PROSPECTUS SUPPLEMENT
(To Prospectus Dated July 28, 1996)
$311,079,000
AMRESCO Residential Securities Corporation Mortgage Loan Trust 1996-4
$9,163,000 6.03% Class A-1 Certificates
$22,400,000 6.37% Class A-2
Certificates $17,600,000 6.85%
Class A-3 Certificates $10,670,000
7.25% Class A-4 Certificates
$13,100,000 7.60% Class A-5
Certificates*
$238,146,000 Class A-6 Adjustable Rate Certificates*
----------
Advanta Mortgage Corp. USA
Long Beach Mortgage Company
Option One Mortgage Corporation
Servicers
AMRESCO RESIDENTIAL SECURITIES CORPORATION
Depositor
----------
LOGO
AMRESCO
AMRESCO Residential Securities Corporation
The AMRESCO Residential Securities Corporation Mortgage Loan Pass-Through
Certificates, Series 1996-4 (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 (collectively, the "Fixed Rate Group
Certificates"), (ii) the Class A-6 Certificates (the "Adjustable Rate Group
Certificates," and together with the Fixed Rate Group Certificates, the "Class A
Certificates"), (iii) one or more classes of subordinate interest-only
Certificates [GRAPHIC OMITTED] and (iv) a residual class (the "Class R
Certificates," and together with such other subordinate Certificates, the
"Subordinate Certificates"). Only the Class A Certificates are offered hereby.
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.
For a discussion of significant matters affecting investment in the
Certificates, see "Risk Factors" beginning on page S-16 and "Prepayment and
Yield Considerations" beginning on page S-53 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.
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public (1) Discount Depositor(1)(2)
<S> <C> <C> <C>
Per Class A-1 Certificate........................................ 99.625000% 0.0650% 99.560000%
Per Class A-2 Certificate........................................ 99.671875% 0.1000% 99.571875%
Per Class A-3 Certificate........................................ 99.750000% 0.2200% 99.530000%
Per Class A-4 Certificate........................................ 99.984375% 0.4000% 99.584375%
Per Class A-5 Certificate........................................ 99.906250% 0.6000% 99.306250%
Per Class A-6 Certificate........................................ 100.000000% 0.2800% 99.720000%
Total $310,913,190.31 $855,164.75 $310,058,025.56
</TABLE>
(1) Plus accrued interest, if any, from August 1, 1996 with respect to the
Fixed Rate Certificates.
(2) Before deducting expenses, estimated to be $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 August 28, 1996. The Class A Certificates will be offered in Europe and
the United States of America.
- --------
* The Pass-Through Rates on the Class A-5 and Class A-6 Certificates are subject
to adjustment, as described in the Summary of Terms herein.
CS First Boston
Prudential Securities Incorporated
Goldman, Sachs & Co.
The date of this Prospectus Supplement is August 16, 1996
<PAGE>
(Cover continued from previous page)
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 1996-4 (the "Trust"). The Fixed Rate Group Certificates will
represent undivided ownership interests in the Mortgage Loans in Group I and the
Pre-Funding Account (as defined herein) solely. The Adjustable Rate Group
Certificates will represent undivided ownership interests in the Mortgage Loans
in Group II (the significant majority of which are the Six-Month LIBOR Loans and
2/28 Loans (each as defined herein)) and the Pre-Funding Account solely. All of
the Mortgage Loans are secured solely by first lien mortgages or deeds of trust.
The Class A Certificates also represent an undivided ownership interest in all
monies due under the respective Mortgage Loans after August 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.
The Trust will be created pursuant to a Pooling and Servicing Agreement
(the "Pooling and Servicing Agreement") to be dated as of August 1, 1996, among
the Depositor, the Seller, the Servicers and Bankers Trust Company, as Trustee
(the "Trustee").
The Pooling and Servicing Agreement provides that additional Mortgage
Loans (the "Subsequent Mortgage Loans") may be purchased by the Trust from the
Depositor from time to time on or before September 20, 1996 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 $8,000,000 and $33,000,000 will be
deposited with the Trustee in the Pre-Funding Account to be used to acquire
Subsequent Mortgage Loans for Group I and Group II, respectively.
It is a condition to issuance of the Class A Certificates that the
Class A Certificates be rated "Aaa" by Moody's, "AAA" by Standard and Poor's and
"AAA" by Fitch.
Distributions of interest will be made to the Owners of the
Certificates on the 25th day of each month (or, if such day is not a business
day, the next business day) beginning September 25, 1996. 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 Class A-6 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 Commission'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
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY OF TERMS.................................................................................................................S-1
RISK FACTORS....................................................................................................................S-16
THE PORTFOLIO OF MORTGAGE LOANS.................................................................................................S-19
General....................................................................................................................S-19
Guidelines.................................................................................................................S-20
Prepayment Penalties.......................................................................................................S-28
Representations Relating to the Mortgage Loans.............................................................................S-28
The Servicers..............................................................................................................S-29
USE OF PROCEEDS.................................................................................................................S-39
THE DEPOSITOR...................................................................................................................S-40
THE SELLER......................................................................................................................S-40
THE MORTGAGE LOAN POOLS.........................................................................................................S-40
General....................................................................................................................S-40
Initial Mortgage Loans -- Group I..........................................................................................S-41
Initial Mortgage Loans -- Group II.........................................................................................S-46
Conveyance of Subsequent Mortgage Loans....................................................................................S-53
PREPAYMENT AND YIELD CONSIDERATIONS.............................................................................................S-53
General....................................................................................................................S-53
Mandatory Prepayment.......................................................................................................S-55
Prepayment and Yield Scenarios for Class A Certificates....................................................................S-55
Payment Lag Feature of Fixed Rate Group Certificates.......................................................................S-61
THE ORIGINATORS.................................................................................................................S-61
FORMATION OF THE TRUST AND TRUST PROPERTY.......................................................................................S-61
ADDITIONAL INFORMATION..........................................................................................................S-62
DESCRIPTION OF THE CLASS A CERTIFICATES.........................................................................................S-62
General....................................................................................................................S-62
Payment Dates..............................................................................................................S-62
Distributions..............................................................................................................S-63
Overcollateralization Provisions...........................................................................................S-66
Crosscollateralization Provisions..........................................................................................S-67
Pre-Funding Account........................................................................................................S-68
Capitalized Interest Account...............................................................................................S-68
Calculation of One-Month LIBOR.............................................................................................S-68
Book Entry Registration of the Class A Certificates........................................................................S-69
Assignment of Rights.......................................................................................................S-72
THE CERTIFICATE INSURANCE POLICIES AND THE
CERTIFICATE INSURER........................................................................................................S-72
THE POOLING AND SERVICING AGREEMENT.............................................................................................S-75
Covenant of the Seller to Take Certain Actions with Respect
to the Mortgage Loans in Certain Situations............................................................................S-75
Assignment of Mortgage Loans...............................................................................................S-76
Servicing..................................................................................................................S-77
Removal and Resignation of a Servicer......................................................................................S-81
Reporting Requirements.....................................................................................................S-82
Removal of Trustee for Cause...............................................................................................S-84
Governing Law..............................................................................................................S-84
Amendments.................................................................................................................S-84
Termination of the Trust...................................................................................................S-84
Optional Termination.......................................................................................................S-85
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.........................................................................................S-85
REMIC Election.............................................................................................................S-85
ERISA CONSIDERATIONS............................................................................................................S-86
RATINGS.........................................................................................................................S-87
LEGAL INVESTMENT CONSIDERATIONS.................................................................................................S-88
UNDERWRITING....................................................................................................................S-88
REPORT OF EXPERTS...............................................................................................................S-89
CERTAIN LEGAL MATTERS...........................................................................................................S-89
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES............................................................................................Annex I
TARGETED BALANCE SCHEDULE...................................................................................................Annex II
INDEX TO LOCATION OF PRINCIPAL
DEFINED TERMS...............................................................................................................A-1
AUDITED FINANCIAL STATEMENTS FOR THE
CERTIFICATE INSURER.........................................................................................................B-1
UNAUDITED FINANCIAL STATEMENTS FOR THE
CERTIFICATE INSURER.........................................................................................................C-1
</TABLE>
Prospectus
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY OF PROSPECTUS............................................................................................................ 1
RISK FACTORS..................................................................................................................... 7
DESCRIPTION OF THE SECURITIES.................................................................................................... 10
General..................................................................................................................... 11
Classes of Securities....................................................................................................... 12
Distributions of Principal and Interest..................................................................................... 13
Book Entry Registration..................................................................................................... 14
List of Owners of Securities................................................................................................ 15
THE TRUSTS....................................................................................................................... 15
Mortgage Loans.............................................................................................................. 15
Contracts................................................................................................................... 17
Mortgage-Backed Securities.................................................................................................. 17
Other Mortgage Securities................................................................................................... 18
CREDIT ENHANCEMENT............................................................................................................... 18
SERVICING OF MORTGAGE LOANS AND CONTRACTS........................................................................................ 22
Payments on Mortgage Loans.................................................................................................. 23
Advances.................................................................................................................... 23
Collection and Other Servicing Procedures................................................................................... 24
Primary Mortgage Insurance.................................................................................................. 25
Standard Hazard Insurance................................................................................................... 26
Title Insurance Policies.................................................................................................... 27
Claims Under Primary Mortgage Insurance Policies and Standard Hazard
Insurance Policies; Other Realization Upon Defaulted Loan............................................................... 27
Servicing Compensation and Payment of Expenses.............................................................................. 28
Master Servicer............................................................................................................. 28
ADMINISTRATION................................................................................................................... 28
Assignment of Mortgage Assets............................................................................................... 28
Evidence as to Compliance................................................................................................... 31
The Trustee................................................................................................................. 31
Administration of the Security Account...................................................................................... 31
Reports..................................................................................................................... 32
Forward Commitments; Pre-Funding............................................................................................ 33
Servicer Events of Default.................................................................................................. 33
Rights Upon Servicer Event of Default....................................................................................... 33
Amendment................................................................................................................... 34
Termination................................................................................................................. 34
USE OF PROCEEDS.................................................................................................................. 35
THE DEPOSITOR.................................................................................................................... 35
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS..................................................................................... 35
General..................................................................................................................... 35
Foreclosure................................................................................................................. 36
Soldiers' and Sailors' Civil Relief Act..................................................................................... 41
The Contracts............................................................................................................... 41
The Title I Program......................................................................................................... 44
LEGAL INVESTMENT MATTERS......................................................................................................... 44
ERISA CONSIDERATIONS............................................................................................................. 45
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.......................................................................................... 46
Federal Income Tax Consequences For REMIC Securities........................................................................ 47
Taxation of Regular Securities.............................................................................................. 48
Taxation of Residual Securities............................................................................................. 54
Treatment of Certain Items of REMIC Income and Expense...................................................................... 56
Tax-Related Restrictions on Transfer of Residual Securities................................................................. 57
Sale or Exchange of a Residual Security..................................................................................... 59
Taxes That May Be Imposed on the REMIC Pool................................................................................. 60
Liquidation of the REMIC Pool............................................................................................... 61
Administrative Matters...................................................................................................... 61
Limitations on Deduction of Certain Expenses................................................................................ 61
Taxation of Certain Foreign Investors....................................................................................... 62
Backup Withholding.......................................................................................................... 62
Reporting Requirements...................................................................................................... 63
Federal Income Tax Consequences for Securities as to Which
No REMIC Election Is Made............................................................................................... 63
Standard Securities..........................................................................................................63
Premium and Discount........................................................................................................ 65
Stripped Securities......................................................................................................... 66
Reporting Requirements and Backup Withholding............................................................................... 69
Taxation of Certain Foreign Investors....................................................................................... 69
Debt Securities..............................................................................................................69
Taxation of Securities Classified as Partnership Interests.................................................................. 70
PLAN OF DISTRIBUTION............................................................................................................. 70
RATINGS...........................................................................................................................71
LEGAL MATTERS.................................................................................................................... 71
FINANCIAL INFORMATION............................................................................................................ 71
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS.................................................................................... A-1
</TABLE>
<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 1996-4 (the "Trust").
Certificates Offered: $311,079,000 Mortgage Loan
Pass-Through Certificates, Series 1996-4 to
be issued in the following Classes (each, a
"Class"):
<TABLE>
<CAPTION>
Initial Certificate Pass-Through
Principal Balance Rate Class
------------------- ---- -----
<S> <C> <C>
$ 9,163,000 6.03% Class A-1 Certificates
$ 22,400,000 6.37% Class A-2 Certificates
$ 17,600,000 6.85% Class A-3 Certificates
$ 10,670,000 7.25% Class A-4 Certificates
$ 13,100,000 7.60%(1) Class A-5 Certificates
$238,146,000 (2) Class A-6 Certificates
</TABLE>
(1) The Pass-Through Rate with respect to the Class A-5 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), 7.60% per annum and for any Payment Date
thereafter, 8.35% per annum and (ii) the weighted average of the Coupon Rates on
the Mortgage Loans in Group I, less 0.63% per annum (the "Fixed Rate Group
Available Funds Cap"). The weighted average of the Coupon Rates on the Initial
Mortgage Loans in Group I as of the Cut-Off Date is 10.646%.
(2) On each Payment Date, the Class A-6 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 0.31% per annum (and
for any Payment Date thereafter, One-Month LIBOR plus 0.62% 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 Group II as of the
Cut-Off Date is 9.897%.
The Class A-1 Certificates, Class A-2
Certificates, Class A-3 Certificates, Class
A-4 Certificates and Class A-5 Certificates
are collectively referred to herein as the
"Fixed Rate Group Certificates," and the
Class A-6 Certificates are also referred to
herein as the "Adjustable Rate Group
Certificates." The Fixed Rate Group
Certificates and the Adjustable Rate Group
Certificates are collectively referred to as
the "Class A Certificates."
Depositor: AMRESCO Residential Securities Corporation
(the "Depositor"), a Delaware corporation.
Seller: AMRESCO Residential Mortgage Corporation
(the "Seller"), a Delaware corporation.
Servicers: Advanta Mortgage Corp. USA ("Advanta"), with
principal executive offices located at 16875
West Bernardo Drive, San Diego, CA 92127,
Long Beach Mortgage Company ("Long Beach"),
with principal executive offices located at
1100 Town and County Road, Orange,
California 92868 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").
Trustee: Bankers Trust Company, a New York banking
corporation (the "Trustee"). The Trustee's
principal executive office is located at 4
Albany Street, New York, New York 10006.
S-1
<PAGE>
Cut-Off Date: As of the close of business on August 1,
1996.
Closing Date: On or about August 28, 1996.
Description of
the Certificates: The Mortgage Loan Pass-Through Certificates,
Series 1996-4 (the "Certificates") will
consist of the Class A Certificates, one or
more classes of subordinate interest-only
Certificates and a residual class (the
"Class R Certificates" and together with
such other subordinate Certificates, the
"Subordinate Certificates"). The
Certificates will be issued pursuant to a
Pooling and Servicing Agreement (the
"Pooling and Servicing Agreement") to be
dated as of August 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 $41,000,000
(approximately $8,000,000 and $33,000,000 of
which shall be allocated to Group I and
Group II, respectively) (the "Original
Pre-Funded Amount") will be deposited in a
trust account in the name of the Trustee
(the "Pre-Funding Account"). It is intended
that additional fixed rate and adjustable
rate Mortgage Loans satisfying the criteria
specified in the Pooling and Servicing
Agreement (the "Subsequent Mortgage Loans")
will be purchased by the Trust from the
Depositor from time to time on or before
September 20, 1996 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: 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 40 states
and the District of Columbia. The properties
securing the Initial Mortgage Loans (the
"Mortgaged Properties") consist primarily of
single-family residences (which may be
attached, detached, part of a two- to four-
family dwelling, a condominium unit or a
unit in a planned unit development). The
Mortgaged Properties may be owner-occupied
and non-owner occupied investment
properties. No Loan-to-Value Ratio (based
upon appraisals made at the time of
origination) exceeded 90% as of the Cut-Off
Date. The Initial Mortgage Loans are not
insured by either primary or pool mortgage
insurance policies; however, certain
distributions due to the Owners of the 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.
S-2
<PAGE>
Unless otherwise noted, all statistical
percentages in this Prospectus Supplement
are measured by the aggregate principal
balance of the Initial Mortgage Loans (the
"Original Aggregate Loan Balance") or of the
Initial Mortgage Loans in the applicable
Mortgage Loan Group, in each case as of the
Cut-Off Date. The statistical
characteristics of the Mortgage Loans will
vary upon the transfer into Group I and
Group II of Subsequent Mortgage Loans.
Group I. As of the Cut-Off Date, the average
Loan Balance of the Initial Mortgage Loans
in Group I was $78,422.15; the interest
rates (the "Coupon Rates") of such Initial
Mortgage Loans ranged from 7.500% to 16.750%
per annum; the weighted average
Loan-to-Value Ratio of such Initial Mortgage
Loans was 67.41%; the weighted average
Coupon Rate of such Initial Mortgage Loans
was 10.646% per annum; and the weighted
average remaining term to maturity of such
Initial Mortgage Loans was 323 months. The
remaining terms to maturity as of the
Cut-Off Date of the Initial Mortgage Loans
in Group I ranged from 158 months to 360
months. The maximum Loan Balance of the
Initial Mortgage Loans in Group I as of the
Cut-Off Date was $580,878.97. Initial
Mortgage Loans in Group I requiring
"balloon" payments represented not more than
9.02% of the Original Aggregate Loan Balance
of the Initial Mortgage Loans in Group I. No
Initial Mortgage Loan in Group I will mature
later than August 1, 2026. As a percentage
of the Original Aggregate Loan Balance of
the Initial Mortgage Loans in Group I,
86.40% were secured by mortgages on
single-family dwellings, 7.38% by mortgages
on two- to four-family dwellings, 2.73% by
mortgages on condominiums, 2.94% by
mortgages on planned unit developments,
0.28% by mortgages on manufactured homes,
0.18% by mortgages on townhouses and 0.09%
by mortgages on other dwellings.
All of the Initial Mortgage Loans in Group I
(the "Fixed Rate Loans") bear interest at a
fixed rate for the life of such Initial
Mortgage Loans. 48.64%, 30.30%, 20.32% and
0.75% of the Initial Mortgage Loans in Group
I were originated by Berkeley Federal
Savings Bank ("Berkeley"), Option One, New
Century Mortgage Corporation ("New Century")
and Walsh Securities, Inc. ("Walsh"),
respectively. See "The Initial Mortgage Loan
Pools -- Initial Mortgage Loans -- Group I"
herein.
Group II. As of the Cut-Off Date, the
average Loan Balance of the Initial Mortgage
Loans in Group II was $104,347.32; the
Coupon Rates of such Initial Mortgage Loans
ranged from 6.500% to 17.800% per annum; the
weighted average Loan-to-Value Ratio of such
Initial Mortgage Loans was 72.84%; the
weighted average Coupon Rate of such Initial
Mortgage Loans was 9.897% per annum; and the
weighted average remaining term to maturity
of such Initial Mortgage Loans was 352
months. The remaining terms to maturity as
of the Cut-Off Date of the Initial Mortgage
Loans in Group II ranged from 117 months to
360 months. The maximum Loan Balance of the
Initial Mortgage Loans in Group II as of the
Cut-Off Date was $762,500.00. None of the
Initial Mortgage Loans in Group II contain
"balloon" payments. No Initial Mortgage Loan
in Group II will mature later than August 1,
2026. As a percentage of the Original
Aggregate Loan Balance of the Initial
Mortgage Loans in Group II, 6.74% were
secured by mortgages on two- to four- family
dwellings, 3.56% by mortgages on condo-
miniums, 5.93% by mortgages on planned unit
developments, 83.42% by mortgages on
single-family dwellings, 0.27% by mortgages
on manufactured homes and 0.09% by mortgages
<PAGE>
on other dwellings. See "The Mortgage Loan
Pools -- Initial Mortgage Loans -- Group II"
herein.
S-3
<PAGE>
All of the Initial Mortgage Loans in Group
II have maximum Coupon Rates. The weighted
average maximum Coupon Rate of the Initial
Mortgage Loans in Group II is 16.882% per
annum, with maximum Coupon Rates that range
from approximately 8.990% to 23.800% per
annum. The Initial Mortgage Loans in Group
II have a weighted average gross margin as
of the Cut-Off Date of 6.183%. The gross
margin for the Initial Mortgage Loans in
Group II ranges from 3.625% to 10.300%. The
minimum Coupon Rates for the Initial
Mortgage Loans in Group II range from 6.500%
to 17.800%.
88.26% of the Initial Mortgage Loans in
Group II (the "Six-Month LIBOR Loans") bear
interest at rates that adjust, along with
the related monthly payments, semiannually
based on Six-Month LIBOR. 2.03% of the
Six-Month LIBOR Loans have a semiannual
reset cap of 1% substantially all of which
have a lifetime reset cap of 7%. 97.91% 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%. 0.06%
of the Six-Month LIBOR Loans have a
semiannual reset cap of 3.0% all of which
have a lifetime reset cap of 7%. The
Six-Month LIBOR Loans consist of Initial
Mortgage Loans aggregating $181,054,508.25.
11.66% of the Initial Mortgage Loans in
Group II (the "2/28 Loans") bear interest at
a fixed rate of interest for a period of two
years after origination and thereafter have
semiannual interest rate and payment
adjustments at frequencies and in the same
manner as the Six-Month LIBOR Loans. 87.99%
of the 2/28 Loans have a periodic rate
adjustment cap of 1.5% and a lifetime reset
cap of 7%. 12.01% of the 2/28 Loans have a
periodic rate adjustment cap of 3.0% and a
lifetime reset cap of 7%. The 2/28 Loans
consist of Initial Mortgage Loans
aggregating $23,922,503.28.
0.08% of the Initial Mortgage Loans in Group
II (the "5/25 Loans") bear interest at a
fixed rate of interest 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 subject
to a 1.5% periodic rate adjustment cap after
the first adjustment. The 5/25 Loans consist
of Initial Mortgage Loans aggregating
$169,813.19.
86.68%, 0.22%, and 13.10% of the Initial
Mortgage Loans in Group II were originated
by Long Beach, Walsh and New Century,
respectively.
All of the Subsequent Mortgage Loans to be
included in the Trust have been purchased by
the Seller from New Century and First Colony
Financial Group ("First Colony") and
identified for sale to the Trust.
Final Scheduled
Payment Dates: The Final Scheduled Payment Dates for each
of the respective Classes of Class A
Certificates are as follows, although it is
anticipated that the actual final Payment
Date for each Class may occur earlier than
the Final Scheduled Payment Date. See
"Prepayment and Yield Considerations"
herein.
S-4
<PAGE>
<TABLE>
<CAPTION>
Month of
Final Scheduled
Payment Date
------------
<S> <C>
Class A-1 Certificates: March, 2006
Class A-2 Certificates: November, 2014
Class A-3 Certificates: April, 2021
Class A-4 Certificates: October, 2023
Class A-5 Certificates: October, 2027
Class A-6 Certificates: October, 2027
</TABLE>
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
September 25, 1996 (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 Class A-6 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 Class A-6 Certificates will be the
interest which has accrued thereon at the
applicable Pass-Through Rate from the
preceding Payment Date (or from the Closing
Date in the case of the first Payment Date)
to and including the day prior to the
current Payment Date. Each period referred
to in the prior sentence relating to the
accrual of interest is the "Accrual Period"
for the related Class of Class A
Certificates. All calculations of interest
on the Fixed Rate Group Certificates will be
made on the basis of a 360-day year assumed
to consist of twelve 30-day months.
Calculations of interest on the Class A-6
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 Group I shall be
distributed as follows: (I) first, to the
Owners of the Class A-1 Certificates the
amount necessary to reduce the Class A-1
Certificate Principal Balance to the
targeted balance for such Payment Date as
set forth on the Targeted Balance
S-5
<PAGE>
Schedule (such amount, the "Targeted
Amount") set forth as Annex II hereto, until
the Class A-1 Certificate Principal Balance
is reduced to zero; (II) second, until the
Class A-1 Certificate Principal Balance is
reduced to zero, to the Owners of the Class
A-2 Certificates, the Principal Distribution
Amount remaining, if any, after the
distribution described in clause (I) above
until the Class A-2 Certificate Principal
Balance is reduced to zero and, after the
Class A-1 Certificate Principal Balance has
been reduced to zero, to the Owners of the
Class A-2 Certificates, the Principal
Distribution Amount until the Class A-2
Certificate Principal Balance is reduced to
zero (provided, however, that if the Class
A-2 Certificate Principal Balance is reduced
to zero prior to the date the Class A-1
Certificate Principal Balance is reduced to
zero, the Principal Distribution Amount
shall be distributed to the Owners of the
Class A-1 Certificates until the Class A-1
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; and (V) fifth, to the Owners of the
Class A-5 Certificates until the Class A-5
Certificate Principal Balance is reduced to
zero; and (B) the Principal Distribution
Amount applicable to Group II shall be
distributed to the Owners of the Class A-6
Certificates until the Class A-6 Certificate
Principal Balance is reduced to zero.
See "Description of the Class A
Certificates--Distributions," "--Overcollat-
eralization Provisions" and "--Crosscol-
lateralization 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
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-3, Class A-4 and Class A-5
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.
S-6
<PAGE>
The credit enhancement provisions of the
Trust result in a limited acceleration of
principal payments to the Owners of the
Classes of Class A Certificates during
certain periods and may result in no
payments of principal being allocated to any
Class of the Class A Certificates during
certain periods. See "Description of the
Class A Certificates --
Overcollateralization Provisions" and
"Description of the Class A Certificates --
Crosscollateralization Provisions" herein.
Such credit enhancement provisions also have
an effect on the weighted average lives of
the Class A Certificates. See "Prepayment
and Yield Considerations" herein. In
addition, the following discussion makes use
of a number of technical defined terms which
are defined under "Description of the Class
A Certificates -- Overcollateralization
Provisions" and "Description of the Class A
Certificates -- Crosscollateralization
Provisions" herein.
On each Payment Date, distributions in
reduction of the Certificate Principal
Balance of the Class A Certificates will be
made in the amounts described herein. The
"Principal Distribution Amount" for each
Mortgage Loan Group and Payment Date shall
be the lesser of:
(a) the Total Available Funds (as defined
below) for the related Mortgage Loan Group
plus any related Insured Payments actually
made by the Certificate Insurer minus the
related Current Interest with respect to the
related Class A Certificates; and
(b) the excess, if any, of (i) the sum of:
(A) the Preference Amount with
respect to principal owed to the Owners of
the Class A Certificates for the related
Group that remains unpaid as of such Payment
Date;
(B) all scheduled installments of
principal actually collected or advanced by
the related Servicer during the related
Remittance Period and all unscheduled
collections of principal (other than Prepaid
Installments) actually collected by the
related Servicer during the related
Prepayment Period;
(C) the principal portion of the
Loan Purchase Price with respect to each
Mortgage Loan in the related Mortgage Loan
Group that was repurchased on or prior to
the related Monthly Remittance Date, to the
extent such amount is actually received by
the Trustee on or prior to the related
Monthly Remittance Date;
(D) any Substitution Amounts (i.e.,
the excess, if any, of the Loan Balance of a
Mortgage Loan being replaced over the
outstanding principal balance of a
replacement Mortgage Loan) delivered on the
related Monthly Remittance Date in
connection with a substitution of a Mortgage
Loan in the related Mortgage Loan Group, to
the extent such Substitution Amounts are
actually received by the Trustee on or prior
to the related Monthly Remittance Date;
(E) all Net Liquidation Proceeds
actually collected by the related Servicer
with respect to the Mortgage Loans in the
related Mortgage Loan Group during the
related Prepayment Period (to the extent
such Net Liquidation Proceeds are related to
principal) to the extent such Net
Liquidation Proceeds are actually received
by the Trustee on or prior to the related
Monthly Remittance Date;
<PAGE>
(F) the amount of any Subordination
Deficit with respect to the related Mortgage
Loan Group for such Payment Date;
S-7
<PAGE>
(G) the portion of the proceeds
received with respect to the related
Mortgage Loan Group by the Trustee upon
termination of the Trust (to the extent such
proceeds relate to principal);
(H) with respect to each Group, any
moneys released from the Pre- Funding
Account as a prepayment of the related Class
of Class A Certificates on the Payment Date
which immediately follows the end of the
Funding Period; and
(I) the amount of any Subordination
Increase Amount with respect to the related
Mortgage Loan Group for such Payment Date to
the extent of any Net Monthly Excess Cash
Flow available for such purpose;
over
(ii) the amount of any Subordination
Reduction Amount with respect to the related
Mortgage Loan Group for such Payment Date.
The "Remittance Period" with respect to any
Monthly Remittance Date is the period
commencing on the second day of the month
preceding the month in which the Monthly
Remittance Date occurs and ending on the
first day of the month in which such Monthly
Remittance Date occurs. A "Monthly
Remittance Date" is any date on which funds
on deposit in the Principal and Interest
Account are required to be remitted by the
Servicers to the Certificate Account, which
is the 20th day of each month, or if such
day is not a Business Day, the next
succeeding Business Day, commencing in
September, 1996. 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 August 2, 1996 and end on September 15,
1996).
A "Liquidated Mortgage Loan" is, in general,
a defaulted Mortgage Loan as to which the
Servicer has determined that all amounts
that it expects to recover on such Mortgage
Loan have been recovered (exclusive of any
possibility of a deficiency judgment).
The Owners of the Class A Certificates are
entitled to receive ultimate recovery of
Realized Losses which occur in the related
Mortgage Loan Group to the extent such
Realized Losses create a Subordination
Deficit in the related Mortgage Loan Group,
and payment in recovery of such losses will
be in the form of an Insured Payment on the
next following Payment Date if not covered
through Net Monthly Excess Cashflow from the
related Mortgage Loan Group or
crosscollateralization from the other
Mortgage Loan Group.
A "Subordination Deficit" with respect to a
Mortgage Loan Group and a Payment Date is
the amount, if any, by which (x) the related
Certificate Principal Balance, after taking
into account all distributions to be made on
such Payment Date, exceeds (y) the sum of
(i) the aggregate Loan Balances of the
Mortgage Loans in the related Mortgage Loan
Group as of the close of business on the
last day of the related Prepayment Period
and (ii) the respective amount, if any, on
deposit in the Pre-Funding Account as of the
close of business on the last day of the
related Remittance Period in respect of such
Mortgage Loan Group.
S-8
<PAGE>
"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--Overcol-
lateralization from Cashflow Structure"
herein.
Servicing: Advanta, Long Beach and Option One will each
serve as a Servicer under the Pooling and
Servicing Agreement with respect to certain
Mortgage Loans. Each Servicer will be
responsible for the servicing of the related
Mortgage Loans and will receive from
interest collected on the applicable
Mortgage Loans a monthly servicing fee on
each such Mortgage Loan equal to the Loan
Balance as of the beginning of the related
Remittance Period multiplied by the
applicable Servicing Fee Rate (such product,
the "Servicing Fee"). See "The Pooling and
Servicing Agreement-- Servicing" herein.
Each Servicer is obligated to make cash
advances ("Advances") with respect to
delinquent payments of principal of and
interest on any Mortgage Loan, other than
Balloon Payments with respect to Balloon
Mortgage Loans, serviced by it to the extent
described in "Servicing of Mortgage
Loans--Advances" herein. The Trustee will be
obligated as a successor servicer to make
any such Advance if a Servicer fails in its
obligation to do so, to the extent provided
in the Pooling and Servicing Agreement.
Credit Enhancement: The Credit Enhancement
provided for the benefit of the Owners of
the Class A Certificates consists of (x) the
overcollateralization and crosscollater-
alization 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
S-9
<PAGE>
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 overcol-
lateralization 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 certain 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 crosscollateraliza-
tion through the application of certain
excess amounts generated by one Mortgage
Loan Group to fund shortfalls in Available
Funds and the required overcollateralization
level in the other Mortgage Loan Group,
subject to certain prior debt service and
credit enhancement requirements of such
Mortgage Loan Group.
See "Prepayment and Yield Considerations",
"Description of the Class A Certificates--
Overcollateralization Provisions" and
"Description of the Class A Certificates--
Crosscollateralization Provisions" herein
and "Credit Enhancement" in the Prospectus.
Certificate Insurance Policies. 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.
<PAGE>
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
S-10
<PAGE>
of unreimbursed payments under the
Certificate Insurance Policies, the
Certificate Insurer will be subrogated to
the rights of the Owners of the related
Class A Certificates on which such Insured
Payments were made. In connection with each
Insured Payment on a related Class A
Certificate, the Trustee, as
attorney-in-fact for the Owner thereof, will
be required to assign to the Certificate
Insurer the rights of such Owner with
respect to the Class A Certificate to the
extent of such Insured Payment.
The Certificate Insurance Policies do not
guarantee any specified rate of prepayments
(including, in the case of the Class A-1
Certificates, distributions in accordance
with the Targeted Balance Schedule), 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. Also, the Certificate
Insurance Policy for the Adjustable Rate
Group does not insure the payment of the
Available Funds Cap Carry-Forward Amount (as
defined herein). See "The Certificate
Insurance Policies and the Certificate
Insurer" herein.
Pre-Funding Account: On the Closing Date, the Original Pre-Funded
Amount will be deposited in the Pre-Funding
Account which account will be in the name
of, and maintained by, the Trustee on behalf
of the Trust and used to acquire Subsequent
Mortgage Loans for addition to Group I and
Group II. With respect to each Group, during
the period (the "Funding Period") from and
including the Closing Date until the
earliest of (i) the date on which the amount
on deposit in the Pre-Funding Account with
respect to the related Group is less than
$100,000, and (ii) September 20, 1996, the
Pre-Funded Amount will be maintained in the
Pre-Funding Account. The Original Pre-Funded
Amount will be reduced during the Funding
Period by the amount thereof used to
purchase Subsequent Mortgage Loans in
accordance with the Pooling and Servicing
Agreement. The amount on deposit in the
Pre-Funding Account at any time is the
"Pre-Funded Amount". Subsequent Mortgage
Loans purchased by and added to the Trust on
any date (each, a "Subsequent Transfer
Date") must satisfy the criteria set forth
in the Pooling and Servicing Agreement. Any
Pre-Funded Amount remaining at the end of
the Funding Period for the related Group
will be distributed to the Owners of the
related Class of Class A Certificates then
entitled to receive distributions of
principal on the Payment Date that
immediately follows the end of such Funding
Period in reduction of the Certificate
Principal Balance of such Owners'
Certificates, thus resulting in a partial
principal prepayment of such Class of Class
A Certificates as specified herein under
"Description of the Certificates--
Distributions." All interest and other
investment earnings on amounts on deposit in
the Pre-Funding Account will be deposited in
the Capitalized Interest Account. The
Pre-Funding Account will not be an asset of
the REMIC (as defined herein).
Although no assurance can be given, it is
intended that the principal amount of
Subsequent Mortgage Loans sold to the Trust
and added to the Trust will require
application of substantially all of the
Original Pre-Funded Amount and it is not
intended that there will be any material
amount of principal prepaid to the holders
of any Class of the Class A Certificates
from the Pre-Funding Account. In the event
that the Depositor is unable to sell
Subsequent Mortgage Loans to the Trust in an
amount equal to the Original Pre-Funded
Amount, principal prepayments to Owners of
the related Class of the Class A
Certificates will occur no later than the
Payment Date in September 1996 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.
S-11
<PAGE>
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 in the case of the Fixed
Rate Group Certificates and the applicable
Pass-Through Rate on the Adjustable Rate
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
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 Date in September 1996 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 Payment Date in
September 1996 in an amount equal to the
portion of the Original Pre-Funded Amount
remaining and allocable to the related
Group.
Optional Termination: The Owners of Class R Certificates will have
the right to purchase all the Mortgage Loans
on any Monthly Remittance Date after the
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 Termina-
tion" 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
S-12
<PAGE>
Bank, and together with Citibank, the
"European Depositaries"), the relevant
depositaries of CEDEL and Euroclear,
respectively, and each a participating
member of DTC. The Class A Certificates will
initially be registered in the name of Cede.
The interests of the Owners of such
Certificates will be represented by
book-entries on the records of DTC and
participating members thereof. No Beneficial
Owner will be entitled to receive a
definitive certificate representing such
person's interest, except in the event that
Definitive Certificates (as defined herein)
are issued under the limited circumstances
described herein. All references in this
Prospectus Supplement to any Class A
Certificates reflect the rights of
Beneficial Owners only as such rights may be
exercised through DTC and its participating
organizations for so long as such Class A
Certificates are held by DTC. See
"Description of the Class A Certificates --
Book-Entry Registration of the Class A
Certificates" herein, and Annex I hereto,
and "Description of the Certificates--
Book-Entry Registration" in the Prospectus.
Ratings: It is a condition of issuance of the Class A
Certificates that the Class A Certificates
receive ratings of "AAA" by Standard &
Poor's, A Division of The McGraw-Hill
Companies ("Standard & Poor's"), "Aaa" by
Moody's Investors Service, Inc. ("Moody's"),
and "AAA" by Fitch Investors Service, L.P.
("Fitch"). Standard & Poor's, Moody's and
Fitch are referred to herein collectively as
the "Rating Agencies." The ratings issued by
the Rating Agencies on the payment of
principal and interest on the Class A-6
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.
Ratings of the Class A-1 Certificates. With
respect to the Class A-1 Certificates, the
ratings assigned to such Certificates do not
address the likelihood that the Certificate
Principal Balance of such Class will be
reduced in accordance with the Targeted
Balance Schedule. While the related
Certificate Insurance Policy guarantees the
timely payment of interest on and the
ultimate payment of the principal amount of
the Class A-1 Certificates, the payment of
principal in accordance with the Targeted
Balance Schedule and the payment in full of
the Class A-1 Certificates on or prior to
such Final Scheduled Payment Date is not
guaranteed by the Certificate Insurer.
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.
S-13
<PAGE>
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
Certificates will be treated as "qualifying
real property loans" under Section 593(d) of
the Internal Revenue Code of 1986, as
amended (the "Code"), "regular . . .
interest(s) in a REMIC" under Section
7701(a)(19)(C) of the Code and "real estate
assets" under Section 856(c) of the Code in
the same proportion that the assets in the
REMIC consist of qualifying assets under
such sections. In addition, interest on the
Class A Certificates will be treated as
"interest on obligations secured by
mortgages on real property" under Section
856(c) of the Code to the extent that such
Certificates are treated as "real estate
assets" under Section 856(c) of the Code.
ERISA Considerations: A fiduciary of any employee benefit plan or
other retirement arrangement subject to the
Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or Section 4975
of the Code (a "Plan") should review
carefully with its legal advisors whether
the purchase or holding of the Class A
Certificates offered hereby could give rise
to a transaction that is prohibited or is
not otherwise permitted either under ERISA
or Section 4975 of the Code or whether there
exists any statutory or administrative
exemption applicable to an investment
therein.
The U.S. Department of Labor has issued to
the Underwriters individual prohibited
transaction exemptions which generally
exempt from the application of certain of
the prohibited transaction provisions of
Section 406 of ERISA and the excise taxes
imposed on such prohibited transactions by
Sections 4975(a) and (b) of the Code
transactions relating to the purchase, sale
and holding of pass-through certificates
underwritten by the Underwriters and the
servicing and operation of related asset
pools, provided that certain conditions are
satisfied.
A fiduciary of a Plan should review the
sections entitled "ERISA Considerations" in
the Prospectus and this Supplement and
consider the issues discussed therein, and
should consult with its legal advisors prior
to making an investment in the Class A
Certificates.
Legal Investment
Considerations: The Class A Certificates will constitute
"mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA") for so long as they
are rated in one of the two highest rating
S-14
<PAGE>
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.
S-15
<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, such as the Mortgage Loans in Group I,
and 2/28 Loans and 5/25 Loans, which are or will be a part of Group II, is
sensitive to prevailing interest rates. Generally, if prevailing interest rates
fall significantly below the interest rates on the Mortgage Loans in Group I, or
the applicable rates on the 2/28 Loans and 5/25 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 Group I or the applicable
rates on the 2/28 Loans and 5/25 Loans. Conversely, if prevailing interest rates
rise significantly above the interest rates on the Mortgage Loans in Group I,
the rate of prepayments is likely to decrease.
The average life of the Class A Certificates, and, if purchased at
other than par, the yields realized by Owners of the Class A Certificates, will
be sensitive to levels of payment (including prepayments relating to the
Mortgage Loans (the "Prepayments")) on the Mortgage Loans 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
Account on the first Payment Date following the end of the Funding Period (in no
S-16
<PAGE>
event later than the September 1996 Payment Date). Although no assurances can be
given, the Depositor expects that the principal amount of Subsequent Mortgage
Loans sold to the Trust will require the application of substantially all
amounts on deposit in the Pre-Funding Account and that there will be no material
principal prepayment to the Owners of the Class A Certificates from the
Pre-Funding Account.
Each Subsequent Mortgage Loan must satisfy the eligibility criteria
referred to above at the time of its addition. Following the transfer of
Subsequent Mortgage Loans, it is anticipated that the aggregate characteristics
of the Mortgage Loans then held in the related Mortgage Loan Group will not vary
significantly from those of the Initial Mortgage Loans. See "The Mortgage Loan
Pool--Conveyance of Subsequent Mortgage Loans" herein.
The Seller has acquired and identified for sale to the Trust a
sufficient amount of Subsequent Mortgage Loans to fully utilize the Original
Pre-Funding Amount.
Risk of Higher Delinquencies Associated with Guidelines. The
Underwriting Guidelines (as described herein under "The Portfolio of Mortgage
Loans--Guidelines") are intended to assess the credit quality of a mortgagor and
the value of the mortgaged property and to evaluate the adequacy of such
property as collateral for the mortgage loan. The Originators provide loans
primarily to mortgagors who do not qualify for loans conforming to FNMA and
FHLMC guidelines but who also have substantial equity in their property.
Furthermore, the Underwriting Guidelines do not prohibit a borrower from
obtaining secondary financing at the time of origination of the Originator's
first lien, which financing would reduce the equity the borrower would otherwise
have in the related mortgaged property 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 Class A-6 Pass-Through Rate; Basis
Risk. The calculation of the Class A-6 Pass-Through Rate is based upon the value
of an index (One-Month LIBOR) which is different from the value of the index
applicable to a substantial portion of the Initial Mortgage Loans in Group II
(Six-Month LIBOR) as described under "The Mortgage Loan Pool -- Initial Mortgage
Loans -- Group II" herein and is subject to the Adjustable Rate Group Available
Funds Cap. The Adjustable Rate Group Available Funds Cap effectively limits the
amount of interest accrued on the Adjustable Rate Group Certificates to the
weighted average of the Coupon Rates on the Mortgage Loans in Group II, less
1.13%. 88.26% of the Initial Mortgage Loans in Group II adjust semiannually
based upon the London interbank offered rate for Six-Month United States dollar
deposits ("Six-Month LIBOR"), whereas the Pass-Through Rate on the Class A-6
Certificates adjusts monthly based upon One-Month LIBOR as described under
"Description of the Class A Certificates -- Calculation of One-Month LIBOR"
herein, subject to the Adjustable Rate Group Available Funds Cap. Consequently,
the Class A-6 Pass-Through Rate for any Payment Date may not equal the Class A-6
Formula Pass-Through Rate (as defined herein) during the related Accrual Period.
11.66% of the Initial Mortgage Loans in Group II are 2/28 Loans that provide for
a fixed interest rate for a period of approximately two years following
origination. 0.08% of the Initial Mortgage Loans in Group II are 5/25 Loans that
provide for a fixed interest rate for a period of approximately five 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-6 Pass-Through Rate adjusts monthly, while the interest rates of the
Initial Mortgage Loans in Group II adjust less frequently, with the result
S-17
<PAGE>
that the Adjustable Rate Group Available Funds Cap may be lower than the Class
A-6 Formula Pass-Through Rate for extended periods in a rising interest rate
environment. In addition, the Initial Mortgage Loans in Group II are subject to
periodic (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-6 Pass-Through Rate. Finally, the Initial Mortgage
Loans in Group II accrue interest on the basis of a 360-day year assumed to
consist of twelve 30-day months, while calculations of interest on the
Adjustable Rate Group Certificates will be made on the basis of the actual
number of days elapsed in the related Accrual Period and a year of 360 days.
This may result in the Adjustable Rate Group Available Funds Cap limiting the
Class A-6 Pass-Through Rate in Accrual Periods that have more than 30 days.
Consequently, the interest which becomes due on the Initial Mortgage Loans in
Group II (net of the 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 Group II) during any Remittance Period may not
equal the amount of interest that would accrue at One-Month LIBOR plus the
margin on the Adjustable Rate Group Certificates during the related Accrual
Period. Furthermore, if the Available Funds Cap determines the Class A-6
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 Group II will have features similar to the
Initial Mortgage Loans in Group II, resulting in the same limitations on the
Class A-6 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
S-18
<PAGE>
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 44.40% 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.
S-19
<PAGE>
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.
Guidelines
The information set forth below with regard to the Originators'
guidelines (collectively, the "Underwriting Guidelines") has been provided to
the Depositor or compiled from information provided to the Depositor by the
Originators. Neither the Depositor, the Seller, the Underwriters nor any of
their respective affiliates have made any independent investigation of such
information, nor has any Originator made any such investigation with respect to
information about the other Originators' guidelines or the Seller's Performance
Assumption Groupings.
Long Beach Originated Mortgage Loans
Mortgage Loans originated by Long Beach (the "Long Beach Loans") were
originated generally in accordance with guidelines (the "Long Beach Guidelines")
established by Long Beach's underwriting department (or that of Long Beach's
predecessor in interest, Long Beach Bank, F.S.B.) under Long Beach's "B-1st,"
"B-1st Fast Trac," "B-1st QuickCredit," "B-1st QuickCredit Fast Trac" or "B-1st
Stated Income" residential loan programs (the "Long Beach Programs"). The Long
Beach Guidelines are primarily intended to evaluate the value and adequacy of
the mortgaged property as collateral and are also intended to consider the
mortgagor's credit standing and repayment ability. On a case-by-case basis and
only with the approval of two or more senior lending officers, Long Beach may
determine that, based upon compensating factors, a prospective mortgagor not
strictly qualifying under the underwriting risk category guidelines described
below warrants an underwriting exception. Compensating factors may include, but
are not limited to, low loan-to-value ratio, low debt-to-income ratio, good
credit history, stable employment and time in residence at the applicant's
current address. It is expected that a substantial number of the Long Beach
Loans to be included in the Mortgage Pool will represent such underwriting
exceptions.
Under the Long Beach Programs, the underwriting department of Long
Beach or of the originator reviews and verifies the loan applicant's sources of
income (except under the B-1st Stated Income and the B-1st Fast Trac programs),
calculates the amount of income from all such sources indicated on the loan
application, reviews the credit history of the applicant and calculates the
debt-to-income ratio to determine the applicant's ability to repay the loan, and
reviews the mortgaged property for compliance with the Long Beach Guidelines.
The Long Beach Guidelines are applied in accordance with a procedure which
complies with applicable federal and state laws and regulations and requires (i)
an appraisal of the mortgaged property which conforms to FHLMC and FNMA
standards and (ii) a review of such appraisal, which review may be conducted by
a Long Beach staff appraiser or representative and, depending upon the original
principal balance and loan-to-value ratio of the mortgaged property may include
a desk review of the original appraisal or a drive-by review appraisal of the
mortgaged property. The Long Beach Guidelines permit single-family loans with
loan-to-value ratios at origination of up to 90% (75% under the B-1st Stated
Income program), depending on the type and use of the property, the
creditworthiness of the mortgagor and the debt-to-income ratio. Under the B-1st
program, the maximum combined loan-to-value ratio for purchase money mortgage
loans, including any second deeds of trust subordinate to Long Beach's first
deed of trust, is 90%.
All of the Mortgage Loans originated in the Long Beach Programs are
based on loan application packages submitted through mortgage brokerage
companies or at Long Beach's retail branches or are purchased from approved
originators pursuant to the Long Beach Guidelines described herein. Loan
application packages submitted through mortgage brokerage companies, containing
in each case relevant credit, property and underwriting information on the loan
request, are compiled by the applicable mortgage brokerage company and submitted
to Long Beach for approval and funding. The mortgage brokerage companies receive
a portion of the loan origination fee charged to the mortgagor at the time the
loan is made. No single mortgage brokerage company accounts for more than 5%,
measured by outstanding principal balance, of the single-family mortgage loans
originated by Long Beach.
Each prospective mortgagor completes an application which includes
information with respect to the applicant's liabilities, income, credit history
and employment history, as well as certain other personal information.
S-20
<PAGE>
Long Beach requires a credit report on each applicant from a credit reporting
company. The applicant must generally provide to Long Beach or the originator a
letter explaining all late payments on mortgage debt and, generally, consumer
(i.e., non-mortgage) debt. The report typically contains information relating to
such matters as credit history with local and national merchants and lenders,
installment debt payments and any record of defaults, bankruptcy, repossession,
suits or judgments. Under the B-1st program, self-employed individuals are
generally required to submit their two most recent federal income tax returns.
As part of its quality control system, Long Beach reverifies information with
respect to the foregoing matters that has been provided by the mortgage
brokerage company prior to funding a loan and periodically audits files based on
a random sample of closed loans. In the course of its pre-funding audit, Long
Beach reverifies the income of each mortgagor or, for a self-employed
individual, reviews the income documentation obtained pursuant to the Long Beach
Guidelines (except under the B-1st Stated Income program). Long Beach generally
verifies the source of funds for the down payment.
Mortgaged properties that are to secure mortgage loans underwritten
under the Long Beach Programs are appraised by qualified independent appraisers
who are approved by Long Beach's internal chief appraiser. In most cases,
below-average properties (including properties requiring major deferred
maintenance) are not acceptable as security for Long Beach mortgage loans in the
Long Beach Programs. Each appraisal includes a market data analysis based on
recent sales of comparable homes in the area and, where deemed appropriate,
replacement cost analysis based on the current cost of constructing a similar
home. Every independent appraisal is reviewed by a Long Beach staff appraiser or
representative before the loan is funded.
The Long Beach Guidelines are less stringent than the standards
generally acceptable to FNMA and FHLMC with regard to the mortgagor's credit
standing and repayment ability. Mortgagors who qualify under the Long Beach
Programs generally have payment histories and debt ratios which would not
satisfy FNMA and FHLMC underwriting guidelines and may have a record of major
derogatory credit items such as outstanding judgments or prior bankruptcies. The
Long Beach Guidelines establish the maximum permitted loan-to-value ratio for
each loan type based upon these and other risk factors.
The B-1st QuickCredit and B-1st QuickCredit Fast Trac residential loan
programs are alternative risk grading programs whereby the various risk
categories are assigned in a manner similar to that used for the B-1st and B-1st
Fast Trac loan programs except that consumer credit history is not used to
determine the appropriate risk grading. As in the B-1st and B-1st Fast Trac
residential loan programs, the B-1st QuickCredit and B-1st QuickCredit Fast Trac
residential loan programs use consumer credit to determine debt-to-income
ratios. Maximum loan-to-value ratios and maximum loan amounts are generally
lower under the B-1st QuickCredit and B-1st QuickCredit Fast Trac residential
loan programs than those permitted under the B-1st or B-1st Fast Trac
residential loan programs, respectively. In general, the B-1st QuickCredit
residential loan program is similar to the B-1st residential loan program except
that the B-1st QuickCredit residential loan program does not consider consumer
credit history, requires lower maximum loan-to-value ratios and requires lower
maximum loan amounts. In most other respects, the requirements of the B-1st
QuickCredit and the B-1st QuickCredit Fast Trac residential loan programs
correspond to the requirements of the B-1st and B-1st Fast Trac residential loan
programs, respectively.
Under the B-1st Stated Income residential loan program, the mortgagor's
employment and income sources must be stated on the mortgagor's application. The
mortgagor's income as stated must be reasonable for the related occupation and
such determination as to reasonableness is subject to the loan underwriter's
discretion. However, the mortgagor's income as stated on the application is not
independently verified. Verification of employment is required for salaried
mortgagors only. Maximum loan-to-value ratios are generally lower under the
B-1st Stated Income residential loan program than those permitted under the
B-1st residential loan program. Except as otherwise stated above, the same
mortgage credit, consumer credit and collateral property underwriting guidelines
apply to the B-1st Stated Income residential loan program as apply to the B-1st
residential loan program.
Long Beach requires title insurance on all mortgage loans in the Long
Beach Programs secured by liens on real property. Long Beach also requires that
fire and extended coverage casualty insurance be maintained on the secured
property in an amount at least equal to the principal balance of the related
single-family loan or the replacement cost of the property, whichever is less.
S-21
<PAGE>
Long Beach Guidelines -- Seller's Performance Assumption Groupings
Under the Long Beach Programs, various risk categories are used to
grade the likelihood that the mortgagor will satisfy the repayment conditions of
the mortgage loan. These risk categories establish the maximum permitted
loan-to-value ratio and loan amount, given the occupancy status of the mortgaged
property and the mortgagor's credit history and debt ratio. In general, higher
credit risk mortgage loans are graded in categories which permit higher debt
ratios and more (or more recent) major derogatory credit items such as
outstanding judgments or prior bankruptcies; however, the Long Beach Programs
establish lower maximum loan-to-value ratios and maximum loan amounts for loans
graded in such categories.
The Long Beach Guidelines have the following categories and criteria
for grading the potential likelihood that an applicant will satisfy the
repayment obligations of a mortgage loan:
"Ambassador;" Credit Grade: "A." Under the "A" risk category,
the applicant must have generally repaid installment of revolving debt
according to its terms and demonstrated steady employment over the last
five years. A maximum of one 30-day late payment, and no 60-day late
payments, within the last 12 months is permitted on an existing
mortgage loan. No collection accounts or charge-offs may remain open
after the funding of the loan. No bankruptcy, discharge or notice of
default filings may have occurred during the preceding three years. The
mortgaged property must be in at least average condition. Mortgage
loans originated under the "Ambassador" program must be owner-occupied.
A maximum Loan-to-Value Ratio of 85% is permitted for a purchase
and/or refinance mortgage loan on a single family property, and a
maximum Loan-to-Value Ratio of 75% is permitted on a mortgaged property
consisting of two-to-four units and condominium properties. The debt
service-to-income ratio generally ranges from 45% or less to 55% or
less based on the mortgagor's net disposable income. Ambassador loans
are classified in the Seller's PAG II category (as defined below).
"Program I;" Credit Grade: "A-." Under the "A-" risk category,
the applicant generally must have repaid installment of revolving debt
according to its terms and have demonstrated steady employment over the
last two years. A maximum of one 30-day late payment, and no 60-day
late payments, within the last 12 months is permitted on an existing
mortgage loan. Minor derogatory items are permitted on a case-by-case
basis as to non-mortgage credit when the majority of the consumer
credit is deemed good. No bankruptcy, discharge or notice of default
filings may have occurred during the preceding three years. The
mortgaged property must be in at least average condition. A maximum
Loan-to-Value Ratio of 80% is permitted for a purchase money and/or
refinance mortgage loan on a single family property, and a maximum
Loan-to-Value Ratio of 75% is permitted on a mortgaged property
consisting of two-to-four units and condominium properties. A maximum
Loan-to-Value Ratio of 70% is permitted for non-owner occupied purchase
money and refinance loans on single family and condominium properties,
and a maximum Loan-to-Value Ratio of 65% is permitted for a mortgage
loan on a non-owner occupied mortgaged property consisting of two units
or second home properties. Generally, the debt service-to- income ratio
must be 47%, but this may be allowed to be increased to 55% based on
the mortgagor's net disposable income. Program I loans are classified
in the Seller's PAG II category (as defined below).
"Program II;" Credit Grade: "B+." Under the "B+" risk
category, the applicant must have generally repaid installment of
revolving debt according to its terms and have demonstrated steady
employment over the last two years. A maximum of two 30-day late
payments, and no 60-day late payments, within the last 12 months is
permitted on an existing mortgage loan. One to three minor derogatory
items that are 90 days or more late are permitted on a case-by-case
basis as to non-mortgage credit when the majority of the consumer
credit is deemed good. No bankruptcy, discharge or notice of default
filings may have occurred during the preceding three years. The
mortgaged property must be in at least average condition. A maximum
Loan-to-Value Ratio of 80% is permitted for a purchase money and/or
refinance mortgage loan on a single family property, and a maximum
Loan-to-Value Ratio of 75% is permitted on a mortgaged property
consisting of two-to-four units and condominium properties. A maximum
Loan-to-Value Ratio of 70% is permitted for non-owner occupied purchase
money and refinance
S-22
<PAGE>
mortgage loans on single family and condominium properties and a
maximum Loan-to-Value Ratio of 65% is permitted for non-owner occupied
purchase money and refinance mortgage loans on mortgaged properties
consisting of two units or second homes properties. Generally, the debt
service-to-income ratio must be 50% or less, but this may be increased
to 55% based on the mortgagor's net disposable income. Program II loans
are classified in the Seller's PAG II category (as defined below).
"Program III;" Credit Grade: "B." Under the "B" risk category,
the applicant must have generally repaid installment of revolving debt
according to its terms and have demonstrated steady employment over the
last two years. A maximum of four 30-day late payments within the last
12 months is acceptable on an existing mortgage loan. One to three
minor derogatory items that are late 90 days or more are permitted on a
case-by-case basis as to non-mortgage credit when the majority of the
consumer credit is deemed good. Any and all payments 60 days or more
late within the past 12 months may not represent more than 50% of the
credit reported during that period. No bankruptcy, discharge or notice
of default filings may have occurred during the preceding two years.
The mortgaged property must be in at least average condition. A maximum
Loan-to-Value Ratio of 80% is permitted for a purchase money and/or
refinance mortgage loan on a single family property, and a maximum
Loan-to-Value Ratio of 75% is permitted on mortgaged properties
consisting of two-to-four units and condominiums. For non-owner
occupied purchase money and refinance properties, the maximum
Loan-to-Value Ratio is 70% for single family and condominium
properties, and 65% for non-owner occupied mortgaged properties
consisting of two units or second homes. Generally, the debt
service-to-income ratio must be 50% or less but this may be increased
to 55% based on the mortgagor's net disposable income. Program III
loans are classified in the Seller's PAG III category (as defined
below).
"Program IV;" Credit Grade: "B-." Under the "B-" risk
category, the applicant must have generally repaid installment and
revolving debt according to its terms and have demonstrated steady
employment over the last two years. A maximum of one 60-day late
payment within the last 12 months, and a maximum of at most 30 days
late at time of application is permitted on an existing mortgage loan.
Certain non-consumer credit, collections, or judgments, may be
disregarded on a case-by-case basis. Payments 60 days or more late
within the last 12 months may not represent more than 50% of the credit
items reported during that period. No bankruptcy, discharge or notice
of default filings may have occurred within the preceding two years.
The mortgaged property must be in at least average condition. A maximum
Loan-to-Value Ratio of 75% is permitted for a purchase money and/or
refinance mortgage loan on an owner-occupied single family property.
For non-owner occupied purchase and refinance properties, the maximum
Loan-to-Value Ratio is 65% for single family and second home
properties. Generally, the debt service-to-income ratio must not exceed
55%. Program IV loans are classified in the Seller's PAG III category
(as defined below).
"Program V;" Credit Grade: "C." Under the "C" risk category,
the applicant may have experienced significant credit problems in the
past. A maximum of two 60-day and one 90-day late payments, or three
60-day late payments and no 90-day late payments within the last 12
months is permitted on an existing mortgage loan. An existing mortgage
loan is not required to be current at the time the application is
submitted. Consumer credit derogatory items will be considered on a
case-by-case basis. No bankruptcy, discharge or notice of default
filings may have occurred during the preceding twelve months. The
mortgaged property must be in at least average condition. A maximum
Loan-to-Value Ratio of 75% is permitted for a purchase money and
refinance mortgage loan on an owner-occupied single family property.
For non-owner occupied purchase money and refinance properties, the
maximum Loan-to-Value Ratio is 60% for single family and second home
properties. Generally, the debt service-to-income ratio must not exceed
55%; however, 55%-60% will be considered on a case-by-case basis.
Program V loans are classified in the Seller's PAG IV category (as
defined below).
"Program VI;" Credit Grade: "C-." Under the "C-" risk
category, the applicant may have experienced significant credit
problems in the past. A maximum of two 60-day and one 90-day late
payments, or three 60-day late payments and no 90-day late payments
within the last 12 months is permitted on an existing mortgage loan. On
a case-by-case basis, the applicant may have a notice of
S-23
<PAGE>
default/foreclosure within the last 24 months with a good explanation.
The applicant may not currently be in bankruptcy; however, the
applicant may have had a bankruptcy with a good explanation and proof
of dismissal/discharge. Consumer derogatory items will be considered on
a case-by-case basis. Long Beach underwriters must be satisfied that
the problem that caused the "C-" credit no longer exists and that there
is a reasonable expectation that the applicant will repay the mortgage
loan according to the terms and conditions agreed upon. The mortgaged
property must be in at least average condition. A maximum Loan-
to-Value Ratio of 70% is permitted for a purchase money mortgage loan,
and a maximum Loan-to-Value Ratio of 65% is permitted for a refinance
of an owner-occupied single family property. On a case-by-case basis,
the maximum Loan-to-Value Ratio permitted for a non-owner occupied
purchase money and refinance mortgage loan is 50%. Generally, the debt
service-to-income ratio must not exceed 55%; however, 55%-60% will be
considered on a case-by-case basis. Program VI loans are classified in
the Seller's PAG V category (as defined below).
There are no Long Beach Loans in Group I. 56.61%, 22.71%, 14.09%, and
6.59% of the Long Beach Loans in Group II are in Seller's PAG II, Seller's PAG
III, Seller's PAG IV and Seller's PAG V risk categories, respectively.
Mortgage Loans Originated by Other Originators
The following discussion addresses Mortgage Loans originated by
Originators other than Long Beach. The Mortgage Loans have been originated by
the Originators in accordance with the Underwriting Guidelines established by
each of them and reviewed and approved by the Seller. The Underwriting
Guidelines are primarily intended to evaluate the value and adequacy of the
mortgaged property as collateral and are also intended to consider the
mortgagor's credit standing and repayment ability. On a case-by-case basis, the
Originator may determine that, based upon compensating factors, a prospective
mortgagor not strictly qualifying under the Underwriting Guidelines warrants an
underwriting exception. Compensating factors may include, but are not limited
to, low loan-to-value ratio, low debt-to-income ratio, good credit history,
stable employment, pride of ownership and time in residence at the applicant's
current address. It is expected that a substantial number of the Mortgage Loans
to be included in the Mortgage Pool will represent such underwriting exceptions.
Under the Underwriting Guidelines, the Originators review and verify
the loan applicant's sources of income (except under the stated income
programs), calculate the amount of income from all such sources indicated on the
loan application, review the credit history of the applicant and calculate the
debt-to-income ratio to determine the applicant's ability to repay the loan, and
review the mortgaged property for compliance with their Underwriting Guidelines.
The Underwriting Guidelines are applied in accordance with a procedure which
complies with applicable federal and state laws and regulations and requires (i)
an appraisal of the mortgaged property which conforms to FHLMC and FNMA
standards and (ii) a review of such appraisal, which review may be conducted by
the Originator's staff appraiser or representative and, depending upon the
original principal balance and loan-to-value ratio of the mortgaged property may
include a desk review of the original appraisal or a drive-by review appraisal
of the mortgaged property. The Underwriting Guidelines permit single-family
loans with loan-to-value ratios at origination of up to 90% for the highest
credit grading category (75% under the stated income programs), depending on the
type and use of the property, the creditworthiness of the mortgagor and the
debt-to-income ratio. Under the Underwriting Guidelines, the maximum combined
loan-to-value ratio for purchase money mortgage loans may differ from those
applicable to refinancings.
All of the Mortgage Loans are based on loan application packages
submitted through mortgage brokerage companies or at the related Originator's
retail branches or are purchased from originators approved by the Originators.
Loan application packages submitted through mortgage brokerage companies,
containing in each case relevant credit, property and underwriting information
on the loan request, are compiled by the applicable mortgage brokerage company
and submitted to the Originator for approval and funding. The mortgage brokerage
companies receive a portion of the loan origination fee charged to the mortgagor
at the time the loan is made.
Each prospective mortgagor completes an application which includes
information with respect to the applicant's liabilities, income, credit history
and employment history, as well as certain other personal information. Each
Originator requires a credit report on each applicant from a credit reporting
company. The applicant must
S-24
<PAGE>
provide to the related Originator or the originator a letter explaining all late
payments on mortgage debt and, generally, consumer (i.e., non-mortgage) debt.
The report typically contains information relating to such matters as credit
history with local and national merchants and lenders, installment debt payments
and any record of defaults, bankruptcy, repossession, suits or judgments.
Self-employed individuals are generally required to submit their two most recent
federal income tax returns. As part of their quality control systems, each
Originator generally reverifies information with respect to the foregoing
matters that has been provided by the mortgage brokerage company prior to
funding a loan and periodically audits files based on a random sample of closed
loans. In the course of their pre-funding audit, each Originator generally
reverifies the income of each mortgagor or, for a self-employed individual,
reviews the income documentation obtained pursuant to the Underwriting
Guidelines (except under stated income programs). If the loan-to-value ratio is
greater than a predetermined level, the Originators generally verify the source
of funds for the down payment; however, the related Originator may not verify
the source of funds if the loan-to-value ratio is less than such level.
Mortgaged properties that are to secure mortgage loans are generally
appraised by qualified independent appraisers who are approved by the related
Originator. In most cases, below-average properties (including properties
requiring major deferred maintenance) are not acceptable as security for
mortgage loans under the Underwriting Guidelines. Each appraisal includes a
market data analysis based on recent sales of comparable homes in the area and,
where deemed appropriate, replacement cost analysis based on the current cost of
constructing a similar home. Except with respect to purchase money mortgage
loans, every independent appraisal is generally reviewed by the related
Originators before the loan is funded, and a drive-by review or appraisal is
generally performed in connection with loan amounts over a certain predetermined
dollar amount established for each State. With respect to purchase money
mortgage loans, an independent appraisal may be reviewed the Originator.
The Underwriting Guidelines are less stringent than the standards
generally acceptable to FNMA and FHLMC with regard to the mortgagor's credit
standing and repayment ability. Mortgagors who qualify under the Underwriting
Guidelines generally have payment histories and debt ratios which would not
satisfy FNMA and FHLMC underwriting guidelines and may have a record of major
derogatory credit items such as outstanding judgments or prior bankruptcies. The
Underwriting Guidelines establish the maximum permitted loan-to-value ratio for
each loan type based upon these and other risk factors.
The Mortgage Loans originated by the Originators other than Long Beach
were originated consistent with and generally conform to "Full Documentation",
"Limited Documentation", or "Stated Income Documentation" residential loan
programs. Under each of the programs, the related Originator generally reviews
the applicant's source of income, calculates the amount of income from sources
indicated on the loan application or similar documentation, reviews the credit
history of the applicant, calculates the debt service-to-income ratio to
determine the applicant's ability to repay the loan, reviews the type and use of
the property being financed, and reviews the 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
S-25
<PAGE>
Limited Documentation programs, generally one such form of verification is
required for 12 months. Under the Stated Income Documentation programs,
generally an applicant may be qualified based upon monthly income as stated on
the mortgage loan application if the applicant meets certain criteria. All the
foregoing programs typically require that with respect to each applicant, there
be a telephone verification of the applicant's employment. Verification of the
source of funds (if any) required to be deposited by the applicant into escrow
in the case of a purchase money loan is generally required under the Full
Documentation program guidelines. No such verification is required under the
other programs.
The Underwriting Guidelines require title insurance on all mortgage
loans secured by liens on real property. The Underwriting Guidelines also
require that fire and extended coverage casualty insurance be maintained on the
secured property in an amount at least equal to the principal balance of the
related single-family loan or the replacement cost of the property, whichever is
less.
Under the Underwriting Guidelines, various risk categories are used to
grade the likelihood that the mortgagor will satisfy the repayment conditions of
the mortgage loan. These risk categories establish the maximum permitted
loan-to-value ratio and loan amount, given the occupancy status of the mortgaged
property and the mortgagor's credit history and debt ratio. In general, higher
credit risk mortgage loans are graded in categories which permit higher debt
ratios and more (or more recent) major derogatory credit items such as
outstanding judgments or prior bankruptcies; however, the Underwriting
Guidelines establish lower maximum loan-to-value ratios and maximum loan amounts
for loans graded in such categories.
ARCC Performance Assumption Grouping
The Seller, through its manager AMRESCO Residential Credit Corporation
("ARCC"), performs due diligence on all mortgage loan portfolios which it
acquires, including the Mortgage Loans included in the Trust Estate. Part of
ARCC's review includes a review of the credit-grading process of the related
Originators. ARCC has developed Performance Assumption Groupings ("PAGs") which
are similar to a credit-grading criteria. ARCC determines which PAG the
originators' related credit grade most closely matches, and all loans which the
Originator has placed in that credit grade are placed in the related PAG
category. Because there are multiple factors in both the credit grades
identified by the originators and the PAG categories, it is unlikely that any
credit grade designation will match up exactly to any PAG category. ARCC uses
its best efforts to match the categories based upon its projection of asset
performance for the related credit grade and PAG. It should be noted that while
the Originators have specific criteria for credit grades, they have the
discretion to place a loan in a credit grade for which it does not meet all of
the criteria, based upon consideration of all relevant factors. It should
further be noted 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.
S-26
<PAGE>
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.
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
S-27
<PAGE>
are no stipulations regarding other derogatory information other than
that bankruptcies should have been discharged.
Approximately 1.49%, 54.23%, 28.77%, 8.21% and 7.29% of the Initial
Group I Mortgage Loans and 0.00%, 55.86%, 22.65%, 12.22% and 9.27% of the
Initial Group II Mortgage Loans (including Long Beach Loans) are in the Seller's
PAG I, PAG II, PAG III, PAG IV, and PAG V, categories, respectively.
Approximately 60.88%, 8.32% and 30.06% of the Initial Group I Mortgage
Loans and 52.35%, 20.03% and 25.95% of the Initial Group II Mortgage Loans that
are not Long Beach Loans are in the Full Documentation, Limited Documentation
and Stated Income Documentation programs, respectively.
Prepayment Penalties
Any Mortgage Loan may be prepaid in full or in part at any time;
however, approximately 72.30% of the Initial Mortgage Loans in Group I and
56.80% of the Initial Mortgage Loans in Group II provide for the payment by the
Mortgagor of a prepayment charge in limited circumstances on certain full or
partial prepayments made for up to five years from the date of execution of the
related Note. The amount of the prepayment charge is as provided in the related
Note. In general, the Note provides that a prepayment charge will apply if, in
any twelve-month period generally during the first five years from the date of
origination of such Mortgage Loan, the Mortgagor prepays an aggregate amount
exceeding 20% of the original principal balance of such Mortgage Loan. The
amount of the prepayment charge will generally be equal to six months' advance
interest calculated on the basis of the rate in effect at the time of such
prepayment on the amount prepaid in excess of 20% of the original balance of
such Mortgage Loan.
The Seller 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 Mortgage Rate (net of the applicable Servicing Fee) (the "Net Coupon
Rate").
S-28
<PAGE>
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
the related Originator, the Certificate Insurer, the Trustee and the Seller of
such breach and request that such Originator cure such breach or honor its
repurchase or substitution obligations for the benefit of the Trust. The
foregoing will constitute the sole remedy available to the Trust for a breach of
representation by an Originator.
The Servicers
The information set forth below concerning the Servicers has been
provided to the Depositor by the related Servicer. Neither the Depositor, the
Seller, the Underwriters nor any of their respective affiliates have made any
independent investigation of such information, nor has any Servicer made any
such investigation with respect to information about the other Servicers.
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 June 30, 1996 in excess of $5.7 billion.
Advanta Parent, through its subsidiaries (including Advanta) managed
assets (including mortgage loans) in excess of $18.2 billion as of June 30,
1996.
As of June 30, 1996, Advanta and its subsidiaries were servicing
approximately 36,400 mortgage loans in the Owned and Managed Servicing Portfolio
representing an aggregate outstanding principal balance of approximately $2.1
billion, and approximately 34,600 mortgage loans in the Third-Party Servicing
Portfolio representing an aggregate outstanding principal balance of
approximately $1.46 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 June 30, 1996, and for each of the four prior years.
In addition to the Owned and Managed Servicing Portfolio, Advanta serviced as of
June 30, 1996, approximately 34,600 mortgage loans with an aggregate principal
balance as of such date of approximately $1.46 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-29
<PAGE>
DELINQUENCY AND FORECLOSURE EXPERIENCE OF
ADVANTA'S OWNED AND MANAGED SERVICING PORTFOLIO
OF MORTGAGE LOANS
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------------------------------------------------------------------------------
Six Months Ending
1992 1993 1994 1995 June 30, 1996
---------------------------------------------------------------------------------------------------------------------
By By By By By
By No. Dollar Dollar Dollar Dollar Dollar
of Amount By No. Amount By No. Amount By No. Amount By No. Amount
Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio 22,318 $908,541 25,460 $1,149,864 26,446 $1,346,100 32,592 $1,797,582 36,393 $2,074,115
Delinquency
percentage(1)
30-59 days 2.71% 2.59% 2.43% 2.22% 2.01% 1.57% 2.67% 2.44% 1.79% 1.71%
60-89 days 0.64 0.64 0.77 0.63 0.57 0.45 0.72 0.71 0.63 0.63
90 days or 1.52 1.69 2.19 2.12 1.85 1.51 1.69 1.23 1.61 1.41
more ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total 4.87% 4.92% 5.39% 4.97% 4.43% 3.53% 5.08% 4.38% 4.03% 3.75%
Foreclosure 2.13% 2.78% 1.32% 1.62% 1.35% 1.38% 1.29% 1.53% 1.34% 1.59%
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,
-----------------------------------------------------------------------
1992 1993 1994 1995 June 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 $1,926,067
Gross losses(2) $6,069 $14,115 $20,886 $13,978 $6,710
Recoveries(3) $145 $123 $179 $148 $39
Net losses(4) $5,924 $13,992 $20,707 $13,830 $6,671
Net losses as a percentage of
average amount outstanding 0.75% 1.33% 1.69% 0.90% 0.69% (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
net losses during such period was negatively impacted by the
S-30
<PAGE>
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.
Long Beach Mortgage Company
Long Beach Mortgage Company (referred to herein as "Long Beach"), a
Delaware corporation, was incorporated in June 1994, and is approved as a
seller/servicer for FNMA and FHLMC and as a non-supervised mortgagee by the U.S.
Department of Housing and Urban Development. On October 7, 1994, Long Beach
succeeded to the mortgage banking business formerly conducted by Long Beach
Bank, F.S.B., a federally chartered savings bank (the "Bank"), including all
operating systems, computers, files and substantially all personnel maintained
and utilized by the Bank in its mortgage banking operations prior to its
reorganization.
The principal business of Long Beach is originating, purchasing,
selling and servicing residential real estate loans secured by one- to
four-family properties ("single-family") and multi-family properties containing
five or more units ("multi-family"). The initial working capital for Long
Beach's operations was provided by Long Beach Financial Services Company. Its
principal sources of funds are anticipated to be sales of loans and
mortgage-backed securities, bank lines of credit, term loans and other
borrowings. At June 30, 1996, Long Beach had 112 offices, consisting of 41 loan
origination centers located in California and 71 loan origination centers
located throughout the rest of the United States.
Lending Activities and Loan Sales. Long Beach originates single-family and
multi-family real estate loans through referrals from mortgage brokerage
companies and through its network of offices and loan origination centers. Long
Beach also participates in secondary market activities by originating and
selling mortgage loans, participations in loans, or mortgage-backed securities
in the secondary market, generally retaining loan servicing; however, in some
cases Long Beach's whole loan sale agreements provide for the transfer of
servicing rights. In addition, Long Beach intends to retain mortgage loans in
its own portfolio to provide a stable source of interest income and to provide
collateral to secure borrowings.
Before Long Beach originates any mortgage loans which are based on
application packages submitted through a mortgage brokerage company that is new
to Long Beach, such mortgage brokerage company is examined by Long Beach through
license and reference checks and through a personal visit by a senior Long Beach
representative. If at any time Long Beach determines that a mortgage brokerage
company consistently submits applications for loans which do not meet Long
Beach's underwriting and quality control standards, Long Beach terminates its
relationship with that mortgage brokerage company.
Long Beach's primary lending activity is funding loans to enable
mortgagors to purchase or refinance residential real property, which loans are
secured by first or second liens on the related real property. Long Beach's loan
portfolio also includes loans for commercial and industrial properties. Long
Beach's single-family real estate
S-31
<PAGE>
loans are predominantly "conventional" mortgage loans, meaning that they are not
insured by the Federal Housing Administration (the "FHA") or partially
guaranteed by the U.S. Department of Veterans Affairs (the "VA").
The following table summarizes Long Beach's (including that of its
predecessor-in-interest Long Beach Bank) one- to four-family residential
mortgage loan origination and sales activity for the periods shown below. Sales
activity may include sales of mortgage loans purchased by Long Beach from other
loan originators.
<TABLE>
<CAPTION>
Year Ended December 31, Six Months
Ended
June 30, 1996
----------------------------------------------------------------------------
1992 1993 1994 1995
-------------------------------------------------------------------------------------------------
(Dollars in Thousands)
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Originations.................... $959,534 $786,374 $1,062,593 $1,112,890 $869,830
Sales........................... $1,081,001 $788,291 $1,081,841 $1,108,162 $873,971
</TABLE>
Loan Servicing. Generally, Long Beach services all the mortgage loans it
originates whether those loans are sold or retained in its portfolio. Servicing
includes collecting and remitting loan payments, accounting for principal and
interest, contacting delinquent mortgagors, and supervising foreclosure in the
event of unremedied defaults. Long Beach's servicing activities are audited
regularly by its internal auditors and examined periodically by applicable
regulatory authorities. Certain financial records of Long Beach relating to its
loan servicing activities are reviewed annually as part of the audit of Long
Beach's financial statements conducted by its independent accountants.
Collection Procedures; Delinquency and Loss Experience. When a mortgagor fails
to make a required payment on a residential mortgage loan, Long Beach attempts
to cause the deficiency to be cured by corresponding with the mortgagor. In most
cases deficiencies are cured promptly. Pursuant to Long Beach's customary
procedures for residential mortgage loans serviced by it for its own account,
Long Beach generally mails a notice of intent to foreclose to the mortgagor
after the loan has become 31 days past due (two payments due but not received)
and, within one month thereafter, if the loan remains delinquent, typically
institutes appropriate legal action to foreclose on the property securing the
loan. If foreclosed, the property is sold at public or private sale and may be
purchased by Long Beach. In California, real estate lenders are generally unable
as a practical matter to obtain a deficiency judgment against the mortgagor on a
loan secured by single-family real estate.
S-32
<PAGE>
Long Beach Programs -- Servicing Portfolio
The following table sets forth Long Beach's delinquency and loss
experience (including that of its predecessor-in-interest, the Bank) at the
dates indicated on its servicing portfolio of mortgage loans originated under
the Long Beach Programs (the majority of such mortgage loans reflected in the
following table are adjustable rate mortgage loans):
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------
June 30,
1992 1993 1994 1995 1996
-------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total Outstanding Principal Balance......... 1,561,256 $1,948,978 $2,422,604 $2,405,639 $2,516,999
Number of Loans............................. 12,257 16,289 21,291 22,775 24,580
DELINQUENCY
Period of Delinquency:
31-60 Days
Principal Balance........................ 12,630 $13,079 $16,816 $32,483 $34,895
Number of Loans.......................... 91 106 131 286 349
Delinquency as a Percentage of Total
Outstanding Principal Balance.......... 0.81% 0.67% 0.69% 1.35% 1.39%
Delinquency as a Percentage of
Number of Loans........................ 0.74% 0.65% 0.62% 1.26% 1.42%
61-90 Days
Principal Balance........................ $10,753 $13,144 $18,104 $21,249 $25,573
Number of Loans.......................... 75 93 129 188 242
Delinquency as a Percentage of Total
Outstanding Principal Balance.......... 0.69% 0.67% 0.75% 0.88% 1.02%
Delinquency as a Percentage of
Number of Loans........................ 0.61% 0.57% 0.61% 0.83% 0.98%
91 Days or More
Principal Balance........................ $48,643 $60,621 $70,034 $94,201 $106,147
Number of Loans.......................... 334 418 509 765 922
Delinquency as a Percentage of Total
Outstanding Principal Balance.......... 3.12% 3.11% 2.89% 3.92% 4.22%
Delinquency as a Percentage of
Number of Loans........................ 2.72% 2.57% 2.39% 3.36% 3.75%
Total Delinquencies:
Principal Balance........................ $72,026 $86,844 $104,953 $147,933 $166,614
Number of Loans.......................... 500 617 769 1,239 1,513
Delinquency as a Percentage of Total
Outstanding Principal Balance.......... 4.61% 4.46% 4.33% 6.15% 6.62%
Delinquency as a Percentage of
Number of Loans........................ 4.08% 3.79% 3.61% 5.44% 6.16%
FORECLOSURES PENDING(1)
Principal Balance........................ $50,104 $64,443 $77,960 $102,962 $112,422
Number of Loans.......................... 342 449 583 859 1,008
Foreclosures Pending as a Percentage of
Total Outstanding Principal Balance.... 3.21% 3.31% 3.22% 4.28% 4.47%
Foreclosures Pending as a Percentage of
Number of Loans........................ 2.79% 2.76% 2.74% 3.77% 4.10%
NET LOAN GAINS (LOSSES) for the Period(2)...
$ (3,198) $ (13,449) $ (24,617) $ (24,320) $(15,453)
NET LOAN GAINS (LOSSES) as a
Percentage of Total outstanding Principal Balance
(0.20)% (0.69)% (1.02)% (1.01)% (0.61)%
</TABLE>
- -------------
(1) Mortgage loans which are in foreclosure but as to which title to the
mortgaged property has not been acquired, at the end of the period
indicated. Foreclosures pending are included in the delinquencies set forth
above.
(2) Net Loan Gains (Losses) is calculated for loans conveyed to REMIC trust
funds as the aggregate of the net loan gain (loss) for all such loans
liquidated during the period indicated. The net loan gain (loss) for any
such loan is equal to the difference between (a) the principal balance plus
accrued interest through the date of liquidation plus all liquidation
expenses related to such loan and (b) all amounts received in connection
with the liquidation of such loan. The majority of Long Beach Program loans
serviced by Long Beach have been conveyed to REMIC trust funds.
S-33
<PAGE>
As of June 30, 1996, 427 one- to four-family residential properties
relating to loans in Long Beach's total servicing portfolio had been acquired
through foreclosure or deed-in-lieu of foreclosure and were not liquidated, 370
of which properties relate to the B 1st, B 1st Fast Trac, B 1st QuickCredit and
B 1st QuickCredit Fast Trac residential mortgage loan servicing portfolio.
There can be no assurance that the delinquency and loss experience of
the Long Beach Loans will correspond to the loss experience of Long Beach's
mortgage portfolio set forth in the foregoing table. The statistics shown above
represent the delinquency and loss experience for residential mortgages
originated under the Long Beach Programs and serviced by Long Beach only for the
years presented, whereas the aggregate delinquency and loss experience on the
Long Beach Loans will depend on the results obtained over the life of the Trust.
Long Beach's portfolio includes mortgage loans with payment and other
characteristics which are not representative of the payment and other
characteristics of the Long Beach Loans. A substantial number of the Long Beach
Loans may also have been originated based on Long Beach Guidelines that are less
stringent than those generally applicable to the servicing portfolio reflected
in the foregoing table. In addition, it should be noted that a portion of the
period covered by the foregoing table was one in which real estate values were
appreciating, particularly in the areas of California where properties securing
the related loans were located. However, over the last several years, the
residential real estate markets in many regions of the country, including
California, have experienced general deterioration, and should such decline in
property values continue such that the principal balances of the Long Beach
Loans and any secondary financing on the related Mortgaged Properties become
equal to or greater than the value of such Mortgaged Properties, the actual
rates of delinquencies, foreclosures and losses could be higher than those
previously experienced by Long Beach. In addition, adverse economic conditions
(which may or may not affect real property values) may affect the timely payment
by Mortgagors of scheduled payments of principal and interest on the Long Beach
Loans and, accordingly, the actual rates of delinquencies, foreclosures and
losses with respect to the Long Beach Loans.
S-34
<PAGE>
Residential Loan Servicing Portfolio
The following table sets forth Long Beach's delinquency and loss
experience (including that of its predecessor-in-interest, the Bank) at the
dates indicated on its entire servicing portfolio (inclusive of loans originated
under the Long Beach Programs) of residential (including multi-family) mortgage
loans:
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------
June 30,
1992 1993 1994 1995 1996
---------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total Outstanding Principal Balance. $2,249,834 $2,434,615 $2,721,665 $2,790,704 $3,107,242
Number of Loans..................... 19,235 21,159 24,669 26,776 30,855
DELINQUENCY
Period of Delinquency:
31-60 Days
Principal Balance.................. $ 21,394 $ 21,834 $ 20,923 $ 35,503 $39,184
Number of Loans.................... 220 224 195 327 415
Delinquency as a Percentage of
Total Outstanding Principal Balance
0.95% 0.90% 0.77% 1.27% 1.26%
Delinquency as a Percentage of
Number of Loans................ 1.14% 1.06% 0.79% 1.22% 1.35%
61-90 Days
Principal Balance $ 18,360 $ 19,321 $ 24,013 $ 25,237 $28,533
Number of Loans.................... 173 177 193 253 284
Delinquency as a Percentage of
Total Outstanding Principal Balance
0.82% 0.79% 0.88% 0.90% 0.92%
Delinquency as a Percentage of
Number of Loans................ 0.90% 0.84% 0.78% 0.95% 0.92%
91 Days or More
Principal Balance.................. $ 85,403 $ 92,100 $ 97,202 $109,703 $122,363
Number of Loans.................... 764 765 771 977 1,157
Delinquency as a Percentage of
Total Outstanding Principal Balance
3.80% 3.78% 3.57% 3.93% 3.94%
Delinquency as a Percentage of
Number of Loans................ 3.97% 3.62% 3.13% 3.65% 3.75%
Total Delinquencies:
Principal Balance.................. $125,157 $133,255 $142,138 $170,444 $190,080
Number of Loans.................... 1,157 1,166 1,159 1,557 1,856
Delinquency as a Percentage of
Total Outstanding Principal Balance
5.56% 5.47% 5.22% 6.11% 6.12%
Delinquency as a Percentage of
Number of Loans................ 6.02% 5.51% 4.70% 5.82% 6.02%
FORECLOSURES PENDING(1)
Principal Balance.................. $ 87,439 $ 96,810 $111,514 $132,679 $141,411
Number of Loans.................... 737 748 955 1,200 1,285
Foreclosures Pending as a
Percentage of Total Outstanding Principal
Balance........................ 3.89% 3.98% 4.10% 4.75% 4.55%
Foreclosures Pending as a
Percentage of Number of Loans..
3.83% 3.54% 3.87% 4.48% 4.16%
NET LOAN GAINS (LOSSES) for the Period(2)
$(10,796) $ (35,474) $ (51,296) $(37,914) $(21,412)
NET LOAN GAINS (LOSSES) as a
Percentage of Total Outstanding Principal
Balance............................. (0.48)% (1.46)% (1.88)% (1.36)% (0.69)%
</TABLE>
- -------------
(1) Mortgage loans which are in foreclosure but as to which title to the
mortgaged property has not been acquired, at the end of the period
indicated. Foreclosures pending are included in the delinquencies set forth
above.
(2) Net Loan Gains (Losses) is calculated for loans conveyed to REMIC trust
funds as the aggregate of the net loan gain (loss) for all such loans
liquidated during the period indicated. The net loan gain (loss) for any
such loan is equal to the difference between (a) the principal balance plus
accrued interest through the date of liquidation plus all liquidation
expenses related to such loan and (b) all amounts received in connection
with the liquidation of such loan. The majority of residential loans
serviced by Long Beach have been conveyed to REMIC trust funds.
S-35
<PAGE>
The delinquency and loss experience percentages set forth above in the
immediately preceding table are calculated on the basis of the total mortgage
loans serviced as of the end of the periods indicated. However, because the
total outstanding principal balance of residential loans serviced by Long Beach
has increased from $2,249,834,000 at December 31, 1992 to $3,107,242,000 at June
30, 1996, the total outstanding principal balance of residential loans serviced
as of the end of any indicated period includes many loans that will not have
been outstanding long enough to give rise to some or all of the indicated
periods of delinquency. In the absence of such substantial and continual
additions of newly originated loans to the total amount of loans serviced, the
percentages indicated above would be higher and could be substantially higher.
The actual delinquency percentages with respect to the Long Beach Loans may be
expected to be substantially higher than the delinquency percentages indicated
above because the composition of the Long Beach Loans will not change.
In addition, over the last several years, there has been a general
deterioration of the real estate market and weakening of the economy in many
regions of the country, including California. The general deterioration of the
real estate market has been reflected in increases in delinquencies of loans
secured by real estate, slower absorption rates of real estate into the market
and lower sales prices for real estate. The general weakening of the economy has
been reflected in decreases in the financial strength of mortgagors and
decreases in the value of collateral serving as security for loans. If the real
estate market and economy continue to decline, Long Beach may experience an
increase in delinquencies on the loans it services and higher net losses on
liquidated loans.
In the opinion of Long Beach, the period to period changes in the
delinquency and loss experience set forth in the table above are attributable
primarily to the introduction and seasoning of higher credit risk mortgage
loans, as measured by credit risk category under Long Beach's underwriting
guidelines, and a general downturn in the California economy.
Option One Mortgage Corporation
Option One Mortgage Corporation ("Option One") was incorporated in
1992, commenced receiving applications for mortgage loans under its regular
lending program in February 1993 and began funding such mortgage loans
indirectly in the same month. The principal business of Option One is the
origination, sale and servicing of non-conforming mortgage loans.
As of December 31, 1994, Option One was a wholly-owned subsidiary of
Plaza Home Mortgage Bank, which was in turn a wholly-owned subsidiary of Plaza
Home Mortgage Corporation ("PHMC"). On March 3, 1995, Fleet National Bank, Rhode
Island acquired 100% of the outstanding stock of PHMC. Following such
acquisition, Option One became a subsidiary of Fleet National Bank, Rhode
Island, which is in turn a subsidiary of Fleet Financial Group, Inc. As of
December 31, 1995, Option One had three loan origination centers in California
and one loan origination center in each of Florida, Georgia, Illinois, Ohio,
Texas and Virginia.
Option One operates as a stand-alone mortgage banking company with
functional reporting responsibility to Fleet Financial Group, Inc. Option One is
a FNMA approved servicer. Option One assumed full servicing responsibilities for
the non-conforming credit servicing portfolio of PHMC on May 4, 1995, all of
which portfolio had been originated by Option One. Prior to such acquisition,
Option One acted as subservicer on such portfolio performing the functions of
delinquency advancing, investor reporting, remitting cash collected, preparing
pertinent reports and making collections on delinquent mortgage loans,
foreclosures and real estate owned.
The following tables set forth, as of December 31, 1993, 1994, 1995 and
June 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 under the Option One Guidelines
(which portfolio does not include mortgage loans that are subserviced for
others) at the end of the indicated periods. The indicated periods of
delinquency are based on the number of days past due on a contractual basis. No
mortgage loan is considered delinquent for these purposes until it is one month
past due on a contractual basis. Such tables restate PHMC's performance
statistics relating only to the non-conforming mortgage loans previously
subserviced by Option One. Such servicing was subsequently transferred to Option
One.
S-36
<PAGE>
Delinquencies and Foreclosures
(Dollars in Thousands)
<TABLE>
<CAPTION>
At December 31, At December 31,
1993 1994
-------------------------------------------------- -------------------------------------------------
Percent Percent by Percent Percent
By No. By Dollar By No. Dollar By No. By Dollar By No.of by Dollar
of Loans Amount of Loans Amount of Loans Amount Loans Amount
-------------------------------------------------- -------------------------------------------------
<S> <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
Period of Delinquency:
31 - 59 days.... 2 251 .16 .17 32 3,247 .52 .53
60 - 89 days.... 3 265 .24 .18 17 1,637 .28 .27
90 days or more. 2 282 .16 .19 28 3,556 .46 .58
- --- --- --- -- ----- --- ---
Total Delinquent Loans 7 798 .56 .54 77 8,440 1.26 1.38
Loans in Foreclosure* 4 415 .32 .28 50 5,328 .82 .87
</TABLE>
<TABLE>
<CAPTION>
At December 31, At June 30
1995 1996
-------------------------------------------------- -------------------------------------------------
Percent Percent by Percent Percent
By No. By Dollar By No. Dollar By No. By Dollar By No.of by Dollar
of Loans Amount of Loans Amount of Loans Amount Loans Amount
-------------------------------------------------- -------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio.... 12,686 $1,153,199 N/A N/A 14,460 1,286,548 N/A N/A
Period of Delinquency: 126 11,364 .99 .99 205 17,091 1.42 1.33
31 - 59 days.... 87 8,138 .69 .71 118 10,464 .82 .81
60 - 89 days.... 294 28,982 2.32 2.51 425 38,466 2.94 2.99
90 days or more. --- ------- ---- ---- --- ------ ---- ----
507 48,484 4.00 4.21 748 66,021 5.18 5.13
Total Delinquent Loans 301 28,874 2.37 2.50 383 33,338 2.65 2.59
Loans in Foreclosure*
</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 June 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 14,460 1,286,548
Foreclosed Loans(1)........ 0 0 12 1,512 80 7,634 149 14,616
Foreclosed Ratio(2)........ 0 .00 .20 .25 .63 .66 1.03 1.14
</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,
------------------------------------------------------------------
Six Months Ended
June 30,
1993 1994 1995 1996
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Portfolio (1) $146,352 $615,488 $1,153,199 1,286,548
Gross Losses (2) $0 $17 $1,291 $1,684
Recoveries (3) $0 $0 $0 $0
Net Losses (4) $0 $17 $1,291 $1,684
Net Losses as a Percentage of Total
Portfolio (5) 0.00% 0.00% 0.11% 0.26%
</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 Six Months Ending June 30, 1996, "Net Losses as a Percentage of
Total Portfolio" was annualized by multiplying "Net Losses" by 2.0
before calculating the Percentage of "Net Losses as a Percentage of
Total Portfolio."
S-37
<PAGE>
The following tables set forth, as of December 31, 1993, 1994, 1995 and
June 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 under
Option One's Guidelines and mortgage loans that are subserviced for others) at
the end of the indicated periods. The indicated periods of delinquency are based
on the number of days past due on a contractual basis. No mortgage loan is
considered delinquent for these purposes until it is one month past due on a
contractual basis. Such tables restate PHMC's performance statistics relating
only to the non-conforming mortgage loans previously subserviced by Option One.
Such servicing was subsequently transferred to Option One.
Delinquencies and Foreclosures
(Dollars in Thousands)
<TABLE>
<CAPTION>
At December 31, At December 31,
1993 1994
-------------------------------------------------- -------------------------------------------------
Percent Percent by Percent Percent
By No. By Dollar By No. Dollar By No. By Dollar By No.of by Dollar
of Loans Amount of Loans Amount of Loans Amount Loans Amount
-------------------------------------------------- -------------------------------------------------
<S> <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
Period of Delinquency:
31 - 59 days.... 2 251 .16 .17 32 3,247 .52 .53
60 - 89 days.... 3 265 .24 .18 17 1,637 .28 .27
90 days or more. 2 282 .16 .19 28 3,556 .46 .58
- --- --- --- -- ----- --- ---
Total Delinquent Loans 7 798 .56 .54 77 8,440 1.26 1.38
Loans in Foreclosure* 4 415 .32 .28 50 5,328 .82 .87
</TABLE>
<TABLE>
<CAPTION>
At December 31, At June 30
1995 1996
-------------------------------------------------- -------------------------------------------------
Percent Percent by Percent Percent
By No. By Dollar By No. Dollar By No. By Dollar By No.of by Dollar
of Loans Amount of Loans Amount of Loans Amount Loans Amount
-------------------------------------------------- -------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio.... 14,625 $1,367,031 N/A N/A 16,238 1,482,965 N/A N/A
Period of Delinquency:
31 - 59 days.... 161 16,501 1.10 1.21 242 22,682 1.49 1.53
60 - 89 days.... 104 10,117 .71 .74 144 13,954 .89 .94
90 days or more. 388 40,275 2.65 2.95 533 52,355 3.28 3.53
--- ------- ---- ---- --- ------ ---- ----
Total Delinquent Loans 653 66,893 4.46 4.90 919 88,991 5.66 6.00
Loans in Foreclosure* 388 38,985 2.65 2.85 483 46,187 2.97 3.11
</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 June 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 16,238 1,482,965
Foreclosed Loans(1).... 0 0 12 1,512 100 9,632 218 21,846
Foreclosed Ratio(2).... 0 .00 .20 .25 .68 .70 1.34 1.47
</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-38
<PAGE>
Loan Loss Experience on
Option One's Servicing Portfolio
of Mortgage Loans
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ending December 31,
-----------------------------------------------------
Six Months Ended
June 30,
1993 1994 1995 1996
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Portfolio (1) $146,352 $615,488 $1,367,031 1,482,965
Gross Losses (2) $0 $17 $1,506 $2,303
Recoveries (3) $0 $0 $0 $0
Net Losses (4) $0 $17 $1,506 $2,303
Net Losses as a Percentage of Total Portfolio (5)
0.00% 0.00% 0.11% 0.31%
</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 Six Months Ending June 30, 1996, "Net Losses as a Percentage of
Total Portfolio" was annualized by multiplying "Net Losses" by 2.0
before calculating the Percentage of "Net Losses as a Percentage of
Total Portfolio."
General
There can be no assurance that the delinquency experience of the Option
One Loans will correspond to the delinquency experience of Option One's mortgage
portfolio set forth in the foregoing tables. See "The Portfolio of Mortgage
Loans -- General" herein. The statistics shown above represent the delinquency
experience for Option One's residential mortgage servicing portfolio only for
the periods presented, whereas the delinquency experience on the Option One
Loans will depend on the results obtained over the life of such Option One
Loans. Option One's residential mortgage servicing portfolio includes mortgage
loans with a variety of payment, credit and other characteristics (including
geographic location) which may not be representative of the payment, credit and
other characteristics of the Option One Loans. Option One has limited default
information with respect to the mortgage loans originated under the Guidelines
and is unable to predict the delinquency and foreclosure that might be expected
with respect to the Option One Loans. See "Risk Factors -- Risk of Higher
Delinquencies Associated with Guidelines" herein. If the residential real estate
market should experience an overall decline in property values, the actual rates
of delinquencies and foreclosures could be higher than those previously
experienced by Option One. In addition, adverse economic conditions may affect
the timely payment by Mortgagors of scheduled payments of principal and interest
on the Option One Loans and accordingly, the actual rates of delinquencies and
foreclosures with respect to the Mortgage Loan Pool. 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
S-39
<PAGE>
Account and to the deposit of certain 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 was incorporated in the State of Delaware on October 13,
1995 and is a wholly-owned subsidiary of AMRESCO, INC. The Seller maintains its
principal offices at 700 N. Pearl, Suite 2400, Dallas, Texas 75201. Neither the
Seller nor any of its affiliates will insure or guarantee distributions on the
Certificates.
THE MORTGAGE LOAN POOLS
General
The statistical information presented in this Prospectus Supplement
concerning the pool of Mortgage Loans is based on the pool of Initial Mortgage
Loans as of the Cut-Off Date. Subsequent Mortgage Loans are intended to be
purchased by the Trust from the Depositor for inclusion in the Trust from time
to time on or before September 20, 1996 from funds on deposit in the Pre-Funding
Account. The Initial Mortgage Loans, any Qualified Replacement Mortgages and the
Subsequent Mortgage Loans are referred to herein collectively as the "Mortgage
Loans." The Subsequent Mortgage Loans, if available, to be purchased by the
Trust will be sold by the Originators to the Seller, by the Seller to the
Depositor and then by the Depositor to the Trust.
This subsection describes generally certain characteristics of the
Initial Mortgage Loans. Unless otherwise specified herein, references herein to
percentages of loan principal balances relating to the Initial Mortgage Loans
refer in each case to the approximate percentage of the aggregate principal
balance of the Initial Mortgage Loans as of the Cut-Off Date, based on the
scheduled principal balances of the Initial Mortgage Loans or the Initial
Mortgage Loans in the applicable Mortgage Loan Group, in each case as of the
Cut-Off Date, after giving effect to all principal payments due on or prior to
the Cut-Off Date. The Initial Mortgage Loan Pool consists of fixed rate and
adjustable-rate Mortgage Loans with remaining terms to maturity of not more than
360 months (including both fully amortizing Mortgage Loans and Balloon Mortgage
Loans). The Initial Mortgage Loans have the characteristics set forth below as
of the Cut-Off Date. Percentages expressed herein based on Loan Balances and
number of Initial Mortgage Loans have been rounded, and in the tables set forth
herein the sum of the percentages may not equal the respective totals due to
such rounding.
Each Mortgage Loan in the Trust will be assigned to one of two mortgage
loan groups consisting of Mortgage Loans which bear fixed rates only, in the
case of Group I, and Mortgage Loans which bear adjustable interest rates
(including 2/28 Loans and 5/25 Loans) only, in the case of Group II. The Fixed
Rate Group Certificates represent undivided ownership interests in all Mortgage
Loans contained in Group I, and distributions on the Fixed Rate Group
Certificates will be based primarily on amounts available for distribution in
respect of Mortgage Loans in Group I. The Adjustable Rate Group Certificates
represent undivided ownership interests in all Mortgage Loans contained in Group
II, and distributions on the Adjustable Rate Group Certificates will be based
primarily on amounts available for distribution in respect of Mortgage Loans in
Group II.
The Loan-to-Value Ratios shown below were calculated based upon the
appraised values of the Mortgaged Properties at the time of origination (the
"Appraised Values"). No assurance can be given that values of the Mortgaged
Properties have remained or will remain at their levels on the dates of
origination of the related
S-40
<PAGE>
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 -- Group I
The information set forth with respect to Group I is based upon data
provided to the Depositor by each of the related Originators and has been
compiled by the Depositor. Neither the Depositor, the Seller, the Servicers, the
Underwriters, the Originators nor any of their respective affiliates have made
or will have made any representation as to the accuracy or completeness of such
compiled information.
As of the Cut-Off Date, the average Loan Balance of the Initial
Mortgage Loans in Group I was $78,422.15; the weighted average Loan-to-Value
Ratio of the Initial Mortgage Loans in Group I was 67.41%; the weighted average
remaining term to maturity was 323 months; the weighted average original term to
maturity was 328 months. The remaining terms to maturity as of the Cut-Off Date
of the Initial Mortgage Loans in Group I ranged from 158 months to 360 months.
The minimum and maximum Loan Balances of Initial Mortgage Loans in Group I as of
the Cut-Off Date were $11,998.36 and $580,878.97, respectively. Balloon Mortgage
Loans represent not more than 9.02% of the Original Aggregate Loan Balance of
the Initial Mortgage Loans in Group I. No Initial Mortgage Loan in Group I will
mature later than August 1, 2026.
All of the Initial Mortgage Loans in Group I bear interest at a fixed
rate for the life of the related Mortgage Loans. The Initial Mortgage Loans in
Group I consist of Mortgage Loans aggregating $64,933,544.05. The Coupon Rates
of the Initial Mortgage Loans in Group I ranged from 7.500% per annum to 16.750%
per annum. The weighted average Coupon Rate of the Initial Mortgage Loans in
Group I was 10.646% per annum.
S-41
<PAGE>
Geographic Distribution of Mortgaged Properties--Initial Group I Mortgage Loans
The geographic distribution of Initial Mortgage Loans in Group I by
state, as of the Cut-Off Date, was as follows:
% of Aggregate
Number of Group I Aggregate Group I Group I
Geographic Area Mortgage Loans Loan Balance Loan Balance
- --------------- -------------- ------------ ------------
Arizona 33 $ 2,274,359.72 3.50%
California 319 30,452,866.78 46.90
Colorado 54 4,424,416.95 6.81
Connecticut 1 84,968.85 0.13
District of Columbia 4 173,258.98 0.27
Florida 58 3,443,342.61 5.30
Georgia 14 838,104.56 1.29
Hawaii 1 119,948.59 0.18
Idaho 3 178,829.97 0.28
Illinois 22 1,374,821.57 2.12
Indiana 43 1,673,975.45 2.58
Kentucky 5 228,725.98 0.35
Louisiana 1 51,667.36 0.08
Maine 2 83,559.58 0.13
Maryland 9 885,330.52 1.36
Massachusetts 6 523,181.91 0.81
Michigan 9 305,595.61 0.47
Missouri 2 166,393.49 0.26
Nevada 9 552,621.29 0.85
New Jersey 4 450,950.07 0.69
New Mexico 1 87,985.04 0.14
New York 2 111,139.86 0.17
North Carolina 6 264,133.50 0.41
Ohio 17 828,985.32 1.28
Oregon 47 3,613,055.63 5.56
Pennsylvania 13 761,241.92 1.17
Rhode Island 4 219,930.93 0.34
South Carolina 4 207,640.07 0.32
Texas 17 1,058,728.89 1.63
Utah 57 4,829,269.57 7.44
Virginia 21 1,419,167.81 2.19
Washington 32 2,740,520.86 4.22
West Virginia 3 174,427.26 0.27
Wisconsin 5 330,397.55 0.51
--- ------------- ------
Total 828 $64,933,544.05 100.00%
=== ============== =======
S-42
<PAGE>
Original Loan-to-Value Ratios -- Initial Group I Mortgage Loans
The original loan-to-value ratios as of the date of origination of the
Initial Mortgage Loans in Group I (based upon appraisals made at the time of
origination thereof) (the "Loan-to-Value Ratios") as of the Cut-Off Date were
distributed as follows:
<TABLE>
<CAPTION>
% of Aggregate
Range of Number of Group I Aggregate Group I Group I
Original LTVs Mortgage Loans Loan Balance Loan Balance
- ------------- -------------- ------------ ------------
<S> <C> <C> <C>
10.01 - 15.00% 1 $ 29,879.64 0.05%
15.01 - 20.00 3 114,093.88 0.18
20.01 - 25.00 3 102,312.93 0.16
25.01 - 30.00 10 431,907.22 0.67
30.01 - 35.00 18 873,064.00 1.34
35.01 - 40.00 21 1,024,988.99 1.58
40.01 - 45.00 24 2,091,389.01 3.22
45.01 - 50.00 38 2,213,125.04 3.41
50.01 - 55.00 47 3,378,309.08 5.20
55.01 - 60.00 82 5,875,165.53 9.05
60.01 - 65.00 98 7,574,508.09 11.67
65.01 - 70.00 164 13,101,348.94 20.18
70.01 - 75.00 179 14,625,882.85 22.52
75.01 - 80.00 112 9,922,145.87 15.28
80.01 - 85.00 18 2,602,282.99 4.01
85.01 - 90.00 10 973,139.99 1.50
--- --------------- ------
Total: 828 $64,933,544.05 100.00%
=== ============== =======
</TABLE>
S-43
<PAGE>
Cut-Off Date Coupon Rates -- Initial Group I Mortgage Loans
The Coupon Rates borne by the Notes relating to the Initial Mortgage
Loans in Group I were distributed as follows as of the Cut-Off Date:
<TABLE>
<CAPTION>
% of Aggregate
Range of Number of Group I Aggregate Group I Group I
Coupon Rates Mortgage Loans Loan Balance Loan Balance
- ------------ -------------- ------------ ------------
<S> <C> <C> <C>
7.001 - 7.500% 1 $ 113,664.99 0.18%
7.501 - 8.000 2 147,258.27 0.23
8.001 - 8.500 8 1,266,406.74 1.95
8.501 - 9.000 35 3,188,008.07 4.91
9.001 - 9.500 65 6,400,587.15 9.86
9.501 - 10.000 148 13,575,865.36 20.91
10.001 - 10.500 118 10,086,743.77 15.53
10.501 - 11.000 141 11,778,526.67 18.14
11.001 - 11.500 78 5,256,172.47 8.09
11.501 - 12.000 83 5,519,323.57 8.50
12.001 - 12.500 48 2,814,824.58 4.33
12.501 - 13.000 43 2,189,114.46 3.37
13.001 - 13.500 14 773,221.40 1.19
13.501 - 14.000 18 928,902.87 1.43
14.001 - 14.500 12 535,412.92 0.82
14.501 - 15.000 8 226,280.72 0.35
15.001 - 15.500 1 11,998.36 0.02
15.501 - 16.000 2 61,772.29 0.10
16.001 - 16.500 2 36,368.42 0.06
16.501 - 17.000 1 23,090.97 0.04
--- ------------- ------
Total 828 $64,933,544.05 100.00%
=== ============== =======
</TABLE>
Cut-Off Date Loan Balances -- Initial Group I Mortgage Loans
The distribution of the outstanding principal amounts of the Initial
Mortgage Loans in Group I as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
% of Aggregate
Number of Group I Aggregate Group I Group I
Range of Loan Balances Mortgage Loans Loan Balance Loan Balance
- ---------------------- -------------- ------------ ------------
<S> <C> <C> <C>
$0.01 - $ 50,000.00 242 $ 8,648,020.09 13.32%
50,000.01 - 100,000.00 383 27,821,602.05 42.85
100,000.01 - 150,000.00 154 18,129,462.75 27.92
150,000.01 - 200,000.00 31 5,304,919.30 8.17
200,000.01 - 250,000.00 7 1,508,244.69 2.32
250,000.01 - 300,000.00 6 1,671,169.86 2.57
300,000.01 - 350,000.00 4 1,269,246.34 1.95
550,000.01 - 600,000.00 1 580,878.97 0.89
--- -------------- ------
Total 828 $64,933,544.05 100.00%
=== ============== =======
</TABLE>
S-44
<PAGE>
Types of Mortgaged Properties -- Initial Group I Mortgage Loans
The Mortgaged Properties securing the Initial Mortgage Loans in Group I
as of the Cut-Off Date were of the property types as follows:
<TABLE>
<CAPTION>
% of Aggregate
Number of Group I Aggregate Group I Group I
Property Types Mortgage Loans Loan Balance Loan Balance
- -------------- -------------- ------------ ------------
<S> <C> <C> <C>
Single-family 716 $56,105,536.33 86.40%
PUD 19 1,908,894.14 2.94
Townhouses 1 113,664.99 0.18
Condominiums 30 1,772,931.77 2.73
Manufactured Home 4 182,924.75 0.28
Apartment 2-4 Units 57 4,791,907.90 7.38
Other 1 57,684.17 0.09
--- -------------- ------
Total 828 $64,933,544.05 100.00%
=== ============== =======
</TABLE>
Months Since First Payment Date -- Initial Group I Mortgage Loans
The distribution of the number of months since the first payment date
of the Initial Mortgage Loans in Group I as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
% of Aggregate
Months Elapsed Number of Group I Aggregate Group I Group I
Since Origination Mortgage Loans Loan Balance Loan Balance
- ----------------- -------------- ------------ ------------
<S> <C> <C> <C>
0 - 6 460 $33,110,015.79 50.99%
7 - 12 322 28,028,325.78 43.16
13 - 18 46 3,795,202.48 5.84
--- ------------- ------
Total 828 $64,933,544.05 100.00%
=== ============== =======
</TABLE>
Remaining Term to Maturity -- Initial Group I Mortgage Loans
The distribution of the number of months remaining to maturity of the
Initial Mortgage Loans in Group I as of the CutOff Date was as follows:
<TABLE>
<CAPTION>
% of Aggregate
Months Remaining Number of Group I Aggregate Group I Group I
to Maturity Mortgage Loans Loan Balance Loan Balance
- ----------- -------------- ------------ ------------
<S> <C> <C> <C>
121 - 180 182 $10,672,109.39 16.44%
181 - 240 22 1,092,476.96 1.68
301 - 360 624 53,168,957.70 81.88
--- ------------- ------
Total 828 $64,933,544.05 100.00%
=== ============== ======
</TABLE>
S-45
<PAGE>
Occupancy Status -- Initial Group I Mortgage Loans
The occupancy status of the Mortgaged Properties securing the Initial
Mortgage Loans in Group I as of the Cut-Off Date was as follows based on
representations by the mortgagors at the time of origination of such Mortgage
Loans:
<TABLE>
<CAPTION>
% of Aggregate
Number of Group I Aggregate Group I Group I
Occupancy Status Mortgage Loans Loan Balance Loan Balance
- ---------------- -------------- ------------ ------------
<S> <C> <C> <C>
Owner Occupied 745 $59,809,988.93 92.11%
Non-Owner Occupied 83 5,123,555.12 7.89
--- ------------- ------
Total 828 $64,933,544.05 100.00%
=== ============== =======
</TABLE>
Initial Mortgage Loans -- Group II
The information set forth with respect to Group II is based upon data
provided to the Depositor by Long Beach and each of the related Originators and
has been compiled by the Depositor. Neither the Depositor, the Seller, the
Servicers, the Underwriters, the Originators nor any of their respective
affiliates have made or will have made any representation as to the accuracy or
completeness of such compiled information.
As of the Cut-Off Date, the average Loan Balance of the Initial
Mortgage Loans in Group II was $104,347.32; the Coupon Rates of the Initial
Mortgage Loans in Group II ranged from 6.500% per annum to 17.800% per annum;
the weighted average Loan-to-Value Ratio of the Initial Mortgage Loans in Group
II was 72.84%; the weighted average Coupon Rate of the Initial Mortgage Loans in
Group II was 9.897% per annum; the weighted average remaining term to maturity
was 352 months; and the weighted average original term to maturity was 354
months. The remaining terms to maturity as of the Cut-Off Date of the Initial
Mortgage Loans in Group II ranged from 117 months to 360 months. The minimum and
maximum Loan Balances of Initial Mortgage Loans in Group II as of the Cut-Off
Date were $10,265.36 and $762,500.00, respectively. None of the Initial Mortgage
Loans in Group II provided for "balloon" payments. No Initial Mortgage Loan in
Group II will mature later than August 1, 2026.
All of the Initial Mortgage Loans in Group II have maximum Coupon
Rates. The weighted average maximum Coupon Rate of the Initial Mortgage Loans in
Group II was 16.882% per annum, with maximum Coupon Rates that range from 8.990%
per annum to 23.800% per annum. The weighted average minimum Coupon Rate of the
Initial Mortgage Loans in Group II was 9.895% per annum, with minimum Coupon
Rates that range from 6.500% to 17.800% per annum. The Initial Mortgage Loans in
Group II have a weighted average gross margin as of the Cut-Off Date of 6.183%.
The gross margin for the Initial Mortgage Loans in Group II range from 3.625% to
10.300%.
88.26% of the Initial Mortgage Loans in Group II bear interest at rates
that adjust, along with the related monthly payments, semiannually based on
Six-Month LIBOR. 2.03% of the Six-Month LIBOR Loans have a semiannual reset cap
of 1% substantially all of which have a lifetime reset cap of 7%. 97.91% 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%. 0.06% of the Six-Month LIBOR Loans have a
semiannual reset cap of 3.0% all of which have a lifetime reset cap of 7%. The
Six-Month LIBOR Loans consist of Initial Mortgage Loans aggregating
$181,054,508.25.
11.66% of the Initial Mortgage Loans in Group II 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. 87.99% of the
2/28 Loans have a periodic rate adjustment cap of 1.5% and a lifetime reset cap
of 7%. 12.01% of the 2/28 Loans have a periodic rate adjustment cap of 3.0% and
a lifetime reset cap of 7%. The 2/28 Loans consist of Initial Mortgage Loans
aggregating $23,922,503.28.
0.08% of the Initial Mortgage Loans in Group II 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 subject to a
1.5% periodic rate adjustment cap after the first adjustment. The 5/25 Loans
consist of Initial Mortgage Loans aggregating $169,813.19.
S-46
<PAGE>
Geographic Distribution of Mortgaged Properties--Initial Group II Mortgage Loans
The geographic distribution of Initial Mortgage Loans in Group II by
state, as of the Cut-Off Date, was as follows:
% of Aggregate
Number of Group II Aggregate Group II Group II
Geographic Area Mortgage Loans Loan Balance Loan Balance
- --------------- -------------- ------------ ------------
Alabama 3 $ 165,749.65 0.08%
Arizona 70 6,097,310.09 2.97
California 648 89,473,125.26 43.61
Colorado 133 13,376,272.75 6.52
Connecticut 9 1,156,709.87 0.56
Florida 22 1,673,544.54 0.82
Georgia 35 2,876,147.95 1.40
Idaho 8 619,819.96 0.30
Illinois 192 19,286,934.45 9.40
Indiana 9 612,650.30 0.30
Iowa 3 283,459.34 0.14
Kansas 9 467,316.47 0.23
Kentucky 6 434,601.19 0.21
Louisiana 13 1,101,797.00 0.54
Maine 1 38,238.25 0.02
Maryland 11 1,152,581.02 0.56
Massachusetts 5 465,377.62 0.23
Michigan 92 7,341,671.51 3.58
Minnesota 77 6,397,472.85 3.12
Missouri 61 3,315,347.62 1.62
Nevada 22 3,288,868.60 1.60
New Hampshire 3 272,182.17 0.13
New Jersey 27 2,564,181.30 1.25
New Mexico 32 3,766,519.45 1.84
New York 29 3,910,358.00 1.91
North Carolina 6 344,056.58 0.17
Ohio 112 6,578,274.14 3.21
Oregon 37 3,367,873.02 1.64
Pennsylvania 72 3,744,984.75 1.83
South Carolina 3 92,243.89 0.04
Tennessee 1 55,942.45 0.03
Texas 49 4,711,928.08 2.30
Utah 90 8,839,002.97 4.31
Washington 66 6,657,710.13 3.25
West Virginia 2 77,620.87 0.04
Wisconsin 4 257,606.46 0.13
Wyoming 4 281,344.17 0.14
----- -------------- ------
Total 1,966 $205,146,824.72 100.00%
===== =============== =======
S-47
<PAGE>
Original Loan-to-Value Ratios -- Initial Group II Mortgage Loans
The original Loan-to-Value Ratios of the Initial Mortgage Loans in
Group II as of the Cut-Off Date were distributed as follows:
% of Aggregate
Range of Number of Group II Aggregate Group II Group II
Original LTVs Mortgage Loans Loan Balance Loan Balance
- ------------- -------------- ------------ ------------
5.01 - 10.00% 2 $ 79,896.09 0.04%
10.01 - 15.00 1 19,951.75 0.01
15.01 - 20.00 6 139,939.94 0.07
20.01 - 25.00 6 195,923.54 0.10
25.01 - 30.00 6 360,769.35 0.18
30.01 - 35.00 9 472,549.99 0.23
35.01 - 40.00 12 496,589.80 0.24
40.01 - 45.00 36 2,156,764.91 1.05
45.01 - 50.00 45 3,718,929.32 1.81
50.01 - 55.00 92 7,321,118.84 3.57
55.01 - 60.00 108 9,621,850.31 4.69
60.01 - 65.00 178 16,460,268.34 8.02
65.01 - 70.00 285 26,088,000.61 12.72
70.01 - 75.00 566 59,394,157.95 28.95
75.01 - 80.00 458 57,684,543.54 28.12
80.01 - 85.00 133 17,830,395.58 8.69
85.01 - 90.00 23 3,105,174.86 1.51
------ --------------- ------
Total 1,966 $205,146,824.72 100.00%
===== =============== =======
S-48
<PAGE>
Cut-Off Date Coupon Rates -- Initial Group II Mortgage Loans
The Coupon Rates borne by the Notes relating to the Initial Mortgage
Loans in Group II were distributed as follows as of the Cut-Off Date:
% of Aggregate
Range of Number of Group II Aggregate Group II Group II
Coupon Rates Mortgage Loans Loan Balance Loan Balance
- ------------ -------------- ------------ ------------
6.001 - 6.500% 1 $ 383,803.90 0.19%
6.501 - 7.000 26 3,835,398.68 1.87
7.001 - 7.500 26 4,037,876.55 1.97
7.501 - 8.000 85 11,637,399.63 5.67
8.001 - 8.500 112 15,987,602.25 7.79
8.551 - 9.000 235 28,506,476.58 13.90
9.001 - 9.500 205 24,228,236.67 11.81
9.501 - 10.000 350 41,039,744.43 20.01
10.001 - 10.500 208 20,421,084.78 9.95
10.501 - 11.000 248 22,165,822.25 10.80
11.001 - 11.500 105 8,813,310.19 4.30
11.501 - 12.000 111 7,933,617.97 3.87
12.001 - 12.500 60 4,230,652.74 2.06
12.501 - 13.000 96 6,404,193.59 3.12
13.001 - 13.500 30 1,415,073.12 0.69
13.501 - 14.000 39 2,255,911.63 1.10
14.001 - 14.500 15 895,629.72 0.44
14.501 - 15.000 8 478,231.48 0.23
15.001 - 15.500 2 53,489.42 0.03
15.501 - 16.000 2 180,853.47 0.09
16.001 - 16.500 1 187,461.58 0.09
17.501 - 18.000 1 54,954.09 0.03
----- -------------- ------
Total 1,966 $205,146,824.72 100.00%
===== ============== =======
Cut-Off Date Loan Balances -- Initial Group II Mortgage Loans
The distribution of the outstanding principal amounts of the Initial
Mortgage Loans in Group II as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
% of Aggregate
Number of Group II Aggregate Group II Group II
Range of Loan Balances Mortgage Loans Loan Balance Loan Balance
- ---------------------- -------------- ------------ ------------
<S> <C> <C> <C>
$ 0.01 - $ 50,000.00 434 $ 14,994,198.39 7.31%
50,000.01 - 100,000.00 753 55,564,270.26 27.09
100,000.01 - 150,000.00 424 51,014,832.48 24.87
150,000.01 - 200,000.00 169 29,199,330.91 14.23
200,000.01 - 250,000.00 77 17,177,876.10 8.37
250,000.01 - 300,000.00 40 10,985,550.97 5.35
300,000.01 - 350,000.00 36 11,585,452.64 5.65
350,000.01 - 400,000.00 15 5,647,143.95 2.75
400,000.01 - 450,000.00 9 3,879,752.17 1.89
450,000.01 - 500,000.00 5 2,391,405.26 1.17
550,000.01 - 600,000.00 1 580,929.18 0.28
600,000.01 - 650,000.00 1 613,941.71 0.30
700,000.01 - 750,000.00 1 749,640.70 0.37
750,000.01 - 800,000.00 1 762,500.00 0.37
----- --------------- ------
Total 1,966 $205,146,824.72 100.00%
===== =============== =======
</TABLE>
S-49
<PAGE>
Types of Mortgaged Properties -- Initial Group II Mortgage Loans
The Mortgaged Properties securing the Initial Mortgage Loans in Group
II as of the Cut-Off Date were of the property types as follows:
<TABLE>
<CAPTION>
% of Aggregate
Number of Group II Aggregate Group II Group II
Property Types Mortgage Loans Loan Balance Loan Balance
- -------------- -------------- ------------ ------------
<S> <C> <C> <C>
Single Family 1,659 $171,123,713.53 83.42%
PUD 78 12,155,080.73 5.93
Condominiums 78 7,309,207.27 3.56
Manufactured Home 8 551,925.97 0.27
Apartment 2-4 Units 140 13,826,545.63 6.74
Other 3 180,351.59 0.09
------ --------------- ------
Total 1,966 $205,146,824.72 100.00%
===== =============== =======
</TABLE>
Months Since Origination -- Initial Group II Mortgage Loans
The distribution of the number of months since the date of origination
of the Initial Mortgage Loans in Group II as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
% of Aggregate
Months Elapsed Number of Group II Aggregate Group II Group II
Since Origination Mortgage Loans Loan Balance Loan Balance
- ----------------- -------------- ------------ ------------
<S> <C> <C> <C>
0 - 6 1,961 $204,773,496.65 99.82%
7 - 12 4 309,215.01 0.15
13 - 18 1 64,113.06 0.03
----- --------------- ------
Total 1,966 $205,146,824.72 100.00%
===== =============== =======
</TABLE>
Remaining Term to Maturity -- Initial Group II Mortgage Loans
The distribution of the number of months remaining to maturity of the
Initial Mortgage Loans in Group II as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
% of Aggregate
Months Remaining Number of Group II Aggregate Group II Group II
to Maturity Mortgage Loans Loan Balance Loan Balance
- ----------- -------------- ------------ ------------
<S> <C> <C> <C>
0 - 120 9 $ 325,572.01 0.16%
121 - 180 98 4,434,847.07 2.16
181 - 240 43 2,424,283.73 1.18
301 - 360 1,816 197,962,121.91 96.50
----- -------------- ------
Total 1,966 $205,146,824.72 100.00%
===== =============== =======
</TABLE>
S-50
<PAGE>
Occupancy Status Initial -- Group II Mortgage Loans
The occupancy status of the Mortgaged Properties securing the Initial
Mortgage Loans in Group II as of the Cut-Off Date was as follows based on
representations by the mortgagors at the time of origination of such Mortgage
Loans:
<TABLE>
<CAPTION>
% of Aggregate
Number of Group II Aggregate Group II Group II
Occupancy Status Mortgage Loans Loan Balance Loan Balance
- ---------------- -------------- ------------ ------------
<S> <C> <C> <C>
Owner Occupied 1,714 $184,326,022.62 89.85%
Non Owner Occupied 252 20,820,802.10 10.15
----- -------------- ------
Total 1,966 $205,146,824.72 100.00%
===== =============== =======
</TABLE>
Margins -- Initial Group II Mortgage Loans
The margins borne by the Notes relating to the Initial Mortgage Loans
in Group II as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
% of Aggregate
Number of Group II Aggregate Group II Group II
Margins Mortgage Loans Loan Balance Loan Balance
------- -------------- ------------ ------------
<S> <C> <C> <C>
0.000 - 3.750% 44 $ 4,984,358.19 2.43%
3.751 - 4.000 46 4,760,085.26 2.32
4.001 - 4.250 31 4,035,076.19 1.97
4.251 - 4.500 62 6,794,650.59 3.31
4.501 - 4.750 30 2,846,224.44 1.39
4.751 - 5.000 136 15,381,575.16 7.50
5.001 - 5.250 75 8,218,651.98 4.01
5.251 - 5.500 123 12,935,272.61 6.31
5.501 - 5.750 82 9,279,837.56 4.52
5.751 - 6.000 146 14,699,505.42 7.17
6.001 - 6.250 105 9,309,721.23 4.54
6.251 - 6.500 240 26,134,865.49 12.74
6.501 - 6.750 207 23,012,256.64 11.22
6.751 - 7.000 143 16,948,508.58 8.26
7.001 - 7.250 375 31,248,802.12 15.23
7.251 - 7.500 31 3,664,062.22 1.79
7.501 - 7.750 58 8,405,531.32 4.10
7.751 - 8.000 11 1,125,428.30 0.55
8.001 - 8.250 14 778,601.38 0.38
8.251 - 8.500 2 114,789.52 0.06
8.501 - 8.750 2 160,406.67 0.08
9.001 - 9.250 1 187,718.52 0.09
9.751 - 10.000 1 65,941.24 0.03
10.251 - 10.500 1 54,954.09 0.03
----- --------------- -------
Total 1,966 $205,146,824.72 100.00%
===== =============== =======
</TABLE>
S-51
<PAGE>
Maximum Coupon Rates -- Initial Group II Mortgage Loans
The maximum Coupon Rates borne by the Notes relating to the Initial
Mortgage Loans in Group II as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
% of Aggregate
Maximum Number of Group II Aggregate Group II Group II
Coupon Rates Mortgage Loans Loan Balance Loan Balance
- ------------ -------------- ------------ ------------
<S> <C> <C> <C>
8.501 - 9.000% 1 $ 114,210.72 0.06%
11.501 - 12.000 1 74,976.80 0.04
13.001 - 13.500 1 383,803.90 0.19
13.501 - 14.000 27 4,012,338.67 1.96
14.001 - 14.500 30 4,329,744.33 2.11
14.501 - 15.000 85 11,492,841.38 5.60
15.001 - 15.500 109 15,929,497.22 7.76
15.501 - 16.000 234 29,109,524.82 14.19
16.001 - 16.500 204 23,994,473.92 11.70
16.501 - 17.000 349 40,290,103.73 19.64
17.001 - 17.500 208 20,421,084.78 9.95
17.501 - 18.000 250 22,252,167.43 10.85
18.001 - 18.500 105 8,813,310.19 4.30
18.501 - 19.000 109 7,821,774.26 3.81
19.001 - 19.500 60 4,230,652.74 2.06
19.501 - 20.000 96 6,404,193.59 3.12
20.001 - 20.500 29 1,365,594.85 0.67
20.501 - 21.000 39 2,255,911.63 1.10
21.001 - 21.500 15 895,629.72 0.44
21.501 - 22.000 8 478,231.48 0.23
22.001 - 22.500 2 53,489.42 0.03
22.501 - 23.000 2 180,853.47 0.09
23.001 - 23.500 1 187,461.58 0.09
23.501 - 24.000 1 54,954.09 0.03
-- --------------- -----
Total 1,966 $205,146,824.72 100.00%
===== =============== =======
</TABLE>
S-52
<PAGE>
Next Rate Adjustment Date -- Initial Group II Mortgage Loans
Next rate adjustment date for each of the Notes relating to the Initial
Mortgage Loans in Group II as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
% of Aggregate
Date of Next Number of Group II Aggregate Group II Group II
Rate Adjustment Date Mortgage Loans Loan Balance Loan Balance
-------------------- -------------- ------------ ------------
<S> <C> <C> <C>
September 1, 1996 1 $ 33,643.00 0.02%
November 1, 1996 24 2,214,322.32 1.08
December 1, 1996 584 60,193,110.67 29.34
January 1, 1997 780 80,583,273.91 39.28
February 1, 1997 378 36,987,658.35 18.03
March 1, 1997 3 1,042,500.00 0.51
June 1, 1998 35 4,860,564.85 2.37
July 1, 1998 60 7,421,348.26 3.62
August 1, 1998 92 10,917,890.17 5.32
September 1, 1998 8 722,700.00 0.35
July 1, 2001 1 169,813.19 0.08
----- -------------- ------
Total 1,966 $205,146,824.72 100.00%
===== =============== =======
</TABLE>
Conveyance of Subsequent Mortgage Loans
The Pooling and Servicing Agreement permits the Trust to acquire
approximately $8,000,000 and $33,000,000 in aggregate principal balance of
Subsequent Mortgage Loans for addition to Group I and Group II, respectively.
Accordingly, the statistical characteristics of the Mortgage Loan Pool and each
Group will vary as of any Subsequent Cut-Off Date upon the acquisition of
Subsequent Mortgage Loans.
The obligation of the Trust to purchase Subsequent Mortgage Loans on a
Subsequent Transfer Date is subject to the following requirements, among others
(which may be waived or modified by the Certificate Insurer): (i) such
Subsequent Mortgage Loan may not be 30 or more days contractually delinquent as
of the related Subsequent Cut-Off Date; (ii) the remaining term to maturity of
such Subsequent Mortgage Loan may not exceed 360 months; (iii) no Subsequent
Mortgage Loan will have a Coupon Rate less than 5.500%; 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 10.715% for Group I and 9.427% for Group II; (b) will
have a weighted average Loan-to-Value Ratio of not more than 71.52% for Group I
and 73.62% for Group II; (c) will not have Balloon Loans with a principal
balance in excess of 30.33% and 0% of the Original Aggregate Loan Balance of the
Mortgage Loans in Group I and Group II, respectively, (d) will not have a
weighted average remaining term to stated maturity of more than 295.23 months
for Group I and 358.38 for Group II; and (e) will have no Mortgage Loan with a
principal balance in excess of $416,500.90 for Group I and $ 728,000.00 for
Group II. In addition, the Certificate Insurer shall have the right to review
and approve each Subsequent Mortgage Loan.
PREPAYMENT AND YIELD CONSIDERATIONS
General
The weighted average life of, and, if purchased at other than par
(disregarding, for purposes of this discussion, the effect on an investor's
yield resulting from the timing of the settlement date and those considerations
discussed below under "Payment Lag Feature of 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
S-53
<PAGE>
the loans and the extent of the mortgagors' equity in such properties, changes
in the mortgagors' housing needs, job transfers and unemployment.
As with fixed rate obligations generally, the rate of prepayment on a
pool of mortgage loans with fixed rates such as the Mortgage Loans in Group I is
affected by prevailing market rates for mortgage loans of a comparable term and
risk level. When the market interest rate is below the mortgage coupon,
mortgagors may have an increased incentive to refinance their mortgage loans.
Depending on prevailing market rates, the future outlook for market rates and
economic conditions generally, some mortgagors may sell or refinance mortgaged
properties in order to realize their equity in the mortgaged properties, to meet
cash flow needs or to make other investments.
The Mortgage Loans in Group II are adjustable rate mortgage loans. As
is the case with conventional fixed rate mortgage loans, adjustable rate
mortgage loans may be subject to a greater rate of principal prepayments in a
declining interest rate environment. For example, if prevailing interest rates
fall significantly, adjustable-rate mortgage loans could be subject to higher
prepayment rates than if prevailing interest rates remain constant because the
availability of fixed rate mortgage loans at competitive interest rates may
encourage mortgagors to refinance 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 5/25 Loans may differ from that of the other
Mortgage Loans in Group II. As a 2/28 Loan or a 5/25 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 Group II may differ from that on the Mortgage Loans in Group I because
the amount of the monthly payments on the Mortgage Loans in Group II are subject
to adjustment on each adjustment date. If such difference in experience were to
occur, the prepayment experience on the Class A-6 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 Class A-6 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 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 Fixed Rate
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.
S-54
<PAGE>
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 Groups I and II, then the related Class(es) of Class A Certificates then
entitled to receive payments of principal will receive a partial prepayment on
the Payment Date in September 1996 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.
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: Class A-1, March, 2006, Class
A-2, November, 2014, Class A-3, April, 2021, Class A-4, October, 2023, Class
A-5, October, 2027, and Class A-6, October, 2027. These dates are the dates on
which the "Initial Certificate Principal Balance" set forth in the summary
hereof for the related Class as of the Closing Date less all amounts previously
distributed to the Owners on account of principal (such amount as to any Class
of the Class A Certificates and as of any time, the related "Class A Certificate
Principal Balance" and as to the Class A Certificates collectively, the
"Certificate Principal Balance") would be reduced to zero assuming that no
Prepayments are received on the Mortgage Loans in the related Group, no optional
termination or mandatory termination is exercised and that a foreclosure process
begins in the month following the month the last Mortgage Loan is scheduled to
mature and is not settled for 13 months. 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) a foreclosure in the last month is likely
not to occur, (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,
thereby causing a termination of the Trust when the outstanding Certificate
Principal Balance is less than 5% of the Original Certificate Balance.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average life of any
Class of the Class A Certificates will be influenced by the rate at which
principal of the Mortgage Loans in the related Mortgage Loan Group is paid,
which may be in the form of scheduled amortization or prepayments (for this
purpose, the term "prepayment" includes Prepayments and liquidations due to
default).
Each Accrual Period for the Class A-6 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 Pass-Through Rate for the Class A-6
Certificates 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 Pass-Through Rate for the Class A-6 Certificates may be calculated
by reference to the Coupon Rates on the Mortgage Loans in Group II. Although the
Coupon Rates on the Mortgage Loans in Group II are subject to adjustment, the
Coupon Rates adjust less frequently than the Class A-6 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 Class A-6 Certificates.
Certain of the Mortgage Loans in Group II, including the 2/28 Loans,
were originated with initial Coupon Rates that were based on competitive
conditions. As a result, the Coupon Rates on such Mortgage Loans in Group II are
more likely to adjust on their first, and possibly subsequent adjustment dates
subject to the effects of the
S-55
<PAGE>
applicable periodic rate cap and lifetime cap. Because the Pass-Through Rate for
the Class A-6 Certificates 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 Group II may limit changes in the Pass-Through Rate for the
Class A-6 Certificates. 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 5/25 Loans will not adjust until
approximately the date on which the 60th 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 Group II. If the Mortgage Loans in Group II
bearing higher Coupon Rates were to prepay, the weighted average Coupon Rate of
the Mortgage Loans in Group II, and consequently the Adjustable Rate Group
Available Funds Cap, would be lower than otherwise would be the case.
Although the Class A-1 Certificates have a Targeted Balances Schedule,
there is no assurance that distributions of principal of the Class A-1
Certificates will be made in accordance with such schedule. In addition, if the
Class A Certificate Principal Balance of the Class A-2 Certificates is reduced
to zero while the Class A-1 Certificates are still outstanding, the entire
Principal Distribution Amount for Group I will be distributed to the Class A-1
Certificates, without regard to the schedule of Targeted Balances, until the
Class A Certificate Principal Balance thereof is reduced to zero.
Prepayments on Mortgage Loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement is
the prepayment assumption (the "Prepayment Assumption"), which represents an
assumed rate of prepayment each month relative to the then outstanding principal
balance of the pool of mortgage loans for the life of such mortgage loans. A
100% Prepayment Assumption assumes a conditional prepayment rate ("CPR") of 5%
per annum of the outstanding principal balance of the Mortgage Loans in the
first month of the life of such Mortgage Loans and an additional 1.364% per
annum in each month thereafter until the twelfth month; beginning in the twelfth
month and in each month thereafter during the life of such Mortgage Loans, a CPR
of 20% per annum is assumed. As used in the table below, 0% Prepayment
Assumption assumes a CPR equal to 0% of the Prepayment Assumption, i.e. no
prepayments. Correspondingly, 75% Prepayment Assumption assumes prepayment rates
equal to 75% of the Prepayment Assumption, and so forth. The Prepayment
Assumption does not purport to be a historical description of prepayment
experience or a prediction of the anticipated rate of prepayment of any pool of
mortgage loans, including the Mortgage Loans. The Depositor believes that no
existing statistics of which it is aware provide a reliable basis for Owners of
Class A Certificates to predict the amount or the timing of receipt of
prepayments on the Mortgage Loans.
It is very unlikely that the Mortgage Loans will prepay at rates
consistent with the Prepayment Assumption until maturity or that all of the
Mortgage Loans in the related Mortgage Loan Group will prepay at the same rate.
There will be discrepancies between the actual characteristics of the Mortgage
Loans included in the Trust and the assumed characteristics used in preparing
the following tables. Any discrepancy may have an effect upon the percentages of
Initial Certificate Principal Balance outstanding set forth in the table and the
weighted average lives of the Class A Certificates. Since the tables were
prepared on the basis of the assumptions in the following paragraph, there will
likely be discrepancies between the characteristics of the actual Mortgage Loans
and the characteristics of the Mortgage Loans assumed in preparing the tables.
Any such discrepancy will likely have an effect upon the percentages of the
Certificate Principal Balances outstanding and weighted average lives of the
Class A Certificates set forth in the tables. In addition, since the actual
Mortgage Loans in the Trust have characteristics which differ from those assumed
in preparing the tables set forth below, the distributions of principal on the
Class A Certificates may be made earlier or later than as indicated in the
tables.
For the purpose of the tables below, it is assumed that: (i) each
Mortgage Loan Group consists of Mortgage Loans with the characteristics set
forth in the table below, (ii) the Closing Date for the Certificates occurs on
August 28, 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 September 1996 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 not
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) all of the Pre-Funded Amount is used to acquire Subsequent
Mortgage Loans on September 1, 1996 and prior to such date, the Pre-Funded
Amount accrues
S-56
<PAGE>
interest at a rate equal to One-Month LIBOR, (ix) the Coupon Rate for each
Mortgage Loan in Group II is adjusted on its next rate adjustment date (and on
subsequent rate adjustment dates, if necessary) to equal the sum of (a) an
assumed final constant level of the applicable index of 5.6641% 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 Pass- Through Rate on the Class A-5 Certificates is
fixed at 7.60% per annum for Payment Dates on or prior to the Clean-Up Call Date
and 8.35% per annum thereafter, (xi) the Class A-6 Pass-Through Rate remains
constant at 5.7319% per annum for Payment Dates on or prior to the Clean-Up Call
Date, and 6.0419% thereafter, (xii) all Mortgage Loans pay on their respective
due dates in accordance with their respective terms, (xiii) the Initial
Certificate Principal Balance of each Class of Certificates is as set forth and
under "Summary of Terms -- Certificates Offered" herein.
Initial Group I Mortgage Loans
<TABLE>
<CAPTION>
Remaining Original Remaining
Principal Gross Coupon Net Coupon Amortization Term to Term to
Balance Rate Rate Term Maturity (in Maturity (in
(in months) months) months)
- -------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$5,856,191.85 11.456 10.956 359 180 179
4,815,917.54 10.603 10.103 176 180 176
1,092,476.96 11.370 10.870 237 240 237
53,168,957.70 10.546 10.046 354 360 354
</TABLE>
Subsequent Group I Mortgage Loans
<TABLE>
<CAPTION>
Remaining Remaining
Amortization Original Term to
Principal Gross Coupon Net Coupon Term Term Maturity
Balance Rate Rate (in months) (in months) (in months)
- -------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$2,570,193.99 11.500 11.000 359 180 179
469,954.20 9.750 9.250 180 180 180
4,959,851.81 10.430 9.930 360 360 360
</TABLE>
S-57
<PAGE>
Initial Group II Mortgage Loans
<TABLE>
<CAPTION>
Original Remaining
Gross Periodic Term to Term to
Principal Coupon Net Gross Gross Rate Months to Rate Change Maturity Maturity
Balance Rate Coupon Rate Margin Life Cap Cap Next Reset Frequency (in months) (in months) Index
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 33,643.00 9.250 8.750 6.250 16.250 1.50 1 6 360 354 Six-Month LIBOR
2,214,322.32 10.380 9.880 6.407 17.326 1.50 3 6 360 355 Six-Month LIBOR
59,519,909.72 9.835 9.335 6.030 16.818 1.50 4 6 352 349 Six-Month LIBOR
79,877,153.12 9.919 9.419 6.057 16.919 1.50 5 6 355 353 Six-Month LIBOR
34,577,685.58 9.979 9.479 6.267 16.957 1.50 6 6 351 350 Six-Month LIBOR
1,042,500.00 10.277 9.777 5.451 17.277 1.50 7 6 360 360 Six-Month LIBOR
2,803,886.74 9.409 8.909 6.886 16.409 1.50 22 6 360 357 Six-Month LIBOR
6,675,856.64 9.681 9.181 7.221 16.681 1.50 23 6 360 358 Six-Month LIBOR
10,847,397.09 10.049 9.549 7.097 17.049 1.50 24 6 360 359 Six-Month LIBOR
722,700.00 9.860 9.360 7.046 16.860 1.50 25 6 360 360 Six-Month LIBOR
169,813.19 8.990 8.490 7.250 15.990 1.50 59 6 360 358 Six-Month LIBOR
3,670,925.96 9.674 9.174 6.148 16.360 1.00 6 6 360 358 Six-Month LIBOR
2,991,031.36 9.842 9.342 5.208 16.842 3.00 22 6 360 357 Six-Month LIBOR
</TABLE>
Subsequent Group II Mortgage Loans
<TABLE>
<CAPTION>
Original
Gross Periodic Term to Remaining
Principal Coupon Net Gross Gross Rate Months to Rate Change Maturity Term to Maturity
Balance Rate Coupon Rate Margin Life Cap Cap Next Reset Frequency (in months) (in months) Index
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 124,100.00 8.500 8.000 6.250 15.500 1.50 3 6 360 356 Six-Month LIBOR
128,350.00 8.950 8.450 5.750 15.950 1.50 4 6 360 357 Six-Month LIBOR
1,546,602.00 9.240 8.740 7.050 16.240 1.50 5 6 360 358 Six-Month LIBOR
4,359,375.00 8.690 8.190 6.410 15.690 1.50 6 6 360 359 Six-Month LIBOR
11,064,548.90 8.580 8.080 6.920 15.580 1.50 7 6 360 360 Six-Month LIBOR
741,300.00 10.160 9.660 6.460 17.160 1.50 22 6 360 358 Six-Month LIBOR
8,784,382.00 10.110 9.610 7.050 17.110 1.50 23 6 360 359 Six-Month LIBOR
6,030,592.87 10.620 10.120 7.000 16.320 1.00 6 6 355 355 Six-Month LIBOR
220,749.23 10.770 10.270 7.650 16.500 3.00 3 6 360 356 Six-Month LIBOR
</TABLE>
S-58
<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 Group I
Mortgage Loans prepay according to the indicated percentages of the Prepayment
Assumption under each Fixed Rate Group Certificate below and (2) for the
Adjustable Rate Group Certificates, the Group II Mortgage Loans prepay according
to the indicated percentages of the Prepayment Assumption under the Adjustable
Rate Group Certificate below.
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
Class A-1 Class A-2
Payment Date 0% 50% 100% 115% 150% 200% 0% 50% 100% 115% 150% 200%
-- --- ---- ---- ---- ---- --- --- ---- ---- ---- ----
<S> <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
August 25, 1997 82 25 25 25 25 25 100 96 68 60 40 12
August 25, 1998 75 0 0 0 0 0 100 74 23 9 0 0
August 25, 1999 69 0 0 0 0 0 100 46 0 0 0 0
August 25, 2000 61 0 0 0 0 0 100 20 0 0 0 0
August 25, 2001 52 0 0 0 0 0 100 0 0 0 0 0
August 25, 2002 43 0 0 0 0 0 100 0 0 0 0 0
August 25, 2003 32 0 0 0 0 0 100 0 0 0 0 0
August 25, 2004 21 0 0 0 0 0 100 0 0 0 0 0
August 25, 2005 8 0 0 0 0 0 100 0 0 0 0 0
August 25, 2006 0 0 0 0 0 0 97 0 0 0 0 0
August 25, 2007 0 0 0 0 0 0 91 0 0 0 0 0
August 25, 2008 0 0 0 0 0 0 83 0 0 0 0 0
August 25, 2009 0 0 0 0 0 0 75 0 0 0 0 0
August 25, 2010 0 0 0 0 0 0 66 0 0 0 0 0
August 25, 2011 0 0 0 0 0 0 25 0 0 0 0 0
August 25, 2012 0 0 0 0 0 0 18 0 0 0 0 0
August 25, 2013 0 0 0 0 0 0 10 0 0 0 0 0
August 25, 2014 0 0 0 0 0 0 2 0 0 0 0 0
August 25, 2015 0 0 0 0 0 0 0 0 0 0 0 0
August 25, 2016 0 0 0 0 0 0 0 0 0 0 0 0
August 25, 2017 0 0 0 0 0 0 0 0 0 0 0 0
August 25, 2018 0 0 0 0 0 0 0 0 0 0 0 0
August 25, 2019 0 0 0 0 0 0 0 0 0 0 0 0
August 25, 2020 0 0 0 0 0 0 0 0 0 0 0 0
August 25, 2021 0 0 0 0 0 0 0 0 0 0 0 0
August 25, 2022 0 0 0 0 0 0 0 0 0 0 0 0
August 25, 2023 0 0 0 0 0 0 0 0 0 0 0 0
August 25, 2024 0 0 0 0 0 0 0 0 0 0 0 0
August 25, 2025 0 0 0 0 0 0 0 0 0 0 0 0
August 25, 2026 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Avg Life(1) 4.9 0.7 0.7 0.7 0.7 0.7 14.3 2.9 1.4 1.2 0.9 0.6
</TABLE>
<TABLE>
<CAPTION>
Class A-3 Class A-4
Payment Date 0% 50% 100% 115% 150% 200% 0% 50% 100% 115% 150% 200%
-- --- ---- ---- ---- ---- --- --- ---- ---- ---- ----
<S> <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
August 25, 1997 100 100 100 100 100 100 100 100 100 100 100 100
August 25, 1998 100 100 100 100 71 19 100 100 100 100 100 100
August 25, 1999 100 100 73 52 8 0 100 100 100 100 100 30
August 25, 2000 100 100 30 7 0 0 100 100 100 100 40 0
August 25, 2001 100 96 0 0 0 0 100 100 92 56 0 0
August 25, 2002 100 70 0 0 0 0 100 100 47 13 0 0
August 25, 2003 100 46 0 0 0 0 100 100 11 0 0 0
August 25, 2004 100 26 0 0 0 0 100 100 0 0 0 0
August 25, 2005 100 7 0 0 0 0 100 100 0 0 0 0
August 25, 2006 100 0 0 0 0 0 100 84 0 0 0 0
August 25, 2007 100 0 0 0 0 0 100 59 0 0 0 0
August 25, 2008 100 0 0 0 0 0 100 37 0 0 0 0
August 25, 2009 100 0 0 0 0 0 100 16 0 0 0 0
August 25, 2010 100 0 0 0 0 0 100 0 0 0 0 0
August 25, 2011 100 0 0 0 0 0 100 0 0 0 0 0
August 25, 2012 100 0 0 0 0 0 100 0 0 0 0 0
August 25, 2013 100 0 0 0 0 0 100 0 0 0 0 0
August 25, 2014 100 0 0 0 0 0 100 0 0 0 0 0
August 25, 2015 90 0 0 0 0 0 100 0 0 0 0 0
August 25, 2016 77 0 0 0 0 0 100 0 0 0 0 0
August 25, 2017 63 0 0 0 0 0 100 0 0 0 0 0
August 25, 2018 48 0 0 0 0 0 100 0 0 0 0 0
August 25, 2019 31 0 0 0 0 0 100 0 0 0 0 0
August 25, 2020 13 0 0 0 0 0 100 0 0 0 0 0
August 25, 2021 0 0 0 0 0 0 87 0 0 0 0 0
August 25, 2022 0 0 0 0 0 0 49 0 0 0 0 0
August 25, 2023 0 0 0 0 0 0 7 0 0 0 0 0
August 25, 2024 0 0 0 0 0 0 0 0 0 0 0 0
August 25, 2025 0 0 0 0 0 0 0 0 0 0 0 0
August 25, 2026 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Avg Life(1) 21.8 7.0 3.6 3.1 2.4 1.7 26.0 11.5 6.0 5.2 3.9 2.8
</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-59
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
Class A-5 Class A-6
Payment Date 0% 50% 100% 115% 150% 200% 0% 50% 100% 115% 150% 200%
-- --- ---- ---- ---- ---- --- --- ---- ---- ---- ----
<S> <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
August 25, 1997 100 100 100 100 100 100 96 89 82 79 74 67
August 25, 1998 100 100 100 100 100 100 96 79 64 60 51 38
August 25, 1999 100 100 100 100 100 100 95 71 50 45 35 23
August 25, 2000 100 100 100 100 100 74 95 63 40 35 24 14
August 25, 2001 100 100 100 100 92 43 94 56 32 27 17 8
August 25, 2002 100 100 100 100 63 24 93 49 25 20 12 5
August 25, 2003 100 100 100 84 43 13 92 44 20 15 8 3
August 25, 2004 100 100 86 63 28 7 91 39 16 12 6 1
August 25, 2005 100 100 67 47 19 3 90 35 13 9 4 1
August 25, 2006 100 100 52 35 12 0 89 31 10 7 2 0
August 25, 2007 100 100 40 25 7 0 88 28 8 5 2 0
August 25, 2008 100 100 30 18 4 0 87 24 6 4 1 0
August 25, 2009 100 100 23 13 2 0 85 22 5 3 0 0
August 25, 2010 100 98 17 9 0 0 83 19 4 2 0 0
August 25, 2011 100 74 11 5 0 0 81 17 3 1 0 0
August 25, 2012 100 64 8 3 0 0 79 15 2 1 0 0
August 25, 2013 100 55 5 1 0 0 76 13 1 1 0 0
August 25, 2014 100 47 3 0 0 0 73 11 1 0 0 0
August 25, 2015 100 40 2 0 0 0 70 9 1 0 0 0
August 25, 2016 100 33 1 0 0 0 66 8 0 0 0 0
August 25, 2017 100 28 0 0 0 0 62 7 0 0 0 0
August 25, 2018 100 23 0 0 0 0 57 6 0 0 0 0
August 25, 2019 100 18 0 0 0 0 52 5 0 0 0 0
August 25, 2020 100 14 0 0 0 0 46 4 0 0 0 0
August 25, 2021 100 10 0 0 0 0 39 3 0 0 0 0
August 25, 2022 100 7 0 0 0 0 32 2 0 0 0 0
August 25, 2023 100 4 0 0 0 0 24 1 0 0 0 0
August 25, 2024 67 1 0 0 0 0 15 0 0 0 0 0
August 25, 2025 23 0 0 0 0 0 5 0 0 0 0 0
August 25, 2026 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Avg Life(1) 28.4 18.7 11.0 9.6 7.2 5.2 21.0 8.0 4.3 3.8 2.9 2.1
</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-60
<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 Group I (net of the
Servicing Fee) received by the Servicer during each Remittance Period is to be
remitted to the Trustee on or prior to the related Monthly Remittance Date,
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
September 25, 1996. 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 Mortgage Loans purchased or
originated by five originators (the "Originators") with aggregate outstanding
Loan Balances of $270,080,368.77. The largest Originator of such loans is Long
Beach, which originated 86.68% of the Initial Mortgage Loans in Group II. The
other Originators as of the Cut-Off Date are Berkeley, Option One, New Century
and Walsh. In addition, the Seller has purchased approximately $8,000,000 of
mortgage loans from First Colony and $33,000,000 from New Century to be used to
satisfy the Pre-Funding Account purchase requirement.
FORMATION OF THE TRUST AND TRUST PROPERTY
AMRESCO Residential Securities Corporation Mortgage Loan Trust 1996-4
(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-61
<PAGE>
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Initial Mortgage
Loans and the Mortgaged Properties is based upon the pool as constituted at the
close of business on the Cut-Off Date, as adjusted (with respect to all Initial
Mortgage Loans that were current as of the Cut-Off Date) for the scheduled
principal payments due on or before such date. Prior to the issuance of the
Class A Certificates, Initial Mortgage Loans may be removed from the pool as a
result of incomplete documentation or non-compliance with representations and
warranties set forth in the Pooling and Servicing Agreement, if the Depositor
deems such removal necessary or appropriate. A limited number of other Initial
Mortgage Loans may be included in the pool prior to the issuance of the
Certificates.
A current report on Form 8-K will be available to purchasers of the
Class A Certificates and will be filed and incorporated by reference into the
Registration Statement together with the Pooling and Servicing Agreement with
the Securities and Exchange Commission within fifteen days after the initial
issuance of the Class A Certificates. In the event Initial Mortgage Loans are
removed from or added to the pool as set forth in the preceding paragraph, such
removal or addition will be noted in the current report on Form 8-K. A current
report on Form 8-K will also be filed within fifteen days of the end of the
Funding Period reflecting the additions to the Trust.
DESCRIPTION OF THE CLASS A CERTIFICATES
General
Each Certificate will represent certain undivided, fractional ownership
interests in the Trust Estate created and held pursuant to the Pooling and
Servicing Agreement, subject to the limits and the priority of distribution
described therein.
As described in "The Mortgage Loan Pool" herein, the Mortgage Loan Pool
is divided into two Groups, Group I, which contains only fixed rate Mortgage
Loans, and Group II, which contains only adjustable rate Mortgage Loans
(including the 2/28 Loans). For each Mortgage Loan Group, the related Class of
Class A Certificates will evidence the right to receive on each Payment Date the
Class A Distribution Amount for such Class of Class A Certificates, in each case
until the related Class A Certificate Principal Balance is reduced to zero.
Payment Dates
On each Payment Date, the Owners of each Class of the Class A
Certificates will be entitled to receive, from amounts then on deposit in the
certificate account established and maintained by the Trustee in accordance with
the Pooling and Servicing Agreement (the "Certificate Account") and until the
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 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.
S-62
<PAGE>
Distributions
Upon receipt, the Trustee will be required to deposit into the
Certificate Account, (i) the total of the principal and interest collections on
the Mortgage Loans, including any Net Liquidation Proceeds, required to be
remitted by the Servicers, together with any Substitution Amount and any Loan
Purchase Price, (ii) the related Capitalized Interest Requirement and any
Pre-Funding Account Earnings, (iii) any Insured Payment, and (iv) the proceeds
of any liquidation of the Trust Estate. The Trustee will also be required to
deposit into the Certificate Account any Pre-Funded Amounts to be distributed as
a prepayment at the end of the Funding Period.
The Pooling and Servicing Agreement establishes a pass-through rate on
each Class of the Class A Certificates (each, a "Pass-Through Rate") as set
forth in the Summary herein under "Certificates Offered." The Pass-Through Rate
of Fixed Rate Group Certificates will be as set forth on the cover hereof;
provided, that, the Class A-5 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, 7.60% per
annum and for any Payment Date thereafter, 8.35% per annum and (ii) the Fixed
Rate Group Available Funds Cap. The Pass-Through Rate with respect to the Class
A-6 Certificates will equal the lesser of (i) with respect to any Payment Date
which occurs on or prior to the Clean-Up Call Date, One-Month LIBOR plus 0.31%
per annum (and for any Payment Date after the Clean-Up Call Date, One-Month
LIBOR plus 0.62% 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 Group II, less the sum of 1.13% per
annum, 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-6
Pass-Through Rate (i.e., the rate set by the Adjustable Rate Group Available
Funds Cap) is less than the Class A-6 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-6 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-6 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-6 Formula Pass-Through Rate" for a Payment Date is the
rate determined by clause (i) of the definition of "Class A-6 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 (i) and
(ii) above) (such net sum being the "Total Monthly Excess
Cashflow" with respect to such Mortgage Loan Group and Payment
Date) in the following order of priority:
(A) first, such Total Monthly Excess Cashflow shall be
allocated to the payment of the Class A Distribution
Amount pursuant to clauses (v)(A) and (B) below on
such Payment Date with respect to the related
Mortgage Loan Group in an amount equal to the amount,
if any, by which (x) the sum of (i) the related
Current Interest and (ii) the Subordination
S-63
<PAGE>
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:
(A) To the Owners of the Class A Certificates of the
related Group, the related Current Interest, on a pro
rata basis without any priority among such Class A
Certificates;
(B) To the Owners of the related Class of Class A
Certificates (i) the Principal Distribution Amount
applicable to Group I shall be distributed as
follows: (a) first, to the Owners of the Class A-1
Certificates the amount necessary to reduce the Class
A-1 Certificate
S-64
<PAGE>
Principal Balance to the Targeted Amount for such
Payment Date, until the Class A-1 Certificate
Principal Balance is reduced to zero; (b) second,
until the Class A-1 Certificate Principal Balance is
reduced to zero, to the Owners of the Class A-2
Certificates, the Principal Distribution Amount
remaining, if any, after the distribution described
in clause (a) above until the Class A-2 Certificate
Principal Balance is reduced to zero and, after the
Class A-1 Certificate Principal Balance has been
reduced to zero, to the Owners of the Class A-2
Certificates, the Principal Distribution Amount until
the Class A-2 Certificate Principal Balance is
reduced to zero (provided, however, that if the Class
A-2 Certificate Principal Balance is reduced to zero
prior to the date the Class A-1 Certificate Principal
Balance is reduced to zero, the Principal
Distribution Amount shall be distributed to the
Owners of the Class A-1 Certificates until the Class
A-1 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; and (B) the
Principal Distribution Amount applicable to Group II
shall be distributed to the Owners of the Class A-6
Certificates until the Class A-6 Certificate
Principal Balance is reduced to zero; and
(C) To the Owners of the Subordinate Certificates, all
remaining distributable amounts as specified in the
Pooling and Servicing Agreement.
On each Payment Date, the Trustee shall distribute to the Owners of the
Class A-6 Certificates the amount, if any, on deposit in the account established
to hold any Adjustable Rate Group Available Funds Cap Carry Forward Amounts.
"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.
"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-65
<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,
S-66
<PAGE>
even though the Certificate Principal Balance will, following the accelerated
amortization resulting from the application of the Net Monthly Excess Cashflow,
represent less than 100% of the aggregate Loan Balance. Accordingly, with
respect to a Mortgage Loan Group, in the absence of the provisions relating to
Subordination Reduction Amounts, the Subordinated Amount would increase above
the Specified Subordinated Amount requirements even without the further
application of any Net Monthly Excess Cashflow.
The Pooling and Servicing Agreement provides generally that, on any
Payment Date, all amounts collected on account of scheduled principal with
respect to the related Remittance Period and unscheduled principal with respect
to the related Prepayment Period (other than any such amount applied to the
payment of a Subordination Reduction Amount) will be distributed to the Owners
of the related Class A Certificates on such Payment Date. If any Mortgage Loan
became a Liquidated Loan during such prior Remittance Period, the Net
Liquidation Proceeds related thereto and allocated to principal may be less than
the principal balance of the related Mortgage Loan; the amount of any such
insufficiency is a "Realized Loss." In addition, the Pooling and Servicing
Agreement provides that the principal balance of any Mortgage Loan which becomes
a Liquidated Loan shall thenceforth equal zero. The Pooling and Servicing
Agreement does not contain any requirement that the amount of any Realized Loss
be distributed to the Owners of the related Class A Certificates on the Payment
Date which immediately follows the event of loss; i.e., the Pooling and
Servicing Agreement does not require the current recovery of losses. However,
the occurrence of a Realized Loss will reduce the related Subordinated Amount
(and may result in a Subordination Deficit as described below under "--
Overcollateralization and the Certificate Insurance Policies"), which to the
extent that such reduction causes such Subordinated Amount to be less than the
related Specified Subordinated Amount applicable to the related Payment Date,
will require the payment of a Subordination Increase Amount on such Payment Date
(or, if insufficient funds are available on such Payment Dates, on subsequent
Payment Dates, until the Subordinated Amount equals the related Specified
Subordinated Amount). The effect of the foregoing is to allocate losses to the
Owners of the Subordinate Certificates by reducing, or eliminating entirely,
payments of 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
S-67
<PAGE>
Available Funds Shortfalls with respect to one of the Mortgage Loan Groups may
result in the continuation of Subordination Deficiencies with respect to the
other Mortgage Loan Group to the extent that Net Monthly Excess Cashflow with
respect to the better-performing Mortgage Loan Group is diminished due to the
allocation of Total Monthly Excess Cashflow from such Mortgage Loan Group to
cover Available Funds Shortfalls occurring in the other Mortgage Loan Group.
Pre-Funding Account
On the Closing Date, the Original Pre-Funded Amount will be deposited
in the Pre-Funding Account, which account shall be in the name of and maintained
by the Trustee and shall be part of the Trust Estate. During the Funding Period,
the Pre-Funded Amount will be maintained in the Pre-Funding Account. The
Original Pre-Funded Amount will be reduced during the Funding Period by the
amount thereof used to purchase Subsequent Mortgage Loans in accordance with the
Pooling and Servicing Agreement. Any Pre-Funded Amount remaining at the end of
the Funding Period for the related Group will be distributed to the Owners of
the related Class or Classes of Class A Certificates then entitled to receive
payments of principal on the Payment Date that immediately follows the end of
such Funding Period 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 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 Date in September 1996 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 Class A-6 Certificates.
"One-Month LIBOR" means, as of any One-Month LIBOR Determination Date,
the rate for deposits in United States dollars for a period equal to the
relevant Accrual Period (commencing on the first day of such Accrual Period)
which appears in the Telerate Page 3750 as of 11:00 a.m., London time, on such
date. If such rate does not appear on Telerate Page 3750, the rate for that day
will be determined on the basis of the rates at which deposits in United States
dollars are offered by the Reference Banks at approximately 11:00 a.m., London
time, on that day to prime banks in the London interbank market for a period
equal to the relevant Accrual Period (commencing on the first day of such
Accrual Period). The Trustee will request the principal London office of each of
the Reference Banks to provide a quotation of its rate. If at least two such
quotations are provided, the rate for that day will be the arithmetic mean of
the quotations. If fewer than two quotations are provided as requested, the rate
for that day will be the arithmetic mean of the rates quoted by major banks in
New York City, selected by the Trustee, at approximately 11:00 a.m., New York
City time, on that day for loans in United States dollars to leading European
banks for a period equal to the relevant Accrual Period (commencing on the first
day of such Accrual Period).
S-68
<PAGE>
"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 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
S-69
<PAGE>
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
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.
S-70
<PAGE>
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,
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
S-71
<PAGE>
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).
Insured Payments do not include the payment on the Class A-6 Certificates of any
Available Funds Cap Carry-Forward Amount.
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 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
S-72
<PAGE>
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 August 1, 1996 among AMRESCO Residential Securities Corporation, as
Depositor, AMRESCO Residential Mortgage Corporation, as Seller, Advanta
Mortgage Corp. USA, Long Beach Mortgage Company 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.
"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.
"Notice" means the telephonic or telegraphic notice, promptly
confirmed in writing by telecopy substantially in the form of Exhibit A
attached to the Certificate Insurance Policy, the original of which is
subsequently delivered by registered or certified mail, from the
Trustee specifying the Insured Payment which shall be due and owing on
the applicable Payment Date.
"Owner" means each Owner (as defined in the Agreement) who, on
the applicable Payment Date, is entitled under the terms of the
applicable 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 Group I or Group II, 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,
S-73
<PAGE>
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 a 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, formerly known as Municipal Bond Investors
Assurance Corporation, 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 one European branch in the
Republic of France.
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, June 30,
1995 1996
---- ----
(Audited) (Unaudited)
Admitted Assets $3,814 $4,179
Liabilities 2,540 2,804
Capital and Surplus 1,274 1,375
-------------------- ----------------------
December 31, June 30,
1995 1996
---- ----
(Audited) (Unaudited)
Assets $4,463 $4,691
Liabilities 1,937 2,088
Shareholder's Equity 2,526 2,602
---------------
Audited financial statements of the Certificate Insurer as of December
31, 1995 and 1994 and for each of the three years in the period ended December
31, 1995 are included herein as Appendix B. Unaudited financial statements of
the Certificate Insurer as of the six-month period ended June 30, 1996 are
included herein as Appendix C. Such financial statements have been prepared on
the basis of generally accepted accounting principles. Copies
S-74
<PAGE>
of the Certificate Insurer's 1995 year-end audited financial statements prepared
in accordance with statutory accounting practices are available from the
Certificate Insurer. The address of the Certificate Insurer is 113 King Street,
Armonk, New York 10504.
A copy of the Annual Report on Form 10-K of MBIA Inc. is available from
the Certificate Insurer (at the address above) or the Securities and Exchange
Commission.
The Certificate Insurer does not accept any responsibility for the
accuracy or completeness of this Prospectus Supplement or any information or
disclosure contained herein, or omitted herefrom, other than with respect to the
accuracy of the information regarding the Certificate Insurance Policies and the
Certificate Insurer under the heading "THE CERTIFICATE INSURANCE POLICIES AND
THE CERTIFICATE INSURER" and in Appendix B and Appendix C.
Moody's rates the claims paying ability of the Certificate Insurer
"Aaa".
Standard & Poor's rates the claims paying ability of the Certificate
Insurer "AAA".
Fitch rates the claims paying ability of the Certificate Insurer "AAA".
Each rating of the Certificate Insurer should be evaluated
independently. The ratings reflect the respective rating agency's current
assessment of the creditworthiness of the Certificate Insurer and its ability to
pay claims on its policies of insurance. Any further explanation as to the
significance of the above ratings may be obtained only from the applicable
rating agency.
The above ratings are not recommendations to buy, sell or hold the
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, Seller, a Servicer, the Certificate Insurer or the Trustee that
any representations and warranties contained in a Transfer Agreement with
respect to the Mortgage Loans that were assigned to the Trust were untrue in any
material respect as of the Closing Date with the result that the interests of
the Owners or of the Certificate Insurer are materially and adversely affected,
or the value of the related Mortgage Loan is materially and adversely affected,
the party discovering such breach is required to give prompt written notice to
certain other parties thereto.
Upon the earliest to occur of the Seller's discovery of or its receipt
of notice of a breach described above from any of the other parties pursuant to
the related Transfer Agreement, the related Originator will be required promptly
to (i) cure such breach in all material respects or, within the time period
specified in the related Transfer Agreement, to (ii) substitute in lieu of each
affected Mortgage Loan a Qualified Replacement Mortgage (as such term is defined
in the Pooling and Servicing Agreement) and deliver any Substitution Amount to
the related Servicer for deposit into its Principal and Interest Account on
behalf of the Trust as part of the Monthly Remittance remitted by such Servicer
on the related Monthly Remittance Date or (iii) purchase such Mortgage Loan from
the Trust at a purchase price equal to the Loan Purchase Price (as defined
below) thereof. Notwithstanding any provision of the Pooling and Servicing
Agreement to the contrary, with respect to any Mortgage Loan which is not in
default or as to which no default is imminent, no such repurchase or
substitution will be made unless the Originator obtains for the Trustee and the
Certificate Insurer an opinion of counsel experienced in federal income tax
matters and acceptable to the Certificate Insurer to the effect that such a
repurchase or substitution would not constitute a Prohibited Transaction for the
Trust or otherwise subject the Trust to tax and would not jeopardize the status
of the REMIC Trust as a REMIC (a "REMIC Opinion"), addressed to the Trustee and
the Certificate Insurer and
S-75
<PAGE>
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.
Assignment of Mortgage Loans
Pursuant to the Pooling and Servicing Agreement, the Seller on the
Closing Date will transfer, assign, set over and otherwise convey without
recourse to the Depositor and the Depositor will transfer, assign, set over and
otherwise convey without recourse to the Trustee in trust all of its respective
right, title and interest in and to each Mortgage Loan and all its respective
right, title and interest in and to principal and interest due on each such
Mortgage Loan on or after the Cut-Off Date; provided, however, that the
Depositor will reserve and retain all its right, title and interest in and to
principal (including Prepayments) and interest due on each Initial Mortgage Loan
on or prior to the Cut-Off Date (except with respect to Initial Mortgage Loans
that were delinquent on the Cut-Off Date, which payments are not being retained
by the Depositor). Purely as a protective measure and not to be construed as
contrary to the parties' intent that the transfer on the Closing Date is a sale,
the Seller has also been deemed to have granted to the Depositor and the
Depositor has also been deemed to have granted to the Trustee a security
interest in the Trust Estate in the event that the transfer of the Trust Estate
is deemed to be a loan and not a sale.
In connection with the transfer and assignment of the Initial Mortgage
Loans on the Closing Date and the Subsequent Mortgage Loans on each Subsequent
Transfer Date, the Depositor will be required to:
(i) deliver without recourse to the Trustee on the Closing
Date with respect to each Initial Mortgage Loan or on each Subsequent
Transfer Date with respect to each Subsequent Mortgage Loan identified
in the related Schedule of Mortgage Loans (A) the original Notes,
endorsed in blank or to the order of the Trustee, (B) the original
title insurance policy or any one of an original title binder, an
original preliminary title report, or an original title commitment, or
a copy certified by the issuer of any of the foregoing, or the
attorney's opinion of title, (C) originals or certified copies of all
intervening recorded assignments, showing a complete chain of title
from origination to the Trustee, if any, including warehousing
assignments, with evidence of recording thereon, (D) originals of all
assumption, modification, written assurance or substitution agreements,
if any and (E) either: (1) the original Mortgage, with evidence of
recording thereon, (2) a certified copy if such original Mortgage has
not been received from the applicable recording office by the Seller
and returned to the custodian or (3) a copy of the Mortgage certified
by the public recording office in those instances where the original
recorded Mortgage has been lost;
(ii) cause the Originator (if the Originator is Long Beach or
Option One) or the Seller within 60 days following the Closing Date
with respect to the Initial Mortgage Loans, or the Subsequent Transfer
Date with respect to the Subsequent Mortgage Loans, to submit for
recording in the appropriate jurisdictions, assignments of the
Mortgages to "Bankers Trust Company, as Trustee of AMRESCO Residential
Securities Corporation Mortgage Loan Trust 1996-4 under the Pooling and
Servicing Agreement dated as of August 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;
S-76
<PAGE>
(iii) if not delivered on the Closing Date, deliver the title
insurance policy or title searches, the original Mortgages and such
recorded assignments, together with originals or duly certified copies
of any and all prior assignments, to the Trustee within 15 days of
receipt thereof by the Depositor (but in any event, with respect to any
Mortgage as to which original recording information has been made
available to the Depositor within two years after the Closing Date with
respect to the Initial Mortgage Loans, or Subsequent Transfer Date with
respect to the Subsequent Mortgage Loans); and
(iv) furnish to the Trustee and the Certificate Insurer, at
the Depositor's expense, a tax opinion and an opinion of counsel with
respect to the sale and perfection of all Subsequent Mortgage Loans
delivered to the Trust in form and substance satisfactory to the
Trustee and the Certificate Insurer.
The Trustee will agree, for the benefit of the Owners, to review the
documents contained in each Mortgage Loan File held by the Trustee ("File")
within 45 days after the Closing Date or Subsequent Transfer Date (or the date
of receipt of any documents delivered to the Trustee after such date) to
ascertain that all required documents (or certified copies of documents) have
been executed and received.
If the Trustee during such 45-day period finds any document
constituting a part of a File which is not properly executed, has not been
received, or is unrelated to the Mortgage Loans, or that any Mortgage Loan does
not conform in a material respect to the description thereof as set forth in the
Schedule of Mortgage Loans, the Trustee will be required to promptly notify the
Depositor, the Seller, the Owners and the Certificate Insurer. The Seller will
agree in the Pooling and Servicing Agreement to request that the related
Originator use reasonable efforts to remedy a material defect in a document
constituting part of a File of which it is so notified by the Trustee. If,
however, within the time period set forth in the related Transfer Agreement
after the Trustee's notice to it respecting such defect the related Originator
or other party to a Transfer Agreement shall not have remedied the defect and
the defect materially and adversely affects the interest in the related Mortgage
Loan of the Owners or of the Certificate Insurer, the Seller will request the
related Originator within the time period specified in the related Transfer
Agreement to (i) substitute in lieu of such Mortgage Loan another Mortgage Loan
of like kind (a "Qualified Replacement Mortgage," as such term is defined in the
Pooling and Servicing Agreement) and deliver any "Substitution Amount" (the
excess, if any, of the Loan Balance of a Mortgage Loan being replaced over the
outstanding principal balance of a replacement Mortgage Loan plus accrued and
unpaid interest) to the related Servicer for deposit into its Principal and
Interest Account on behalf of the Trust as part of the Monthly Remittance 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 Trustee has agreed to provide an
updated exception report during the 12th month after the Closing Date indicating
the current status of the exceptions previously noted by the Trustee (the "Final
Certification"). After delivery of the Final Certification, the Trustee shall
provide to the Certificate Insurer and the related Servicer no less frequently
than monthly updated certifications indicating the then current status of
exceptions, until all such exceptions have been eliminated.
Servicing
Each Servicer will be obligated under the Pooling and Servicing
Agreement to service and administer the Mortgage Loans identified as being
serviced by it as described therein and with reasonable care, and using that
degree of skill and attention that such Servicer exercises with respect to
comparable mortgage loans that it services for itself or others, and shall have
full power and authority, acting alone, to do or cause to be done any and all
things in connection with such servicing and administration which it may deem
necessary or desirable. Consistent with the foregoing, each Servicer will be
permitted to, in its discretion, (i) waive any assumption fees, late payment
charges, charges for checks returned for insufficient funds or other fees which
may be collected in the ordinary course of servicing the Mortgage Loans, (ii) if
a Mortgagor is in default or about to be in default because of a Mortgagor's
financial condition, arrange with the Mortgagor a schedule for the payment of
delinquent payments due on the related Mortgage Loan, or (iii) modify payments
of monthly principal and interest on any Mortgage Loan becoming subject to the
terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended, in
accordance with such Servicer's general policies with respect to comparable
mortgage loans subject to such Act.
Each Servicer will be paid a monthly fee from interest collected with
respect to each Mortgage Loan serviced by it (as well as from any Liquidation
Proceeds from a Liquidated Mortgage Loan ("Liquidation Proceeds")
S-77
<PAGE>
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
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 was 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 unrecovered Delinquency Advances
and Servicing Advances to the extent permitted in the Pooling and
Servicing Agreement;
(iv) to withdraw amounts that have been deposited to its
respective Principal and Interest Account in error; and
(v) to clear and terminate its respective Principal and
Interest Account following the termination of the Trust Estate.
S-78
<PAGE>
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.
Delinquency Advances are intended to maintain a regular flow of
scheduled interest and principal payments on the Certificates rather than to
guarantee or insure against losses. Each Servicer is obligated to make
Delinquency Advances with respect to delinquent payments of principal of or
interest on each Mortgage Loan, other than delinquent Balloon Payments on
"Balloon Mortgage Loans" (i.e., Mortgage Loans with respect to which the
principal balance, by its original terms, does not fully amortize at final
maturity), serviced by it (with such payments of interest adjusted to the
related Net Coupon Rate) to the extent that such Delinquency Advances are, in
its good faith business judgment, recoverable from future payments and
collections or insurance payments or proceeds of liquidation of the related
Mortgage Loan. With respect to a delinquent Balloon Payment, the Servicer is not
required to make a Delinquency Advance of such delinquent Balloon Payment. The
Servicer will, however, make monthly Delinquency Advances with respect to
Balloon Mortgage Loans with delinquent Balloon Payments, in each case in an
amount equal to the assumed monthly principal and interest payment that would
have been due on the related Due Date based on the original principal
amortization schedule for the applicable Balloon Mortgage Loan. Such Delinquency
Advances shall be required only to the extent that the Servicer, in its good
faith business judgment, determines that such Delinquency Advance will be
recoverable from future payments and collections or insurance payments or
proceeds of liquidation of the related Mortgage Loan. Each Servicer shall be
permitted to fund its payment of Delinquency Advances on any Business Day, or to
reimburse itself for any Delinquency Advances paid from such Servicer's own
funds, from collections on the related Mortgage Loan deposited to the related
Principal and Interest Account subsequent to the related Remittance Period
(including "Prepaid Installments" (i.e., early payments of scheduled principal
and interest intended by the borrower to be treated as such)) and shall deposit
into the related Principal and Interest Account with respect thereto (i)
collections from the Mortgagor whose delinquency gave rise to the shortfall
which resulted in such Delinquency Advance net of any such Delinquency Advance
and (ii) Net Liquidation Proceeds recovered on account of the related Mortgage
Loan to the extent of the amount of aggregate Delinquency Advances related
thereto. Previously unreimbursed Delinquency Advances that the Servicer
determines to be unrecoverable may be reimbursed to the Servicer out of any
Mortgagor payments prior to their deposit to the related Principal and Interest
Account or from funds on deposit in the related Principal and Interest Account.
All Delinquency Advances will be included with the distribution to Owners of the
Certificates of the related Group of Certificates on the related Payment Date.
Any failure by a Servicer to make a Delinquency Advance as required under the
Pooling and Servicing Agreement with respect to the Certificates will constitute
an event of default thereunder for such Servicer, in which case the Trustee, as
successor servicer, or the successor servicer will be obligated to make any such
Delinquency Advance, in accordance with the terms of the Pooling and Servicing
Agreement.
Each Servicer will be required to pay all customary, reasonable and
necessary "out of pocket" costs and expenses incurred in the performance of its
servicing obligations, including, but not limited to, (i) expenditures in
connection with a foreclosed Mortgage Loan prior to the liquidation thereof,
including, without limitation, expenditures for real estate property taxes,
hazard insurance premiums, property restoration or preservation ("Preservation
Expenses"), (ii) the cost of any enforcement or judicial proceedings, including
foreclosures and (iii) the cost of the management and liquidation of Property
acquired in satisfaction of the related Mortgage, to the extent such expenses
are, in its good faith business judgment, recoverable. Such costs will
constitute "Servicing Advances." Each Servicer may recover a Servicing Advance
(x) to the extent permitted by the Mortgage Loans or, if not theretofore
recovered from the Mortgagor on whose behalf such Servicing Advance was made,
from Liquidation Proceeds realized upon the liquidation of the related Mortgage
Loan or (y), to the extent that such Servicing Advance is determined by the
Servicer in its good faith business judgment to be non-recoverable from such
proceeds from Net Monthly Excess Cashflow and certain other Mortgage Loan
proceeds as specified in the Pooling and Servicing Agreement.
S-79
<PAGE>
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
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
S-80
<PAGE>
be treated as Servicing Advances) on account of the premiums therefor if not
paid by the Mortgagor if permitted by the terms of such Mortgage Loan.
Each Servicer will have the right under the Pooling and Servicing
Agreement to accept applications of Mortgagors for consent to (i) partial
releases of Mortgages, (ii) alterations and (iii) removal, demolition or
division of Mortgaged Properties. No application for approval may be considered
by such Servicer unless: (i) the provisions of the related Note and Mortgage
have been complied with; (ii) the loan-to-value ratio and debt-to-income ratio
after any release does not exceed the maximum loan-to-value ratio and
debt-to-income ratio established in accordance with the Guidelines set forth
herein to be applicable to such Mortgage Loan; and (iii) the lien priority of
the related Mortgage is not affected.
Each Servicer will be permitted under the Pooling and Servicing
Agreement to enter into subservicing agreements for any servicing and
administration of Mortgage Loans with any institution which is acceptable to the
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
S-81
<PAGE>
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.
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;
S-82
<PAGE>
(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;
(x) the total of any Substitution Amounts or Loan Purchase
Price amounts included in such distribution with respect to each Group
and in total;
(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 the Class A-6
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) 30-59 days delinquent, (ii) 60-89 days delinquent and (ii) 90
or more days delinquent, as of the close of business on the last day of
the Remittance Period (taking into account any payments received from
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.
S-83
<PAGE>
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.
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.
S-84
<PAGE>
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 any Available Funds Cap Carry-Forward Amount at such
time, 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.
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;
provided, that if the Certificate Insurer or any Servicer exercises such rights,
such party shall not be required to pay any Available Funds Cap Carry-Forward
Amount as part of its purchase price.
Termination Upon Loss of REMIC Status. Following a final determination
by the Internal Revenue Service or by a court of competent jurisdiction, in
either case from which no appeal is taken within the permitted time for such
appeal, or if any appeal is taken, following a final determination of such
appeal from which no further appeal can be taken, to the effect that the REMIC
does not and will no longer qualify as a "REMIC" pursuant to Section 860D of the
Code (the "Final Determination"), at any time on or after the date which is 30
calendar days following such Final Determination the Certificate Insurer or the
Owners of a majority in Percentage Interests represented by the Class A
Certificates then outstanding with the consent of the Certificate Insurer may
direct the Trustee on behalf of the Trust to adopt a plan of complete
liquidation, as contemplated by Section 860F(a)(4) of the Code.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of certain of the material anticipated federal
income tax consequences of the purchase, ownership and disposition of the Class
A Certificates is to be considered only in connection with "Certain Federal
Income Tax Consequences" in the Prospectus. The discussion herein and in the
Prospectus is based upon laws, regulations, rulings and decisions now in effect,
all of which are subject to change. The discussion below and in the Prospectus
does not purport to deal with all federal tax consequences applicable to all
categories of investors, some of which may be subject to special rules.
Investors should consult their own tax advisors in determining the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the Class A Certificates.
REMIC Election
Pursuant to the Pooling and Servicing Agreement, the Trustee will elect
to treat the Trust Estate (other than the Pre-Funding Account and the
Capitalized Interest Account) as a REMIC for federal income tax purposes. The
REMIC will issue the Class A Certificates and the Subordinate Certificates
(other than the Class R Certificates) which will be designated as regular
interests in the REMIC and the Class R Certificates which will be designated as
the residual interest in the REMIC. See "Formation of the Trust and Trust
Property" herein.
Qualification as a REMIC requires ongoing compliance with certain
conditions. Arter & Hadden, special tax counsel, will advise that, in its
opinion, for federal income tax purposes, assuming (i) the REMIC election is
made and (ii) compliance with the Pooling and Servicing Agreement, the REMIC
will be treated as a REMIC, the Class A Certificates will be treated as "regular
interests" in the REMIC and the Class R Certificates will be the sole "residual
interest" in the REMIC. Except as indicated below and in the Prospectus, for
federal income tax purposes, regular interests in a REMIC are treated as debt
instruments issued by the REMIC on the date on which
S-85
<PAGE>
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 115% for the Fixed Rate Group
Certificates and 115% for the Adjustable Group Certificates. See "Prepayment and
Yield Considerations -- Projected Prepayment and Yield for Class A Certificates"
herein.
As a result of the qualification of certain specified assets of the
Trust as a REMIC, the Trust will not be subject to federal income tax except
with respect to (i) income from prohibited transactions, (ii) "net income from
foreclosure property" and (iii) certain contributions to the Trust after the
Closing Date (see "Certain Federal Income Tax Consequences" in the Prospectus).
The total income of the Trust (exclusive of any income that is taxed at the
REMIC level) will be taxable to the Beneficial Owners of the Certificates.
Under the laws of New York State and New York City, an entity that is
treated for federal income tax purposes as a REMIC generally is exempt from
entity level taxes imposed by those jurisdictions. This exemption does not
apply, however, to the income on the Class A Certificates.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain requirements on those employee benefit plans and
individual retirement arrangements to which it applies ("Plan") and on those
persons who are fiduciaries with respect to such Plans. Any Plan fiduciary which
proposes to cause a Plan to acquire any of the Class A Certificates should
consult with counsel with respect to the consequences under ERISA and the Code
of the Plan's acquisition and ownership of such Certificates. See "ERISA
Considerations" in the Prospectus.
The Department of Labor has issued to the Underwriters individual
prohibited transaction exemptions PTE 89-88, 54 Fed. Reg. 42.582 (Oct. 17,
1989), PTE 89-89, 54 Fed. Reg. 42.589 (Oct. 17, 1989), and PTE 90-32, 55 Fed.
Reg. 23.147 (June 6, 1990) (the "Exemptions"); which generally exempt from the
application of the prohibited transaction provisions of Section 406(a), Section
406(b)(1) and Section 406(b)(2) of ERISA and the excise taxes imposed pursuant
to Sections 4975(a) and (b) of the Code, with respect to the initial purchase,
the holding and the subsequent resale by Plans of certificates in pass-through
trusts that consist of certain receivables, loans and other obligations that
meet the conditions and requirements of the Exemptions. The loans covered by the
Exemptions include mortgage loans such as the Mortgage Loans.
Among the conditions that must be satisfied for the Exemptions to apply
are the following:
(1) the acquisition of the Class A Certificates by a Plan is
on terms (including the price for the certificates) that are at least
as favorable to the Plan as they would be in an arm's-length
transaction with an unrelated party;
(2) the rights and interests evidenced by the Class A
Certificates acquired by the Plan are not subordinated to the rights
and interests evidenced by other Certificates of the Trust Estate;
(3) the Class A Certificates acquired by the Plan have
received a rating at the time of such acquisition that is one of the
three highest generic rating categories from either Standard & Poor's,
Moody's, Duff & Phelps Credit Rating Co. ("D&P") or Fitch;
(4) the Trustee must not be an affiliate of any other member
of the Restricted Group (as defined below);
(5) the sum of all payments made to and retained by any
Underwriter in connection with the distribution of the Class A
Certificates represents not more than reasonable compensation for
underwriting the Class A Certificates; the sum of all payments made to
and retained by the Seller pursuant to the assignment of the Mortgage
Loans to the Trust Estate represents not more than the fair market
value of such loans; the sum of all payments made to and retained by
any Servicer represents not more than reasonable compensation for such
person's services under the Agreement and reimbursement of such
person's reasonable expenses in connection therewith; and
S-86
<PAGE>
(6) the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933.
The Trust Estate must also meet the following requirements:
(i) the corpus of the Trust Estate must consist solely of a
fixed pool of assets of the type that have been included in other
investment pools;
(ii) certificates in such other investment pools must have
been rated in one of the three highest rating categories of Standard &
Poor's, Moody's, Fitch or D&P for at least one year prior to the Plan's
acquisition of Class A Certificates; and
(iii) certificates evidencing interests in such other
investment pools must have been purchased by investors other than Plans
for at least one year prior to the Plan's acquisition of the Class A
Certificates.
Moreover, the Exemptions provide relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire certificates in a trust in which the
fiduciary (or its affiliate) is a mortgagor on the receivables held in the
trust; provided that, among other requirements, (i) in the case of an
acquisition in connection with the initial issuance of certificates, at least
fifty percent of each class of certificates in which Plans have invested is
acquired by persons independent of the Restricted Group and at least fifty
percent of the aggregate interest in the trust is acquired by persons
independent of the Restricted Group; (ii) such fiduciary (or its affiliate) is a
mortgagor with respect to five percent or less of the fair market value of the
obligations contained in the trust; (iii) the Plan's investment in certificates
of any class does not exceed twenty-five percent of all of the certificates of
that class outstanding at the time of the acquisition; and (iv) immediately
after the acquisition, no more than twenty-five percent of the assets of the
Plan with respect to which such person is a fiduciary are invested in
certificates representing an interest in one or more trusts containing assets
sold or serviced by the same entity. The Exemptions do not apply to Plans
sponsored by the Depositor, the Certificate Insurer, the Underwriters, the
Trustee, the related Servicer, any mortgagor with respect to Mortgage Loans
included in the Trust Estate constituting more than five percent of the
aggregate unamortized principal balance of the assets in the Trust Estate, or
any affiliate of such parties (the "Restricted Group"). As of the date hereof,
there is no single Mortgage Loan included in the Trust Estate that constitutes
more than five percent of the aggregate unamortized principal balance of the
assets of the Trust Estate.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the possible applicability of the
Exemptions, or other exemptive relief, and all of the potential consequences in
their specific circumstances, prior to making an investment in the Class A
Certificates. Each Plan fiduciary should determine whether under the general
fiduciary standards of investment procedure and diversification an investment in
the Class A Certificates is appropriate for the Plan, taking into account the
overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
RATINGS
It is a condition of the issuance of the Class A Certificates that the
Class A Certificates receive ratings of "AAA" by Standard & Poor's, "Aaa" by
Moody's and "AAA" by Fitch. The ratings assigned to the Class A Certificates
will be based primarily on the claims-paying ability of the Certificate Insurer.
The ratings assigned to the Class A-6 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
Investors Services, One State Street Plaza, 33rd Floor, New York, New York
10004. Such ratings will be the views only of such rating agencies. There is no
assurance that any such ratings will continue for any period of time or that
such ratings will not be revised or withdrawn. Any such revision or withdrawal
of such ratings may have an adverse effect on the market price of the Class A
Certificates. A security rating is not a recommendation to buy, sell or hold
securities.
Ratings of the Class A-1 Certificates. With respect to the Class A-1
Certificates the ratings assigned to such Certificates do not address the
likelihood that the Certificate Principal Balance of such Class will be reduced
in accordance with the Targeted Balance Schedule. While the related Certificate
Insurance Policy guarantees the timely payment of interest on and the ultimate
payment of the principal amount of the Class A-1 Certificates, the payment in
full of the Class A-1 Certificates on or prior to such Final Scheduled Payment
Date is not guaranteed by the Certificate Insurer.
S-87
<PAGE>
LEGAL INVESTMENT CONSIDERATIONS
The Class A Certificates will constitute "mortgage related securities"
for purposes of SMMEA for so long as they are rated in one of the two highest
rating categories by one or more nationally recognized statistical rating
organizations. As such, such Classes of Certificates will be legal investments
for certain entities to the extent provided in SMMEA, subject to state laws
overriding SMMEA. In addition, institutions whose investment activities are
subject to review by federal or state regulatory authorities may be or may
become subject to restrictions, which may be retroactively imposed by such
regulatory authorities, on the investment by such institutions in certain forms
of mortgage related securities. Furthermore, certain states have enacted
legislation overriding the legal investment provisions of SMMEA.
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
------------ -------------------
CS First Boston 55%
Prudential Securities Incorporated 35%
Goldman, Sachs & Co. 10%
Class A-2 Certificates
Underwriters Percentage Interest
------------ -------------------
CS First Boston 55%
Prudential Securities Incorporated 35%
Goldman, Sachs & Co. 10%
Class A-3 Certificates
Underwriters Percentage Interest
------------ -------------------
CS First Boston 55%
Prudential Securities Incorporated 35%
Goldman, Sachs & Co. 10%
Class A-4 Certificates
Underwriters Percentage Interest
------------ -------------------
CS First Boston 55%
Prudential Securities Incorporated 35%
Goldman, Sachs & Co. 10%
Class A-5 Certificates
Underwriters Percentage Interest
------------ -------------------
CS First Boston 55%
Prudential Securities Incorporated 35%
Goldman, Sachs & Co. 10%
S-88
<PAGE>
Class A-6 Certificates
Underwriters Percentage Interest
------------ -------------------
CS First Boston 55%
Prudential Securities Incorporated 35%
Goldman, Sachs & Co. 10%
The Underwriters are collectively committed to purchase all of the
Class A Certificates if any Class A Certificates are purchased. The Depositor
has been advised by the Underwriters that they propose initially to offer the
Class A Certificates to the public at the respective offering prices set forth
on the cover page hereof and to certain dealers at such price less a concession
not in excess of the respective amounts set forth in the table below (expressed
as a percentage of the respective Class Certificate Balance). The Underwriters
may allow and such dealers may reallow a discount not in excess of the
respective amounts set forth in the table below to certain other dealers.
Class Selling Reallowance
- ----- ------- -----------
Concession Discount
---------- --------
A-1.................................... 0.04% 0.025%
A-2.................................... 0.06% 0.050%
A-3.................................... 0.13% 0.125%
A-4.................................... 0.25% 0.125%
A-5.................................... 0.35% 0.250%
A-6.................................... 0.18% 0.125%
The Depositor has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or contribute
to payments which the Underwriters may be required to make in respect thereof.
REPORT OF EXPERTS
The consolidated balance sheets of the Certificate Insurer, MBIA
Insurance Corporation (formerly known as Municipal Bond Investors Assurance
Corporation) as of December 31, 1995 and 1994 and the related consolidated
statements of income, changes in shareholder's equity, and cash flows for each
of the three years in the period ended December 31, 1995, appearing in Appendix
B of this Prospectus Supplement, have been audited by Coopers & Lybrand, L.P.,
independent accountants, as set forth in their report included therein, and are
included in reliance upon such report and upon the authority of such firm as
experts in accounting and auditing.
CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Seller by Arter & Hadden, Washington,
D.C. and by L. Keith Blackwell, Esquire, General Counsel for the Depositor.
Certain legal matters relating to insolvency issues and certain federal income
tax matters concerning the Certificates will be passed upon for the Depositor by
Arter & Hadden. Certain legal matters relating to the Class A Certificates will
be passed upon for the Underwriters by Stroock & Stroock & Lavan, New York, New
York. Legal matters relating to the Policies will be passed upon for the
Certificate Insurer by Kutak Rock, Omaha, Nebraska.
S-89
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered AMRESCO
Residential Securities Corporation Mortgage Loan Trust 1996-4 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
I-1
<PAGE>
Securities from and including the last coupon payment date 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. 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>
ANNEX II
TARGETED BALANCE SCHEDULE
Date Targeted Amount
---- ---------------
Initial Balance $9,163,000.00
September 25, 1996 8,766,608.08
October 25, 1996 8,168,524.33
November 25, 1996 7,572,433.77
December 25, 1996 6,978,323.94
January 25, 1997 6,386,182.41
February 25, 1997 5,795,996.80
March 25, 1997 5,207,754.79
April 25, 1997 4,621,444.09
May 25, 1997 4,037,052.47
June 25, 1997 3,454,567.73
July 25, 1997 2,873,977.73
August 25, 1997 2,295,270.37
September 25, 1997 1,718,433.59
October 25, 1997 1,143,455.39
November 25, 1997 570,323.81
<PAGE>
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Page
----
2/28 Loans S-4
5/25 Loans S-4
Accrual Period S-5
Actuarial Loans S-41
Adjustable Rate Certificates S-1
Adjustable Rate Group Available Funds Cap S-63
Advanta S-1
Advanta Parent S-29
Appraised Values S-40
Available Funds S-65
Available Funds Cap Carry-Forward Amount S-63
Balloon Mortgage Loans S-79
Balloon Payments S-78
Bank S-31
Beneficial Owners S-12
Berkeley S-3
Book-Entry Certificates S-69
Business Day S-5
Capitalized Interest Account S-12
Carry Forward Amount S-6
Cede S-13
CEDEL S-12
CEDEL Participants S-70
Certificate Account S-62
Certificate Insurance Policy S-10
Certificate Insurer S-10
Certificate Principal Balance S-55
Certificates S-2
Citibank S-13
Class S-1
Class A Certificate Principal Balance S-55
Class A Certificates S-1
Class A Distribution Amount S-5
Class A-1 Certificates S-1
Class A-2 Certificates S-1
Class A-3 Certificates S-1
Class A-4 Certificates S-1
Class A-5 Certificates S-1
Class A-6 Certificates S-1
Class A-6 Formula Pass-Through Rate S-63
Class A-6 Pass-Through Rate S-63
Class R Certificates S-2
Clean-Up Call Date S-12
Closing Date S-2
Code S-14
Compensating Interest S-80
Cooperative S-70
Coupon Rates S-3
CPR S-56
Current Interest S-6
Cut-Off Date S-2
D&P S-87
Daily Collections S-78
Definitive Certificate S-69
Deleted Mortgage Loan S-29
Depositor S-1
Determination Date S-83
DTC S-12
DTC Participants S-70
Due Dates S-80
ERISA S-86
Euroclear S-12
Euroclear Operator S-70
Euroclear Participants S-70
European Depositaries S-13
Excess Subordinated Amount S-66
Exemption S-86
FHA S-32
File S-77
Final Certification S-77
Final Scheduled Payment Dates S-55
Financial Intermediary S-69
First Colony S-4
Fiscal Agent S-73
Fitch S-87
Fixed Rate Certificates S-1
Fixed Rate Group Available Funds Cap S-1
Funding Period S-11
GAAP S-74
Initial Certificate Principal Balance S-55
Initial Mortgage Loans S-2
Insurance Policy S-10
Insured Payment S-10
Liquidated Mortgage Loan S-8
Liquidation Proceeds S-78
Loan Balance S-76
Loan Purchase Price S-28
Loan-to-Value Ratios S-43
Long Beach Loans S-20
Monthly Remittance Date S-8
Moody's S-13
Mortgage Loan Group 2
Mortgage Loans S-40
Mortgaged Properties S-2
Mortgages S-2
Net Coupon Rate S-29
Net Liquidation Proceeds S-78
Net Monthly Excess Cashflow S-64
New Century S-3
NIV S-31
Notes S-2
One-Month LIBOR S-68
One-Month LIBOR Determination Date S-68
Original Aggregate Loan Balance S-3
Original Pre-Funded Amount S-2
Originators S-61
Owners S-3
Participants S-69
Pass-Through Rate S-63
Payment Date S-5
Percentage Interest S-62
PHMC S-36
Plan S-86
Preference Amount S-9
Pre-Funded Amount S-11
Pre-Funding Account S-2
Premium Amount S-63
Prepaid Installments S-79
Prepayment Assumption S-56
Prepayment Interest Excess S-78
Prepayment Interest Shortfall S-80
Prepayments S-16
Preservation Expenses S-80
Principal and Interest Account S-78
Principal Distribution Amount S-7
Qualified Replacement Mortgage S-29
Rating Agencies S-13
Realized Loss S-67
Record Date S-5
Reference Banks S-69
Register S-62
Registrar S-62
Relevant Depositary S-69
REMIC S-14
REMIC Opinion S-76
Remittance Period S-8
REO Property S-79
Restricted Group S-87
Riegle Act S-19
Rules S-69
SAP S-74
Seller S-1
Servicer S-1
Servicers S-1
Servicing Advance S-80
Servicing Fee Rate S-78
Six-Month LIBOR Loan S-4
Specified Subordinated Amount S-66
Standard & Poor's S-13
Subordinate Certificates S-2
Subordinated Amount S-66
Subordination Deficit S-8
Subordination Increase Amount S-66
Subordination Reduction Amount S-66
Subsequent Cut-Off Date S-16
Subsequent Mortgage Loans S-2
Subsequent Transfer Agreement S-16
Subsequent Transfer Date S-11
Substitution Amount S-77
Targeted Amount S-6
Telerate Page 3750 S-69
Terms and Conditions S-71
Total Available Funds S-65
Total Monthly Excess Cashflow S-63
Transfer Agreement S-28
Trust S-61
Trust Estate S-61
Trustee S-2
Underwriters S-88
VA S-32
Walsh S-3
Weighted average life S-55
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
APPENDIX B
AUDITED FINANCIAL STATEMENTS FOR THE CERTIFICATE INSURER
MBIA INSURANCE CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1995 and 1994
and for the years ended
December 31, 1995, 1994 and 1993
B-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF
MBIA INSURANCE CORPORATION:
We have audited the accompanying consolidated balance sheets of MBIA Insurance
Corporation and Subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, changes in shareholder's equity and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of MBIA Insurance
Corporation and Subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
As discussed in Note 7 to the consolidated financial statements, effective
January 1, 1993 the Company adopted Statement of Financial Accounting Standards
No. 109 "Accounting for Income Taxes." As discussed in Note 2 to the
consolidated financial statements, effective January 1, 1994 the Company adopted
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
\s\ COOPERS & LYBRAND
New York, New York
January 22, 1996
B-2
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
------------------- ----------------
ASSETS
Investments:
<S> <C> <C>
Fixed maturity securities held as available-for-sale
at fair value (amortized cost $3,428,986 and
$3,123,838) $3,652,621 3,051,906
Short-term investments, at amortized cost
(which approximates fair value) 198,035 121,384
Other investments 14,064 11,970
------------ ------------
Total investments 3,864,720 3,185,260
Cash and cash equivalents 2,135 1,332
Accrued investment income 60,247 55,347
Deferred acquisition costs 140,348 133,048
Prepaid reinsurance premiums 200,887 186,492
Goodwill (less accumulated amortization of
$37,366 and $32,437) 105,614 110,543
Property and equipment, at cost (less accumulated
depreciation of $12,137 and $9,501) 41,169 39,648
Receivable for investments sold 5,729 945
Other assets 42,145 46,552
------------ ------------
TOTAL ASSETS $4,462,994 $3,759,167
============ ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deferred premium revenue $ 1,616,315 $ 1,512,211
Loss and loss adjustment expense reserves 42,505 40,148
Deferred income taxes 212,925 97,828
Payable for investments purchased 10,695 6,552
Other liabilities 54,682 46,925
------------ ------------
TOTAL LIABILITIES 1,937,122 1,703,664
------------ ------------
Shareholder's Equity:
Common stock, par value $150 per share; authorized,
issued and outstanding - 100,000 shares 15,000 15,000
Additional paid-in capital 1,021,584 953,655
Retained earnings 1,341,855 1,134,061
Cumulative translation adjustment 2,704 427
Unrealized appreciation (depreciation) of investments,
net of deferred income tax provision (benefit)
of $78,372 and $(25,334) 144,729 (47,640)
------------ ------------
TOTAL SHAREHOLDER'S EQUITY 2,525,872 2,055,503
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $4,462,994 $3,759,167
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
B-3
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31
----------------------------------------
1995 1994 1993
--------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Gross premiums written $349,812 $361,523 $479,390
Ceded premiums (45,050) (49,281) (47,552)
---------- ---------- ----------
Net premiums written 304,762 312,242 431,838
Increase in deferred premium revenue (88,365) (93,226) (200,519)
---------- ---------- ----------
Premiums earned (net of ceded
premiums of $30,655
$33,340 and $41,409) 216,397 219,016 231,319
Net investment income 219,834 193,966 175,329
Net realized gains 7,777 10,335 8,941
Other income 2,168 1,539 3,996
---------- ---------- ----------
Total revenues 446,176 424,856 419,585
---------- ---------- ----------
Expenses:
Losses and loss adjustment expenses 10,639 8,093 7,821
Policy acquisition costs, net 21,283 21,845 25,480
Underwriting and operating expenses 41,812 41,044 38,006
---------- ---------- ----------
Total expenses 73,734 70,982 71,307
---------- ---------- ----------
Income before income taxes and cumulative
effect of accounting changes 372,442 353,874 348,278
Provision for income taxes 81,748 77,125 86,684
---------- ---------- ----------
Income before cumulative effect of
accounting changes 290,694 276,749 261,594
Cumulative effect of accounting changes --- --- 12,923
---------- ---------- ----------
Net income $290,694 $276,749 $274,517
========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
B-4
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
For the years ended December 31, 1995, 1994 and 1993
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Unrealized
Additional Cumulative Appreciation
Common Stock Paid-in Retained Translation (Depreciation)
Shares Amount Capital Earnings Adjustment of Investments
------- -------- ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993 100,000 $ 15,000 $ 931,943 $ 670,795 $ (474) $ 2,379
Net income --- --- --- 274,517 --- ---
Change in foreign currency translation --- --- --- --- (729) ---
Change in unrealized appreciation
of investments net of change in
deferred income taxes of $(1,381) --- --- --- --- --- 2,461
Dividends declared (per
common share $500.00) --- --- --- (50,000) --- ---
Tax reduction related to tax sharing
agreement with MBIA Inc. --- --- 11,851 --- --- ---
------- -------- ---------- ---------- ---------- ------------
Balance, December 31, 1993 100,000 15,000 943,794 895,312 (1,203) 4,840
------- -------- ---------- ---------- ---------- ------------
Net income --- --- --- 276,749 --- ---
Change in foreign currency translation --- --- --- --- 1,630 ---
Change in unrealized depreciation
of investments net of change in
deferred income taxes of $27,940 --- --- --- --- --- (52,480)
Dividends declared (per
common share $380.00) --- --- --- (38,000) --- ---
Tax reduction related to tax sharing
agreement with MBIA Inc. --- --- 9,861 --- --- ---
------- -------- ---------- ---------- ---------- ------------
Balance, December 31, 1994 100,000 15,000 953,655 1,134,061 427 (47,640)
------- -------- ---------- ---------- ---------- ------------
Exercise of stock options --- --- 5,403 --- --- ---
Net income --- --- --- 290,694 --- ---
Change in foreign currency translation --- --- --- --- 2,277 ---
Change in unrealized appreciation
of investments net of change in
deferred income taxes of $(103,707) --- --- --- --- --- 192,369
Dividends declared (per
common share $829.00) --- --- --- (82,900) --- ---
Capital contribution from MBIA Inc. --- --- 52,800 --- --- ---
Tax reduction related to tax sharing
agreement with MBIA Inc. --- --- 9,726 --- --- ---
------- -------- ---------- ---------- ---------- ------------
Balance, December 31, 1995 100,000 $ 15,000 $1,021,584 $1,341,855 $ 2,704 $144,729
======= ======== ========== ========== ========== ============
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
B-5
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31
-----------------------------------------
1995 1994 1993
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $290,694 $276,749 $274,517
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in accrued investment income (4,900) (3,833) (5,009)
Increase in deferred acquisition costs (7,300) (12,564) (10,033)
Increase in prepaid reinsurance premiums (14,395) (15,941) (6,143)
Increase in deferred premium revenue 104,104 109,167 206,662
Increase in loss and loss adjustment expense reserves 2,357 6,413 8,225
Depreciation 2,676 1,607 1,259
Amortization of goodwill 4,929 4,961 5,001
Amortization of bond (discount) premium, net (2,426) 621 (743)
Net realized gains on sale of investments (7,778) (10,335) (8,941)
Deferred income taxes 11,391 19,082 7,503
Other, net 29,080 (8,469) 15,234
----------- ------------ ------------
Total adjustments to net income 117,738 90,709 213,015
----------- ------------ ------------
Net cash provided by operating activities 408,432 367,458 487,532
----------- ------------ ------------
Cash flows from investing activities:
Purchase of fixed maturity securities, net
of payable for investments purchased (897,128) (1,060,033) (786,510)
Sale of fixed maturity securities, net of
receivable for investments sold 473,352 515,548 205,342
Redemption of fixed maturity securities,
net of receivable for investments redeemed 83,448 128,274 225,608
(Purchase) sale of short-term investments, net (32,281) 3,547 (40,461)
(Purchase) sale of other investments, net (692) 87,456 (37,777)
Capital expenditures, net of disposals (4,228) (3,665) (3,601)
----------- ------------ ------------
Net cash used in investing activities (377,529) (328,873) (437,399)
----------- ------------ ------------
Cash flows from financing activities:
Capital contribution from MBIA Inc. 52,800 --- ---
Dividends paid (82,900) (38,000) (50,000)
----------- ------------ ------------
Net cash used by financing activities (30,100) (38,000) (50,000)
----------- ------------ ------------
Net increase in cash and cash equivalents 803 585 133
Cash and cash equivalents - beginning of year 1,332 747 614
----------- ------------ ------------
Cash and cash equivalents - end of year $2,135 $1,332 $747
=========== ============ ============
Supplemental cash flow disclosures:
Income taxes paid $ 50,790 $ 53,569 $ 52,967
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
B-6
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
MBIA Insurance Corporation ("MBIA Corp."), formerly known as Municipal Bond
Investors Assurance Corporation, is a wholly owned subsidiary of MBIA Inc. MBIA
Inc. was incorporated in Connecticut on November 12, 1986 as a licensed insurer
and, through the following series of transactions during December 1986, became
the successor to the business of the Municipal Bond Insurance Association (the
"Association"), a voluntary unincorporated association of insurers writing
municipal bond and note insurance as agent for the member insurance companies:
o MBIA Inc. acquired for $17 million all of the outstanding common stock of
New York domiciled insurance company and changed the name of the insurance
company to Municipal Bond Investors Assurance Corporation. In April 1995, the
name was again changed to MBIA Insurance Corp. Prior to the acquisition, all of
the obligations of this company were reinsured and/or indemnified by the former
owner.
o Four of the five member companies of the Association, together with their
affiliates, purchased all of the outstanding common stock of MBIA Inc. and
entered into reinsurance agreements whereby they ceded to MBIA Inc.
substantially all of the net unearned premiums on existing and future
Association business and the interest in, or obligation for, contingent
commissions resulting from their participation in the Association. MBIA Inc.'s
reinsurance obligations were then assumed by MBIA Corp. The participation of
these four members aggregated approximately 89% of the net insurance in force of
the Association. The net assets transferred from the predecessor included the
cash transferred in connection with the reinsurance agreements, the related
deferred acquisition costs and contingent commissions receivable, net of the
related unearned premiums and contingent commissions payable. The deferred
income taxes inherent in these assets and liabilities were recorded by MBIA
Corp. Contingent commissions receivable (payable) with respect to premiums
earned prior to the effective date of the reinsurance agreements by the
Association in accordance with statutory accounting practices, remained as
assets (liabilities) of the member companies.
Effective December 31, 1989, MBIA Inc. acquired for $288 million all of
the outstanding stock of Bond Investors Group, Inc. ("BIG"), the parent company
of Bond Investors Guaranty Insurance Company ("BIG Ins."), which was
subsequently renamed MBIA Insurance Corp. of Illinois ("MBIA Illinois").
B-7
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In January 1990, MBIA Illinois ceded its portfolio of net insured
obligations to MBIA Corp. in exchange for cash and investments equal to its
unearned premium reserve of $153 million. Subsequent to this cession, MBIA Inc.
contributed the common stock of BIG to MBIA Corp. resulting in additional
paid-in capital of $200 million. The insured portfolio acquired from BIG Ins.
consists of municipal obligations with risk characteristics similar to those
insured by MBIA Corp. On December 31, 1990, BIG was merged into MBIA Illinois.
Also in 1990, MBIA Inc. formed MBIA Assurance S.A. ("MBIA Assurance"),
a wholly owned French subsidiary, to write financial guarantee insurance in the
international community. MBIA Assurance provides insurance for public
infrastructure financings, structured finance transactions and certain
obligations of financial institutions. The stock of MBIA Assurance was
contributed to MBIA Corp. in 1991 resulting in additional paid-in capital of $6
million. Pursuant to a reinsurance agreement with MBIA Corp., a substantial
amount of the risks insured by MBIA Assurance is reinsured by MBIA Corp.
In 1993, MBIA Inc. formed a wholly owned subsidiary, MBIA Investment
Management Corp. ("IMC"). IMC, which commenced operations in August 1993,
principally provides guaranteed investment agreements to states, municipalities
and municipal authorities which are guaranteed as to principal and interest.
MBIA Corp. insures IMC's outstanding investment agreement liabilities.
In 1993, MBIA Corp. assumed the remaining business from the fifth member of
the Association.
In 1994, MBIA Inc. formed a wholly owned subsidiary, MBIA Securities
Corp. ("SECO"), to provide fixed-income investment management services for MBIA
Inc.'s municipal cash management service businesses. In 1995, portfolio
management for a portion of MBIA Corp.'s insurance related investment portfolio
was transferred to SECO; the management of the balance of this portfolio was
transferred in January 1996.
2. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles ("GAAP"). The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
B-8
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Significant accounting policies are as follows:
CONSOLIDATION
The consolidated financial statements include the accounts of MBIA Corp., MBIA
Illinois, MBIA Assurance and BIG Services, Inc. All significant intercompany
balances have been eliminated. Certain amounts have been reclassified in prior
years' financial statements to conform to the current presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and demand deposits with banks.
INVESTMENTS
Effective January 1, 1994, MBIA Corp. adopted Statement of Financial Accounting
Standards ("SFAS") 115 "Accounting for Certain Investments in Debt and Equity
Securities." In accordance with SFAS 115, MBIA Corp. reclassified its entire
investment portfolio ("Fixed-maturity securities") as "available-for-sale."
Pursuant to SFAS 115, securities classified as available-for-sale are required
to be reported in the financial statements at fair value, with unrealized gains
and losses reflected as a separate component of shareholder's equity. The
cumulative effect of MBIA Corp.'s adoption of SFAS 115 was a decrease in
shareholder's equity at December 31, 1994 of $46.8 million, net of taxes. The
adoption of SFAS 115 had no effect on MBIA Corp.'s earnings.
Bond discounts and premiums are amortized on the effective-yield method
over the remaining term of the securities. For pre-refunded bonds the remaining
term is determined based on the contractual refunding date. Short-term
investments are carried at amortized cost, which approximates fair value and
include all fixed-maturity securities with a remaining term to maturity of less
than one year. Investment income is recorded as earned. Realized gains or losses
on the sale of investments are determined by specific identification and are
included as a separate component of revenues.
Other investments consist of MBIA Corp.'s interest in limited
partnerships and a mutual fund which invests principally in marketable equity
securities. MBIA Corp. records dividends from its investment in marketable
equity securities and its share of limited partnerships and
B-9
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
mutual funds as a component of investment income. In addition, MBIA Corp.
records its share of the unrealized gains and losses on these investments, net
of applicable deferred income taxes, as a separate component of shareholder's
equity.
PREMIUM REVENUE RECOGNITION
Premiums are earned pro rata over the period of risk. Premiums are allocated to
each bond maturity based on par amount and are earned on a straight-line basis
over the term of each maturity. When an insured issue is retired early, is
called by the issuer, or is in substance paid in advance through a refunding or
defeasance accomplished by placing U.S. Government securities in escrow, the
remaining deferred premium revenue, net of the portion which is credited to a
new policy in those cases where MBIA Corp. insures the refunding issue, is
earned at that time, since there is no longer risk to MBIA Corp. Accordingly,
deferred premium revenue represents the portion of premiums written that is
applicable to the unexpired risk of insured bonds and notes.
POLICY ACQUISITION COSTS
Policy acquisition costs include only those expenses that relate primarily to,
and vary with, premium production. For business produced directly by MBIA Corp.,
such costs include compensation of employees involved in marketing, underwriting
and policy issuance functions, certain rating agency fees, state premium taxes
and certain other underwriting expenses, reduced by ceding commission income on
premiums ceded to reinsurers. For business assumed from the Association, such
costs were comprised of management fees, certain rating agency fees and
marketing and legal costs, reduced by ceding commissions received by the
Association on premiums ceded to reinsurers. Policy acquisition costs are
deferred and amortized over the period in which the related premiums are earned.
LOSSES AND LOSS ADJUSTMENT EXPENSES
Reserves for losses and loss adjustment expenses ("LAE") are established in an
amount equal to MBIA Corp.'s estimate of the identified and unidentified losses,
including costs of settlement on the obligations it has insured.
To the extent that specific insured issues are identified as currently
or likely to be in default, the present value of expected payments, including
loss and LAE associated with these issues, net of expected recoveries, is
allocated within the total loss reserve as case basis reserves. Management of
MBIA Corp. periodically evaluates its estimates for losses and LAE and any
resulting adjustments are reflected in current earnings. Management
B-10
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
believes that the reserves are adequate to cover the ultimate net cost of
claims, but the reserves are necessarily based on estimates, and there can be no
assurance that the ultimate liability will not exceed such estimates.
CONTINGENT COMMISSIONS
Contingent commissions may be receivable from MBIA Corp.'s and the Association's
reinsurers under various reinsurance treaties and are accrued as the related
premiums are earned.
INCOME TAXES
MBIA Corp. is included in the consolidated tax return of MBIA
Inc. The tax provision for MBIA Corp. for financial reporting purposes is
determined on a stand alone basis. Any benefit derived by MBIA Corp. as a result
of the tax sharing agreement with MBIA Inc. and its subsidiaries is reflected
directly in shareholder's equity for financial reporting purposes.
Deferred income taxes are provided in respect of temporary differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse.
The Internal Revenue Code permits financial guarantee insurance
companies to deduct from taxable income additions to the statutory contingency
reserve, subject to certain limitations. The tax benefits obtained from such
deductions must be invested in non-interest bearing U. S. Government tax and
loss bonds. MBIA Corp. records purchases of tax and loss bonds as payments of
Federal income taxes. The amounts deducted must be restored to taxable income
when the contingency reserve is released, at which time MBIA Corp. may present
the tax and loss bonds for redemption to satisfy the additional tax liability.
PROPERTY AND EQUIPMENT
Property and equipment consists of MBIA Corp.'s headquarters and equipment and
MBIA Assurance's furniture, fixtures and equipment, which are recorded at cost
and, exclusive of land, are depreciated on the straight-line method over their
estimated service lives ranging from 4 to 31 years. Maintenance and repairs are
charged to expenses as incurred.
GOODWILL
Goodwill represents the excess of the cost of the acquired and contributed
subsidiaries over the tangible net assets at the time of acquisition or
contribution. Goodwill attributed to the acquisition of the licensed insurance
B-11
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
company includes recognition of the value of the state licenses held by that
company, and is amortized by the straight-line method over 25 years. Goodwill
related to the wholly owned subsidiary of MBIA Inc. contributed in 1988 is
amortized by the straight-line method over 25 years. Goodwill attributed to the
acquisition of MBIA Illinois is amortized according to the recognition of future
profits from its deferred premium revenue and installment premiums, except for a
minor portion attributed to state licenses, which is amortized by the
straight-line method over 25 years.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated at
year-end exchange rates. Operating results are translated at average rates of
exchange prevailing during the year. Unrealized gains or losses resulting from
translation are included as a separate component of shareholder's equity.
3. STATUTORY ACCOUNTING PRACTICES
The financial statements have been prepared on the basis of GAAP, which differs
in certain respects from the statutory accounting practices prescribed or
permitted by the insurance regulatory authorities. Statutory accounting
practices differ from GAAP in the following respects:
o premiums are earned only when the related risk has expired
rather than over the period of the risk;
o acquisition costs are charged to operations as incurred rather
than as the related premiums are earned;
o a contingency reserve is computed on the basis of statutory requirements and
reserves for losses and LAE are established, at present value, for specific
insured issues which are identified as currently or likely to be in default.
Under GAAP reserves are established based on MBIA Corp.'s reasonable estimate
of the identified and unidentified losses and LAE on the insured obligations
it has written;
o Federal income taxes are only provided on taxable income for which income
taxes are currently payable, while under GAAP, deferred income taxes are
provided with respect to temporary differences;
o fixed-maturity securities are reported at amortized cost rather than fair
value;
B-12
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
o tax and loss bonds purchased are reflected as admitted assets as well as
payments of income taxes; and
o certain assets designated as "non-admitted assets" are charged directly
against surplus but are reflected as assets under GAAP.
The following is a reconciliation of consolidated shareholder's equity
presented on a GAAP basis to statutory capital and surplus for MBIA Corp. and
its subsidiaries, MBIA Illinois and MBIA Assurance:
As of December 31
-----------------
(In thousands) 1995 1994 1993
-------------- ---- ---- ----
GAAP shareholder's equity ... $ 2,525,872 $ 2,055,503 $ 1,857,743
Premium revenue recognition . (328,450) (296,524) (242,577)
Deferral of acquisition costs (140,348) (133,048) (120,484)
Unrealized (gains) losses ... (223,635) 71,932 --
Contingent commissions ...... (1,645) (1,706) (1,880)
Contingency reserve ......... (743,510) (620,988) (539,103)
Loss and loss adjustment
expense reserves ........... 28,024 18,181 26,262
Deferred income taxes ....... 205,425 90,328 99,186
Tax and loss bonds .......... 70,771 50,471 25,771
Goodwill .................... (105,614) (110,543 (115,503)
Other ....................... (12,752) (13,568 (11,679)
------------ ----------- -----------
Statutory capital
and surplus ......... $ 1,274,138 1,110,038 $ 977,736
=========== ========= ===========
Consolidated net income of MBIA Corp. determined in accordance with
statutory accounting practices for the years ended December 31, 1995, 1994 and
1993 was $278.3 million, $224.9 million and $258.4 million, respectively.
4. PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS
Premiums earned include $34.0 million, $53.0 million and $85.6 million for 1995,
1994 and 1993, respectively, related to refunded and called bonds.
5. INVESTMENTS
MBIA Corp.'s investment objective is to optimize long-term, after-tax returns
while emphasizing the preservation of capital and claims-paying capability
through maintenance of high-quality investments with adequate liquidity. MBIA
Corp.'s investment policies limit the amount of credit exposure to any one
issuer. The fixed-maturity portfolio is comprised of high-quality (average
B-13
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
rating Double-A) taxable and tax-exempt investments of diversified maturities.
The following tables set forth the amortized cost and fair value of the
fixed-maturities and short-term investments included in the consolidated
investment portfolio of MBIA Corp. as of December 31, 1995 and 1994.
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---- ----- ------ ----------
(In thousands)
December 31, 1995
Taxable bonds
United States Treasury
and Government Agency .. $ 6,742 $ 354 -- $ 7,096
Corporate and other
obligations ............ 592,604 30,536 (212) 622,928
Mortgage-backed .......... 389,943 21,403 (932) 410,414
Tax-exempt bonds municipal
Obligations .............. 2,637,732 175,081 (2,595) 2,810,218
--------- ------- ------ ---------
Total fixed-
maturities $3,627,021 $ 227,374 (3,739) $3,850,656
========== ========== ====== ==========
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---- ----- ------ ----------
(In thousands)
Taxable bonds
United States Treasury
and Government Agency $ 15,133 -- (149) $ 14,984
Corporate and other ...
obligations ......... 461,601 2,353 (23,385) 440,569
Mortgage-backed ......... 317,560 3,046 (12,430) 308,176
Tax-exempt bonds
State and municipal
obligations ........... 2,450,928 36,631 (77,998) 2,409,561
--------- ------ ------- ---------
Total fixed-
maturities ......... $3,245,222 $ 42,030 $ (113,962) $3,173,290
========== ========== ========== ==========
Fixed-maturity investments carried at fair value of $8.1 million and
$7.4 million as of December 31, 1995 and 1994, respectively, were on deposit
with various regulatory authorities to comply with insurance laws.
B-14
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below sets forth the distribution by expected maturity of the
fixed-maturities and short-term investments at amortized cost and fair value at
December 31, 1995. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations.
Amortized Fair
(In thousands) Cost Value
- -------------- ---- -----
Maturity
Within 1 year ....................... $ 178,328 $ 178,256
Beyond 1 year but within 5 years .... 448,817 477,039
Beyond 5 years but within 10 years .. 1,133,527 1,211,645
Beyond 10 years but within 15 years . 742,790 804,421
Beyond 15 years but within 20 years . 686,871 730,030
Beyond 20 years ..................... 46.745 38,851
-------- --------
3,237,078 3,440,242
Mortgage-backed ..................... 389,943 410,414
------- -------
Total fixed-maturities and short-term
investments ....................... $3,627,021 $3,850,656
========== ==========
6. INVESTMENT INCOME AND GAINS AND LOSSES
Investment income consists of:
Years ended December 31
-----------------------
(In thousands) 1995 1994 1993
- ------------------------------- ---- ---- ----
Fixed-maturities .............. $ 216,653 $ 193,729 $ 173,070
Short-term investments ...... 6,008 3,003 2,844
Other investments ............. 17 12 2,078
-- -- -----
Gross investment income ..... 222,678 196,744 177,992
Investment expenses ........... 2,844 2,778 2,663
----- ----- -----
Net investment income ....... 219,834 193,966 175,329
Net realized gains (losses):
Fixed-maturities:
Gains..................... 9,941 9,635 9,070
Losses................ .. (2,537) (8,851) (744)
------ ------ ----
Net..................... 7,404 784 8,326
Other investments:
Gains................... 382 9,551 615
Losses................... (9) -- --
---- ------ ----
Net....................... 373 9,551 615
--- ----- ---
Net realized gains .......... 7,777 10,335 8,941
----- ------ -----
Total investment income ....... $ 227,611 $ 204,301 $ 184,270
=========== =========== ===========
B-15
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Unrealized gains (losses) consist of:
As of December 31
-----------------
(In thousands) 1995 1994
- --------------------------------- ---- ----
Fixed-maturities:
Gains ......................... $ 227,374 $ 42,030
Losses ........................ (3,739) (113,962)
Net .......................... 223,635 (71,932)
Other investments:
Gains ......................... 287 --
Losses ........................ (821) (1,042)
------- ------
Net ........................... (534) (1,042)
------ ------
Total ........................... 223,101 (72,974)
Deferred income tax (benefit) ... 78,372 (25,334)
------ -------
Unrealized gains (losses) - net $ 144,729 $ (47,640)
========= =========
The deferred taxes in 1995 and 1994 relate primarily to unrealized
gains and losses on MBIA Corp.'s fixed-maturity investments, which are reflected
in shareholders' equity in 1995 and 1994 in accordance with MBIA Corp.'s
adoption of SFAS 115.
The change in net unrealized gains (losses) consists of:
Years ended December 31
-----------------------
In thousands 1995 1994 1993
- ------------ ---- ---- ----
Fixed-maturities ............... $ 295,567 $(289,327) $ 101,418
Other investments .............. 508 (8,488) 3,842
--- ------ -----
Total ........................ 296,075 (297,815) 105,260
Deferred income taxes (benefit) 103,706 (27,940) 1,381
------- ------- -----
Unrealized gains (losses), net $ 192,369 $(269,875) $ 103,879
========= ========= =========
7. INCOME TAXES
Effective January 1, 1993, MBIA Corp. changed its method of accounting for
income taxes from the income statement-based deferred method to the balance
sheet-based liability method required by SFAS 109 "Accounting for Income Taxes."
MBIA Corp. adopted the new pronouncement on the cumulative catch-up basis and
recorded a cumulative adjustment, which increased net income and reduced the
deferred tax liability by $13.0 million. The cumulative effect represents the
impact of adjusting the deferred tax liability to reflect the January 1, 1993
tax rate of 34% as opposed to the higher tax rates in effect when certain of the
deferred taxes originated.
B-16
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SFAS 109 requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The effect on tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at December 31, 1995 and 1994 are as presented below:
(In thousands) 1995 1994
- ----------------------------------------------- ---- ----
Deferred tax assets
Tax and loss bonds .......................... $ 71,183 $ 50,332
Unrealized losses ........................... -- 25,334
Alternative minimum tax credit carry forwards 39,072 22,391
Loss and loss adjustment expense reserves ... 9,809 6,363
Other ....................................... 954 3,981
--- -----
Total gross deferred tax assets ............. 121,018 108,401
======= =======
Deferred tax liabilities
Contingency reserve ......................... 131,174 91,439
Deferred premium revenue .................... 64,709 54,523
Deferred acquisition costs .................. 49,122 48,900
Unrealized gains ............................ 78,372 --
Contingent commissions ...................... 7,158 4,746
Other ....................................... 3,408 6,621
----- -----
Total gross deferred tax liabilities ........ 333,943 206,229
------- -------
Net deferred tax liability .................. $212,925 $ 97,828
======== ========
Under SFAS 109, a change in the Federal tax rate requires a restatement
of deferred tax assets and liabilities. Accordingly, the restatement for the
change in the 1993 Federal tax rate resulted in a $5.4 million increase in the
tax provision, of which $3.2 million resulted from the recalculation of deferred
taxes at the new Federal rate.
The provision for income taxes is composed of:
Years ended December 31
-----------------------
(In thousands) 1995 1994 1993
- --------------------------------- ---- ---- ----
Current ......................... $70,357 $58,043 $66,086
Deferred ........................ 11,391 19,082 20,598
------ ------ ------
Total ......................... $81,748 $77,125 $86,684
======= ======= =======
B-17
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The provision for income taxes gives effect to permanent differences
between financial and taxable income. Accordingly, MBIA Corp.'s effective income
tax rate differs from the statutory rate on ordinary income. The reasons for
MBIA Corp.'s lower effective tax rates are as follows:
Years ended December 31
-----------------------
1995 1994 1993
---- ---- ----
Income taxes computed on pre-tax
financial income at statutory rates .......... 35.0% 35.0% 35.0%
Increase (reduction) in taxes resulting from:
Tax-exempt interest ........................ (12.5) (12.0) (10.6)
Amortization of goodwill ................... 0.5 0.5 0.5
Other ...................................... (1.1) (1.7) --
---- ---- ----
Provision for income taxes ......... 21.9% 21.8% 24.9%
==== ==== ====
8. DIVIDENDS AND CAPITAL REQUIREMENTS
Under New York state insurance law, MBIA Corp. may pay a dividend only from
earned surplus subject to the maintenance of a minimum capital requirement. The
dividends in any 12-month period may not exceed the lesser of 10% of its
policyholders' surplus as shown on its last filed statutory-basis financial
statements, or of adjusted net investment income, as defined, for such 12-month
period, without prior approval of the superintendent of the New York State
Insurance Department.
In accordance with such restrictions on the amount of dividends which
can be paid in any 12-month period, MBIA Corp. had approximately $44 million
available for the payment of dividends as of December 31, 1995. In 1995, 1994
and 1993, MBIA Corp. declared and paid dividends of $83 million, $38 million and
$50 million, respectively, to MBIA Inc.
Under Illinois Insurance Law, MBIA Illinois may pay a dividend from
unassigned surplus, and the dividends in any 12-month period may not exceed the
greater of 10% of policyholders' surplus (total capital and surplus) at the end
of the preceding calendar year, or the net income of the preceding calendar year
without prior approval of the Illinois State Insurance Department.
In accordance with such restrictions on the amount of dividends which
can be paid in any 12-month period, MBIA Illinois may pay a dividend only with
prior approval as of December 31, 1995.
B-18
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The insurance departments of New York state and certain other statutory
insurance regulatory authorities and the agencies which rate the bonds insured
by MBIA Corp. have various requirements relating to the maintenance of certain
minimum ratios of statutory capital and reserves to net insurance in force. MBIA
Corp. and MBIA Assurance were in compliance with these requirements as of
December 31, 1995.
9. LINES OF CREDIT
MBIA Corp. has a standby line of credit commitment in the amount of $650 million
with a group of major banks to provide loans to MBIA Corp. after it has incurred
cumulative losses (net of any recoveries) from September 30, 1995 in excess of
the greater of $500 million and 6.25% of average annual debt service. The
obligation to repay loans made under this agreement is a limited recourse
obligation payable solely from, and collateralized by, a pledge of recoveries
realized on defaulted insured obligations including certain installment premiums
and other collateral. This commitment has a seven-year term and expires on
September 30, 2002 and contains an annual renewal provision subject to the
approval by the bank group.
MBIA Corp. and MBIA Inc. maintain bank liquidity facilities aggregating
$275 million. At December 31, 1995, MBIA Inc. had $18 million outstanding under
these facilities.
10. NET INSURANCE IN FORCE
MBIA Corp. guarantees the timely payment of principal and interest on municipal,
asset-/mortgage-backed and other non-municipal securities. MBIA Corp.'s ultimate
exposure to credit loss in the event of nonperformance by the insured is
represented by the insurance in force as set forth below.
The insurance policies issued by MBIA Corp. are unconditional
commitments to guarantee timely payment on the bonds and notes to bondholders.
The creditworthiness of each insured issue is evaluated prior to the issuance of
insurance and each insured issue must comply with MBIA Corp.'s underwriting
guidelines. Further, the payments to be made by the issuer on the bonds or notes
may be backed by a pledge of revenues, reserve funds, letters of credit,
investment contracts or collateral in the form of mortgages or other assets. The
right to such money or collateral would typically become MBIA Corp.'s upon the
payment of a claim by MBIA Corp.
B-19
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 1995, insurance in force, net of cessions to reinsurers,
has a range of maturity of 1-43 years. The distribution of net insurance in
force by geographic location and type of bond, including $2.7 billion and $1.5
billion relating to IMC's municipal investment agreements guaranteed by MBIA
Corp. in 1995 and 1994, respectively, is set forth in the following tables:
<TABLE>
<CAPTION>
As of December 31
-----------------
($ in billions) 1995 1994
- --------------- ---- ----
Net Number % of Net Net Number % of Net
Georgraphic Insurance of Issues Insurance Insurance of Issues Insurance
Location In Force Outstanding In Force In Force Outstanding In Force
- -------- -------- ----------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
California .. $ 51.2 3,122 14.8 $ 43.9 2,832 14.3%
New York .... 30.1 4,846 8.7 25.0 4,447 8.2
Florida ..... 26.9 1,684 7.7 25.4 1,805 8.3
Texas ....... 20.4 2,031 5.9 18.6 2,102 6.1
Pennsylvania 19.7 2,143 5.7 19.5 2,108 6.4
New Jersey .. 16.4 1,730 4.7 15.0 1,590 4.9
Illinois .... 15.0 1,090 4.3 14.7 1,139 4.8
Massachusetts 9.3 1,070 2.7 8.6 1,064 2.8
Ohio ........ 9.1 1,017 2.6 8.3 996 2.7
Michigan .... 7.9 1,012 2.3 5.7 972 1.9
--- ----- --- --- --- ---
Subtotal .... 206.0 19,745 59.4 184.7 19,055 60.4
Other ....... 135.6 11,147 39.1 118.8 10,711 38.8
----- ------ ---- ----- ------ ----
Total U.S. 341.6 30,892 98.5 303.5 29,766 99.2
International 5.1 53 1.5 2.5 18 0.8
--- -- --- --- -- ---
$ 346.7 30,945 100.0% $ 306.0 29,784 100.0%
======== ====== ===== ======== ====== =====
</TABLE>
B-20
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
As of December 31
-----------------
($ in billions) 1995 1994
- --------------- ---- ----
Net Number % of Net Net Number % of Net
Insurance of Issues nsurance Insurance of Issues Insurance
Type of Bond In Force Outstanding In Force In Force Outstanding In Force
- ------------ -------- ----------- -------- -------- ----------- --------
Municipal
<S> <C> <C> <C> <C> <C> <C>
General Obligation $ 91.6 11,445 26.4% $ 84.2 11,029 27.5%
Utilities ........ 60.3 4,931 17.4 56.0 5,087 18.3
Health Care ...... 51.9 2,458 15.0 50.6 2,670 16.5
Transportation ... 25.5 1,562 7.4 21.3 1,486 7.0
Special Revenue .. 24.4 1,445 7.0 22.7 1,291 7.4
Industrial
development and
pollution control
revenue ......... 17.2 924 5.0 15.1 1,016 4.9
Housing .......... 15.8 2,671 4.5 13.6 2,663 4.5
Higher education . 15.2 1,261 4.4 14.0 1,208 4.6
======= ======= ====== ======= ======= =====
Other ............ 7.3 134 2.1 3.8 124 1.2
309.2 26,831 89.2 281.3 26,574 91.9
======= ======= ======= ======= ======= =====
Non-municipal
Asset/mortgage-
backed ......... 20.2 256 5.8 12.8 151 4.2
Investor-owned
utilities ...... 6.4 3,559 1.8 5.7 2,918 1.9
International .... 5.1 53 1.5 2.5 18 0.8
Other ............ 5.8 246 1.7 3.7 123 1.2
--- --- --- --- --- ---
37.5 4,114 10.8 24.7 3,210 8.1
---- ----- ---- ---- ----- ---
$346.7 30,945 100.0% $306.0 29,784 100.0%
======= ======= ======= ====== ======= =====
</TABLE>
11. REINSURANCE
MBIA Corp. reinsures portions of its risks with other insurance companies
through various quota and surplus share reinsurance treaties and facultative
agreements. In the event that any or all of the reinsurers were unable to meet
their obligations, MBIA Corp. would be liable for such defaulted amounts.
Amounts deducted from gross insurance in force for reinsurance ceded by
MBIA Corp., MBIA Assurance and MBIA Illinois were $50.1 billion and
B-21
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
$42.6 billion, at December 31, 1995 and 1994, respectively. The distribution of
ceded insurance in force by geographic location and type of bond is set forth in
the tables below:
As of December 31
-----------------
(In billions) 1995 1994
- ------------- ---- ----
% of % of
Ceded Ceded Ceded Ceded
Insurance Insurance Insurance Insurance
Geographic Location In Force In Force In Force In Force
- ------------------- -------- -------- -------- --------
California ......... $ 8.8 17.5% $ 7.5 17.6%
New York ........... 5.7 11.4 4.9 11.5
New Jersey ......... 3.1 6.1 2.0 4.7
Texas .............. 2.8 5.6 2.5 5.9
Pennsylvania ....... 2.7 5.4 2.6 6.1
Florida ............ 2.3 4.6 2.1 4.9
Illinois ........... 2.2 4.5 2.3 5.4
District of Columbia 1.5 3.0 1.6 3.8
Washington ......... 1.4 2.7 1.2 2.8
Puerto Rico ........ 1.3 2.6 1.1 2.6
Massachusetts ...... 1.1 2.1 0.9 2.1
Ohio ............... 1.0 2.1 0.9 2.1
--- --- --- ---
Subtotal ........... 33.9 67.6 29.6 69.5
Other .............. 14.4 28.8 12.3 28.9
---- ---- ---- ----
Total U. S ..... 48.3 96.4 41.9 98.4
International ...... 1.8 3.6 0.7 1.6
--- --- --- ---
$ 50.1 100.0% $42.6 100.0%
======= ===== ===== =====
B-22
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31
-----------------
(In billions) 1995 1994
- ------------- ---- ----
% of % of
Ceded Ceded Ceded Ceded
Insurance Insurance Insurance Insurance
Type of Bond In Force In Force In Force In Force
- ------------ -------- -------- -------- --------
Municipal
General obligation ... $ 11.7 23.3% $ 9.7 22.8%
Utilities ............ 9.0 18.0 8.5 20.0
Health care .......... 6.6 13.1 6.5 15.3
Transportation ....... 5.5 11.0 4.5 10.6
Special revenue ...... 3.2 6.4 2.7 6.3
Industrial development
and pollution
control revenue... 3.0 6.0 2.9 6.8
Housing .............. 1.4 2.8 1.0 2.3
Higher education ..... 1.2 2.4 1.2 2.8
Other ................ 2.4 4.8 1.5 3.5
--- --- --- ---
44.0 87.8 38.5 90.4
==== ==== ==== ====
Non-municipal
Asset-/mortgage-backed 3.6 7.2 2.7 6.3
International ........ 1.8 3.6 0.7 1.6
Other ................ 0.7 1.4 0.7 1.7
--- --- --- ---
6.1 12.2 4.1 9.6
--- ---- --- ---
$ 50.1 100.0% $ 42.6 100.0%
======== ===== ======== =====
Included in gross premiums written are assumed premiums from other
insurance companies of $11.7 million, $6.3 million and $20.4 million for the
years ended December 31, 1995, 1994 and 1993, respectively. The percentages of
the amounts assumed to net premiums written were 3.8%, 2.0% and 4.7% in 1995,
1994 and 1993, respectively.
Gross premiums written include $0.2 million in 1994 and $5.4 million in
1993 related to the reassumption by MBIA Corp. of reinsurance previously ceded
by the Association. Also included in gross premiums in 1993 is $10.8 million of
premiums assumed from a member of the Association. Ceded premiums written are
net of $0.2 million in 1995, $1.6 million in 1994 and $2.5 million in 1993
related to the reassumption of reinsurance previously ceded by MBIA Corp. or
MBIA Illinois.
B-23
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. EMPLOYEE BENEFITS
MBIA Corp. participates in MBIA Inc.'s pension plan covering all eligible
employees. The pension plan is a defined contribution plan and MBIA Corp.
contributes 10% of each eligible employee's annual total compensation. Pension
expense for the years ended December 31, 1995, 1994 and 1993 was $3.2 million,
$3.0 million and $3.1 million, respectively. MBIA Corp. also has a profit
sharing/401(k) plan which allows eligible employees to contribute up to 10% of
eligible compensation. MBIA Corp. matches employee contributions up to the first
5% of total compensation. MBIA Corp. contributions to the profit sharing plan
aggregated $1.4 million, $1.4 million and $1.3 million for the years ended
December 31, 1995, 1994 and 1993, respectively. The 401(k) plan amounts are
invested in common stock of MBIA Inc. Amounts relating to the above plans that
exceed limitations established by Federal regulations are contributed to a
non-qualified deferred compensation plan. Of the above amounts for the pension
and profit sharing plans, $2.7 million, $2.6 million and $2.6 million for the
years ended December 31, 1995, 1994 and 1993, respectively, are included in
policy acquisition costs.
MBIA Corp. also participates in MBIA Inc.'s common stock incentive plan
which enables employees of MBIA Corp. to acquire shares of MBIA Inc. or to
benefit from appreciation in the price of the common stock of MBIA Inc.
MBIA Corp. also participates in MBIA Inc.'s restricted stock program,
adopted in December 1995, whereby key executive officers of MBIA Corp. are
granted restricted shares of MBIA Inc. common stock.
Effective January 1, 1993, MBIA Corp. adopted SFAS 106 "Employers'
Accounting for Postretirement Benefits Other than Pensions." Under SFAS 106,
companies are required to accrue the cost of employee post-retirement benefits
other than pensions during the years that employees render service. Prior to
January 1, 1993, MBIA Corp. had accounted for these post-retirement benefits on
a cash basis. In 1993, MBIA Corp. adopted the new pronouncement on the
cumulative catch-up basis and recorded a cumulative effect adjustment which
decreased net income and increased other liabilities by $0.1 million. As of
January 1, 1994, MBIA Corp. eliminated these post-retirement benefits.
B-24
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. RELATED PARTY TRANSACTIONS
The business assumed from the Association, relating to insurance on unit
investment trusts sponsored by two members of the Association, includes deferred
premium revenue of $1.6 million and $1.9 million at December 31, 1995 and 1994,
respectively.
In 1993, MBIA Corp. assumed the balance of $10.8 million of deferred
premium revenue from a member of the Association which had not previously ceded
its insurance portfolio to MBIA Corp. Also in 1993, MBIA Corp. assumed $0.4
million of deferred premium revenue relating to one of the trusts which was
previously ceded to an affiliate of an Association member.
Since 1989, MBIA Corp. has executed five surety bonds to guarantee the
payment obligations of the members of the Association, one of which is a
principal shareholder of MBIA Inc., which had their Standard & Poor's
claims-paying rating downgraded from Triple-A on their previously issued
Association policies. In the event that they do not meet their Association
policy payment obligations, MBIA Corp. will pay the required amounts directly to
the paying agent instead of to the former Association member as was previously
required. The aggregate amount payable by MBIA Corp. on these surety bonds is
limited to $340 million. These surety bonds remain outstanding as of December
31, 1995.
MBIA Corp. has investment management and advisory agreements with an
affiliate of a principal shareholder of MBIA Inc., which provides for payment of
fees on assets under management. Total related expenses for the years ended
December 31, 1995, 1994 and 1993 amounted to $2.5 million, $2.6 million and $2.4
million, respectively. These agreements were terminated on January 1, 1996 at
which time SECO commenced management of MBIA Corp.'s consolidated investment
portfolios. In addition, investment management expenses of $0.1 million were
paid to SECO for the portion of the investment portfolio transferred in 1995.
MBIA Corp. has various insurance coverages provided by a principal
shareholder of MBIA Inc., the cost of which was $1.9 million, $1.9 million and
$2.0 million for the years ended December 31, 1995, 1994 and 1993, respectively.
B-25
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Included in other assets at December 31, 1995 and 1994 is $1.1 million
and $14.5 million of net receivables from MBIA Inc. and other subsidiaries.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts of financial instruments shown in the following
table have been determined by MBIA Corp. using available market information and
appropriate valuation methodologies. However, in certain cases considerable
judgment is necessarily required to interpret market data to develop estimates
of fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amount MBIA Corp. could realize in a current market exchange.
The use of different market assumptions and/or estimation methodologies may have
a material effect on the estimated fair value amounts.
FIXED-MATURITY SECURITIES - The fair value of fixed-maturity securities equals
quoted market price, if available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar securities.
SHORT-TERM INVESTMENTS - Short-term investments are carried at amortized cost
which, because of their short duration, is a reasonable estimate of fair value.
OTHER INVESTMENTS - Other investments consist of MBIA Corp.'s interest in
limited partnerships and a mutual fund which invests principally in marketable
equity securities. The fair value of other investments is based on quoted market
prices.
CASH AND CASH EQUIVALENTS, RECEIVABLE FOR INVESTMENTS SOLD AND PAYABLE FOR
INVESTMENTS PURCHASED - The carrying amounts of these items are a reasonable
estimate of their fair value.
PREPAID REINSURANCE PREMIUMS - The fair value of MBIA Corp.'s prepaid
reinsurance premiums is based on the estimated cost of entering into an
assumption of the entire portfolio with third party reinsurers under current
market conditions.
B-26
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DEFERRED PREMIUM REVENUE - The fair value of MBIA Corp.'s deferred premium
revenue is based on the estimated cost of entering into a cession of the entire
portfolio with third party reinsurers under current market conditions.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES - The carrying amount is composed of
the present value of the expected cash flows for specifically identified claims
combined with an estimate for unidentified claims. Therefore, the carrying
amount is a reasonable estimate of the fair value of the reserve.
INSTALLMENT PREMIUMS - The fair value is derived by calculating the present
value of the estimated future cash flow stream at 9% and 13.25% at December 31,
1995 and December 31, 1994, respectively.
As of December 31,
------------------
1995 1994
---- ----
Carrying Estimated Carrying Estimated
(In thousands) Amount Fair Value Amount Fair Value
- -------------- ------ ---------- ------ ----------
ASSETS:
Fixed-maturity securuities $3,652,621 $3,652,621 $3,051,906 $3,051,906
Short-term investments.. 198,035 198,035 121,384 121,384
Other investments ...... 14,064 14,064 11,970 11,970
Cash and cash equivalents 23,258 23,258 1,332 1,332
Prepaid reinsurance
premiums .............. 200,887 174,444 186,492 159,736
Receivable for
investments sold ...... 5,729 5,729 945 945
LIABILITIES:
Deferred premium
revenue ............. 1,616,315 1,395,159 1,512,211 1,295,305
Loss and loss adjustment
expense reserves ..... 42,505 42,505 40,148 40,148
Payable for investments
purchased ........... 10,695 10,695 6,552 6,552
OFF-BALANCE-SHEET
INSTRUMENTS:
Installment premiums.... ---- 235,371 --- 176,944
B-27
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
APPENDIX C
UNAUDITED FINANCIAL STATEMENTS FOR THE CERTIFICATE INSURER
C-1
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
I N D E X
PAGE
Consolidated Balance Sheets -
June 30, 1996 (Unaudited) and December 31, 1995 (Audited) ............ 3
Consolidated Statements of Income -
Three months and six months ended June 30, 1996
and 1995 (Unaudited) ............................................... 4
Consolidated Statement of Changes in Shareholder's Equity -
Six months ended June 30, 1996 (Unaudited) ........................... 5
Consolidated Statements of Cash Flows -
Six months ended June 30, 1996 and 1995 (Unaudited) .................. 6
Notes to Consolidated Financial Statements (Unaudited) ................... 7
C-2
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
--------------- ------------------
(Unaudited) (Audited)
ASSETS
<S> <C> <C>
Investments:
Fixed-maturity securities held as available-for-sale
at fair value (amortized cost $3,735,457 and $3,428,986) ...... $3,813,749 $3,652,621
Short-term investments, at amortized cost
(which approximates fair value) ............................... 219,945 198,035
Other investments ............................................... 13,781 14,064
---------- ----------
TOTAL INVESTMENTS ........................................... 4,047,475 3,864,720
Cash and cash equivalents ........................................... 4,649 2,135
Accrued investment income ........................................... 64,494 60,247
Deferred acquisition costs .......................................... 143,536 140,348
Prepaid reinsurance premiums ........................................ 208,614 200,887
Goodwill (less accumulated amortization of $39,814 and $37,366) ..... 103,166 105,614
Property and equipment, at cost (less accumulated depreciation
of $13,540 and $12,137) ......................................... 42,845 41,169
Receivable for investments sold ..................................... 1,430 5,729
Securities purchased under agreement to resell ...................... 36,750 ---
Other assets ........................................................ 37,614 42,145
---------- ----------
TOTAL ASSETS ................................................ $4,690,573 $4,462,994
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deferred premium revenue ........................................ $1,728,845 $1,616,315
Loss and loss adjustment expense reserves ....................... 50,437 42,505
Deferred income taxes ........................................... 168,981 212,925
Payable for investments purchased ............................... 30,857 10,695
Securities sold under agreement to repurchase ................... 36,750 ---
Other liabilities ............................................... 72,506 54,682
---------- ----------
TOTAL LIABILITIES ........................................... 2,088,376 1,937,122
---------- ----------
Shareholder's Equity:
Common stock, par value $150 per share; authorized,
issued and outstanding - 100,000 shares ....................... 15,000 15,000
Additional paid-in capital ...................................... 1,030,998 1,021,584
Retained earnings ............................................... 1,506,726 1,341,855
Cumulative translation adjustment ............................... (1,109) 2,704
Unrealized appreciation of investments, net of deferred
income tax provision of $27,542 and $78,372 .................... 50,582 144,729
---------- ----------
TOTAL SHAREHOLDER'S EQUITY .................................. 2,602,197 2,525,872
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY .................. $4,690,573 $4,462,994
========== ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
C-3
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands)
Three months ended Six months ended
June 30 June 30
------------------ -------------------
1996 1995 1996 1995
-------- -------- -------- --------
Revenues:
Gross premiums written $134,443 $106,665 $255,454 $177,777
Ceded premiums (11,914) (12,049) (26,629) (19,129)
-------- -------- -------- --------
Net premiums written 122,529 94,616 228,825 158,648
Increase in deferred premium revenue (60,021) (40,406) (105,553) (53,086)
-------- -------- -------- --------
Premiums earned (net of ceded
premiums of $9,682, $6,814
$18,902 and $14,652) 62,508 54,210 123,272 105,562
Net investment income 61,653 53,783 120,656 106,848
Net realized gains 3,895 1,698 6,587 3,422
Other income 354 224 1,323 1,132
-------- -------- -------- --------
Total revenues 128,410 109,915 251,838 216,964
-------- -------- -------- --------
Expenses:
Losses and loss adjustment expenses 4,288 2,710 7,466 4,743
Policy acquisition costs, net 5,990 5,130 11,890 10,270
Underwriting and operating expenses 11,777 9,247 22,326 18,999
-------- -------- -------- --------
Total expenses 22,055 17,087 41,682 34,012
-------- -------- -------- --------
Income before income taxes 106,355 92,828 210,156 182,952
Provision for income taxes 22,786 20,604 45,285 40,080
-------- -------- -------- --------
Net income $83,569 $72,224 $164,871 $142,872
======== ======== ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
C-4
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (Unaudited)
For the six months ended June 30, 1996
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Common Stock Additional Cumulative Unrealized
------------------------- Paid-In Retained Translation Appreciation
Shares Amount Capital Earnings Adjustment of Investments
---------- ---------- ---------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 ............... 100,000 $15,000 $1,021,584 $1,341,855 $ 2,704 $144,729
Exercise of stock options .............. -- -- 3,740 -- -- --
Net income ............................. -- -- -- 164,871 -- --
Change in foreign
currency transactions ................ -- -- -- -- (3,813) --
Change in unrealized
appreciation of
investment net of change
in deferred income taxes
of $50,830 ........................... -- -- -- -- -- (94,147)
Tax reduction related to
tax sharing agreement
with MBIA Inc. ....................... -- -- 5,674 -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30, 1996 ................ 100,000 $15,000 $1,030,998 $1,506,726 $(1,109) $ 50,582
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
C-5
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Six Months Ended
June 30
---------------------
1996 1995
--------- ---------
Cash flows from operating activities:
Net income ............................................. $164,871 $142,872
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in accrued investment income ................ (4,247) (2,129)
Increase in deferred acquisition costs ............... (3,188) (4,081)
Increase in prepaid reinsurance premiums ............. (7,727) (4,477)
Increase in deferred premium revenue ................. 113,280 59,123
Increase in loss and loss adjustment expense reserves. 7,932 3,872
Depreciation ......................................... 1,442 1,295
Amortization of goodwill ............................. 2,448 2,465
Amortization of bond discount, net ................... (2,870) (620)
Net realized gains on sale of investments ............ (6,587) (3,422)
Deferred income taxes ................................ 6,886 6,092
Other, net ........................................... 27,690 20,094
--------- --------
Total adjustments to net income ...................... 135,059 78,212
--------- --------
Net cash provided by operating activities ............ 299,930 221,084
--------- --------
Cash flows from investing activities:
Purchase of fixed-maturity securities, net
of payable for investments purchased ................. (698,356) (381,468)
Sale of fixed-maturity securities, net of
receivable for investments sold ...................... 334,470 237,019
Redemption of fixed-maturity securities,
net of receivable for investments redeemed ........... 75,960 31,546
Purchase of short-term investments, net ................ (6,763) (60,631)
Securities purchased under agreement to resell ......... (36,750) ---
Sale (purchase) of other investments, net .............. 402 (807)
Capital expenditures, net of disposals ................. (3,129) (2,326)
--------- --------
Net cash used in investing activities ................ (334,166) (176,667)
--------- --------
Cash flows from financing activities:
Dividends paid ......................................... --- (43,500)
Securities sold under agreement to repurchase .......... 36,750 ---
--------- --------
Net cash provided (used) by financing activities ..... 36,750 (43,500)
--------- --------
Net increase in cash and cash equivalents ................ 2,514 917
Cash and cash equivalents - beginning of period .......... 2,135 1,332
--------- --------
Cash and cash equivalents - end of period ................ $ 4,649 $ 2,249
========= ========
Supplemental cash flow disclosures:
Income taxes paid ...................................... $ 32,978 $ 26,201
The accompanying notes are an integral part of the
consolidated financial statements.
C-6
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
- ----------------------------
The accompanying consolidated financial statements are unaudited and
include the accounts of MBIA Insurance Corporation and its Subsidiaries (the
"Company"). The statements do not include all of the information and disclosures
required by generally accepted accounting principles. These statements should be
read in conjunction with the Company's consolidated financial statements and
notes thereto for the year ended December 31, 1995. The accompanying
consolidated financial statements have not been audited by independent
accountants in accordance with generally accepted auditing standards but in the
opinion of management such financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary to summarize fairly
the Company's financial position and results of operations. The results of
operations for the six months ended June 30, 1996 may not be indicative of the
results that may be expected for the year ending December 31, 1996. The December
31, 1995 condensed balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles.
2. Dividends Declared
- ---------------------
No dividends were declared by the Company during the six months ended June
30, 1996.
C-7
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
PROSPECTUS
- --------------------------------------------------------------------------------
Mortgage Loan Asset Backed Securities
(Issuable in Series)
AMRESCO Residential Securities Corporation
(Depositor)
This Prospectus relates to Mortgage Loan Asset Backed Securities to be
issued from time to time in one or more series (and one or more classes within a
series), certain classes of which may be offered on terms determined at the time
of sale and described in this Prospectus and the related Prospectus Supplement.
Each series of Securities will be issued by a separate trust (each, a "Trust")
and will evidence a beneficial ownership interest in such Trust. The assets of a
Trust will include one or more of the following: (i) single family residential
mortgage loans, including mortgage loans secured by junior liens on the related
mortgaged properties and Title I loans and other types of home improvement
retail installment contracts and timeshare mortgages, (ii) conditional sales
contracts and installment sales or loan agreements or participation interests
therein secured by manufactured housing, (iii) mortgage-backed securities, (iv)
other mortgage-related assets and securities and (v) reinvestment income,
reserve funds, cash accounts, insurance policies (including financial guaranty
insurance policies and surety bonds), guaranties, letters of credit or similar
types of credit support or enhancement as more particularly described in the
related Prospectus Supplement.
One or more classes of Securities of a series may be (i) entitled to
receive distributions allocable to principal, principal prepayments, interest or
any combination thereof prior to one or more other classes of Securities of such
series or after the occurrence of certain events or (ii) subordinated in the
right to receive such distributions to one or more senior classes of Securities
of such series, in each case as specified in the related Prospectus Supplement.
Interest on each class of Securities entitled to distributions allocable to
interest may accrue at a fixed rate or at a rate that is subject to change from
time to time as specified in the related Prospectus Supplement. The Depositor or
its affiliates may retain or hold for sale from time to time one or more classes
of a series of Securities.
Distributions on the Securities will be made at the intervals and on the
dates specified in the related Prospectus Supplement from the assets of the
related Trust and any other assets pledged for the benefit of the Securities. An
affiliate of the Depositor may make or obtain for the benefit of the Securities
limited representations and warranties with respect to mortgage assets assigned
to the related Trust. Neither the Depositor nor any affiliates will have any
other obligation with respect to the Securities.
The yield on Securities will be affected by the rate of payment of
principal (including prepayments) of mortgage assets in the related Trust. Each
series of Securities will be subject to early termination under the
circumstances described herein and in the related Prospectus Supplement.
If specified in a Prospectus Supplement, an election may be made to treat
the Trust for the related series or specified portions thereof as a "real estate
mortgage investment conduit" ("REMIC") for federal income tax purposes. See
"Certain Federal Income Tax Consequences".
It is a condition to the issuance of the Securities that the Securities be
rated in not less than the fourth highest rating category by a nationally
recognized rating organization.
See "Risk Factors" beginning on Page 7 herein and in the section entitled
"Risk Factors" in the related Prospectus Supplement for a discussion of
significant risk factors.
See "ERISA Considerations" herein and in the related Prospectus Supplement
for a discussion of restrictions on the acquisition of Securities by "plan
fiduciaries."
An investor should carefully review the information in the related
Prospectus Supplement concerning the risks associated with the different types
and classes of Securities.
THE ASSETS OF A TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE RELATED
SECURITIES. THE SECURITIES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
DEPOSITOR, ANY SERVICER, ANY MASTER SERVICER, ANY ORIGINATOR, ANY TRUSTEE OR ANY
OF THEIR AFFILIATES, EXCEPT AS SET FORTH HEREIN AND IN THE RELATED PROSPECTUS
SUPPLEMENT. NEITHER THE SECURITIES NOR THE UNDERLYING MORTGAGE ASSETS WILL BE
GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE
DEPOSITOR, ANY SERVICER, ANY MASTER SERVICER, ANY ORIGINATOR, ANY TRUSTEE OR ANY
OF THEIR AFFILIATES, EXCEPT AS SET FORTH IN THE RELATED PROSPECTUS SUPPLEMENT.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR ANY RELATED PROSPECTUS
SUPPLEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
Offers of the Securities may be made through one or more different methods,
including offerings through underwriters, as more fully described herein and in
the related Prospectus Supplement. See "Plan of Distribution" herein and
"Underwriting" in the related Prospectus Supplement.
There will have been no public market for any series of Securities prior to
the offering thereof. There can be no assurance that a secondary market will
develop for the Securities of any series or, if it does develop, that such
market will continue.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of Securities unless accompanied by a Prospectus
Supplement.
- --------------------------------------------------------------------------------
The date of this Prospectus is 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................................. 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
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 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
1
<PAGE>
secured by junior liens on the related
mortgaged properties, including Title I
Loans and other types of home
improvement retail installment
contracts; and (iv) Mortgage Loans
secured by timeshare estates
representing an ownership interest in
common with other owners in one or more
vacation units entitling the owner
thereof to the exclusive use of a unit
and access to the accompanying
recreational facilities for the week or
weeks owned. See "The Trusts - Mortgage
Loans" herein.
B. Contracts......................... Contracts may include conditional sales
contracts and installment sales or loan
agreements or participation interests
therein secured by new or used
Manufactured Homes (as defined herein).
Contracts may be conventional (i.e.,
not insured or guaranteed by any
government agency) or insured by the
Federal Housing Administration ("FHA"),
including Title I Contracts, or
partially guaranteed by the Veterans
Administration ("VA"), as specified in
the related Prospectus Supplement. See
"The Trusts - Contracts" herein.
C. Mortgage-Backed Securities......... "Mortgage-Backed Securities" (or "MBS")
may include (i) private (that is, not
guaranteed or insured by the United
States or any agency or instrumentality
thereof) mortgage participations,
mortgage pass-through certificates or
other mortgage-backed securities or
(ii) certificates insured or guaranteed
by Federal Home Loan Mortgage
Corporation ("FHLMC") or Federal
National Mortgage Association ("FNMA")
or Government National Mortgage
Association ("GNMA"). See "The Trusts -
Mortgage-Backed Securities" herein.
D. Other Mortgage Assets............. Trust assets may also include
reinvestment income, reserve funds,
cash accounts, insurance policies
(including financial guaranty insurance
policies and surety bonds), guaranties,
letters of credit or similar types of
credit support or enhancement as
described in the related Prospectus
Supplement.
The related Prospectus Supplement for a
series of Securities will describe the
Mortgage Assets to be included in the
Trust for such series.
The Securities........................ The Securities of any series may be
issued in one or more classes, as
specified in the Prospectus Supplement.
One or more classes of Securities of
each series (i) may be entitled to
receive distributions allocable only to
principal, only to interest or to any
combination thereof; (ii) may be
entitled to receive distributions only
of prepayments of principal throughout
the lives of the Securities or during
specified periods; (iii) may be
subordinated in the right to receive
distributions of scheduled payments of
principal, prepayments of principal,
interest or any combination thereof to
one or more other classes of Securities
of such series throughout the lives of
the Securities or during specified
periods; (iv) may be entitled to
receive such distributions only after
the occurrence of events specified in
the Prospectus Supplement; (v) may be
entitled to receive distributions in
accordance with a schedule or formula
or on the basis of collections from
designated portions of the assets in
the related Trust; (vi) as to
Securities entitled to distributions
allocable to interest, may be entitled
to receive interest at a fixed rate or
a rate that is subject to change from
time to time; (vii) may accrue
interest, with such accrued interest
added to the principal or notional
amount of the Securities, and no
payments being made thereon
2
<PAGE>
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.
3
<PAGE>
Optional Termination.................. The Servicer, the Seller, the
Depositor, or, if specified in the
related Prospectus Supplement, the
Owners of a related class of Securities
or a credit enhancer may at their
respective options effect early
retirement of a series of Securities
through the purchase of the Mortgage
Assets in the related Trust. See
"Administration -- Termination" herein.
Mandatory Termination................. The Trustee, the Servicer or certain
other entities specified in the related
Prospectus Supplement may be required
to effect early retirement of a series
of Securities by soliciting competitive
bids for the purchase of the assets of
the related Trust or otherwise. See
"Administration -- Termination" herein.
Advances.............................. The Servicer of the Mortgage Loans and
Contracts will be obligated (but only
as specified in the related Prospectus
Supplement) to advance delinquent
installments of principal and/or
interest (less applicable servicing
fees) on the Mortgage Loans and
Contracts in a Trust. Any such
obligation to make advances may be
limited to amounts due to the Owners of
Securities of the related series, to
amounts deemed to be recoverable from
late payments or liquidation proceeds,
to specified periods or to any
combination thereof, in each case as
specified in the related Prospectus
Supplement. Any such advance will be
recoverable under the terms and
conditions specified in the related
Prospectus Supplement. See "Servicing
of Mortgage Loans and Contracts"
herein.
Credit Enhancement.................... If specified in the related Prospectus
Supplement, a series of Securities, or
certain classes within such series, may
have the benefit of one or more types
of credit enhancement ("Credit
Enhancement") including but not limited
to subordination, cross support,
mortgage pool insurance, special hazard
insurance, financial guaranty insurance
policies, a bankruptcy bond, reserve
funds, other insurance, guaranties and
similar instruments and arrangements.
The protection against losses afforded
by any such Credit Enhancement will be
limited. If Owners of Securities are
materially dependent upon Credit
Enhancement for timely payments of
interest and/or principal on their
Securities, the related Prospectus
Supplement will include information,
including financial information,
concerning the provider of such Credit
Enhancement. See "Credit Enhancement"
herein.
Book Entry Registration............... Securities of one or more classes of a
series may be issued in book entry form
("Book Entry Securities") in the name
of a clearing agency (a "Clearing
Agency") registered with the Securities
and Exchange Commission, or its
nominee. Transfers and pledges of Book
Entry Securities may be made only
through entries on the books of the
Clearing Agency in the name of brokers,
dealers, banks and other organizations
eligible to maintain accounts with the
Clearing Agency ("Clearing Agency
Participants") or their nominees.
Transfers and pledges by purchasers and
other beneficial owners of Book Entry
Securities ("Beneficial Owners") other
than Clearing Agency Participants may
be effected only through Clearing
Agency Participants. All references to
the Owners of Securities shall mean
Beneficial Owners to the extent
Beneficial Owners may exercise their
rights through a Clearing Agency.
Except as otherwise specified in this
Prospectus or a related Prospectus
Supplement, the term "Owners" shall be
deemed to include Beneficial Owners.
See "Risk Factors -- Book
4
<PAGE>
Entry Registration" and "Description of
the Securities - Book Entry
Registration" herein.
Certain Federal Income Tax
Consequences...................... Federal income tax consequences will
depend on, among other factors, whether
one or more elections are made to treat
a Trust or specified portions thereof
as a "real estate mortgage investment
conduit" ("REMIC") under the Internal
Revenue Code of 1986, as amended (the
"Code"), or, if no REMIC election is
made, whether the Securities are
considered to be debt obligations,
Standard Securities, Stripped
Securities or Partnership Interests.
The related Prospectus Supplement for
each series of Securities will specify
whether a REMIC election will be made.
See "Certain Federal Income Tax
Consequences" herein and in the related
Prospectus Supplement.
ERISA Considerations.................. A fiduciary of any employee benefit
plan subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or the Code should carefully
review with its own legal advisors
whether the purchase or holding of
Securities could give rise to a
transaction prohibited or otherwise
impermissible under ERISA or the Code.
Certain classes of Securities may not
be transferred unless the Trustee and
the Depositor are furnished with a
letter of representation or an opinion
of counsel to the effect that such
transfer will not result in a violation
of the prohibited transaction
provisions of ERISA and the Code and
will not subject the Trustee, the
Depositor or the Servicer to additional
obligations. See "Description of the
Securities - General" herein and "ERISA
Considerations" herein and in the
related Prospectus Supplement.
Legal Investment Matters.............. The Prospectus Supplement for each
series of Securities will specify
which, if any, of the classes of
Securities offered thereby constitute
"mortgage related securities" for
purposes of the Secondary Mortgage
Market Enhancement Act of 1984
("SMMEA"). Classes of Securities that
qualify as "mortgage related
securities" will be legal investments
for certain types of institutional
investors to the extent provided in
SMMEA, subject, in any case, to any
other regulations which may govern
investments by such institutional
investors. Institutions whose
investment activities are subject to
review by federal or state authorities
should consult with their counsel or
the applicable authorities to determine
whether an investment in a particular
class of Securities (whether or not
such class constitutes a "mortgage
related security") complies with
applicable guidelines, policy
statements or restrictions. See "Legal
Investment." See "Legal Investment
Considerations" herein and in the
related Prospectus Supplement.
Use of Proceeds....................... Substantially all the net proceeds from
the sale of a series of Securities will
be applied to the purchase of the
Mortgage Assets included or to be
included in the related Trust (or to
reimburse the amounts previously used
to effect such purchase), the costs of
carrying the Mortgage Assets until sale
of the Securities and to pay other
expenses. See "Use of Proceeds" herein.
5
<PAGE>
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.
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
7
<PAGE>
and claims by such assignees may be subject to set-off as a result of such
lender's or seller's noncompliance. These laws would apply to the Trustee as
assignee of the Contracts. Each Seller of Contracts will warrant that each
Contract sold by it complies with all requirements of law and will make certain
warranties relating to the validity, subsistence, perfection and priority of the
security interest in each Manufactured Home securing a Contract. A breach of any
such warranty that materially adversely affects any Contract would create an
obligation of the Seller to repurchase such Contract unless such breach is
cured. If any related Credit Enhancement is exhausted and recovery of amounts
due on the Contracts is dependent on repossession and resale of Manufactured
Homes securing Contracts that are in default, certain other factors may limit
the ability of the Trust to realize upon the Manufactured Homes or may limit the
amount realized to less than the amount due. See "Certain Legal Aspects of the
Mortgage Assets - The Contracts" herein.
Limited Liquidity. There will be no market for the Securities of any
series prior to the issuance thereof, and there can be no assurance that a
secondary market will develop or, if it does develop, that it will provide
liquidity of investment or will continue for the life of the Securities of such
series. The market value of some or all of the classes of Securities will
fluctuate with changes in prevailing rates of interest. Consequently, the sale
of Securities in any market that may develop may be at a discount from the
principal amount or purchase price. Owners of Securities generally have no right
to request redemption of Securities, and the Securities are subject to
redemption only under the limited circumstances described in the related
Prospectus Supplement
Limited Assets. Owners of Securities of each series must rely upon
distributions on the related Mortgage Assets, together with the other specific
assets pledged for the benefit of such series (which assets may be subject to
release from such pledge prior to payment in full of the Securities), for the
payment of principal of, and interest on, that series of Securities. If the
assets comprising the Trust are insufficient to make payments on such
Securities, no other assets of the Depositor will be available for payment of
the deficiency. Because payments of principal will be applied to classes of
outstanding Securities of a series in the priority specified in the related
Prospectus Supplement, a deficiency may have a disproportionately greater effect
on the Securities of classes having lower priority in payment. In addition, due
to the priority of payments and the allocation of losses, defaults experienced
on the assets comprising a Trust may have a disproportionate effect on a
specified class or classes within such series.
Limitations, Reduction and Substitution of Credit Enhancement. Credit
Enhancement may be provided in one or more of the forms described in the related
Prospectus Supplement, including, but not limited to, prioritization as to
payments of one or more classes of such series, a Mortgage Pool Insurance
Policy, a Financial Guaranty Insurance Policy, a Special Hazard Insurance
Policy, a bankruptcy bond, one or more Reserve Funds, other insurance,
guaranties and similar instruments and agreements, or any combination thereof.
Regardless of the Credit Enhancement provided, the amount of coverage may be
limited in amount and in most cases will be subject to periodic reduction in
accordance with a schedule or formula. Furthermore, such Credit Enhancement may
provide only very limited coverage as to certain types of losses and may provide
no coverage as to certain other types of losses. The Trustee may be permitted to
reduce, terminate or substitute all or a portion of the Credit Enhancement for
any series of Securities, if the applicable rating agencies indicate that the
then-current rating thereof will not be adversely affected.
Original Issue Discount. All the Compound Interest Securities and
Stripped Securities that are entitled only to interest distributions will be,
and certain of the other Securities may be, issued with original issue discount
for federal income tax purposes. An Owner of a Security issued with original
issue discount will be required to include original issue discount in ordinary
gross income for federal income tax purposes as it accrues, in advance of
receipt of the cash attributable to such income. Accrued but unpaid interest on
such Securities generally will be treated as original issue discount for this
purpose. Moreover, the calculation of original issue discount on REMIC
Securities (as defined herein) is subject to uncertainties because of the lack
of guidance from the Internal Revenue Service under applicable statutory
provisions. See "Certain Federal Income Tax Consequences - Federal Income Tax
Consequences for REMIC Securities," "- Taxation of Regular Securities - Variable
Rate Regular Securities," "Certain Federal Income Tax Consequences - Federal
Income Tax Consequences for Securities as to Which No REMIC Election Is Made -
Standard Securities," and "Certain Federal Income Tax Consequences - Premium and
Discount" and "- Stripped Securities" herein.
8
<PAGE>
Book Entry Registration. Because transfers and pledges of Book Entry
Securities may be effected only through book entries at a Clearing Agency
through Clearing Agency Participants, the liquidity of the secondary market for
Book Entry Securities may be reduced to the extent that some investors are
unwilling to hold Securities in book entry form in the name of Clearing Agency
Participants and the ability to pledge Book Entry Securities may be limited due
to lack of a physical certificate. Beneficial Owners of Book Entry Securities
may, in certain cases, experience delay in the receipt of payments of principal
and interest because such payments will be forwarded by the Trustee to the
Clearing Agency who will then forward payment to the Clearing Agency
Participants who will thereafter forward payment to Beneficial Owners. In the
event of the insolvency of the Clearing Agency or of a Clearing Agency
Participant in whose name Securities are recorded, the ability of Beneficial
Owners to obtain timely payment and (if the limits of applicable insurance
coverage by the Securities Investor Protection Corporation are exceeded, or if
such coverage is otherwise unavailable) ultimate payment of principal and
interest on Book Entry Securities may be impaired.
The Status of the Mortgage Assets in the Event of Bankruptcy of the
Seller. The Seller and the Depositor intend that the transfers of the Mortgage
Assets from the Seller to the Depositor, and in turn to the applicable Trust,
constitute sales rather than pledges to secure indebtedness for insolvency
purposes. If, however, the Seller were to become a debtor under the federal
bankruptcy code, it is possible that a creditor, trustee-in-bankruptcy or
receiver of the Seller may argue that the sale thereof by the Seller is a pledge
rather than a sale. This position, if argued or accepted by a court, could
result in a delay in or reduction of distributions on the related Securities.
Junior Lien Mortgage Loans. Because Mortgage Loans secured by junior
(i.e., second, third, etc.) liens are subordinate to the rights of the
beneficiaries under the related senior deeds of trust or senior mortgages, a
decline in the residential real estate market would adversely affect the
position of the related Trust as a junior beneficiary or junior mortgagee before
having such an effect on the position of the related senior beneficiaries or
senior mortgagees. A rise in interest rates over a period of time, the general
condition of a Mortgaged Property and other factors may also have the effect of
reducing the value of the Mortgaged Property from the value at the time the
junior lien Mortgage Loan was originated and, as a result, may reduce the
likelihood that, in the event of a default by the borrower, liquidation or other
proceeds will be sufficient to satisfy the junior lien Mortgage Loan after
satisfaction of any senior liens and the payment of any liquidation expenses.
Liquidation expenses with respect to defaulted Mortgage Loans do not
vary directly with the outstanding principal balance of the Mortgage Loans at
the time of default. Therefore, assuming that a Servicer took the same steps in
realizing upon defaulted Mortgage Loans having small remaining principal
balances as in the case of defaulted Mortgage Loans having larger principal
balances, the amount realized after expenses of liquidation would be smaller as
a percentage of the outstanding principal balance of the smaller Mortgage Loans.
To the extent the average outstanding principal balances of the Mortgage Loans
in a Trust are relatively small, realizations net of liquidation expenses may
also be relatively small as a percentage of the principal amount of the Mortgage
Loans.
Reliance on Management of the Timeshare Unit. Unlike most conventional
single-family residential properties, the value of a timeshare unit is
substantially dependent on the management of the resort property in which it is
located. Management of timeshare resort properties includes operation of a
reservation system, maintenance of the physical structure, refurbishing of
individual units, maintenance and management of common areas and recreational
facilities, and facilitating the rental of individual units on behalf of
timeshare owners. In addition, timeshare units, which are purchased for
intervals of one or more specified weeks each year, are marketed as the owner's
purchase of future vacation opportunities rather than as a primary residence, a
second home or an investment. Accordingly, while Mortgagors are obligated to
make payments under their Mortgage Loan irrespective of any defect in, damage to
or change in conditions (such as poor management, faulty construction or
physical, social or environmental conditions) relating to the timeshare
properties, any such defect, damage or change in conditions could result in
delays in payment or in defaults by Mortgagors whose timeshare units are
affected.
Limitations on Interest Payments and Foreclosures. Generally, under the
terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the
"Relief Act"), or similar state legislation, a Mortgagor who enters military
service after the origination of the related Mortgage Loan (including a
Mortgagor who is a member of the National Guard or is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active
9
<PAGE>
duty) may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such Mortgagor's active duty status, unless a
court orders otherwise upon application of the lender. It is possible that such
action could have an effect, for an indeterminate period of time, on the ability
of the related Servicer to collect full amounts of interest on certain of the
Mortgage Loans. In addition, the Relief Act imposes limitations that would
impair the ability of the related Servicer to foreclose on an affected Mortgage
Loan during the Mortgagor's period of active duty status. Thus, in the event
that such a Mortgage Loan goes into default, there may be delays and losses
occasioned by the inability to realize upon the Mortgaged Property in a timely
fashion.
Limited Nature of Ratings. It is a condition to the issuance of the
Securities that each class of Securities be rated in one of the four highest
rating categories by one or more of Moody's, S&P or Fitch. See "Summary of
Prospectus-Ratings" herein. A security rating is not a recommendation to buy,
sell or hold securities and may be subject to revision or withdrawal at any
time. No person is obligated to maintain the rating on any Certificate, and,
accordingly, there can be no assurance that the ratings assigned to any class of
Securities on the date on which such Securities are initially issued will not be
lowered or withdrawn by a Rating Agency at any time thereafter. In the event any
rating is revised or withdrawn, the liquidity of the related Securities may be
adversely affected. Issuance of any of the Securities in book-entry form may
reduce the liquidity of such Securities in the secondary trading market because
investors may be unwilling to purchase Securities for which they cannot obtain
physical securities.
Applicable Legal and Regulatory Risks. Applicable federal and state
laws generally regulate interest rates and other charges, require certain
disclosures, prohibit unfair and deceptive practices, regulate debt collection,
and require licensing of the originators of the mortgage loans and contracts.
Depending on the provisions of the applicable law and the specified facts and
circumstances involved, violations of those laws, policies and principles may
limit the ability to collect all or part of the principal of or interest on the
Mortgage Loans and Contracts and may entitle the borrower to a refund of amounts
previously paid. In addition, many state and local authorities have imposed
stringent restrictions on the operations of timeshare developers, including
requirements of filing registration statements and advertising material with
state regulatory authorities regarding timeshare units being offered and
permitting the right to rescind an executed contract within specified time
periods and possibly permitting such purchasers to recover damages from such
timeshare developers. Such remedies could adversely affect the quality of
management of the related resort, in particular, the ability of the management
of the related resorts to minimize losses through remarketing efforts and/or
through the assumption programs. See "Certain Legal Aspects of the Mortgage
Assets" herein.
DESCRIPTION OF THE SECURITIES
Each Trust will be created pursuant to an Agreement entered into among
the Depositor, the Trustee, the Master Servicer, if any, and the Servicer. The
provisions of each Agreement will vary depending upon the nature of the
Securities to be issued thereunder and the nature of the related Trust.
Securities which represent beneficial interests in the Trust will be issued
pursuant to the Agreement. Securities which represent debt obligations of the
Trust will be issued pursuant to an Indenture between the Trust and the
Indenture Trustee. The following summaries and the summaries set forth under
"Administration" describe certain provisions relating to each series of
Securities. The Prospectus Supplement for a series of Securities will describe
the specific provisions relating to such series. Such summaries do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to, all the provisions of the Agreement for each series of Securities.
The Depositor will provide Owners, without charge, on written request a copy of
the Agreement for the related series. Requests should be addressed to AMRESCO
Residential Securities Corporation, 700 N. Pearl Street, Suite 2400, Dallas,
Texas 75201. The Agreement relating to a series of Securities will be filed with
the Securities and Exchange Commission within 15 days after the date of issuance
of such series of Securities (the "Delivery Date").
The Securities of a series will be entitled to payment only from the
assets of the Trust and any other assets pledged for the benefit of the
Securities and will not be entitled to payments in respect of the assets
included in any other trust fund established by the Depositor. The Securities
will not represent obligations of the Depositor, the
10
<PAGE>
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
11
<PAGE>
of Securities and (ii) interest on such Securities. If specified in the
Prospectus Supplement, one or more classes of a series of Securities may
evidence a beneficial ownership interest in, or a debt obligation payable from,
separate groups of assets included in the related Trust.
The Securities will have an aggregate original Security Principal
Balance equal to the aggregate unpaid principal balance of the Mortgage Assets
(plus, amounts held in a Pre-Funding Account, if any) as of the time and day
prior to creation of the Trust specified in the related Prospectus Supplement
(the "Cut-Off Date") after deducting payments of principal due before the
Cut-Off Date and will bear interest at rates which, on a weighted basis, will be
equal to the Pass-Through Rate. The Pass-Through Rate will equal the weighted
average rate of interest borne by the related Mortgage Assets, net of the
aggregate servicing fees, amounts allocated to the residual interests and any
other amounts as are specified in the Prospectus Supplement. The original
Security Principal Balance (or Notional Principal Balance) of the Securities of
a series and the interest rate on the classes of such Securities will be
determined in the manner specified in the Prospectus Supplement.
Each class of Securities that is entitled to distributions allocable to
interest will bear interest at a fixed rate or a rate that is subject to change
from time to time (a) in accordance with a schedule, (b) by reference to an
index, or (c) otherwise (each, a "Security Interest Rate"). One or more classes
of Securities may provide for interest that accrues but is not currently payable
("Compound Interest Securities"). With respect to any class of Compound Interest
Securities, any interest that has accrued but is not paid on a given
Distribution Date will be added to the aggregate Security Principal Balance of
such class of Securities on that Distribution Date.
A series of Securities may include one or more classes entitled only to
distributions or payments (i) allocable to interest, (ii) allocable to principal
(and allocable as between scheduled payments of principal and Principal
Prepayments, as defined below), or (iii) allocable to both principal (and
allocable as between scheduled payments of principal and Principal Prepayments)
and interest. A series of Securities may consist of one or more classes as to
which distributions or payments will be allocated (i) on the basis of
collections from designated portions of the assets of the Trust, (ii) in
accordance with a schedule or formula, (iii) in relation to the occurrence of
events, or (iv) otherwise. The timing and amounts of such distributions or
payments may vary among classes, over time or otherwise.
A series of Securities may include one or more Classes of Scheduled
Amortization Securities and Companion Securities. "Scheduled Amortization
Securities" are Securities with respect to which payments of principal are to be
made in specified amounts on specified Distribution Dates, to the extent of
funds available on such Distribution Date. "Companion Securities" are Securities
which receive payments of all or a portion of any funds available on a given
Distribution Date which are in excess of amounts required to be applied to
payments on Scheduled Amortization Securities on such Distribution Date. Because
of the manner of application of payments of principal to Companion Securities,
the weighted average lives of Companion Securities of a series may be expected
to be more sensitive to the actual rate of prepayments on the Mortgage Assets in
the related Trust than will the Scheduled Amortization Securities of such
series.
One or more series of Securities may constitute series of "Special
Allocation Securities", which may include Senior Securities, Subordinated
Securities, Priority Securities and Non-Priority Securities. As specified in the
related Prospectus Supplement for a series of Special Allocation Securities, the
timing and/or priority of payments of principal and/or interest may favor one or
more classes of Securities over one or more other classes of Securities. Such
timing and/or priority may be modified or reordered upon the occurrence of one
or more specified events. Losses on Trust assets for such series may be
disproportionately borne by one or more classes of such series, and the proceeds
and distributions from such assets may be applied to the payment in full of one
or more classes within such series before the balance, if any, of such proceeds
are applied to one or more other classes within such series. For example,
Special Allocation Securities in a series may be comprised of one or more
classes of Senior Securities having a priority in right to distributions of
principal and interest over one or more classes of Subordinated Securities, as a
form of Credit Enhancement. See "Credit Enhancement -- Subordination" herein.
Typically, the Subordinated Securities will carry a rating by the rating
agencies lower than that of the Senior Securities. In addition, one or more
classes of Securities ("Priority Securities") may be entitled to a priority of
distributions of principal or interest from assets in the Trust over another
class of Securities ("Non-Priority
12
<PAGE>
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
13
<PAGE>
and are not accompanied by amounts representing scheduled interest due after the
month of such payments ("Principal Prepayments"). Any such allocation may have
the effect of accelerating the amortization of such Securities relative to the
interests evidenced by the other Securities.
Unscheduled Distributions. The Securities of a series may be subject to
receipt of distributions before the next scheduled Distribution Date under the
circumstances and in the manner described below and in the related Prospectus
Supplement. If applicable, such unscheduled distributions will be made on the
Securities of a series on the date and in the amount specified in the related
Prospectus Supplement if, due to substantial payments of principal (including
Principal Prepayments) on the related Mortgage Assets, low rates then available
for reinvestment of such payments or both, it is determined, based on specified
assumptions, that the amount anticipated to be on deposit in the Security
Account for such series on the next related Distribution Date, together with, if
applicable, any amounts available to be withdrawn from any related Reserve Fund
or from any other Credit Enhancement provided for such series, may be
insufficient to make required distributions on the Securities on such
Distribution Date. The amount of any such unscheduled distribution that is
allocable to principal will not exceed the amount that would otherwise have been
required to be distributed as principal on the Securities on the next
Distribution Date and will include interest at the applicable Security Interest
Rate (if any) on the amount of the unscheduled distribution allocable to
principal for the period and to the date specified in the Prospectus Supplement.
All distributions allocable to principal in any unscheduled
distribution will be made in the same priority and manner as distributions of
principal on the Securities would have been made on the next Distribution Date
except as otherwise stated in the related Prospectus Supplement, and, with
respect to Securities of the same class, unscheduled distributions of principal
will be made on a pro rata basis. Notice of any unscheduled distribution will be
given by the Trustee prior to the date of such distribution.
Book Entry Registration
Securities may be issued as Book Entry Securities and held in the name
of a Clearing Agency registered with the Securities and Exchange Commission or
its nominee. Transfers and pledges of Book Entry Securities may be made only
through entries on the books of the Clearing Agency in the name of Clearing
Agency Participants or their nominees. Clearing Agency Participants may also be
Beneficial Owners of Book Entry Securities.
Purchasers and other Beneficial Owners may not hold Book Entry
Securities directly but may hold, transfer or pledge their ownership interest in
the Securities only through Clearing Agency Participants. Furthermore,
Beneficial Owners will receive all payments of principal and interest with
respect to the Securities and, if applicable, may request redemption of
Securities, only through the Clearing Agency and the Clearing Agency
Participants. Beneficial Owners will not be registered Owners of Securities or
be entitled to receive definitive certificates representing their ownership
interest in the Securities except under the limited circumstances, if any,
described in the related Prospectus Supplement. See "Risk Factors - Book Entry
Registration" herein.
If Securities of a series are issued as Book Entry Securities, the
Clearing Agency will be required to make book entry transfers among Clearing
Agency Participants, to receive and transmit payments of principal and interest
with respect to the Securities of such series, and to receive and transmit
requests for redemption with respect to such Securities. Clearing Agency
Participants with whom Beneficial Owners have accounts with respect to such Book
Entry Securities will be similarly required to make book entry transfers and
receive and transmit payments and redemption requests on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial Owners will not
be registered Owners of Securities and will not possess physical certificates, a
method will be provided whereby Beneficial Owners may receive payments, transfer
their interests, submit redemption requests and receive the reports provided
herein.
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
14
<PAGE>
of Owners of Securities of that series held by the Trustee. With respect to Book
Entry Securities, the only named Owner on the Security Register will be the
Clearing Agency.
Neither the Agreement nor the Trust Indenture, if any, will not provide
for the holding of any annual or other meetings of Owners of Securities.
THE TRUSTS
The Trust for a series of Securities will consist of: (i) the Mortgage
Assets (subject, if specified in the related Prospectus Supplement, to certain
exclusions, such as a portion of the mortgage interest rate being retained by
the Seller and not sold to the Trust) received on and after the related Cut-Off
Date; (ii) amounts, if any, deposited in a Pre-Funding Account; (iii) all
payments (subject, if specified in the Prospectus Supplement, to certain
exclusions, such as the retention by the Seller of payments due and accrued
before the related Cut-Off Date but collected after such Cut-Off Date) in
respect of such Mortgage Assets, which may be adjusted, to the extent specified
in the related Prospectus Supplement, in the case of interest payments on
Mortgage Assets, to the Pass-Through Rate; (iv) if specified in the Prospectus
Supplement, reinvestment income on such payments; (v) with respect to a Trust
that includes Mortgage Loans, or Contracts, all property acquired by foreclosure
or deed in lieu of foreclosure with respect to any such Mortgage Loan or
Contract; (vi) certain rights of the Trustee, the Depositor and the Servicer
under any insurance policies, hazard insurance or surety bonds required to be
maintained in respect of the related Mortgage Assets; and (vii) if so specified
in the Prospectus Supplement, one or more forms of Credit Enhancement.
The Securities of each series will be entitled to payment only from the
assets of the related Trust and any other assets pledged therefor and will not
be entitled to payments in respect of the assets of any other trust established
by the Depositor.
Mortgage Assets may be acquired by the Depositor from affiliated or
unaffiliated originators. The following is a brief description of the Mortgage
Assets expected to be included in the Trusts. If specific information respecting
the Mortgage Assets is not known at the time the related series of Securities
initially are offered, more general information of the nature described below
will be provided in the related Prospectus Supplement, and specific information
will be set forth in a report on Form 8-K to be filed with the Securities and
Exchange Commission within fifteen days after the initial issuance of such
Securities. A copy of the Agreement and, if applicable, a copy of the Indenture
with respect to each series of Securities will be attached to the Form 8-K and
will be available for inspection at the corporate trust office of the Trustee
specified in the related Prospectus Supplement. A schedule of the Mortgage
Assets relating to each series of Securities, will be attached to the related
Agreement delivered to the Trustee upon delivery of such Securities.
Mortgage Loans
The Mortgage Loans will be evidenced by promissory notes (the "Mortgage
Notes") secured by mortgages or deeds of trust (the "Mortgages") creating liens
on residential properties (the "Mortgaged Properties"). Such Mortgage Loans will
be within the broad classification of single family mortgage loans, defined
generally as loans on residences containing one to four dwelling units. If
specified in the Prospectus Supplement, the Mortgage Loans may include
cooperative apartment loans ("Cooperative Loans") secured by security interests
in shares issued by Cooperatives and in the related proprietary leases or
occupancy agreements granting exclusive rights to occupy specific dwelling units
in such Cooperatives' buildings, or the Mortgage Loans may be secured by junior
liens on the related mortgaged properties, including Title I Loans and other
types of home improvement retail installment contracts. The Mortgaged Properties
securing the Mortgage Loans may include investment properties and vacation and
second homes, including timeshare estates. Each Mortgage Loan will be selected
by the Depositor for inclusion in the Trust from among those acquired by the
Depositor or originated or acquired by one or more affiliated or unaffiliated
originators, including newly originated loans.
The Mortgage Loans will be "conventional" mortgage loans, that is they
will not be insured or guaranteed by any governmental agency, the principal and
interest on the Mortgage Loans included in the Trust for a series
15
<PAGE>
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
Mortgage Loan,
16
<PAGE>
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
17
<PAGE>
from time to time. The Prospectus Supplement for a series of Securities will
describe any Other Mortgage Securities to be included in the Trust for such
series.
CREDIT ENHANCEMENT
General. Various forms of Credit Enhancement may be provided with
respect to one or more classes of a series of Securities or with respect to the
assets in the related Trust. Credit Enhancement may be in the form of the
subordination of one or more classes of the Securities of such series, the
establishment of one or more Reserve Funds, the use of a cross-support feature,
use of a Mortgage Pool Insurance Policy, Special Hazard Insurance Policy,
bankruptcy bond, or another form of Credit Enhancement described in the related
Prospectus Supplement, or any combination of the foregoing. Credit Enhancement
may not provide protection against all risks of loss and may not guarantee
repayment of the entire principal balance of the Securities and interest
thereon. If losses occur which exceed the amount covered by Credit Enhancement
or which are not covered by the Credit Enhancement, Owners will bear their
allocable share of losses.
Subordination. Distributions in respect of scheduled principal,
interest or any combination thereof otherwise payable to one or more classes of
Securities of a series (the "Subordinated Securities") may be paid to one or
more other classes of such series (the "Senior Securities") under the
circumstances and to the extent provided in the Prospectus Supplement. If
specified in the Prospectus Supplement, delays in receipt of scheduled payments
on the Mortgage Assets and losses on defaulted Mortgage Assets will be borne
first by the various classes of Subordinated Securities and thereafter by the
various classes of Senior Securities, in each case under the circumstances and
subject to the limitations specified in the Prospectus Supplement. The aggregate
distributions in respect of delinquent payments on the Mortgage Assets over the
lives of the Securities or at any time, the aggregate losses in respect of
defaulted Mortgage Assets which must be borne by the Subordinated Securities by
virtue of subordination and the amount of the distributions otherwise
distributable to the Subordinated Securities that will be distributable to
Owners of Senior Securities on any Distribution Date may be limited as specified
in the Prospectus Supplement. If aggregate distributions in respect of
delinquent payments on the Mortgage Assets or aggregate losses in respect of
such Mortgage Assets were to exceed the total amounts payable and available for
distribution to Owners of Subordinated Securities or, if applicable, were to
exceed the specified maximum amount, Owners of Senior Securities could
experience losses on the Securities.
In addition to or in lieu of the foregoing, all or any portion of
distributions otherwise payable to Subordinated Securities on any Distribution
Date may instead be deposited into one or more Reserve Funds (as defined below)
established by the Trustee. If so specified in the Prospectus Supplement, such
deposits may be made on each Distribution Date, on each Distribution Date for
specified periods, or on each Distribution Date until the balance in the Reserve
Fund has reached a specified amount and, following payments from the Reserve
Fund to Owners of Senior Securities or otherwise, thereafter to the extent
necessary to restore the balance in the Reserve Fund to required levels, in each
case as specified in the Prospectus Supplement. If so specified in the
Prospectus Supplement, amounts on deposit in the Reserve Fund may be released to
the Depositor or the Owners of any class of Securities at the times and under
the circumstances specified in the Prospectus Supplement.
If specified in the Prospectus Supplement, various classes of
Subordinate Securities and Subordinated Securities may themselves be subordinate
in their right to receive certain distributions to other classes of Senior and
Subordinated Securities, respectively, through a cross-support mechanism or
otherwise.
As between classes of Senior Securities and as between classes of
Subordinated Securities, distributions may be allocated among such classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in 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
18
<PAGE>
for each class or series of Securities. The issuer of any Financial Guaranty
Insurance Policy (a "Financial Guaranty Insurer") will be described in the
related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, a
Financial Guaranty Insurance Policy will unconditionally and irrevocably
guarantee to holders of Securities that an amount equal to each full and
complete insured payment will be received by an agent (an "Insurance Paying
Agent") of the Trustee or Indenture Trustee on behalf of such holders, for
distribution by the Trustee to them. The "insured payment" will be defined in
the related Prospectus Supplement, and will generally equal the full amount of
the distributions of principal and interest to which such holders are entitled
under the related Agreement or Indenture plus any other amounts specified
therein or in the related Prospectus Supplement (the "Insured Payment").
Financial Guaranty Insurance Policies may apply only to certain
specified classes, or may apply at the Mortgage Asset level and only to
specified Mortgage Assets.
The specific terms of any Financial Guaranty Insurance Policy will be
as set forth in the related Prospectus Supplement. Financial Guaranty Insurance
Policies may have limitations including (but not limited to) limitations on the
insurer's obligation to guarantee the obligations of the Originators to
repurchase or substitute for any Mortgage Loans. Financial Guaranty Insurance
Policies will not guarantee any specified rate of prepayments and/or to provide
funds to redeem Securities on any specified date.
Subject to the terms of the related Agreement, the Financial Guaranty
Insurer may be subrogated to the rights of each holder of Securities to receive
payments under the Securities to the extent of any payment by such Financial
Guaranty Insurer under the related Financial Guaranty Insurance Policy.
Cross-Support. If specified in the related Prospectus Supplement, the
beneficial ownership of separate groups of assets included in the Trust for a
series may be evidenced by separate classes of related series of Securities. In
such case, Credit Enhancement may be provided by a cross-support feature which
may require that distributions be made with respect to Securities evidencing
beneficial ownership of one or more asset groups prior to distributions to
Subordinated Securities evidencing a beneficial ownership interest in other
asset groups within the same Trust. The Prospectus Supplement for a series which
includes a cross-support feature will describe the manner and conditions for
applying such cross-support feature.
If specified in the Prospectus Supplement, the coverage provided by one
or more forms of Credit Enhancement may apply concurrently to two or more
separate Trusts for a separate series of Securities. If applicable, the
Prospectus Supplement will identify the Trusts to which such credit support
relates and the manner of determining the amount of the coverage provided
thereby and of the application of such coverage to the identified Trusts.
Pool Insurance. If specified in the related Prospectus Supplement, one
or more mortgage pool insurance policies (each, a "Mortgage Pool Insurance
Policy") will be obtained.
Any such Mortgage Pool Insurance Policy will, subject to the
limitations described below and in the Prospectus Supplement, cover loss by
reason of default in payments on such Mortgage Loans up to the amounts specified
in the Prospectus Supplement or report on Form 8-K and for the periods specified
in the Prospectus Supplement. The Trustee under the related Agreement will agree
to use its best reasonable efforts to cause to be maintained in effect any such
Mortgage Pool Insurance Policy and to supervise the filing of claims thereunder
to the issuer of such Mortgage Pool Insurance Policy (the "Pool Insurer") for
the period of time specified in the related Prospectus Supplement. A Mortgage
Pool Insurance Policy, however, is not a blanket policy against loss, because
claims thereunder may only be made respecting particular defaulted Mortgage
Loans and only upon satisfaction of certain conditions precedent set forth in
such policy as described in the related Prospectus Supplement. The Mortgage Pool
Insurance Policies, if any, will not cover loss due to a failure to pay or
denial of a claim under a primary mortgage insurance policy, irrespective of the
reason therefor. The related Prospectus Supplement will
19
<PAGE>
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.
20
<PAGE>
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
21
<PAGE>
Securities, if any, would otherwise be entitled may instead be deposited into
the Reserve Fund from time to time and in the amounts as specified in the
Prospectus Supplement. Any cash in any Reserve Fund and the proceeds of any
other instrument upon maturity will be invested in Eligible Investments. If a
letter of credit is deposited with the Trustee, such letter of credit will be
irrevocable. Any instrument deposited therein will name the Trustee as a
beneficiary and will be issued by an entity acceptable to each rating agency
that rates the Securities. Additional information with respect to such
instruments deposited in the Reserve Funds may be set forth in the Prospectus
Supplement.
Any amounts so deposited and payments on instruments so deposited will
be available for withdrawal from the Reserve Fund for distribution with respect
to the Securities for the purposes, in the manner and at the times specified in
the Prospectus Supplement.
Other Insurance, Guaranties and Similar Instruments or Agreements. If
specified in the Prospectus Supplement, the related Trust may also include
insurance, guaranties, surety bonds, letters of credit, guaranteed investment
contracts or similar arrangements for the purpose of (i) maintaining timely
payments or providing additional protection against losses on the assets
included in such Trust, (ii) paying administrative expenses, (iii) establishing
a minimum reinvestment rate on the payments made in respect of such assets or
principal payment rate on such assets, (iv) guaranteeing timely payment of
principal and interest under the Securities, or for such other purpose as is
specified in such Prospectus Supplement. Such arrangements may include
agreements under which Owners are entitled to receive amounts deposited in
various accounts held by the Trustee upon the terms specified in the Prospectus
Supplement. Such arrangements may be in lieu of any obligation of the Servicers
or the Seller to advance delinquent installments in respect of the Mortgage
loans. See "Servicing of Mortgage Loans and Contracts - Advances" herein.
SERVICING OF MORTGAGE LOANS AND CONTRACTS
With respect to each series of Securities, the related Mortgage Loans
and Contracts will be serviced by a sole servicer or by a master servicer with
various sub-servicers pursuant to, or as provided for in, the Agreement. The
Prospectus Supplement for each series will specify the servicer and the master
servicer, if any, for such series.
The Depositor will require adequate servicing experience, where
appropriate, and financial stability, generally including a net worth
requirement (to be specified in the Agreement) as well as satisfaction of
certain other criteria.
Each Servicer will be required to perform the customary functions of a
mortgage loan servicer, including collection of payments from borrowers (the
"Mortgagors") and remittance of such collections to the Trustee, maintenance of
applicable standard hazard insurance or primary mortgage insurance policies,
attempting to cure delinquencies, supervising foreclosures, management of
Mortgaged Properties under certain circumstances, and maintaining accounting
records relating to the Mortgage Loans and Contracts, as applicable, and, if
specified in the related Prospectus Supplement, maintenance of escrow or
impoundment accounts of Mortgagors for payment of taxes, insurance, and other
items required to be paid by the Mortgagor pursuant to the Mortgage Loan or
Contract. Each Servicer will also be obligated to make advances in respect of
delinquent installments on Mortgage Loans and Contracts, as applicable, as
described more fully under "- Payments on Mortgage Loans" and "- Advances" below
and in respect of certain taxes and insurance premiums not paid on a timely
basis by Mortgagors.
Each Servicer will be entitled to a monthly servicing fee as specified
in the related Prospectus Supplement. Each Servicer will also generally be
entitled to collect and retain, as part of its servicing compensation, late
payment charges and assumption underwriting fees. Each Servicer will be
reimbursed from proceeds of one or more of the insurance policies described
herein ("Insurance Proceeds") or from proceeds received in connection with the
liquidation of defaulted Mortgage Loans ("Liquidation Proceeds") for certain
expenditures pursuant to the Agreement. See "- Advances" and "- Servicing
Compensation and Payment of Expenses" below.
22
<PAGE>
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.
23
<PAGE>
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.
24
<PAGE>
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
25
<PAGE>
appropriately applied may be dependent on its being named as an additional
insured under any standard hazard insurance policy and under any flood insurance
policy referred to below, or upon the extent to which information in this regard
is furnished to such Servicer by Mortgagors. Each Agreement may provide that the
related Servicer may satisfy its obligation to cause hazard insurance policies
to be maintained by maintaining a blanket policy insuring against hazard losses
on the Mortgage Loans serviced by such Servicer.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, wind-storm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers and, therefore, will not contain identical
terms and conditions, the basic terms thereof are dictated by state law. Such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mud flow), nuclear
reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, in certain cases, vandalism. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not intended to be all-inclusive. If the
property securing a Mortgage Loan is located in a federally designated flood
area, flood insurance will be required to be maintained in such amounts as would
be required by FNMA in connection with its mortgage loan purchase program. The
Depositor may also purchase special hazard insurance against certain of the
uninsured risks described above. See "Credit Enhancement - Special Hazard
Insurance".
Since the amount of hazard insurance the Servicer is required to cause
to be maintained on the improvements securing the Mortgage Loans declines as the
principal balances owing thereon decrease, if the residential properties
securing the Mortgage Loans appreciate in value over time, the effect of
coinsurance in the event of partial loss may be that hazard insurance proceeds
will be insufficient to restore fully the damaged property.
The Depositor will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
Cooperative Loan. Generally, the Cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the Cooperative and
the tenant-stockholders of that Cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain such insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to such borrower's cooperative dwelling or such
Cooperative's building could significantly reduce the value of the collateral
securing such Cooperative Loan to the extent not covered by other credit
support.
Contracts. The Servicer will generally be required to cause to be
maintained with respect to each Contract one or more hazard insurance policies
which provide, at a minimum, the same coverage as a standard form fire and
extended coverage insurance policy that is customary for manufactured housing,
issued by a company authorized to issue such policies in the state in which the
Manufactured Home is located and in an amount which is not less than the maximum
insurable value of such Manufactured Home or the principal balance due from the
borrower on the related Contract, whichever is less. When a Manufactured Home's
location was, at the time of origination of the related Contract, within a
federally designated special flood hazard area, the Servicer also shall cause
such flood insurance to be maintained, which coverage shall be at least equal to
the minimum amount specified in the preceding sentence or such lesser amount as
may be available under the federal flood insurance program.
The Servicer may maintain, in lieu of causing individual hazard
insurance policies to be maintained with respect to each Manufactured Home, and
shall maintain, to the extent that the related Contract does not require the
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.
26
<PAGE>
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,
27
<PAGE>
however, that the defaulted Mortgage Loans are not covered by a Mortgage Pool
Insurance Policy, primary mortgage insurance policies, the Special Hazard
Insurance Policy or another form of Credit Enhancement, or claims are either not
made or paid under such policies or Credit Enhancement, or if coverage
thereunder has ceased, such a loss will occur to the extent that the proceeds
from the liquidation of a defaulted Mortgage Loan or Contract, after
reimbursement of the Servicer's expenses, are less than the Principal Balance of
such defaulted Mortgage Loan or Contract.
Master Servicer
A Master Servicer may be specified in the related Prospectus Supplement
for the related series of Securities. Customary servicing functions with respect
to Mortgage Loans constituting the Mortgage Pool will be provided by the
Servicer directly or through one or more Sub-Servicers subject to supervision by
the Master Servicer. If the Master Servicer is not directly servicing the
Mortgage Loans, then the Master Servicer will (i) administer and supervise the
performance by the Servicer of its servicing responsibilities under the
Agreement with the Master Servicer, (ii) maintain a current data base with the
payment histories of each Mortgagor, (iii) review monthly servicing reports and
data relating to the Mortgage Pool for discrepancies and errors, and (iv) act as
back-up Servicer during the term of the transaction unless the Servicer is
terminated or resigns in such case the Master Servicer shall assume the
obligations of the Servicer.
The Master Servicer will be a party to the Agreement for any series for
which Mortgage Loans comprise the assets of a Trust. The Master Servicer will be
required to satisfy the standard established for the qualification of the Master
Servicer in the related Agreement. The Master Servicer will be compensated for
the performance of its services and duties under each Agreement as specified in
the related Prospectus Supplement.
ADMINISTRATION
The following summary describes certain provisions which will be common
to each Agreement. The summary does not purport to be complete and is subject
to, and qualified in its entirety by reference to, the provisions of a
particular Agreement. Material terms of a specific Agreement will be further
described in the related Prospectus Supplement.
Assignment of Mortgage Assets
Assignment of the Mortgage Loans. At the time of issuance, the
Depositor will assign the Mortgage Loans to the Trustee, together with all
principal and interest adjusted to the Remittance Rate, subject to exclusions
specified in the Prospectus Supplement, due on or with respect to such Mortgage
Loans on or after the Cut-Off Date. The Trustee and the Indenture Trustee will,
concurrently with such assignment, execute, countersign and deliver the
Securities to the Depositor in exchange for the Mortgage Loans. Each Mortgage
Loan will be identified in a schedule appearing as an exhibit to the Agreement.
Such schedule may include information as to the Principal Balance of each
Mortgage Loan as of the Cut-Off Date, as well as information respecting the
Mortgage Rate, the scheduled monthly payment of principal and interest as of the
Cut-Off Date and the maturity date of each Mortgage Note.
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.
28
<PAGE>
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
29
<PAGE>
to be registered in the name of the Trustee or, if applicable, the Indenture
Trustee (directly or through a participant in a depository). The Trustee or, if
applicable, the Indenture Trustee (or its custodian) will have possession of any
certificated Mortgage-Backed Securities and Other Mortgage Securities but will
not be in possession of or be assignee of record of any underlying assets for a
Mortgage-Backed Security or Other Mortgage Security. Each Mortgage-Backed
Security and Other Mortgage Security will be identified in a schedule appearing
as an exhibit to the related Agreement which may specify certain information
with respect to such security, including, as applicable, the original principal
amount, outstanding principal balance as of the Cut-Off Date, annual
pass-through rate or interest rate and maturity date and certain other pertinent
information for each such security. The Depositor will represent and warrant,
among other things, the information contained in such schedule is true and
correct and that immediately prior to the transfer of the related securities,
the Depositor had good title to, and was the sole owner of, each such security.
Repurchase or Substitution of Mortgage Loans and Contracts. The Trustee
and, if applicable, the Indenture Trustee will review the documents delivered to
it with respect to the Mortgage Loans and Contracts included in the related
Trust. If any document is not delivered or is found to be defective in any
material respect and the Depositor or the related Seller, if so required, cannot
deliver such document or cure such defect within the period specified in the
related Prospectus Supplement after notice thereof (which will be required to be
given within the period specified in the related Prospectus Supplement), and if
any other party obligated to deliver such document or cure such defect has not
done so and has not substituted or repurchased the affected Mortgage Loan or
Contract, then the Depositor will cause the Seller, not later than the first
date designated for the deposit of payments into the Security Account (a
"Deposit Date") which is more than a specified number of days after such period,
(a) if so provided in the Prospectus Supplement to remove the affected Mortgage
Loan or Contract from the Trust and substitute one or more other Mortgage Loans
or Contracts therefor or (b) repurchase the Mortgage Loan or Contract from the
Trustee for a price equal to 100% of its Principal Balance plus one month's
interest thereon at the applicable Remittance Rate. This repurchase and, if
applicable, substitution obligation will generally constitute the sole remedy
available for a material defect in a document relating to a Mortgage Loan or
Contract.
The Depositor is required to do or cause the Seller to do either of the
following (a) cure any breach of any representation or warranty that materially
and adversely affects the interests of the Owners in a Mortgage Loan (each, a
"Defective Mortgage Loan") or Contract within the period specified in the
related Prospectus Supplement of its discovery by the Depositor or its receipt
of notice thereof from the Trustee, (b) repurchase such Defective Mortgage Loan
or Contract not later than the first Deposit Date which is more than a specified
number of days after such period for a price equal to 100% of its Principal
Balance plus one month's interest thereon at the applicable Remittance Rate, or
(c) if so specified in the Prospectus Supplement, remove the affected Mortgage
Loan or Contract from the Trust and substitute one or more other mortgage loans
or contracts therefor. This repurchase and, if applicable, substitution
obligation will generally constitute the sole remedies available to the Trustee
for any such breach.
If the related Prospectus Supplement so provides, the Depositor or a
designated affiliate may be obligated to repurchase or substitute Mortgage Loans
or Contracts as described above, whether or not the Depositor obtains such an
agreement from the Seller which sold such Mortgage Loans or Contracts.
If a REMIC election is to be made with respect to all or a portion of a
Trust, there may be federal income tax limitations on the right to substitute
Mortgage Loans or Contracts.
Evidence as to Compliance
The Agreement will provide that on or before a specified date in each
year, beginning the first such date that is at least a specified number of
months on and after the Cut-Off Date, a firm of independent public accountants
will furnish a statement to the Trustee to the effect that, based on an
examination of certain specified documents and records relating to the servicing
of the Depositor's mortgage loan portfolio conducted substantially in compliance
with the audit program for mortgages serviced for FNMA or FHLMC, the United
States Department of Housing and Urban Development Mortgage Audit Standards or
the Uniform Single Audit Program for Mortgage Bankers or in accordance with
other standards specified in the Agreement (the "Applicable Accounting
Standards"), such
30
<PAGE>
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;
31
<PAGE>
(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).
32
<PAGE>
Forward Commitments; Pre-Funding
The Trustee of a Trust may enter into a Pre-Funding Agreement for the
transfer of additional Mortgage Loans and Contracts to such Trust following the
date on which such Trust is established and the related Securities are issued.
The Trustee of a Trust may enter into Pre-Funding Agreements to permit the
acquisition of additional Mortgage Loans that could not be delivered by the
Depositor or have not formally completed the origination process, in each case
prior to the Delivery Date. Any Pre-Funding Agreement will require that any
Mortgage Loans so transferred to a Trust conform to the requirements specified
in such Pre-Funding Agreement. If a Pre-Funding Agreement is to be utilized, the
related Trustee will be required to deposit in the Purchase Account all or a
portion of the proceeds received by the Trustee in connection with the sale of
one or more classes of Securities of the related series; the additional Mortgage
Loans will be transferred to the related Trust in exchange for money released
from the related Pre-Funding Account. Each Pre-Funding Agreement will set a
specified period during which any such transfers must occur. The Pre-Funding
Agreement or the related Agreement will require that, if all moneys originally
deposited to such Pre-Funding Account are not so used by the end of such
specified period, then any remaining moneys will be applied as a mandatory
prepayment of the related class or classes of Securities as specified in the
related Prospectus Supplement. The specified period for the acquisition by a
Trust of additional Mortgage Loans is not expected to exceed three months from
the date such Trust is established.
Servicer Events of Default
"Events of Default" under the Agreement will consist of (i) any failure
by the Servicer to duly observe or perform in any material respect any other of
its covenants or agreements in the Agreement materially affecting the rights of
Owners which continues unremedied for a specified number of days after the
giving of written notice of such failure to the Depositor by the Trustee or to
the Servicer and the Trustee by the Owners of Securities evidencing interests in
the Trust aggregating not less than 25% of the affected class of Securities; and
(ii) certain events of insolvency, readjustment of debt, marshaling of assets
and liabilities or similar proceedings and certain actions by the Servicer
indicating its insolvency, reorganization or inability to pay its obligations.
Rights Upon Servicer Event of Default
As long as an Event of Default under the Agreement remains unremedied
by the Servicer, the Trustee or Owners of Securities evidencing an ownership
interest in the Trust may terminate all the rights and obligations of the
Servicer under the Agreement, whereupon the Trustee or Master Servicer, if any,
or a new Servicer appointed pursuant to the Agreement, will succeed to all the
responsibilities, duties and liabilities of the Servicer under the Agreement and
will be entitled to similar compensation arrangements. Following such
termination, the Depositor shall appoint any established mortgage loan servicer
satisfying the qualification standards established in the Agreement to act as
successor to the Servicer under the Agreement. If no such successor shall have
been appointed within a specified number of days following such termination,
then either the Depositor or the Trustee may petition 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.
33
<PAGE>
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.
34
<PAGE>
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
35
<PAGE>
in a cooperative and accompanying occupancy rights is financed through a
cooperative share loan evidenced by a promissory note and secured by a security
interest in the occupancy agreement or proprietary lease and in the related
cooperative shares. The lender takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement and a financing
statement covering the proprietary lease or occupancy agreement and the
cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of cooperative
shares.
Timeshare Units. Because timeshare interests are considered to be
interests in real property, the manner and method of obtaining and enforcing a
security interest in a timeshare estate is similar to the methods used in other
real property lending transactions. The timeshare units comprising Mortgage
Loans are either mortgages or deeds of trust or other instruments under
applicable state law creating a first lien on the timeshare estate securing the
related Mortgage Note, depending upon the prevailing practice in the state in
which the timeshare estate is located. A mortgage creates a lien upon the
timeshare estate, which lien is generally not prior to liens for real estate
taxes and assessments. Priority between mortgages depends on their terms and
generally on the order of filing with a state or county office.
Foreclosure
Mortgages. Foreclosure of a deed of trust is generally accomplished by
a non-judicial trustee's sale under a specific provision in the deed of trust
that authorizes the trustee to sell the property to a third party upon any
default by the borrower under the terms of the note or deed of trust. In some
states, the trustee must record a notice of default and send a copy to the
borrower-trustor and any person who has recorded a request for a copy of a
notice of default and notice of sale. In addition, the trustee must provide
notice in some states to any other individual having an interest in the real
property, including any junior lienholders. The borrower, or any other person
having a junior encumbrance on the real estate, may, during a reinstatement
period, cure the default by paying the entire amount in arrears plus the costs
and expenses incurred in enforcing the obligation. Generally, state law controls
the amount of foreclosure expenses and costs, including attorney's fees' which
may be recovered by a lender. If the deed of trust is not reinstated, a notice
of sale must be posted in a public place and, in most states, published for a
specific period of time in one or more newspapers. In addition, some state laws
require that a copy of the notice of sale be posted on the property and sent to
all parties having an interest in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action.
The action is initiated by the service of legal pleadings upon all parties
having an interest in the real property. Delays in completion of the foreclosure
may occasionally result from difficulties in locating necessary parties
defendant. Judicial foreclosure proceedings are often not protested by any of
the parties defendant. However, when the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be time
consuming. After the completion of judicial foreclosure, the court generally
issues a judgment of foreclosure and appoints a referee or other court officer
to conduct the sale of the property.
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.
36
<PAGE>
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.
37
<PAGE>
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.
38
<PAGE>
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 Cooperative Loan, would be
39
<PAGE>
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.
40
<PAGE>
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
41
<PAGE>
home securing a manufactured housing conditional sales contract is registered.
In the event the Depositor fails, due to clerical errors, to effect such
notation or delivery, or files the security interest under the wrong law (for
example, under a motor vehicle title statute rather than under the UCC, in a few
states), the Trustee may not have a first priority security interest in the
Manufactured Home securing a Contract. As manufactured homes have become larger
and often have been attached to their sites without any apparent intention to
move them, courts in many states have held that manufactured homes, under
certain circumstances, may become subject to real estate title and recording
laws. As a result, a security interest in a manufactured home could be rendered
subordinate to the interests of other parties claiming an interest in the home
under applicable state real estate law. In order to perfect a security interest
in a manufactured home under real estate law, the holder of the security
interest must file either a "fixture filing" under the provisions of the UCC or
a real estate mortgage under the real estate laws of the state where the home is
located. These filings must be made in the real state records office of the
county where the home is located. So long as the borrower does not violate this
agreement, a security interest in the Manufactured Home will be governed by the
certificate of title laws or the UCC, and the notation of the security interest
on the certificate of title or the filing of a UCC financing statement will be
effective to maintain the priority of the security interest in the Manufactured
Home. If, however, a Manufactured Home is permanently attached to this site,
other parties could obtain an interest in the Manufactured Home which is prior
to the security interest transferred to the Trustee. With respect to a series of
Securities and as described in the related Prospectus Supplement, the Depositor
may be required to perfect a security interest in the Manufactured Home under
applicable real estate laws. If such real estate filings are not required and if
any of the foregoing events were to occur, the only recourse would be to pursue
the Trust's rights to require repurchase for breach of warranties.
The Depositor will assign its security interest in the Manufactured
Homes. Neither the Depositor nor the Trustee or, if applicable, Indenture
Trustee will amend the certificates of title to identify a new secured party.
Accordingly, the Depositor or the Seller will continue to be named as the
secured party on the certificates of title relating to the Manufactured Homes.
In most states, such assignment is an effective conveyance of such security
interest without amendment of any lien noted on the related certificate of title
and the new secured party succeeds to the rights of the secured party. However,
in some states there exists a risk that, in the absence of an amendment to the
certificate of title, such assignment of the security interest might not be held
effective against creditors of the Depositor or the Seller.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien on the certificate
of title or delivery of the required documents and fees will be sufficient to
protect against the rights of subsequent purchasers of a Manufactured Home or
subsequent lenders who take a security interest in the Manufactured Home. If
there are any Manufactured Homes as to which the security interest is not
perfected, such security interest would be subordinate to, among others,
subsequent purchasers for value of Manufactured Homes and holders of perfected
security interests. There also exists a risk in not identifying a new secured
party on the certificate of title that, through fraud or negligence, the
security interest could be released.
Enforcement of Security Interests in Manufactured Homes. The Servicer,
to the extent required by the related Agreement, may take action to enforce the
security interest with respect to Contracts in default by repossession and
resale of the Manufactured Homes securing such Contracts in default. So long as
the Manufactured Home has not become subject to the real estate law, a creditor
can repossess a Manufactured Home securing a Contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by 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.
42
<PAGE>
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.
43
<PAGE>
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
44
<PAGE>
purchase, a depository institution will be required to determine whether a
mortgage derivative product that it is considering acquiring is high-risk, and
if so that the proposed acquisition would reduce the institution's overall
interest rate risk. Reliance on analysis and documentation obtained from a
securities dealer or other outside party without internal analysis by the
institution would be unacceptable. There can be no assurance as to which classes
of the Securities of any series will be treated as high-risk under the Policy
Statement. In addition, the National Credit Union Administration has issued
regulations governing federal credit union investments which prohibit investment
in certain specified types of securities, which may include certain classes of
Securities. Similar policy statement have been issued by regulators having
jurisdiction over other types of depository institutions.
There may be other restrictions on the ability of certain investors
either to purchase certain classes of Securities or to purchase any class of
Securities representing more than a specified percentage of the investors'
assets. The Depositor will make no representations as to the proper
characterization of any class of Securities for legal investment or other
purposes, or as to the ability of particular investors to purchase any class of
Securities under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any class of Securities. Accordingly, all
investors whose investment activities are subject to legal investment laws and
regulations, regulatory capital requirements or review by regulatory authorities
should consult with their own legal advisors in determining whether and to what
extent the Securities of any class constitute a legal investment under SMMEA or
are subject to investment, capital or other restrictions, and whether SMMEA has
been overridden in any jurisdiction applicable to such investor.
ERISA CONSIDERATIONS
ERISA imposes requirements on employee benefit plans (and on certain
other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds and separate
accounts in which such plans, accounts or arrangements are invested)
(collectively, "Plans") subject to ERISA and on persons who are fiduciaries with
respect to such Plans. Among other things, ERISA requires that the assets of
Plans be held in trust and that the trustee, or other duly authorized fiduciary,
have exclusive authority and discretion to manage and control the assets of such
Plans. ERISA also imposes certain duties on persons who are fiduciaries of
Plans. Under ERISA, any person who exercises any authority or control respecting
the management or disposition of the assets of a Plan is considered to be a
fiduciary of such Plan (subject to certain exceptions not here relevant). In
addition to the imposition of general fiduciary standards of investment prudence
and diversification, ERISA prohibits a broad range of transactions involving
Plan assets and persons ("Parties in Interest") having certain specified
relationships to a Plan and imposes additional prohibitions where Parties in
Interest are fiduciaries with respect to such Plan.
The United States Department of Labor (the "DOL") has issued
regulations concerning the definition of what constitutes the assets of a Plan.
(DOL Reg Section 2510.3-101). Under this regulation, the underlying assets and
properties of corporations, partnerships and certain other entities in which a
Plan makes an "equity" investment could be deemed for purposes of ERISA to be
assets of the investing Plan in certain circumstances. In such case, the
fiduciary making such an investment for the Plan could be deemed to have
delegated his or her asset management responsibility, and the underlying assets
and properties could be subject to ERISA reporting and disclosure. Certain
exceptions to the regulation may apply in the case of a Plan's investment in the
Securities, but the Depositor cannot predict in advance whether such exceptions
apply due to the factual nature of the conditions to be met. Accordingly,
because the Mortgage Loans and Contracts may be deemed Plan assets of each Plan
that 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
45
<PAGE>
property, and the acquisition and holding of certain mortgage pool pass-through
certificates representing an interest in such mortgage pools by PTE.
PTE 83-1 sets forth three general conditions which must be satisfied
for any transaction to be eligible for exemption: (i) the maintenance of a
system of insurance or other protection for the pooled mortgage loans and
property securing such loans, and for indemnifying Owners against reductions in
pass-through payments due to property damage or defaults in loan payments in an
amount not less than the greater of one percent of the aggregate principal
balance of all covered pooled mortgage loans or the principal balance of the
largest covered pooled mortgage loan, (ii) the existence of a pool trustee who
is not an affiliate of the sponsor, and (iii) a limitation on the amount of the
payments retained by the pool sponsor, together with other funds inuring to its
benefit, to not more than adequate consideration for selling the mortgage loans
plus reasonable compensation for services provided by the pool sponsor.
Although the Trustee and, if applicable, the Indenture Trustee for any
series of Securities will be unaffiliated with the Depositor, there can be no
assurance that the system of insurance or subordination will meet the general or
specific conditions referred to above. In addition, the nature of a Trust's
assets or the characteristics of one or more classes of the related series of
Securities may not be included within the scope of PTE 83-1 or any other class
exemption under ERISA. The Prospectus Supplement will provide additional
information with respect to the application of ERISA and the Code to the related
Securities.
Several underwriters of mortgage-backed securities have applied for and
obtained ERISA prohibited transactions exemptions which are in some respects
broader than PTE 83-1. Such exemptions can only apply to mortgage-backed
securities which, among other conditions, are sold in an offering with respect
to which such underwriter serves as the sole or a managing underwriter, or as a
selling or placement agent. Several other underwriters have applied for similar
exemptions. If such an exemption might be applicable to a series of Securities,
the related Prospectus Supplement will refer to such possibility.
Each Plan fiduciary who is responsible for making the investment
decisions whether to purchase or commit to purchase and to hold Securities must
make its own determination as to whether the general and the specific conditions
of PTE 83-1 have been satisfied or as to the availability of any other
prohibited transaction exemptions Each Plan fiduciary should also determine
whether, under the general fiduciary standards of investment prudence and
diversification, an investment in the Securities is appropriate for the Plan,
taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
Any Plan proposing to invest in Securities should consult with its
counsel to confirm that such investment will not result in a prohibited
transaction and will satisfy the other requirements of ERISA and the Code.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the anticipated material
federal income tax consequences of the purchase, ownership and disposition of
Securities and is based upon the advice of Arter & Hadden, special counsel to
the Depositor. The discussion below does not purport to address all federal
income tax consequences that may be applicable to particular categories of
investors, some of which may be subject to special rules. The authorities on
which this discussion is based are subject to change or differing
interpretations, and any such change or interpretation could apply
retroactively. This discussion reflects the applicable provisions of the Code
including recent amendments under the Omnibus Budget Reconciliation Act of 1993
("OBRA"), as well as final regulations concerning REMICs (the "REMIC
Regulations") promulgated on December 23, 1992, and final regulations under
Sections 1271 through 1273 and 1275 of the Code concerning debt instruments
promulgated on January 27, 1994 (the "OID Regulations"). The Depositor intends
to rely on the OID Regulations for all Securities offered pursuant to this
Prospectus; however, investors should be aware that the OID Regulations do not
adequately address certain issues relevant to prepayable securities, such as the
Securities. Investors should consult their own tax advisors in determining the
federal, state, local and any other tax consequences to them of the purchase,
ownership and disposition of Securities, particularly with respect to federal
income tax changes effected by OBRA and the REMIC Regulations. The Prospectus
Supplement for each series of Securities will discuss any special tax
consideration
46
<PAGE>
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
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
47
<PAGE>
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
48
<PAGE>
principal amount upon the request of a Regular Securityholder or by random lot
(a "Retail Class Security")) will be treated as a single installment obligation
for purposes of determining the original issue discount includible in a Regular
Securityholder's income. The total amount of original issue discount on a
Regular Security is the excess of the "stated redemption price at maturity" of
the Regular Security over its "issue price." The issue price of a Regular
Security is the first price at which a substantial amount of Regular Securities
of that class are first sold to the public. The Depositor will determine
original issue discount by including the amount paid by an initial Regular
Securityholder for accrued interest that relates to a period prior to the issue
date of the Regular Security in the issue price of a Regular Security and will
include in the stated redemption price at maturity any interest paid on the
first Distribution Date to the extent such interest is attributable to a period
in excess of the number of days between the issue date and such first
Distribution Date. The stated redemption price at maturity of a Regular Security
always includes the original principal amount of the Regular Security, but
generally will not include distributions of stated interest if such interest
distributions constitute "qualified stated interest." Qualified stated interest
generally means stated interest that is unconditionally payable in cash or in
property (other than debt instruments of the issuer) at least annually at (i) a
single fixed rate, (ii) one or more qualified floating rates (as described
below), (iii) a fixed rate followed by one or more qualified floating rates,
(iv) a single objective rate (as described below) or (v) a fixed rate and an
objective rate that is a qualified inverse floating rate. The OID Regulations
state that interest payments are unconditionally payable only if a late payment
or nonpayment is expected to be penalized or reasonable remedies exist to compel
payment. Certain debt securities may provide for default remedies in the event
of late payment or nonpayment of interest. The interest on such debt securities
will be unconditionally payable and constitute qualified stated interest, not
OID. Nevertheless, absent clarification of the OID Regulations, where debt
securities do not provide for default remedies, the interest payments will be
included in the debt security's stated redemption price at maturity and taxed as
OID. Any stated interest in excess of the qualified stated interest is included
in the stated redemption price at maturity. If the amount of original issue
discount is "de minimis" as described below, the amount of original issue
discount is treated as zero, and all stated interest is treated as qualified
stated interest. Distributions of interest on Regular Securities with respect to
which deferred interest will accrue may not constitute qualified stated
interest, in which case the stated redemption price at maturity of such Regular
Securities includes all distributions of interest as well as principal thereon.
Moreover, if the interval between the issue date and the first Distribution Date
on a Regular Security is longer than the interval between subsequent
Distribution Dates (and interest paid on the first Distribution Date is less
than would have been earned if the stated interest rate were applied to
outstanding principal during each day in such interval), the stated interest
distributions on such Regular Security technically do not constitute qualified
stated interest. In such case a special rule, applying solely for the purpose of
determining whether original issue discount is de minimis, provides that the
interest shortfall for the long first period (i.e., the interest that would have
been earned if interest had been paid on the first Distribution Date for each
day the Regular Security was outstanding) is treated as made at a fixed rate if
the value of the rate on which the payment is based is adjusted in a reasonable
manner to take into account the length of the interval. Regular Securityholders
should consult their own tax advisors to determine the issue price and stated
redemption price at maturity of a Regular Security.
Under a de minimis rule, original issue discount on a Regular Security
will be considered to be zero if such original issue discount is less than 0.25%
of the stated redemption price at maturity of the Regular Security multiplied by
the weighted average maturity of the Regular Security. For this purpose, the
weighted maturity of the Regular Security is computed as the sum of the amounts
determined by multiplying the number of full years (i.e., rounding down partial
years) from the issue date until each distribution in reduction of stated
redemption price 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
49
<PAGE>
issue discount on the Regular Security accrued during an accrual period for each
day on which he holds the Regular Security, including the date of purchase but
excluding the date of disposition. Although not free from doubt, the Depositor
intends to treat the monthly period ending on the day before each Distribution
Date as the accrual period, rather than the monthly period corresponding to the
prior calendar month. With respect to each Regular Security, a calculation will
be made of the original issue discount that accrues during each successive full
accrual period (or shorter period from the date of original issue) that ends on
the day before the related Distribution Date on the Regular Security. For a
Regular Security, original issue discount is to be calculated initially based on
a schedule of maturity dates that takes into account the level of prepayments
and an anticipated reinvestment rate that are most likely to occur, which is
expected to be based on the Prepayment Assumption. The original issue discount
accruing in a full accrual period would be the excess, if any, of (i) the sum of
(a) the present value of all of the remaining distributions to be made on the
Regular Security as of the end of that accrual period that are included in the
Regular Security's stated redemption price at maturity and (b) the distributions
made on the Regular Security during the accrual period that are included in the
Regular Security's stated redemption price at maturity over (ii) the adjusted
issue price of the Regular Security at the beginning of the accrual period. The
present value of the remaining distributions referred to in the preceding
sentence is calculated based on (i) the yield to maturity of the Regular
Security at the issue date, (ii) events (including actual prepayments) that have
occurred prior to the end of the accrual period and (iii) the Prepayment
Assumption. For these purposes, the adjusted issue price of a Regular Security
at the beginning of any accrual period equals the issue price of the Regular
Security, increased by the aggregate amount of original issue discount with
respect to the Regular Security that accrued in all prior accrual periods and
reduced by the amount of distributions included in the Regular Security's stated
redemption price at maturity that were made on the Regular Security in such
prior period. The original issue discount accruing during any accrual period (as
determined in this paragraph) will then be divided by the number of days in the
period to determine the daily portion of original issue discount for each day in
the period.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Securityholder generally
will increase to take into account prepayments on the Regular Securities as a
result of prepayments on the Mortgage Assets or that exceed the Prepayment
Assumption, and generally will decrease (but not below zero for any period) if
the prepayments are slower than the Prepayment Assumption. In the event of a
change in circumstances that does not result in a substantially contemporaneous
pro rata prepayment, the yield and maturity of the Regular Securities are
redetermined by treating the Regular Securities as reissued on the date of the
change for an amount equal to the adjusted issue price of the Regular
Securities. To the extent specified in the applicable Prospectus Supplement, an
increase in prepayments on the Mortgage Assets with respect to a series of
Regular Securities can result in both a change in the priority of principal
payments with respect to certain classes of Regular Securities and either an
increase or decrease in the daily portions of original issue discount with
respect to such Regular Securities.
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.
50
<PAGE>
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
51
<PAGE>
Security that reflects the right to receive the non-contingent payments,
determined in the same manner as if the separate non-contingent debt instrument
were a debt instrument issued as part of an investment unit. The contingent
components of the Regular Security would constitute options or other property
rights and would be taxed as if issued as a separate instrument. No accrual of
original issue discount generally would be required with respect to such
components under the contingent payment rules. Accordingly, the rate at which
income is accrued by a Securityholder may vary depending on whether the original
issue discount rules or the contingent payment rules apply to certain variable
rate debt instruments.
Market Discount. A purchaser of a Regular Security also may be subject
to the market discount rules of Code Sections 1276 through 1278. Under these
sections and the principles applied by the OID Regulations in the context of
original issue discount, "market discount" is the amount by which a subsequent
purchaser's initial basis in the Regular Security (i) is exceeded by the stated
redemption price at maturity of the Regular Security or (ii) in the case of a
Regular Security having original issue discount, is exceed by the sum of the
issue price of such Regular Security plus any original issue discount that would
have previously accrued thereon if held by an original Regular Securityholder
(who purchased the Regular Security at its issue price), in either case less any
prior distributions included in the stated redemption price at maturity of such
Regular Security. Such purchaser generally will be required to recognize accrued
market discount as ordinary income as distributions includible in the stated
redemption price at maturity of such Regular Security are received in an amount
not exceeding any such distribution. That recognition rule would apply
regardless of whether the purchaser is a cash-basis or accrual-basis taxpayer.
Such market discount would accrue in a manner to be provided in Treasury
regulations and should take into account the Prepayment Assumption. The
Conference Committee Report to the 1986 Act provides that until such regulations
are issued, such market discount would accrue either (i) on the basis of a
constant interest rate or (ii) in the ratio of stated interest allocable to the
relevant period to the sum of the interest for such period plus the remaining
interest as of the end of such period, or in the case of a Regular Security
issued with original issue discount, in the ratio of original issue discount
accrued for the relevant period to the sum of the original issue discount
accrued for such period plus the remaining original issue discount as of the end
of such period. Such purchaser also generally will be required to treat a
portion of any gain on a sale or exchange of the Regular Security as ordinary
income to the extent of the market discount accrued to the date of disposition
under one of the foregoing methods, less any accrued market discount previously
reported as ordinary income as partial distributions in reduction of the stated
redemption price at maturity were received. Such purchaser will be required to
defer deduction of a portion of the excess of the interest paid or accrued on
indebtedness incurred to purchase or carry a Regular Security over the interest
distributable thereon. The deferred portion of such interest expense in any
taxable year generally will not exceed the accrued market discount on the
Regular Security for such year. Any such deferred interest expense is, in
general, allowed as a deduction not later than the year in which the related
market discount income is recognized or the Regular Security is disposed of. As
an alternative to the inclusion of market discount in income on the 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
52
<PAGE>
Security as a "capital asset" within the meaning of Code Section 1221, the
Regular Securityholder may elect under Code Section 171 to amortize such premium
under a constant yield method that reflects compounding based on the interval
between payments on the Regular Securities. This election, once made, applies to
all obligations held by the taxpayer at the beginning of the first taxable year
to which such section applies and to all taxable debt obligations thereafter
acquired and is binding on such taxpayer in all subsequent years. The Conference
Committee Report to the 1986 Act indicates a Congressional intent that the same
rules that apply to the accrual of market discount on installment obligations
will also apply to amortizing bond premium under Code Section 171 on installment
obligations such as the Regular Securities, although it is unclear whether the
alternatives to the constant interest method described above under "Market
Discount" are available. Except as otherwise provided in Treasury regulations
yet to be issued amortizable bond premium will be treated as an offset to
interest income on a Regular Security rather than as a separate deduction item.
Purchasers who pay a premium for their Regular Securities should consult their
tax advisors regarding the election to amortize premium and the method to be
employed.
Sale or Exchange of Regular Securities. If a Regular Securityholder
sells or exchanges a Regular Security, the Regular Securityholder will recognize
gain or loss equal to the difference, if any, between the amount received and
his adjusted basis in the Regular Security. The adjusted basis of a Regular
Security generally will equal the cost of the Regular Security to the seller,
increased by any original issue discount or market discount previously included
in the seller's gross income with respect to the Regular Security and reduced by
amounts included in the stated redemption price at maturity of the Regular
Security that were previously received by the seller and by any amortized
premium.
Except as described above with respect to market discount, and except
as provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Security realized by an investor who holds the Regular Security as a
capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Security has been held for the long-term
capital gain holding period (currently more than one year). Gain from the
disposition of a Regular Security that might otherwise be capital gain will be
treated as ordinary income to the extent that such gain does not exceed the
excess, if any, of (i) the amount that would have been includible in the gross
income of the holder if his yield on such Regular Security were 110% of the
applicable Federal rate under Code Section 1274(d) as of the date of purchase
over (ii) the amount of income actually includible in the gross income of such
holder with respect to the Regular Security. In addition, gain or loss
recognized from the sale of a Regular Security by certain banks or thrift
institutions will be treated as ordinary income or loss pursuant to Code Section
582(c). The maximum tax rate for individuals on the excess of net long-term
capital gain over net short-term capital loss is 28%.
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.
53
<PAGE>
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.
54
<PAGE>
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 relevant legislative history, market discount on such Mortgage
Assets might
55
<PAGE>
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.
56
<PAGE>
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
57
<PAGE>
it is not a Disqualified Organization or (ii) furnishes a social security number
and states under penalties of perjury that the social security number is that of
the transferee, provided that during the period such person is the record holder
of the Residual Security, the Pass-Through Entity does not have actual knowledge
that such affidavit is false.
For these purposes, (i) "Disqualified Organization" means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
its activities are subject to tax and a majority of its board of directors is
not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 521) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511 and (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis. Except as may be provided in Treasury
regulations yet to be issued, any person holding an interest in a Pass-Through
Entity as a nominee for another will, with respect to such interest, be treated
as a Pass-Through Entity.
The Agreement with respect to a series of Securities will provide that
neither legal title nor beneficial interest in a Residual Security may be
transferred or registered unless (i) the proposed transferee provides to the
Depositor and the Trustee an affidavit to the effect that such transferee is not
a Disqualified Organization, is not purchasing such Residual Securities on
behalf of a Disqualified Organization (i.e., as a broker, nominee or middleman
thereof) and is not an entity that holds REMIC residual securities as nominee to
facilitate the clearance and settlement of such securities through electronic
book-entry changes in accounts of participating organizations and (ii) the
transferor provides a statement in writing to the Depositor and the Trustee that
it has no actual knowledge that such affidavit is false. Moreover, the Agreement
will provide that any attempted or purported transfer in violation of these
transfer restrictions will be null and void and will vest no rights in any
purported transferee. Each Residual Security with respect to a series will have
a legend referring to such restrictions on transfer, and each Residual
Securityholder will be deemed to have agreed, as a condition of ownership
thereof, to any amendments to the related Agreement required under the Code or
applicable Treasury regulations to effectuate the foregoing restrictions.
Information necessary to compute an applicable excise tax must be furnished to
the Internal Revenue Service and to the requesting party within 60 days of the
request, and the Depositor or the Trustee may charge a fee for computing and
providing such information.
Noneconomic Residual Interests. Under the REMIC Regulations certain
transfers of Residual Securities are disregarded, in which case the transferor
continues to be treated as the owner of the Residual Securities and thus
continues to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the Final REMIC Regulations, a transfer of a Noneconomic
Residual Interest (defined below) to a Residual Securityholder (other than a
Residual Securityholder who is not a U.S. Person, as defined below under
"Foreign Investors") is disregarded for all federal income tax purposes unless
no significant purpose of the transfer is to impede the assessment or collection
of tax. A residual interest in a REMIC (including a residual interest with a
positive value at issuance) is a "Noneconomic Residual Interest" unless, at the
time of the transfer, (i) the present value of the expected future distributions
on the residual interest at least equals the product of the present value of the
anticipated excess inclusions and the highest federal corporate income tax rate
in effect for the year in which the transfer occurs and (ii) the transferor
reasonably expects that the transferee will receive distributions from the REMIC
at or after the time at which taxes accrue on the anticipated excess inclusions
in an amount sufficient to satisfy the accrued taxes. The anticipated excess
inclusions and the present value rate are determined in the same manner as set
forth above under "Disqualified Organizations." A significant purpose to impede
the assessment or collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known (had "improper knowledge") that the
transferor would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. Under the REMIC Regulations, a transferor is
presumed not to have improper knowledge if (i) the transferor conducted, at the
time of the transfer, a reasonable investigation of the financial condition of
the transferee and, as a result of the investigation, the transferor found that
the transferee had historically paid its debts as they came due and found no
significant evidence to indicate that the transferor will not continue to pay
its debts as they come due in the future; and (ii) the transferee represents to
the transferor that it understands that, as the holder of the Noneconomic
Residual Interest, the transferee may incur tax liabilities in excess of any
cash flows generated by the
58
<PAGE>
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%
rate. Prohibited
59
<PAGE>
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
60
<PAGE>
as agent of the Residual Securityholders, the Residual Securityholder chosen by
the Residual Securityholders or such other person specified pursuant to Treasury
regulations will be required to act as tax matters person.
Treasury regulations provide that a holder of a Residual Security is
not required to treat items on its return consistently with their treatment on
the REMIC Pool's return if a holder owns 100% of the Residual Securities for the
entire calendar year. Otherwise, each holder of a Residual Security is required
to treat items on its return consistently with their treatment on the REMIC
Pool's return, unless the holder of a Residual Security either files a statement
identifying the inconsistency or establishes that the inconsistency resulted
from incorrect information received from the REMIC Pool. The Service may assess
a deficiency resulting from a failure to comply with the consistency requirement
without instituting an administrative proceeding at the REMIC Pool level.
Limitations on Deduction of Certain Expenses
An investor who is an individual, estate or trust will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such itemized deductions, in the aggregate, do not exceed
2% of the investor's adjusted gross income. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser of (i) 3% of the excess, if
any, of adjusted gross income over $100,000, adjusted yearly for inflation
($50,000, adjusted yearly for inflation, in the case of a married individual
filing a separate return), or (ii) 80% of the amount of itemized deductions
otherwise allowable for such year. In the case of a REMIC Pool, such deductions
may include deductions under Code Section 212 for servicing fees and all
administrative and other expenses relating to the REMIC Pool or any similar
expenses allocated to the REMIC Pool with respect to a regular interest it holds
in another REMIC. Such investors who hold REMIC Securities either directly or
indirectly through certain pass-through entities may have their pro rata share
of such expenses allocated to them as additional gross income, but may be
subject to such limitation on deductions. In addition, such expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause such investors to be subject to significant additional tax liability.
Treasury regulations provide that the additional gross income and corresponding
amount of expenses generally are to be allocated entirely to the holders of
Residual Securities in the case of a REMIC Pool that would not qualify as a
fixed investment trust in the absence of a REMIC election. However, such
additional gross income and limitation on deductions will apply to the allocable
portion of such expenses to holders of Regular Securities, as well as holders of
Residual Securities, where such Regular Securities are issued in a manner that
is similar to pass-through certificates in a fixed investment trust. In general,
such allocable portion will be determined based on the ratio that a REMIC
Securityholder's income, determined on a daily basis, bears to the income of all
holders of Regular Securities and Residual Securities with respect to a REMIC
Pool. As a result, individuals, estates or trusts holding REMIC Securities
(either directly or indirectly through a grantor trust, partnership, S
corporation, REMIC, or certain other pass-through entities described in the
foregoing Treasury regulations) may have taxable income in excess of the
interest income at the pass-through rate on Regular Securities that are issued
in a single class or otherwise consistently with fixed investment trust status
or in excess of cash distributions for the related period on Residual
Securities.
Taxation of Certain Foreign Investors
Regular Securities. Interest, including original issue discount,
distributable to Regular Securityholders who are nonresident aliens, foreign
corporations, or other Non-U.S. Persons (as defined below), will be considered
"portfolio interest" and therefore, generally will not be subject to 30% United
States withholding tax, provided that such Non-U.S. Person (i) is not a
"10-percent shareholder" within the meaning of Code Section 871(h)(3)(B) or a
controlled foreign corporation described in Code Section 881(c)(3)(C) and (ii)
provides the Trustee, or the person who would otherwise be required to withhold
tax from such distributions under Code Sections 1441 or 1442, with an
appropriate statement, signed under penalties of perjury, identifying the
beneficial owner and stating, among other things, that the beneficial owner of
the Regular Security is a Non-U.S. Person. If such statement, or any other
required statement, is not provided, 30% withholding will apply unless reduced
or eliminated pursuant to an applicable tax treaty or unless the interest on the
Regular Security is effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Person. In the latter case,
such Non-U.S. Person will be subject to United States federal income tax at
regular rates. Investors who are Non-U.S. Persons should consult
61
<PAGE>
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
the close
62
<PAGE>
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.
63
<PAGE>
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."
64
<PAGE>
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.
65
<PAGE>
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
66
<PAGE>
all debt instruments issued in connection with the same transaction must be
treated as a single debt instrument. The Trustee will make and report all
computations described below using this aggregate approach, unless substantial
legal authority requires otherwise.
Furthermore, the regulations under Code Section 1286 support the
treatment of a Stripped Security as a single debt instrument issued on the date
it is originated for purposes of calculating any original issue discount. The
preamble to such regulations state that such regulations are premised on the
assumption that an aggregation approach is appropriate in determining whether
original issue discount on a stripped bond or stripped coupon is de minimis. In
addition, under these regulations, a Stripped Security that represents a right
to payments of both interest and principal may be viewed either as issued with
original issue discount or market discount (as described below), at a de minimis
original issue discount, or presumably, at a premium. The preamble to such
regulations also provide that such regulations are premised on the assumption
that generally the interest component of such a Stripped Security would be
treated as stated interest under the original issue discount rules. Further, the
regulations provide that the purchaser of such a Stripped Security may be
required to account for any discount as market discount rather than original
issue discount if either (i) the initial discount with respect to the Strip
Security was treated as zero under the de minimis rule or (ii) no more than 100
basis points in excess of reasonable servicing is stripped off the related
Mortgage Assets. Any such market discount would be reportable as described above
under "Federal Income Tax Consequences for REMIC Securities - Taxation of
Regular Securities - Market Discount," without regard to the de minimis rule
therein.
Status of Stripped Securities. No specific legal authority exists as to
whether the character of the Stripped Securities, for federal income tax
purposes, will be the same as that of the Mortgage Assets. Stripped Securities
owned by applicable holders should be considered to represent "qualifying real
property loans" within the meaning or Code Section 593(d)(1), "real estate
assets" within the meaning of Code Section 856(c)(A), "obligations(s) . . .
principally secured by an interest in real property" within the meaning of Code
Section 860G(a)(3)(A), and "loans . . . secured by an interest in real property"
within the meaning of Code Section 7701(a)(19)(C)(v), and interest (including
original issue discount) income attributable to Stripped Securities should be
considered to represent "interest on obligations secured by mortgages on real
property" within the meaning or Code Section 856(c)(3)(B), provided that in each
case the Mortgage Assets and interest on such Mortgage Assets qualify for such
treatment. The application of such Code provisions to buy-down Mortgage Assets
is uncertain. See "- Federal Income Tax Consequences for Securities as to Which
No REMIC Election is Made" and "- Standard Securities - Tax Status" above.
Original Issue Discount. Except as described above under "- General,"
each Stripped Security will be considered to have been issued (i) on the date
that the stripped interest is purchased and (ii) at a price equal to its
purchase price or, if more than one stripped interest is purchased, the share of
the purchase price allocable to such stripped interest. Each stripped interest
generally will have original issue discount equal to the excess of its stated
redemption price at maturity (or, in the case of a stripped coupon, the amount
payable on the due date of such coupon) over its issue price. Original issue
discount with respect to a Stripped Security must be included in 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.
67
<PAGE>
While the matter is not free from doubt, the holder of a Stripped Security
should be entitled in the year that it becomes certain (assuming no further
prepayments) that the holder will not recover a portion of its adjusted basis in
such Stripped Security to recognize an ordinary loss equal to such portion of
unrecoverable basis.
As an alternative to the method described above, the fact that some of
or all the interest payments with respect to the Stripped Securities will not be
made if the Mortgage Assets are prepaid could lead to the interpretation that
such interest payments are "contingent" within the meaning of the proposed
regulations issued under Code Section 1274 that address the treatment of
contingent payments. If the rules of those proposed regulations apply, treatment
of a Stripped Security under such rules depends on whether the aggregate amount
of principal payments, if any, to be made on the Stripped Security is less than
or greater than its issue price. If the aggregate principal payments are greater
than or equal to the issue price, the principal payments would be treated as a
separate installment obligation issued at a price equal to the purchase price
for the Stripped Security. In such case, original issue discount would be
calculated and accrued under the method described above without consideration of
the interest payments with respect to the Stripped Security. Such payments of
interest would be includible in the Stripped Securityholder's gross income in
the taxable year in which the amounts become fixed. If the aggregate amount of
principal payments to be made on the Stripped Security is less than its issue
price, each payment of principal would be treated as a return of basis. Each
payment of interest would be treated as includible in gross income to the extent
of the applicable Federal rate under Code Section 1274(d), as applied to the
adjusted basis of the Stripped Security, while amounts received in excess of the
applicable Federal rate, as applied to the adjusted basis of the Stripped
Security, would be characterized as a return of basis until the total amount of
interest payments treated as a return of basis equalled the excess of the
purchase price over the aggregate stated principal payments. Any additional
interest payments thereafter would be treated as ordinary income. While not free
from doubt, uncertainty as to the payment of interest arising as a result of the
possibility of prepayment of the Mortgage Assets should not cause the rules
under the proposed contingent payment regulations to apply to interest with
respect to the Stripped Securities.
Sale or Exchange of Stripped Securities. Sale or exchange of a Stripped
Security prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Stripped
Securityholder's adjusted basis in such Stripped Security, as described above
under "Federal Income Tax Consequences for REMIC Securities - Taxation of
Regular Securities - Sale or Exchange of Regular Securities." To the extent that
a subsequent purchaser's purchase price is exceeded by the remaining payments on
the Stripped Securities, such subsequent purchaser will be required for federal
income tax purposes to accrue and report such excess as if it were original
issue discount in the manner described above. It is not clear for this purpose
whether the assumed prepayment rate that is to be used in the case of a Stripped
Securityholder other than by original Stripped Securityholder should be the
Prepayment Assumption or a new rate based on the circumstances at the date of
subsequent purchase.
Purchase of More Than One Class of Stripped Securities. Where an
investor purchases more than one class of Stripped Securities, it is currently
unclear whether for federal income tax purposes such classes of Stripped
Securities should be treated separately or aggregated for purposes of the rules
described above.
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
68
<PAGE>
not reported all interest and dividend income required to be shown on his
federal income tax return, 31% backup withholding may be required in respect of
any reportable payments, as described above under "- Backup Withholding."
Taxation of Certain Foreign Investors
To the extent that a Security evidences ownership in Mortgage Assets
that are issued on or before July 18, 1984, interest or original issue discount
paid by the person required to withhold tax under Code Section 1441 or 1442,
which apply to nonresident aliens, foreign corporations, or other Non-U.S.
Persons generally will be subject to 30% United States withholding tax, or such
lower rate as may be provided for interest by an applicable tax treaty. Accrued
original issue discount or market discount recognized by the Securityholder on
the sale or exchange of such a Security also will be subject to federal income
tax at the same rate.
Treasury regulations provide that interest or original issue discount
paid by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Assets issued after July 18, 1984, will be
"portfolio interest" and will be treated in the manner, and such persons will be
subject to the same certification requirements described above under "- Taxation
of Certain Foreign Investors - Regular Securities."
Debt Securities
General. "Debt Securities," if issued and as described in the related
Prospectus Supplement may be issued either as (i) non-recourse debt of the
Depositor secured by the related Mortgage Assets, in which case the related
Trust will constitute only a security device which constitutes a collateral
arrangement for the issuance of secured debt and not an entity for federal
income tax purposes or (ii) debt of a partnership, in which case the related
Trust will constitute a partnership for federal income tax purposes. In either
case, Debt Securities, will follow the federal income tax treatment hereinafter
described.
Original Issue Discount. It is likely that the Debt Securities will be
treated as having been issued with "original issue discount" within the meaning
of Code Section 1273(a) because interest payments on the Debt Securities may, in
the event of certain shortfalls, be deferred for periods exceeding one year. As
a result, interest payments may not be considered "qualified stated interest"
payments.
In general, a holder of a Debt Security having original issue discount
must include original issue discount in ordinary income as it accrues in advance
of receipt of the cash attributable to the discount, regardless of the method of
accounting otherwise used. The amount of original issue discount on a Debt
Security will be computed generally as described under "- Federal Income Tax
Consequences for REMIC Certificates" and "Taxation of Regular Certificates -
Original Issue Discount" and "- Variable Rate Regular Certificates." The
Depositor intends to report any information required with respect to the Debt
Securities based on the OID Regulations.
Market Discount. A purchaser of a Debt Security may be subject to the
market discount rules of Code Sections 1276 through 1278. In general, "market
discount" is the amount by which the stated redemption price at maturity (or, in
the case of a Debt Security issued with original issue discount, the adjusted
issue price) of the Debt Security exceeds the purchaser's basis in a Debt
Security. The holder of a Debt Security that has market discount generally will
be required to include accrued market discount in ordinary income to the extent
payments includible in the stated redemption price at maturity of such Debt
Security are received. The amount of market discount on a Debt Security will be
computed generally as described under "Federal Income Tax Consequences for REMIC
Certificates" and "- Taxation of Regular Certificates - Market Discount."
Premium. A Debt Security purchased at a cost greater than its currently
outstanding stated redemption price at maturity is considered to be purchased at
a premium. A holder of a Debt Security who holds a Debt Security as a "capital
asset" within the meaning of Code Section 1221 may elect under Code Section 171
to amortize the premium under the constant interest method. That election will
apply to all premium obligations that the holder of a Debt Security acquires on
or after the first day of the taxable year for which the election is made,
unless the IRS permits the revocation of the election. In addition, it appears
that the same rules that apply to the accrual of market
69
<PAGE>
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
70
<PAGE>
will be obligated to purchase all such Securities if any are purchased and that
the Depositor will indemnify the Underwriters against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended.
RATINGS
Each class of Securities of a Series will be rated at their initial
issuance in one of the four highest categories by at least one Rating Agency.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning Rating Agency. No person is obligated to maintain the rating on any
Security, and, accordingly, there can be no assurance that the ratings assigned
to a Security upon initial issuance will not be lowered or withdrawn by a Rating
Agency at any time thereafter. In general, ratings address credit risk and do
not represent any assessment of the likelihood or rate of principal prepayments.
LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Securities will be passed upon for the Depositor by Arter & Hadden, Washington,
D.C. and by Keith Blackwell, General Counsel for the Depositor. Certain legal
matters relating to insolvency issues and certain federal income tax matters
concerning the Securities will be passed upon for the Depositor by Arter &
Hadden.
FINANCIAL INFORMATION
A Trust will be formed with respect to each series of Securities. No
Trust will have any assets or obligations prior to the issuance of the related
series of Securities. No Trust will engage in any activities other than those
described herein or in the Prospectus Supplement. Accordingly, no financial
statement with respect to any Trust is included in this Prospectus or will be
included in the Prospectus Supplement.
The Depositor has determined that its financial statements are not
material to the offering made hereby.
A Prospectus Supplement and the related Form 8-K (which will be
incorporated by reference to the Registration Statement) may contain financial
statements of the related Credit Enhancer, if any.
71
<PAGE>
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
<PAGE>
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained in this Prospectus
Supplement or the Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the
Depositor or by the Underwriters. This Prospectus Supplement and the Prospectus
do not constitute an offer to sell, or a solicitation of an offer to buy any of
the securities offered hereby in any jurisdiction in which the person making
such offer or solicitation is not qualified to do so or to anyone to whom it is
unlawful to make such offer or solicitation. Neither the delivery of this
Prospectus Supplement or the Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that information herein (including
information incorporated by reference herein) or therein is correct as of any
time subsequent to the date of this Prospectus Supplement or the Prospectus.
----------
TABLE OF CONTENTS
Page
----
Prospectus Supplement
Summary of Terms.............................................................S-1
Risk Factors ...............................................................S-16
The Portfolio of Mortgage Loans.............................................S-19
Use of Proceeds.............................................................S-39
The Depositor...............................................................S-40
The Seller..................................................................S-40
The Mortgage Loan Pools.....................................................S-40
Prepayment and Yield Considerations.........................................S-53
The Originators.............................................................S-61
Formation of the Trust and Trust Property...................................S-61
Additional Information......................................................S-62
Description of the Class A Certificates.....................................S-62
The Certificate Insurance Policies and the Certificate
Insurer.....................................................................S-72
The Pooling and Servicing Agreement.........................................S-75
Certain Federal Income Tax Consequences.....................................S-85
ERISA Considerations........................................................S-86
Ratings.....................................................................S-87
Legal Investment Considerations.............................................S-88
Underwriting................................................................S-88
Report of Experts...........................................................S-89
Certain Legal Matters.......................................................S-89
Global Clearance, Settlement and Tax
Documentation Procedures........................................Annex I
Targeted Balance Schedule...............................................Annex II
Index to Location of Principal Defined Terms.................................A-1
Audited Financial Statements for the
Certificate Insurer.................................................B-1
Unaudited Financial Statements for the
Certificate Insurer.................................................C-1
Prospectus
Summary of Prospectus..........................................................1
Risk Factors...................................................................7
Description of the Certificates...............................................10
The Trusts....................................................................15
Credit Enhancement............................................................18
Servicing of the Mortgage Loans and Contracts.................................22
Administration................................................................28
Use of Proceeds...............................................................35
The Depositor.................................................................35
Certain Legal Aspects of the Mortgage Assets..................................35
Legal Investment Matters......................................................44
ERISA Considerations..........................................................45
Certain Federal Income Tax Consequences.......................................46
Plan of Distribution..........................................................70
Ratings.......................................................................71
Legal Matters.................................................................71
Financial Information.........................................................71
Index to Location of Principal Defined Terms.................................A-1
================================================================================
<PAGE>
AMRESCO Residential
Securities Corporation
Mortgage Loan Trust 1996-4
$311,079,000
Mortgage Loan Pass-Through
Certificates, Series 1996-4
$9,163,000
Class A-1 Certificates
$22,400,000
Class A-2 Certificates
$17,600,000
Class A-3 Certificates
$10,670,000
Class A-4 Certificates
$13,100,000
Class A-5 Certificates
$238,146,000
Class A-6 Adjustable Rate Certificates
PROSPECTUS SUPPLEMENT
CS First Boston
Prudential Securities Incorporated
Goldman, Sachs & Co.
August 16, 1996
================================================================================
