgage loans are pre-funded for one month.
** Mortgage loans are pre-funded for two months.
S-51
<PAGE>
The following tables set forth the percentages of the initial principal balance
of the Class A Certificates that would be outstanding after each of the dates
shown, assuming (1) for the Fixed Rate Group Certificates, the Fixed Rate Group
Mortgage Loans prepay according to the indicated percentages of HEP under each
Fixed Rate Group Certificate below and the Adjustable Rate Group Mortgage Loans
prepay at 25% HEP and (2) for the Adjustable Rate Group Certificates, the Fixed
Rate Group Mortgage Loans prepay at 23% HEP and the Adjustable Rate Group
Mortgage Loans prepay according to the indicated percentages of HEP under the
Adjustable Rate Group Certificate below except that under the 0% HEP for all
Certificates, the Mortgage Loans in both Mortgage Loan Groups prepay at 0% HEP.
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
Class A-1 Class A-2
Payment Date 0% 15% 18% 20% 23% 26% 28% 0% 15% 18% 20% 23% 26% 28%
-- --- --- --- --- --- --- -- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Balance 100 100 100 100 100 100 100 100 100 100 100 100 100 100
December 25, 1997 92 52 43 38 30 22 16 100 100 100 100 100 100 100
December 25, 1998 89 3 0 0 0 0 0 100 100 81 65 43 22 8
December 25, 1999 86 0 0 0 0 0 0 100 43 13 0 0 0 0
December 25, 2000 82 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2001 79 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2002 75 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2003 70 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2004 65 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2005 59 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2006 52 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2007 45 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2008 37 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2009 27 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2010 17 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2011 0 0 0 0 0 0 0 81 0 0 0 0 0 0
December 25, 2012 0 0 0 0 0 0 0 71 0 0 0 0 0 0
December 25, 2013 0 0 0 0 0 0 0 59 0 0 0 0 0 0
December 25, 2014 0 0 0 0 0 0 0 46 0 0 0 0 0 0
December 25, 2015 0 0 0 0 0 0 0 31 0 0 0 0 0 0
December 25, 2016 0 0 0 0 0 0 0 15 0 0 0 0 0 0
December 25, 2017 0 0 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2018 0 0 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2019 0 0 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2020 0 0 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2021 0 0 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2022 0 0 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2023 0 0 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2024 0 0 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2025 0 0 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2026 0 0 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2027 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Avg Life(1) 9.3 1.1 1.0 0.9 0.8 0.7 0.7 17.6 3.0 2.5 2.3 2.0 1.8 1.7
</TABLE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
Class A-3 Class A-4
Payment Date 0% 15% 18% 20% 23% 26% 28% 0% 15% 18% 20% 23% 26% 28%
-- --- --- --- --- --- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Balance 100 100 100 100 100 100 100 100 100 100 100 100 100 100
December 25, 1997 100 100 100 100 100 100 100 100 100 100 100 100 100 100
December 25, 1998 100 100 100 100 100 100 100 100 100 100 100 100 100 100
December 25, 1999 100 100 100 89 42 0 0 100 100 100 100 100 99 73
December 25, 2000 100 86 27 0 0 0 0 100 100 100 92 44 1 0
December 25, 2001 100 11 0 0 0 0 0 100 100 52 17 0 0 0
December 25, 2002 100 0 0 0 0 0 0 100 50 0 0 0 0 0
December 25, 2003 100 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2004 100 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2005 100 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2006 100 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2007 100 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2008 100 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2009 100 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2010 100 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2011 100 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2012 100 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2013 100 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2014 100 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2015 100 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2016 100 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2017 94 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2018 58 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2019 19 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2020 0 0 0 0 0 0 0 76 0 0 0 0 0 0
December 25, 2021 0 0 0 0 0 0 0 29 0 0 0 0 0 0
December 25, 2022 0 0 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2023 0 0 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2024 0 0 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2025 0 0 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2026 0 0 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2027 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Avg Life(1) 22.3 4.5 3.8 3.4 3.0 2.7 2 .5 24.6 6.1 5.1 4.6 4.0 3.5 3.3
</TABLE>
- -----------------------------
(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 Class A
Certificate Principal Balance for such Class of Class A Certificate.
S-52
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
Class A-5 Class A-6
Payment Date 0% 15% 18% 20% 23% 26% 28% 0% 15% 18% 20% 23% 26% 28%
-- --- --- --- --- --- --- -- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Balance 100 100 100 100 100 100 100 100 100 100 100 100 100 100
December 25, 1997 100 100 100 100 100 100 100 100 100 100 100 100 100 100
December 25, 1998 100 100 100 100 100 100 100 100 100 100 100 100 100 100
December 25, 1999 100 100 100 100 100 100 100 100 100 100 100 100 100 100
December 25, 2000 100 100 100 100 100 100 72 100 100 100 100 100 100 100
December 25, 2001 100 100 100 100 66 20 0 100 100 100 100 100 100 94
December 25, 2002 100 100 90 52 2 0 0 100 100 100 100 100 63 40
December 25, 2003 100 99 34 0 0 0 0 100 100 100 98 55 21 1
December 25, 2004 100 50 0 0 0 0 0 100 100 89 58 0 0 0
December 25, 2005 100 8 0 0 0 0 0 100 100 0 0 0 0 0
December 25, 2006 100 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2007 100 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2008 100 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2009 100 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2010 100 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2011 100 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2012 100 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2013 100 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2014 100 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2015 100 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2016 100 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2017 100 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2018 100 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2019 100 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2020 100 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2021 100 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2022 73 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2023 6 0 0 0 0 0 0 100 0 0 0 0 0 0
December 25, 2024 0 0 0 0 0 0 0 35 0 0 0 0 0 0
December 25, 2025 0 0 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2026 0 0 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2027 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Avg Life(1) 26.4 8.1 6.8 6.1 5.3 4.7 4.3 27.8 9.1 8.5 8.0 7.2 6.4 5.9
</TABLE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
Class A-7 Class A-8
Payment Date 0% 15% 18% 20% 23% 26% 28% 0% 15% 18% 22% 25% 28% 32%
-- --- --- --- --- --- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Balance 100 100 100 100 100 100 100 100 100 100 100 100 100 100
December 25, 1997 100 100 100 100 100 100 100 96 85 82 79 77 74 71
December 25, 1998 100 100 100 100 100 100 100 96 71 66 61 56 52 47
December 25, 1999 100 100 100 100 100 100 100 95 60 54 46 42 37 32
December 25, 2000 100 100 100 100 100 100 100 95 50 43 36 31 27 21
December 25, 2001 100 100 100 100 100 100 100 94 42 35 28 23 19 14
December 25, 2002 100 100 100 100 100 100 100 93 35 29 22 17 14 10
December 25, 2003 100 100 100 100 100 100 100 92 30 23 17 13 10 0
December 25, 2004 100 100 100 100 0 0 0 92 25 19 13 0 0 0
December 25, 2005 100 100 0 0 0 0 0 91 21 15 0 0 0 0
December 25, 2006 100 0 0 0 0 0 0 89 18 12 0 0 0 0
December 25, 2007 100 0 0 0 0 0 0 88 15 0 0 0 0 0
December 25, 2008 100 0 0 0 0 0 0 87 12 0 0 0 0 0
December 25, 2009 100 0 0 0 0 0 0 85 0 0 0 0 0 0
December 25, 2010 100 0 0 0 0 0 0 83 0 0 0 0 0 0
December 25, 2011 100 0 0 0 0 0 0 81 0 0 0 0 0 0
December 25, 2012 100 0 0 0 0 0 0 79 0 0 0 0 0 0
December 25, 2013 100 0 0 0 0 0 0 76 0 0 0 0 0 0
December 25, 2014 100 0 0 0 0 0 0 73 0 0 0 0 0 0
December 25, 2015 100 0 0 0 0 0 0 70 0 0 0 0 0 0
December 25, 2016 100 0 0 0 0 0 0 66 0 0 0 0 0 0
December 25, 2017 100 0 0 0 0 0 0 62 0 0 0 0 0 0
December 25, 2018 100 0 0 0 0 0 0 58 0 0 0 0 0 0
December 25, 2019 100 0 0 0 0 0 0 52 0 0 0 0 0 0
December 25, 2020 100 0 0 0 0 0 0 46 0 0 0 0 0 0
December 25, 2021 100 0 0 0 0 0 0 40 0 0 0 0 0 0
December 25, 2022 100 0 0 0 0 0 0 33 0 0 0 0 0 0
December 25, 2023 100 0 0 0 0 0 0 25 0 0 0 0 0 0
December 25, 2024 100 0 0 0 0 0 0 17 0 0 0 0 0 0
December 25, 2025 0 0 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2026 0 0 0 0 0 0 0 0 0 0 0 0 0 0
December 25, 2027 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Avg Life(1) 28.7 9.1 8.6 8.4 8.0 7.8 7.6 21.1 5.1 4.3 3.6 3.2 2.9 2.5
</TABLE>
- -----------------------------
(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 Class A
Certificate Principal Balance for such Class of Class A Certificate.
S-53
<PAGE>
Payment Lag Feature of Fixed Rate Group Certificates
Pursuant to the Pooling and Servicing Agreement, an amount equal to
Mortgagor payments with respect to each Mortgage Loan in the Fixed Rate Group
(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, which does not occur until the month following the month of
receipt. As a result, the monthly distributions to the Owners of the Fixed Rate
Group Certificates generally reflect an Accrual Period reflecting Mortgagor
payments during the prior calendar month, and the first Payment Date will not
occur until January 27, 1997. Thus, the effective yield to the Owners of the
Fixed Rate Group Certificates will be below that otherwise produced by the
related Pass- Through Rate and purchase price 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 nine originators (the "Originators") with aggregate outstanding
Loan Balances of $558,217,679. The largest Originator of such loans is Option
One, which originated 36.00% of the Initial Mortgage Loans in the Adjustable
Rate Group and 21.35% of the Initial Mortgage Loans in the Fixed Rate Group. The
other Originators as of the Cut-Off Date are Quality, New Century, Weyerhaeuser,
BNC, First Colony Financial Group, Highland Federal Bank, First Franklin
Financial Corporation and Accredited Home Lenders, Inc.
On October 25, 1996, AMRESCO Residential Mortgage Company (a subsidiary of
the Seller) purchased substantially all of the assets and assumed certain of the
liabilities of Quality.
FORMATION OF THE TRUST AND TRUST PROPERTY
AMRESCO Residential Securities Corporation Mortgage Loan Trust 1996-5 (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-54
<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 Statistical Calculation Date, as adjusted (with respect to
all Initial Mortgage Loans that were current as of the Statistical Calculation
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
description of the pool of Mortgage Loans, as of the Closing Date will be filed
in a current report on Form 8-K within fifteen days after the initial issuance
of the Class A Certificates. 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 Mortgage Loan Groups (each a "Mortgage Loan Group"), the Fixed
Rate Group, which contains fixed rate Mortgage Loans, 5/25 Loans and 7/23 Loans,
and the Adjustable Rate Group, which contains only adjustable rate Mortgage
Loans (including the 2/28 Loans and the 3/27 Loans). For each Mortgage Loan
Group, the related Class(es) 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 Class A
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
applicable 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
S-55
<PAGE>
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
Class A Certificate Principal Balance for the related Class of the Class A
Certificates 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) 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 on
the Pre-Funding Payment Date.
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 each
Class of the Fixed Rate Group Certificates will be as set forth on the cover
hereof provided, that each such Pass-Through Rate is subject to the Fixed Rate
Group Available Funds Cap; provided, further, that, the Class A-7 Pass-Through
Rate shall be the lesser of (i) as of any Payment Date which occurs on or prior
to the Clean-Up Call Date, 7.075% per annum and for any Payment Date thereafter,
7.575% per annum and (ii) the Fixed Rate Group Available Funds Cap. The Class
A-8 Pass-Through Rate 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 plus
0.225% per annum (and for any Payment Date after the Clean-Up Call Date,
One-Month LIBOR plus 0.450% per annum) and (ii) the Adjustable Rate Group
Available Funds Cap.
The "Adjustable Rate Group Available Funds Cap" is the weighted average of
the Coupon Rates on Mortgage Loans in the Adjustable Rate Group, less either (x)
0.65% per annum during the first six Remittance Periods or (y) 1.15% per annum
during any Remittance Period thereafter, calculated as of the first day of the
related Remittance Period.
The Pooling and Servicing Agreement provides that if, on any Payment Date,
the Adjustable Rate Group Available Funds Cap limits the Class A-8 Pass-Through
Rate (i.e., the rate set by the Adjustable Rate Group Available Funds Cap) is
less than the Class A-8 Formula Pass-Through Rate), the amount of any such
shortfall will be carried forward and be due and payable on future Payment Dates
and shall accrue interest at the applicable Class A-8 Formula Pass-Through Rate,
until paid (such shortfall, together with such accrued interest, the "Available
Funds Cap Carry-Forward Amount"). The Certificate Insurance Policy does not
cover the Available Funds Cap Carry-Forward Amount; the payment of such amount
may be funded only from (i) any excess interest in the Adjustable Rate Group
resulting from the Adjustable Rate Group Available Funds Cap being in excess of
the Class A-8 Formula Pass-Through Rate on future Payment Dates and (ii) any Net
Monthly Excess Cashflow which would otherwise be paid to the Trustee or a
Servicer on account of certain reimbursable amounts, or to the Owners of the
Subordinate Certificates.
The "Class A-8 Formula Pass-Through Rate" for a Payment Date is the rate
determined by clause (i) of the definition of "Class A-8 Pass-Through Rate" on
such Payment Date.
On each Payment Date, the Trustee is required to make the following
disbursements and transfers from moneys then on deposit in the Certificate
Account with respect to each Mortgage Loan Group as specified below in the
following order of priority:
(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 then due;
(iii) Third, the Trustee shall allocate an amount equal to the sum
of (x) the Total Monthly Excess Spread with respect to each
Mortgage Loan Group and Payment Date plus (y) any
Subordination Reduction Amount with respect to each 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
S-56
<PAGE>
(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
(C) 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 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 each 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 of
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 allocation 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;
(C) third, an amount equal to the lesser of (i) any
portion of the Net Monthly Excess Cashflow
remaining after the allocations described in
clauses (A) and (B) above and (ii) the excess of
(a) the Available Funds Cap Carry-Forward Amount
for such Payment Date over (b) the amount then on
deposit in the account established to hold the
Available Funds Cap Carry-Forward Amount shall be
allocated to the account established to hold the
Available Funds Cap Carry-Forward Amount;
(D) fourth, any Net Monthly Excess Cashflow remaining
after the allocations described in clauses (A),
(B) and (C) 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:
S-57
<PAGE>
(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 Class S Certificates, the
Class S Distribution Amount (as defined in the
Pooling and Servicing Agreement);
(C) To the Owners of the related Class of Class A
Certificates (i) the Principal Distribution Amount
applicable to the Fixed Rate Group 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 (B) the Principal Distribution Amount
applicable to the Adjustable Rate Group shall be
distributed to the Owners of the Class A-8
Certificates until the Class A-8 Certificate
Principal Balance thereof has been reduced to
zero; and
(D) To the Owners of the Subordinate Certificates, all
remaining distributable amounts as specified in
the Pooling and Servicing Agreement.
"Total 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) plus the interest portion of any Delinquency Advances, any Compensating
Interest and any Capitalized Interest Requirement over (y) the Current Interest
for all related Classes of Class A Certificates and Class S Certificates.
"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 Available Funds 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 Policies.
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.
S-58
<PAGE>
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 Prepayment 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 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 of 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 Certificate Principal
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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 Net Monthly Excess Cashflow and of Subordination Reduction Amounts
which such Owners would otherwise receive.
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. 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
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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.
Final Payments
To the extent that the aggregate Certificate Principal Balance of the Class
A-7 Certificates or Class A-8 Certificates has not been reduced to zero on the
Class A-7 Termination Date or the Class A-8 Termination Date, respectively, the
Certificate Insurer will include as an Insured Payment to the Owners of such
Certificates on such Payment Date an amount sufficient to reduce the respective
Certificate Principal Balance of the Class A-7 Certificates or the Class A-8
Certificates, as the case may be, to zero. 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 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 Mortgage Loan Group will be distributed to
the Owners of the related Class or Classes of Class A Certificates then entitled
to receive payments of principal on the Pre-Funding Payment Date in reduction of
the Class A 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 related Funding Period. The
Pre-Funding Account will not be an asset of the REMIC.
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 Estate. 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 Class A Certificate Principal
Balance of the related Class(es) of Class A Certificates exceeds the aggregate
Loan Balance of the Mortgage Loans in the related Mortgage Loan Group plus the
Trustee Fee 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 the January and February
1997 Payment Dates and on the Pre-Funding Payment Date to fund such excess, if
any. Any amounts remaining in the Capitalized Interest Account at the end of the
applicable 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 the second Business Day prior to each Payment Date (each a "One-Month
LIBOR Determination Date"), the Trustee will determine One-Month LIBOR for the
next Accrual Period for the Adjustable Rate Group 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
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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 The
Chase Manhattan Bank will act as depositary for Euroclear (in such capacities,
individually the "Relevant Depositary" and collectively the "European
Depositaries"). Investors may hold such beneficial interests in the Book-Entry
Certificates in minimum denominations 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 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
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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
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
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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.
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,
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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.
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 Class A
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 Class A 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
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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 Class A 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:
"Agreement" means the Pooling and Servicing Agreement dated as of
December 1, 1996 among AMRESCO Residential Securities Corporation, as
Depositor, AMRESCO Residential Capital Markets, Inc., as Seller, Advanta
Mortgage Corp. USA and Option One Mortgage Corporation, 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, Rhode Island, 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.
"Class A-7 Termination Date" means November 25, 2026.
"Class A-8 Termination Date" means November 25, 2026.
"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 Related Mortgage Loan Group) for such Related
Mortgage Loan Group.
"Insured Payment" means, as of any Payment Date, an amount equal to
the sum of (i) the Deficiency Amount plus (ii) any Preference Amount then
due and owing under the Certificate Insurance Policy plus (iii) as of the
Class A-7 Termination Date and with respect to the Class A-7 Certificates,
an amount sufficient to reduce the Certificate Principal Balance of the
Class A-7 Certificates to zero plus (iv) as of the Class A-8 Termination
Date and with respect to the Class A-8 Certificates, an amount sufficient
to reduce the Certificate Principal Balance of the Class A-8 Certificates
to zero.
"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
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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
Class A Certificate to payment under the Certificate Insurance Policy.
"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 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.
"Related Mortgage Loan Group" means Fixed Rate Group or Adjustable
Rate Group, as the case may be.
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 15th Floor, 61 Broadway, 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 each Certificate Insurance Policy is not refundable for any reason
including payment, or provision being made for payment, prior to the maturity of
the Class A Certificates.
The Certificate Insurer is the principal operating subsidiary of MBIA Inc.,
a New York Stock Exchange listed company. MBIA Inc. 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 two European branches, one in the
Republic of France and the other in the Kingdom of Spain. New York has laws
prescribing minimum capital requirements, limiting classes and concentration of
investments and requiring the approval of policy rates and forms. State laws
also regulate the amount of both the aggregate and individual risks that may be
insured, the payment of dividends by the Certificate Insurer, changes in control
and transactions among affiliates. Additionally, the Certificate Insurer is
required to maintain contingency reserves on its liabilities in certain amounts
and for certain periods of time.
The consolidated financial statements of the Certificate Insurer, a
wholly-owned subsidiary of MBIA Inc., and its subsidiaries as of December 31,
1995 and December 31, 1994 and for the three years ended December 31, 1995,
prepared in accordance with generally accepted accounting principles, included
in the Annual Report on Form 10-K of MBIA Inc. for the year ended December 31,
1995 and the consolidated financial statements of the Certificate Insurer and
its subsidiaries for the nine months ended September 30, 1996 and for the period
ending September 30, 1996 and September 30, 1995, included in the Quarterly
Report on Form 10-Q of MBIA Inc. for the period ending September 30, 1996, are
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
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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.
All financial statements of the Certificate Insurer and its subsidiaries
included in documents filed by MBIA Inc. pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the date
of this Prospectus Supplement and prior to the termination of the offering of
the Certificates shall be deemed to be incorporated by reference into this
Prospectus Supplement and to be a part hereof from the respective dates of
filing such documents.
The 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, September 30,
1995 1996
---- ----
(Audited) (Unaudited)
(In millions)
Admitted Assets $3,814 $4,348
Liabilities 2,540 2,911
Capital and Surplus 1,274 1,437
GAAP
------------------------- ----------------------
December 31, September 30,
1995 1996
---- ----
(Audited) (Unaudited)
(In millions)
Assets $4,463 $4,861
Liabilities 1,937 2,161
Shareholder's Equity 2,526 2,700
--------------------
Copies of the financial statements of the Certificate Insurer incorporated
by reference herein and copies of the Certificate Insurer's 1995 year-end
audited financial statements prepared in accordance with statutory accounting
practices are available, without charge, from the Certificate Insurer. The
address of the Certificate Insurer is 113 King Street, Armonk, New York 10504.
The telephone number of the Certificate Insurer is (914) 273-4545.
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 heretofrom, other than with respect to the accuracy
of the information regarding the Certificate Insurance Policies and Certificate
Insurer set forth under the heading "The Certificate Insurance Policies and the
Certificate Insurer" herein. Additionally, the Certificate Insurer makes no
representations regarding the Certificates or the advisability of investing in
the Certificates.
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".
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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 Class A
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 Class A
Certificates. The Certificate Insurer does not guaranty the market price of the
Class A Certificates nor does it guaranty that the ratings on the Class A
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, the Seller, a Servicer, the Certificate Insurer, the Trustee or the
Custodian 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, (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 Trust 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, if it
believes such opinion may be necessary, 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 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 and the
Trustee.
"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.
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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 Custodian, on behalf of 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 Seller (or Option One if the related Mortgage Loan was
originated by Option One) 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 "The Chase
Manhattan Bank, as Trustee of AMRESCO Residential Securities Corporation
Mortgage Loan Trust 1996-5 under the Pooling and Servicing Agreement dated
as of December 1, 1996" 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 Custodian on behalf of 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 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 cause the
Custodian to review the documents contained in each Mortgage Loan File held by
the Custodian (each, a "File") within 45 days after the Closing Date or
Subsequent Transfer Date (or the date of receipt of any documents delivered to
the Custodian after such date) to ascertain that all required documents (or
certified copies of documents) have been executed and received.
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If the Custodian on behalf of 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 Custodian on behalf of 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 Custodian on behalf of the Trustee. If, however, within
the time period set forth in the related Transfer Agreement after such 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 to be remitted by the Servicer on
the related 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 as part of the Monthly Remittance to be remitted by such
Servicer on the related Monthly Remittance Date.
In addition to the foregoing, the Custodian on behalf of 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 Custodian on behalf of the Trustee (the "Final Certification"). After
delivery of the Final Certification, the Custodian on behalf of 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 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
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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 scheduled 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
or Subsequent Cut-Off Date, as the case may be, and past due interest and
principal on any Mortgage Loan, other than Balloon Payments, that were
delinquent as of the Cut-Off Date or Subsequent Cut-Off Date, as the case may
be, 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 on or prior to the Cut-Off
Date or Subsequent Cut-Off Date, as the case may be, if such Mortgage Loan was
current as of the Cut-Off Date or Subsequent Cut-Off Date, as the case may be,
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 or Subsequent
Cut-Off Date, as the case may be, and principal due on all current Mortgage
Loans on or prior to the Cut-Off Date or Subsequent Cut-Off Date, as the
case may be, 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 unreimbursed Delinquency Advances and
Servicing Advances and unrecovered Delinquency Advances and Servicing
Advances determined by it to be nonrecoverable 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 were 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.
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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 nonrecoverable 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 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
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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
such Servicer in the Certificate Account 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.
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 Underwriting Guidelines set forth herein to
be applicable to such Mortgage Loan; and (iii) the lien priority of the related
Mortgage is not affected.
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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
subject to such subservicing agreement. 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 or after 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 year end 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 (including the requirement
that certain of the Servicers maintain their net worth at levels specified in
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 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.
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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 and
in total;
(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 and the aggregate Loan Balance of each Group and in
total, in each case 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 in total, and the
aggregate Loan Balance of the Initial Mortgage Loans and the Subsequent
Mortgage Loans in each Group and in total, 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 and in total, 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 (this information need not be provided on each Payment Date
but only upon the request of an Owner or the Certificate Insurer);
(x) the total of any Substitution Amounts or Loan Purchase Price
amounts included in such distribution with respect to each Group and in
total;
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(xi) the weighted average Coupon Rate of the Mortgage Loans with
respect to each Group and in total;
(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 in total;
(xv) the Servicing Fees, Trustee Fees and Premium Amount allocable to
each Group and in total; and
(xvi) the applicable Pass-Through Rate of each of the Adjustable Rate
Group Certificates for the next Accrual Period.
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 days delinquent, (ii) 31-60 days delinquent, (ii) 61-90 days delinquent
and (iii) 91 or more days delinquent (exclusive of foreclosures), as of the
close of business on the last day of the Remittance Period (taking into
account any payments received from Mortgagors on or prior to the 15th day
of each month, 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, 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.
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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 Policies. 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 Policies.
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 Policies
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 Owners of the Class R Certificates, 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
Certificate Insurer.
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By Servicers. If the Owners of the Class R Certificates 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, the Class S 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 and the Class S
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 23% HEP for the Fixed Rate Group
Certificates and 25% HEP for the Adjustable Rate 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.
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.
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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 (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 such 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 Class A 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
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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").
It is believed that the Exemptions will apply to the acquisition and
holding of the Class A Certificates by Plans following the expiration of the
Funding Period and that all conditions of the Exemptions other than those within
the control of the investors will be met. In addition, 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. Notwithstanding the foregoing, the Exemptions will
not apply with respect to any Class A Certificates until such time as the
balance of the Pre-Funding Account is reduced to zero. Accordingly, until such
time, the Class A Certificates may not be purchased by any entity using the
assets of a Plan.
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. In particular, purchasers that are insurance companies
should consult with their counsel with respect to the United States Supreme
Court case, John Hancock Mutual Life Insurance Co. v. Harris Trust and Savings
Bank (decided December 13, 1993). In John Hancock, the Supreme Court ruled that
assets held in an insurance company's general account may be deemed to be "plan
assets" under certain circumstances. Purchasers should analyze whether the
decision may have an impact with respect to purchases of the Class A
Certificates.
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 will be based
primarily on the claims-paying ability of the Certificate Insurer. The ratings
assigned to the Class A-8 Certificates do not cover the payment of the Available
Funds Cap Carry-Forward Amount. 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, 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 MATTERS
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.
S-81
<PAGE>
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
------------ -------------------
Prudential Securities Incorporated 60%
CS First Boston 20%
Goldman, Sachs & Co. 10%
Morgan Stanley & Co. Incorporated 10%
Class A-2 Certificates
Underwriters Percentage Interest
------------ -------------------
Prudential Securities Incorporated 60%
CS First Boston 20%
Goldman, Sachs & Co. 10%
Morgan Stanley & Co. Incorporated 10%
Class A-3 Certificates
Underwriters Percentage Interest
------------ -------------------
Prudential Securities Incorporated 60%
CS First Boston 20%
Goldman, Sachs & Co. 10%
Morgan Stanley & Co. Incorporated 10%
Class A-4 Certificates
Underwriters Percentage Interest
------------ -------------------
Prudential Securities Incorporated 60%
CS First Boston 20%
Goldman, Sachs & Co. 10%
Morgan Stanley & Co. Incorporated 10%
Class A-5 Certificates
Underwriters Percentage Interest
------------ -------------------
Prudential Securities Incorporated 60%
CS First Boston 20%
Goldman, Sachs & Co. 10%
Morgan Stanley & Co. Incorporated 10%
Class A-6 Certificates
Underwriters Percentage Interest
------------ -------------------
Prudential Securities Incorporated 60%
CS First Boston 20%
Goldman, Sachs & Co. 10%
Morgan Stanley & Co. Incorporated 10%
S-82
<PAGE>
Class A-7 Certificates
Underwriters Percentage Interest
------------ -------------------
Prudential Securities Incorporated 60%
CS First Boston 20%
Goldman, Sachs & Co. 10%
Morgan Stanley & Co. Incorporated 10%
Class A-8 Certificates
Underwriters Percentage Interest
------------ -------------------
Prudential Securities Incorporated 60%
CS First Boston 20%
Goldman, Sachs & Co. 10%
Morgan Stanley & Co. Incorporated 10%
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 financial statements of the Certificate Insurer, MBIA
Insurance Corporation as of December 31, 1995 and 1994 and for the three years
in the period ended December 31, 1995, incorporated by reference into this
Prospectus Supplement have been audited by Coopers & Lybrand, L.L.P.,
independent accountants, as set forth in their report thereon incorporated by
reference herein in reliance 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 Class A Certificates will
be passed upon for the Underwriters by Arter & Hadden. Legal matters relating to
the Certificate Insurance Policies will be passed upon for the Certificate
Insurer by Kutak Rock, Omaha, Nebraska.
S-83
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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 1996-5 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 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
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<PAGE>
excluding the settlement date, on the basis of the Accrual Period for the
related Class. 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 Accrual
Period for the related Class. 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:
(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;
I-2
<PAGE>
(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>
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<PAGE>
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Page
----
2/28 Loans S-4
3/27 Loans S-5
5/25 Loans S-3
7/23 Loans S-4
Accrual Period S-6
Actuarial Loans S-31
Adjustable Rate Group Available Funds Cap S-56
Adjustable Rate Group Certificates S-1
Advanta S-1
Advanta Parent S-24
Appraised Values S-31
ARCC S-21
Available Funds S-58
Available Funds Cap Carry-Forward Amount S-56
Balloon Mortgage Loans S-73
Balloon Payments S-72
Beneficial Owners S-12
BNC S-3
Book-Entry Certificates S-62
Business Day S-6
Capitalized Interest Account S-11
Carry Forward Amount S-6
Cede S-12
CEDEL S-12
CEDEL Participants S-63
Certificate Account S-55
Certificate Insurance Policy S-10
Certificate Insurer S-10
Certificates S-2
Chase S-12
Citibank S-12
Class S-1
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-8 Formula Pass-Through Rate S-56
Class A-8 Pass-Through Rate S-56
Class R Certificates S-2
Class S Certificates S-2
Clean-Up Call Date S-12
Closing Date S-2
Code S-14
Compensating Interest S-73
Cooperative S-64
Coupon Rates S-3
CPR S-48
Current Interest S-6
Custodian S-2
Cut-Off Date S-2
D&P S-80
Daily Collections S-72
Definitive Certificate S-62
Deleted Mortgage Loan S-23
Depositor S-1
Determination Date S-77
DTC S-12
DTC Participants S-63
Due Dates S-73
ERISA S-80
Euroclear S-12
Euroclear Operator S-64
Euroclear Participants S-63
European Depositaries S-12
Excess Subordinated Amount S-59
Exemption S-80
File S-70
Final Certification S-71
Final Scheduled Payment Dates S-47
Financial Intermediary S-62
Fiscal Agent S-66
Fixed Rate Group Available Funds Cap S-1
Fixed Rate Group Certificates S-1
Funding Period S-11
GAAP S-68
HEP S-48
Initial Certificate Principal Balance S-1
Initial Mortgage Loans S-3
Insurance Policy S-10
Insured Final Payment S-5
Insured Payment S-10
Liquidated Mortgage Loan S-8
Liquidation Proceeds S-71
Loan Balance S-69
Loan Purchase Price S-23
Loan-to-Value Ratios S-33
Monthly Remittance Date S-8
Moody's S-13
Mortgage Loans S-30
Mortgaged Properties S-3
Mortgages S-3
Net Coupon Rate S-23
Net Liquidation Proceeds S-72
Net Monthly Excess Cashflow S-57
New Century S-3
NIV S-26
Notes S-3
One-Month LIBOR S-61
One-Month LIBOR Determination Date S-61
Option One S-1
Option One Loans S-29
Original Aggregate Loan Balance S-2
Original Pre-Funded Amount S-2
Originators S-54
Owners S-3
Participants S-62
Pass-Through Rate S-56
Payment Date S-5
Percentage Interest S-55
PHMC S-26
Plan S-80
Preference Amount S-9
Pre-Funded Amount S-11
Pre-Funding Account S-2
Pre-Funding Payment Date S-11
Premium Amount S-56
Prepaid Installments S-73
Prepayment Interest Excess S-71
Prepayment Interest Shortfall S-74
Prepayments S-15
Preservation Expenses S-73
Principal and Interest Account S-72
Principal Distribution Amount S-7
Qualified Replacement Mortgage S-23
Quality S-3
Rating Agencies S-13
Realized Loss S-60
Record Date S-5
Reference Banks S-62
Register S-55
Registrar S-55
Relevant Depositary S-62
REMIC S-13
REMIC Opinion S-69
Remittance Period S-8
REO Property S-72
Restricted Group S-81
Riegle Act S-18
Rules S-62
SAP S-68
Seller S-1
Servicer S-1
Servicers S-1
Servicing Advance S-73
Servicing Fee Rate S-71
Six-Month LIBOR Loan S-4
Specified Subordinated Amount S-59
Standard & Poor's S-13
Statistical Calculation Date S-2
Subordinate Certificates S-2
Subordinated Amount S-59
Subordination Deficit S-8
Subordination Increase Amount S-59
Subordination Reduction Amount S-59
Subsequent Cut-Off Date S-15
Subsequent Mortgage Loans S-2
Subsequent Transfer Agreement S-15
Subsequent Transfer Date S-11
Substitution Amount S-71
Telerate Page 3750 S-62
Terms and Conditions S-64
Total Available Funds S-58
Total Monthly Excess Cashflow S-57
Transfer Agreement S-23
Trust S-54
Trust Estate S-54
Trustee S-2
Underwriters S-82
Weighted average life S-48
Weyerhaeuser S-5
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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.
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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.
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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.
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The date of this Prospectus is July 28, 1996.
<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................................................. 11
Distributions of Principal and Interest............................... 13
Book Entry Registration............................................... 14
List of Owners of Securities.......................................... 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..................................... 7
Servicing Compensation and Payment of Expenses........................ 27
Master Servicer....................................................... 28
ADMINISTRATION............................................................. 28
Assignment of Mortgage Assets......................................... 28
Evidence as to Compliance............................................. 30
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............................................................ 34
THE DEPOSITOR.............................................................. 34
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....................................... 53
Treatment of Certain Items of REMIC Income and Expense................ 55
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........................... 59
Liquidation of the REMIC Pool......................................... 60
Administrative Matters................................................ 60
Limitations on Deduction of Certain Expenses.......................... 61
Taxation of Certain Foreign Investors................................. 61
Backup Withholding.................................................... 62
Reporting Requirements................................................ 62
Federal Income Tax Consequences for Securities as to
Which No REMIC Election Is Made..................................... 63
Premium and Discount.................................................. 64
Stripped Securities................................................... 66
Reporting Requirements and Backup Withholding......................... 68
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
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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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1
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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
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2
<PAGE>
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thereon 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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3
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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 Entry
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4
<PAGE>
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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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5
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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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6
<PAGE>
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 and
claims by such assignees may be subject to set-off as a result of such lender's
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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.
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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
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time of the origination of the Mortgage Loan and is later called to active 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
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obligations of the Depositor, the 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.
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
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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 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
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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.
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
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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.
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
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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 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
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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 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
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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.
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
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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 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
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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 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
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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 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.
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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 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
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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 liquidation of
defaulted Mortgage Loans ("Liquidation Proceeds") for certain expenditures
pursuant to the Agreement. See " - Advances" and " - Servicing Compensation and
Payment of Expenses" below.
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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.
Collection and Other Servicing Procedures
Each Servicer will service the Mortgage Loans and Contracts pursuant to
guidelines established in the related Agreement.
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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
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.
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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.
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.
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
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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 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.
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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.
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
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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.
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.
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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.
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
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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.
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"),
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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 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;
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(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;
(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).
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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 Isuch 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 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.
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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.
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.
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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 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
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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.
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.
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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 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.
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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.
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.
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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.
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
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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 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.
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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 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
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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 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.
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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 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.
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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 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
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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 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
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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 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
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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 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
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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.
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
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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 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
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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.
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.
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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, 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
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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 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
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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%.
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.
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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.
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.
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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.
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
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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 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.
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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 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
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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 (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
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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 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%
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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.
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
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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
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
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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 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
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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, 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.
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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 "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."
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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.
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.
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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 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
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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 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
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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.
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
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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.
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
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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 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
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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............................................30
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.......................................................22
Loan-to-Value Ratio........................................................16
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..................................................12
Non-U.S. Person............................................................62
Noneconomic Residual Interest..............................................58
Nonrecoverable Advance.....................................................23
Notional Principal Balance.................................................13
OBRA.......................................................................46
OID Regulations............................................................46
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......................................................49
Principal Balance..........................................................16
Principal Prepayments......................................................14
Priority Certificates......................................................12
PTE 83-1...................................................................45
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..........................................................46
Remittance Date............................................................23
Remittance Rate............................................................23
Reserve Fund...............................................................21
Residual Certificateholders................................................53
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
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================================================================================
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-29
The Depositor ...................................................... S-30
The Seller ......................................................... S-30
The Mortgage Loan Pools ............................................ S-30
Prepayment and Yield Considerations ................................ S-46
The Originators .................................................... S-54
Formation of the Trust and Trust Property .......................... S-54
Additional Information ............................................. S-55
Description of the Class A Certificates ............................ S-55
The Certificate Insurance Policies and the
Certificate Insurer ............................................. S-65
The Pooling and Servicing Agreement ................................ S-69
Certain Federal Income Tax Consequences ............................ S-79
ERISA Considerations ............................................... S-80
Ratings ............................................................ S-81
Legal Investment Matters ........................................... S-81
Underwriting ....................................................... S-81
Report of Experts .................................................. S-82
Certain Legal Matters .............................................. S-82
Global Clearance, Settlement and Tax
Documentation Procedures ......................................... Annex I
Index to Location of Principal Defined Terms ....................... A-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 .................................................... 34
The Depositor ...................................................... 34
Certain Legal Aspects of the Mortgage Assets ....................... 35
Legal Investment Matters ........................................... 44
ERISA Considerations ............................................... 45
Certain Federal Income Tax Consequences ............................ 46
Plan of Distribution ............................................... 70
Ratings ............................................................ 71
Legal Matters ...................................................... 71
Financial Information .............................................. 71
Index to Location of Principal Defined Terms ....................... A-1
================================================================================
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AMRESCO Residential Securities Corporation Mortgage Loan Trust 1996-5
$700,000,000
Mortgage Loan Pass-Through
Certificates, Series 1996-5
$42,200,000
Class A-1 Certificates
$29,000,000
Class A-2 Certificates
$16,500,000
Class A-3 Certificates
$17,000,000
Class A-4 Certificates
$15,000,000
Class A-5 Certificates
$15,900,000
Class A-6 Certificates
$14,400,000
Class A-7 Certificates
$550,000,000
Class A-8 Adjustable Rate Certificates
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PROSPECTUS SUPPLEMENT
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Prudentoal Securotoes Incorporated
CS First Boston
Goldman, Sachs & Co.
Morgan Stanley & Co.
Incorporated
December 4, 1996
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