<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
on June 24, 1997
Registration Statement No. 333-_____
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------------------------------
AMRESCO RESIDENTIAL SECURITIES CORPORATION
(Exact name of Registrant as specified in its governing instruments)
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DELAWARE 75-2620414
- --------------------------------- ---------------------------------------
(State of Incorporation) (I.R.S. Employer Identification Number)
700 N. Pearl Street, Suite 2400
Dallas, Texas 75201
(Address of principal executive offices)
(214) 953-7700
-----------------------------------------------------
L. Keith Blackwell
Vice President, General Counsel and Secretary
AMRESCO, INC.
700 N. Pearl Street, Suite 2400
Dallas, Texas 75201
(214) 953-7700
Fax: (214) 953-7757
-----------------------------------------------------
Please send copies of communications to:
Michael W. Trickey Joseph V. Gatti, Esq.
Senior Vice President of Finance Arter & Hadden
AMRESCO Residential Credit Corporation 1801 K Street, N.W.,
3401 Centrelake Drive, Suite 480 Suite 400 K
Ontario, California 91761 Washington, D.C. 20006
(909) 605-7600 (212) 775-7100
Fax: (909) 941-7619 Fax: (202) 857-0172
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC. From time to time
after the effective date of this Registration Statement as determined by market
conditions and pursuant to Rule 415.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following Box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, please check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
Pursuant to Rule 429 of the Securities Act of 1933, the Prospectus filed as
part of this Registration Statement may be used in connection with the
securities covered by Registration Statement No. 333-8687.
CALCULATION OF REGISTRATION FEE
-----------------------------------------------------
<TABLE>
<CAPTION>
===================================================================================================================================
Proposed Maximum Proposed Maximum
Title of Securities Amount Being Offering Price Aggregate Offering Amount of (1)
Being Registered Registered Per Unit* Price Registration Fee
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage Loan Asset Backed $1,000,000 100% $1,000,000 $ 303.03
Certificates
===================================================================================================================================
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee.
-----------------------------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER
<PAGE> 2
BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933
OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
COMMISSION ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
This registration statement registers mortgage asset-backed pass-through
certificates and debt securities collateralized by various types of mortgage
collateral described herein. The registration statement contains two forms of
prospectuses covering, (i) one-to-four ("single") family residential first and
junior lien, fixed and adjustable rate mortgage loans or interests therein
represented by agency or private label pass-through securities and (ii)
multifamily/commercial mortgage loans. Each of the single family mortgage
prospectus and the multifamily/commercial prospectus is accompanied by one or
more forms of prospectus supplement describing certain structures that are
expected to be employed by the Registrant. As described in the prospectus, each
transaction may have Classes of Certificates with various characteristics,
mortgage assets with various characteristics, various forms and terms of credit
enhancement, one or more subservicers, various underwriting and servicing
standards with respect to mortgage assets, various tax consequences and various
other characteristics, each of which will be fully described in the actual form
of prospectus supplement filed pursuant to Rule 424(b).
The forms of the single family and multifamily/commercial prospectuses are
similar in many respects in that they both relate to real estate security for
the related mortgage obligations. The primary differences between these
prospectuses are under the captions addressing risk factors, certain legal
aspects of the mortgage loans, servicing of the mortgage loans and the
description of the securities, as it now appears more likely in the
multifamily/commercial context than in the single family context that internal
cash flow allocations (e.g., senior/subordinate securities) will provide the
predominate credit enhancement on those securities.
<PAGE> 3
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEMS AND CAPTION IN FORM S-3 LOCATION IN PROSPECTUS
<S> <C> <C>
1. Forepart of Registration Statement and Outside Front Cover
Page of Prospectus.............................................. Forepart of Registration
Statement and Outside Front
Cover Page **
2. Inside Front and Outside Back Cover Pages of Prospectus............ Inside Front Cover Page and
Outside Back Cover Page of
Prospectus **
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges....................................... Summary**; The Seller**;
Special Considerations**
4. Use of Proceeds.................................................... Use of Proceeds**
5. Determination of Offering Price.................................... *
6. Dilution........................................................... *
7. Selling Security-Holders........................................... *
8. Plan of Distribution............................................... Plan of Distribution **
9. Description of Securities to be Registered......................... Outside Front Cover; Summary;
The Trusts; The Securities;
Administration of Agreement
and Servicing of Mortgage
Loans **
10. Interests of Named Experts and Counsel............................. *
11. Material Changes................................................... *
12. Incorporation of Certain Information by Reference.................. Inside Front Cover Page**;
Incorporation of Certain
Documents by Reference**
13. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities ........................................ See Page II-2
</TABLE>
- --------------------------
* Answer negative or item inapplicable.
** To be completed from time to time by Prospectus Supplement.
3
<PAGE> 4
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PRELIMINARY PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
Subject to Completion, Dated ___________, 199__
PROSPECTUS SUPPLEMENT
(To Prospectus Dated _________________________, 1997)
$___________
AMRESCO RESIDENTIAL SECURITIES CORPORATION MORTGAGE LOAN TRUST 199__-__
$___________ CLASS A-1 ADJUSTABLE RATE CERTIFICATES
$___________ _____% CLASS A-2 CERTIFICATES
$___________ _____% CLASS A-3 CERTIFICATES
$___________ _____% CLASS A-4 CERTIFICATES
$___________ _____% CLASS A-5 CERTIFICATES
$___________ _____% CLASS A-6 CERTIFICATES
$___________ _____% CLASS A-7 CERTIFICATES*
$___________ CLASS A-8 ADJUSTABLE RATE CERTIFICATES
-------------------------------
Servicers
AMRESCO RESIDENTIAL SECURITIES CORPORATION
Depositor
--------------------
LOGO
AMRESCO
AMRESCO Residential Securities Corporation
The AMRESCO Residential Securities Corporation Mortgage Loan
Pass-Through Certificates, Series 199__-__ (the "Certificates") will consist of
(i) the Class A-1 Certificates, Class A-2 Certificates, Class A-3 Certificates,
Class A- 4 Certificates, Class A-5 Certificates, Class A-6 Certificates and
Class A-7 Certificates (collectively, the "Fixed Rate Group Certificates"),
(ii) the Class A-8 Certificates (the "Adjustable Rate Group Certificates"); and
together with the Fixed Rate Group Certificates, the "Class A Certificates"),
(iii) one or more classes of subordinate interest-only Certificates and (iv) a
residual class (the "Class R Certificates"; and together with such other
subordinate Certificates, the "Subordinate Certificates"). Only the Class A
Certificates are offered hereby.
[SURETY NAME]
On or before the issuance of the Certificates, the Depositor will
obtain from [Surety Name] (the "Certificate Insurer") two financial guaranty
insurance policies relating to the Class A Certificates (the "Certificate
Insurance Policies") in favor of the Trustee. The Certificate Insurance
Policies will in accordance with their respective terms provide for 100%
coverage of the scheduled principal amount of, and scheduled interest due on,
the Class A Certificates.
The Certificates represent undivided ownership interests in one of two
pools (each, a "Mortgage Loan Group") of fixed and adjustable rate mortgage
loans (the "Mortgage Loans") held by AMRESCO Residential Securities Corporation
Mortgage Loan Trust 199__-__ (the "Trust"). The Fixed Rate Group Certificates
will represent undivided ownership interests in the Mortgage Loans in Group I
(the "Fixed Rate Loans and the 5/25 Loans [each defined herein]) and the
Pre-Funding Account (as defined herein) solely. The Adjustable Rate Group
Certificates will represent undivided ownership interests in the Mortgage Loans
in Group II (the Six-Month LIBOR Loans, the 2/28 Loans and the 3/27 Loans (each
as defined herein)) and the Pre-Funding Account solely. All of the Mortgage
Loans are secured solely by first lien mortgages or deeds of trust. The Class
A Certificates also represent an undivided ownership interest in all monies due
under the respective Mortgage Loans after __________, 199__ (the "Cut-Off
Date"), security interests in the properties which secure the Mortgage Loans
(the "Mortgaged Properties"), the financial guaranty insurance policies, funds
on deposit in certain trust accounts, and certain other property.
FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENT IN THE
CERTIFICATES, SEE "RISK FACTORS" BEGINNING ON PAGE S-15 AND "PREPAYMENT AND
YIELD CONSIDERATIONS" BEGINNING ON PAGE S-47 HEREIN AND "RISK FACTORS"
BEGINNING ON PAGE 7 IN THE PROSPECTUS.
(Cover continued on next page)
--------------------
THE CLASS A CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY AND
DO NOT REPRESENT INTERESTS IN OR
OBLIGATIONS OF THE DEPOSITOR, THE SELLER, THE SERVICERS, THE TRUSTEE OR
ANY OF THEIR AFFILIATES. NEITHER THE CLASS A CERTIFICATES NOR THE MORTGAGE
LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
--------------------
The Class A Certificates will be purchased by the Underwriters from
the Depositor and will be offered by the Underwriters from time to time to the
public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. Proceeds to the Depositor from the sale of the
Class A Certificates will be approximately $__________, plus accrued interest
on the Fixed Rate Group Certificates (except the Class A-1 Certificates) at the
applicable Pass-Through Rate from __________, 199__ to, but not including, the
Closing Date, before deducting expenses payable by the Depositor estimated to
be approximately $____________________.
The Class A Certificates are offered subject to prior sale, when, as,
and if accepted by the Underwriters and subject to the Underwriters' right to
reject orders in whole or in part. It is expected that delivery of the Class A
Certificates will be made in book-entry form through the facilities of The
Depository Trust Company ("DTC"), CEDEL S.A. and the Euroclear System on or
about __________, 199__. The Class A Certificates will be offered in Europe
and the United States of America.
----------------
* The Class A-7 Certificate's Pass-Through Rate is subject to adjustment after
the Clean-Up Call Date, as described in the Summary of Terms herein.
[UNDERWRITER]
[UNDERWRITER]
[UNDERWRITER]
The date of this Prospectus Supplement is ___________, 199__
<PAGE> 5
(Cover continued from previous page)
The Trust will be created pursuant to a Pooling and Servicing
Agreement (the "Pooling and Servicing Agreement") to be dated as of __________,
199__, among the Depositor, AMRESCO Capital Markets, Inc. as Seller (the
"Seller"), the Servicers and ___________, as Trustee (the "Trustee").
The Pooling and Servicing Agreement provides that additional Mortgage
Loans (the "Subsequent Mortgage Loans") may be purchased by the Trust from the
Depositor from time to time on or before __________, 199__ from funds on
deposit in the Pre-Funding Account. Each Subsequent Mortgage Loan so acquired
by the Trust will be assigned to one (and only one) of the Mortgage Loan
Groups. On the Closing Date aggregate cash amounts of approximately
$__________ and $__________ will be deposited with the Trustee in the
Pre-Funding Account to be used to acquire Subsequent Mortgage Loans for Group I
and Group II, respectively.
It is a condition to issuance of the Class A Certificates that the
Class A Certificates be rated "Aaa" by Moody's, "AAA" by Standard and Poor's
and "AAA" by Fitch.
Distributions of interest will be made to the Owners of the
Certificates on the 25th day of each month (or, if such day is not a business
day, the next business day) beginning __________, 199__. Interest will be
passed through on each Payment Date to the Owners of the Class A Certificates
based on the related Certificate Principal Balance (as defined herein), and at
the rate applicable to the related Class of the Class A Certificates (each, a
"Pass-Through Rate"). On any Payment Date on or prior to the Clean-Up Call
Date (as defined herein), the Pass-Through Rate for the Class A-7 Certificates
is ___________% and, thereafter, will be the lesser of ________% and the
weighted average of the Coupon Rates of the Mortgage Loans in Group I, less
____________%. The Pass-Through Rate for the Class A-1 Certificates and the
Class A-8 Certificates adjusts monthly based upon One-Month LIBOR (as defined
herein) or as otherwise described herein. Distributions in reduction of the
Certificate Principal Balances will be made on each Payment Date in the manner
and the amounts described herein. Distributions on the Subordinate
Certificates are subordinate to distributions on the Class A Certificates to
the extent described herein.
The yield to investors on the Class A Certificates sold at prices
other than par may be sensitive to the rate and timing of principal payments
(including prepayments, repurchases, defaults and liquidations) on the Mortgage
Loans in the related Group, which may vary over time. See "Prepayment and
Yield Considerations" herein and "Risk Factors" and "Yield, Prepayment and
Maturity Considerations" in the Prospectus.
An election will be made to treat certain assets of the Trust as a
"real estate mortgage investment conduit" (a "REMIC") for federal income tax
purposes. All of the Class A Certificates will constitute "regular interests"
in a REMIC. See "Certain Federal Income Tax Consequences" herein and in the
Prospectus.
--------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF
THE CLASS A CERTIFICATES, INCLUDING PURCHASES OF THE CLASS A CERTIFICATES TO
STABILIZE ITS MARKET PRICE AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING" IN THIS PROSPECTUS
SUPPLEMENT.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE CLASS A CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
THE CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT WILL BE PART OF
A SEPARATE SERIES OF CERTIFICATES BEING OFFERED BY THE DEPOSITOR PURSUANT TO
ITS PROSPECTUS DATED ________________, 1997, 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.
The Depositor will file or cause to be filed with the Commission such periodic
reports with respect to the Trust as are required under the Securities Exchange
Act of 1934 and the rules and regulations of the Commission thereunder. It is
the Depositor's intent to suspend the filing of such reports as soon as such
reports are no longer statutorily required.
<PAGE> 6
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-20
General . . . . . . . . . . . . . . . . . . . . S-20
Underwriting Guidelines . . . . . . . . . . . . S-20
Prepayment Penalties . . . . . . . . . . . . . . S-24
Representations Relating to the Mortgage Loans . S-24
The Servicers . . . . . . . . . . . . . . . . . S-25
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . S-25
THE DEPOSITOR . . . . . . . . . . . . . . . . . . . . S-25
THE SELLER . . . . . . . . . . . . . . . . . . . . . S-25
THE MORTGAGE LOAN POOLS . . . . . . . . . . . . . . . S-26
General . . . . . . . . . . . . . . . . . . . . S-26
Initial Mortgage Loans -- Group I . . . . . . . S-27
Initial Mortgage Loans -- Group II . . . . . . . S-31
Conveyance of Subsequent Mortgage Loans . . . . S-37
PREPAYMENT AND YIELD CONSIDERATIONS . . . . . . . . . S-37
General . . . . . . . . . . . . . . . . . . . . S-37
Mandatory Prepayment . . . . . . . . . . . . . . S-39
Projected Prepayment and Yield for Class A
Certificates . . . . . . . . . . . . . . . . S-39
Payment Lag Feature of Certain Fixed Rate Group
Certificates . . . . . . . . . . . . . . . . S-45
THE ORIGINATORS . . . . . . . . . . . . . . . . . . . S-45
FORMATION OF THE TRUST AND TRUST PROPERTY . . . . . . S-45
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . S-46
DESCRIPTION OF THE CLASS A CERTIFICATES . . . . . . . S-46
General . . . . . . . . . . . . . . . . . . . . S-46
Payment Dates . . . . . . . . . . . . . . . . . S-46
Distributions . . . . . . . . . . . . . . . . . S-47
Overcollateralization Provisions . . . . . . . . S-49
Crosscollateralization Provisions . . . . . . . S-51
Pre-Funding Account . . . . . . . . . . . . . . S-51
Capitalized Interest Account . . . . . . . . . . S-51
Calculation of One-Month LIBOR . . . . . . . . . S-52
Book Entry Registration of the Class A
Certificates . . . . . . . . . . . . . . . . S-52
Assignment of Rights . . . . . . . . . . . . . . S-55
THE CERTIFICATE INSURANCE POLICIES AND THE CERTIFICATE
INSURER . . . . . . . . . . . . . . . . . . . . S-55
THE POOLING AND SERVICING AGREEMENT . . . . . . . . . S-59
Covenant of the Seller to Take Certain Actions with
Respect to the Mortgage Loans in Certain
Situations . . . . . . . . . . . . . . . . . S-59
Assignment of Mortgage Loans . . . . . . . . . . S-59
Servicing . . . . . . . . . . . . . . . . . . . S-61
Removal and Resignation of a Servicer . . . . . S-65
Reporting Requirements . . . . . . . . . . . . . S-65
Removal of Trustee for Cause . . . . . . . . . . S-67
Governing Law . . . . . . . . . . . . . . . . . S-67
Amendments . . . . . . . . . . . . . . . . . . . S-67
Termination of the Trust . . . . . . . . . . . . S-67
Auction Sale; Step Up on Certain Pass-Through
Rates; Termination . . . . . . . . . . . . . S-68
CERTAIN FEDERAL INCOME TAX CONSEQUENCES . . . . . . . S-68
REMIC Election . . . . . . . . . . . . . . . . . S-68
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . S-69
RATINGS . . . . . . . . . . . . . . . . . . . . . . . S-70
LEGAL INVESTMENT CONSIDERATIONS . . . . . . . . . . . S-71
UNDERWRITING . . . . . . . . . . . . . . . . . . . . S-71
REPORT OF EXPERTS . . . . . . . . . . . . . . . . . . S-72
CERTAIN LEGAL MATTERS . . . . . . . . . . . . . . . . S-73
GLOBAL CLEARANCE, SETTLEMENT AND TAX
DOCUMENTATION PROCEDURES . . . . . . . . . . . . Annex I
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS . . . . . A-1
AUDITED FINANCIAL STATEMENTS FOR
THE CERTIFICATE INSURER . . . . . . . . . . . . . . . B-1
UNAUDITED FINANCIAL STATEMENTS FOR
THE CERTIFICATE INSURER . . . . . . . . . . . . . . . C-1
</TABLE>
<PAGE> 7
PROSPECTUS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY OF PROSPECTUS . . . . . . . . . . . . . . . . . 1
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . 7
DESCRIPTION OF THE CERTIFICATES . . . . . . . . . . . . 10
General . . . . . . . . . . . . . . . . . . . . . 11
Classes of Certificates . . . . . . . . . . . . . 11
Distributions of Principal and Interest . . . . . 13
Book Entry Registration . . . . . . . . . . . . . 14
List of Owners of Certificates . . . . . . . . . . 14
THE TRUSTS . . . . . . . . . . . . . . . . . . . . . . 15
Mortgage Loans . . . . . . . . . . . . . . . . . . 15
Contracts . . . . . . . . . . . . . . . . . . . . 17
Mortgage-Backed Securities . . . . . . . . . . . . 17
Other Mortgage Securities . . . . . . . . . . . . 17
CREDIT ENHANCEMENT . . . . . . . . . . . . . . . . . . 18
SERVICING OF MORTGAGE LOANS AND CONTRACTS . . . . . . . 22
Payments on Mortgage Loans . . . . . . . . . . . . 23
Advances . . . . . . . . . . . . . . . . . . . . . 23
Collection and Other Servicing Procedures . . . . 23
Primary Mortgage Insurance . . . . . . . . . . . . 25
Standard Hazard Insurance . . . . . . . . . . . . 25
Title Insurance Policies . . . . . . . . . . . . . 27
Claims Under Primary Mortgage Insurance Policies
and Standard Hazard Insurance Policies; Other
Realization Upon Defaulted Loan . . . . . . . 27
Servicing Compensation and Payment of Expenses . . 27
Master Servicer . . . . . . . . . . . . . . . . . 28
ADMINISTRATION . . . . . . . . . . . . . . . . . . . . 28
Assignment of Mortgage Assets . . . . . . . . . . 28
Evidence as to Compliance . . . . . . . . . . . . 31
The Trustee . . . . . . . . . . . . . . . . . . . 31
Administration of the Certificate Account . . . . 31
Reports . . . . . . . . . . . . . . . . . . . . . 32
Forward Commitments; Pre-Funding . . . . . . . . . 33
Servicer Events of Default . . . . . . . . . . . . 33
Rights Upon Servicer Event of Default . . . . . . 33
Amendment . . . . . . . . . . . . . . . . . . . . 34
Termination . . . . . . . . . . . . . . . . . . . 34
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . 35
THE DEPOSITOR . . . . . . . . . . . . . . . . . . . . . 35
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS 35
General . . . . . . . . . . . . . . . . . . . . . 35
Foreclosure . . . . . . . . . . . . . . . . . . . 36
Soldiers' and Sailors' Civil Relief Act 41
The Contracts . . . . . . . . . . . . . . . . . . 41
The Title I Program . . . . . . . . . . . . . . . 44
LEGAL INVESTMENT MATTERS . . . . . . . . . . . . . . . 44
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . 45
CERTAIN FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . 47
Federal Income Tax Consequences For REMIC
Certificates . . . . . . . . . . . . . . . . . 47
Taxation of Regular Certificates . . . . . . . . . 48
Taxation of Residual Certificates . . . . . . . . 54
Treatment of Certain Items of REMIC Income
and Expense . . . . . . . . . . . . . . . . . 56
Tax-Related Restrictions on Transfer of
Residual Certificates . . . . . . . . . . . . 58
Sale or Exchange of a Residual
Certificate . . . . . . . . . . . . . . . . . 60
Taxes That May Be Imposed on the REMIC
Pool . . . . . . . . . . . . . . . . . . . . . 60
Liquidation of the REMIC Pool . . . . . . . . . . 61
Administrative Matters . . . . . . . . . . . . . . 61
Limitations on Deduction of Certain
Expenses . . . . . . . . . . . . . . . . . . . 61
Taxation of Certain Foreign Investors . . . . . . 62
Backup Withholding . . . . . . . . . . . . . . . . 63
Reporting Requirements . . . . . . . . . . . . . . 63
Federal Income Tax Consequences for
Certificates as to Which No REMIC
Election Is Made . . . . . . . . . . . . . . . 63
Standard Certificates . . . . . . . . . . . . . . 63
Premium and Discount . . . . . . . . . . . . . . . 65
Stripped Certificates . . . . . . . . . . . . . . 66
Reporting Requirements and Backup
Withholding . . . . . . . . . . . . . . . . . 69
Taxation of Certain Foreign Investors . . . . . . 69
Taxation of Securities Classified as
Partnership Interests . . . . . . . . . . . . 69
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . 70
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . 70
FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . 70
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS A-1
</TABLE>
<PAGE> 8
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Reference is made to the Index to Location of
Principal Defined Terms for the location of certain capitalized terms.
ISSUER: AMRESCO Residential Securities Corporation
Mortgage Loan Trust 199__-__ (the "Trust").
CERTIFICATES OFFERED: $___________ Mortgage Loan Pass-Through
Certificates, Series 199__-__ to be issued in
the following Classes (each, a "Class"):
<TABLE>
<CAPTION>
Initial Certificate Pass-Through
Principal Balance Rate Class
----------------- ---- -----
<S> <C> <C> <C>
$___________ (1) Class A-1 Certificates
$___________ _____% Class A-2 Certificates
$___________ _____% Class A-3 Certificates
$___________ _____% Class A-4 Certificates
$___________ _____% Class A-5 Certificates
$___________ _____% Class A-6 Certificates
$___________ _____% (2) Class A-7 Certificates
$___________ (3) Class A-8 Certificates
</TABLE>
(1) On each Payment Date, the Class A-1
Pass-Through Rate will be equal to the lesser
of (i) the rate equal to the London interbank
offered rate for one-month United States
dollar deposits ("One-Month LIBOR")
(calculated as described under "Description
of the Class A Certificates -- Calculation of
One-Month LIBOR" herein) plus _____% per
annum and (ii) the weighted average of the
Coupon Rates on the Mortgage Loans in Group
I, less _____% per annum (the "Fixed Rate
Group Available Funds Cap"). The weighted
average of the Coupon Rates on the Mortgage
Loans in Group I as of the Cut-Off Date is
_____%.
(2) The Pass-Through Rate with respect to
the Class A-7 Certificates shall as of any
Payment Date after the Payment Date on which
the Outstanding Certificate Principal Balance
has declined to less than 10% of the original
Certificate Principal Balance ("Clean-Up Call
Date") will be the lesser of 8.825% and the
Fixed Rate Group Available Funds Cap.
(3) On each Payment Date, the Class A-8
Pass-Through Rate will be equal to the lesser
of (i) with respect to any Payment Date which
occurs on or prior to the Clean-Up Call Date,
the rate equal to One-Month LIBOR plus _____%
per annum (and for any Payment Date
thereafter, One-Month LIBOR plus _____% per
annum), and (ii) the weighted average of the
Coupon Rates on the Mortgage Loans in Group
II, less _____% per annum (the "Adjustable
Rate Group Available Funds Cap"). The
weighted average of the Coupon Rates on the
Mortgage Loans in Group II as of the Cut-Off
Date is _____%.
The Class A-1 Certificates, Class A-2
Certificates, Class A-3 Certificates, Class
A-4 Certificates, Class A-5 Certificates,
Class A-6 Certificates and Class A-7
Certificates are collectively referred to
herein as the "Fixed Rate Group
Certificates," and the Class A-8 Certificates
are also referred to herein as the
"Adjustable Rate Group Certificates." The
Fixed Rate Group Certificates and the
Adjustable Rate Group Certificates are
collectively referred to as the "Class A
Certificates."
DEPOSITOR: AMRESCO Residential Securities Corporation
(the "Depositor"), a Delaware corporation.
SELLER: AMRESCO Residential Capital Markets, Inc.
(the "Seller"), a Delaware corporation.
SERVICERS: [ to be provided] (each a "Servicer" and
collectively, the "Servicers").
TRUSTEE:
CUSTODIAN: ___________________________________
S-1
<PAGE> 9
CUT-OFF DATE: As of the close of business on __________,
199__.
CLOSING DATE: On or about __________, 199__.
DESCRIPTION OF
THE CERTIFICATES: The Mortgage Loan Pass-Through Certificates
(the "Certificates") will consist of the
Class A Certificates, one or more classes of
subordinate interest-only Certificates and a
residual class (the "Class R Certificates"
and together with such other subordinate
Certificates, the "Subordinate
Certificates"). The Certificates will be
issued pursuant to a Pooling and Servicing
Agreement (the "Pooling and Servicing
Agreement") to be dated as of __________,
199__, among the Depositor, the Seller, the
Servicers and the Trustee. Only the Class A
Certificates will be offered hereby.
On the Closing Date, an aggregate cash amount
of approximately $____________ (approximately
$__________ and $__________ of which shall be
allocated to Group I and Group II,
respectively) (the "Original Pre-Funded
Amount") will be deposited in a trust account
in the name of the Trustee (the "Pre-Funding
Account"). It is intended that additional
fixed rate and adjustable rate Mortgage Loans
satisfying the criteria specified in the
Pooling and Servicing Agreement (the
"Subsequent Mortgage Loans") will be
purchased by the Trust from the Depositor
from time to time on or before __________,
199__ from funds on deposit in the
Pre-Funding Account. Each Subsequent
Mortgage Loan so acquired by the Trust will
be assigned to one (and only one) of the
Mortgage Loan Groups. As a result, the
aggregate principal balance of the Mortgage
Loans in each Group will increase by an
amount equal to the aggregate principal
balance of the related Subsequent Mortgage
Loans so purchased and the amount in the
Pre-Funding Account will decrease by the same
amount.
As described below, on the Closing Date, cash
will be deposited in the Capitalized Interest
Account (as defined herein) held by the
Trustee. Funds in the Capitalized Interest
Account will be applied by the Trustee to
cover shortfalls in interest during the
Funding Period (as described under
"Pre-Funding Account") on the Certificates
attributable to the provisions allowing for
purchase of Subsequent Mortgage Loans.
DENOMINATIONS: The Class A Certificates are issuable in book
entry form in minimum original principal
amounts of $1,000 and integral multiples
thereof.
THE MORTGAGE LOANS: 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.
The mortgage loans to be conveyed to the
Trust by the Depositor on the Closing Date
(the "Initial Mortgage Loans") consist of
fixed and adjustable rate conventional
mortgage loans evidenced by promissory notes
(the "Notes") secured by first lien deeds of
trust, security deeds or mortgages (the
"Mortgages"), which are located in _____
states and the District of Columbia. The
properties securing the Initial Mortgage
Loans (the "Mortgaged Properties") consist
primarily of single-family residences (which
may be attached, detached, part of a
two-to-four family dwelling, a condominium
unit or a unit in a planned unit
development). The Mortgaged Properties may
be owner- occupied and non-owner occupied
investment properties. No Loan-to-Value
Ratio (based upon appraisals made at the time
of origination) exceeded 90% as of the
Cut-Off Date. The Initial
S-2
<PAGE> 10
Mortgage Loans are not insured by either
primary or pool mortgage insurance policies;
however, certain distributions due to the
Owners of the Class A Certificates (the
"Owners") are insured by the Certificate
Insurer pursuant to the Certificate Insurance
Policy. See "Credit Enhancement" herein.
The Mortgage Loans are not guaranteed by the
Seller or any affiliate thereof.
Group I. As of the Cut-Off Date, the average
Loan Balance of the Initial Mortgage Loans in
Group I was $___________; the interest rates
(the "Coupon Rates") of such Initial Mortgage
Loans ranged from _____% to _____% per annum;
the weighted average Loan-to-Value Ratio of
such Initial Mortgage Loans was _____%; the
weighted average Coupon Rate of such Initial
Mortgage Loans was _____% per annum; and the
weighted average remaining term to maturity
of such Initial Mortgage Loans was _____
months. The remaining terms to maturity as
of the Cut-Off Date of the Initial Mortgage
Loans in Group I ranged from _____ months to
360 months. The maximum Loan Balance of the
Initial Mortgage Loans in Group I as of the
Cut-Off Date was $___________. Initial
Mortgage Loans in Group I requiring "balloon"
payments represented not more than _____% of
the Original Aggregate Loan Balance of the
Initial Mortgage Loans in Group I. No
Initial Mortgage Loan in Group I will mature
later than June 1, 2026. As a percentage of
the Original Aggregate Loan Balance of the
Initial Mortgage Loans in Group I, _____%
were secured by mortgages on single-family
dwellings, _____% by mortgages on two-to-four
family dwellings, _____% by mortgages on
condominiums, _____% by mortgages on planned
unit developments, _____% by mortgages on
manufactured homes, _____% by mortgages on
townhouses and _____% by mortgages on other
dwellings.
_____% of the Initial Mortgage Loans in Group
I were originated by______________, and the
remaining Initial Mortgage Loans in Group I
were originated by ____________________
_______________________. See "The Initial
Mortgage Loan Pools -- Initial Mortgage Loans
-- Group I" herein. All of the Subsequent
Mortgage Loans to be included in Group I have
been purchased by the Seller from
______________________ and identified for
sale to the Trust.
________% of the Initial Mortgage Loans in
Group I (the "Fixed Rate Loans") bear
interest at a fixed rate for the life of such
Initial Mortgage Loans. _________ % of the
Initial Mortgage Loans in Group I (the "5/25
Loans") bear interest at a fixed rate for a
period of five years after origination and
thereafter have semiannual interest rate and
payment adjustments at frequencies and in the
same manner as the Six-Month LIBOR Loans
(defined below). The 5/25 Loans generally
are subject to a ______% periodic rate
adjustment cap and substantially all have a
lifetime reset cap of ______ % to ________%.
The 5/25 Loans consist of Initial Mortgage
Loans aggregating $________ _________.
Group II. As of the Cut-Off Date, the
average Loan Balance of the Initial Mortgage
Loans in Group II was $___________; the
Coupon Rates of such Initial Mortgage Loans
ranged from _____% to _____% per annum; the
weighted average Loan-to-Value Ratio of such
Initial Mortgage Loans was _____%; the
weighted average Coupon Rate of such Initial
Mortgage Loans was _____% per annum; and the
weighted average remaining term to maturity
of such Initial Mortgage Loans was _____
months. The remaining terms to maturity as
of the Cut-Off Date of the Initial Mortgage
Loans in Group II ranged from _____ months to
_____ months. The maximum Loan Balance of
the Initial Mortgage Loans in Group II as of
the Cut-Off Date was $___________. None of
the Initial Mortgage Loans in Group II
contain "balloon" payments. No Initial
Mortgage Loan in Group II will mature later
than June 1, 2026. As a percentage of the
Original Aggregate Loan Balance of the
Initial Mortgage Loans in Group II,
S-3
<PAGE> 11
_____% were secured by mortgages on
two-to-four family dwellings, _____% by
mortgages on condominiums, _____% by
mortgages on planned unit developments,
_____% by mortgages on single-family
dwellings, _____% by mortgages on
manufactured homes and _____% by mortgages on
other dwellings. See "The Mortgage Loan
Pools -- Initial Mortgage Loans -- Group II"
herein.
All of the Initial Mortgage Loans in Group II
have maximum Coupon Rates. The weighted
average maximum Coupon Rate of the Initial
Mortgage Loans in Group II is _____% per
annum, with maximum Coupon Rates that range
from approximately _____% to _____% per
annum. The Initial Mortgage Loans in Group
II have a weighted average gross margin as of
the Cut-Off Date of _____%. The gross margin
for the Initial Mortgage Loans in Group II
ranges from _____% to _____%. The minimum
Coupon Rates for the Initial Mortgage Loans
in Group II ranges from ________% to
________%.
_____% of the Initial Mortgage Loans in Group
II (the "Six-Month LIBOR Loans") bear
interest at rates that adjust, along with the
related monthly payments, semiannually based
on Six-Month LIBOR. _____% of the Six-Month
LIBOR Loans have a semiannual reset cap of
_____% and substantially all have a lifetime
reset cap of ______% to ______%. _ ____% of
the Six-Month LIBOR Loans have a semiannual
reset cap of _____% and substantially all
have a lifetime reset cap of _____%. The
Six-Month LIBOR Loans consist of Initial
Mortgage Loans aggregating $___________.
_____% of the Initial Mortgage Loans in Group
II (the "2/28 Loans") bear interest at a
fixed rate of interest for a period of two
years after origination and thereafter have
semiannual interest rate and payment
adjustments at frequencies and in the same
manner as the Six-Month LIBOR Loans. _____%
of the 2/28 Loans have a periodic rate
adjustment cap of _____% and substantially
all of which have a lifetime reset cap of __
__% to _____%. _____% of the 2/28 Loans have
a periodic rate adjustment cap of _____% and
generally have a lifetime reset cap of
_____%. _____% of the 2/28 Loans have a
periodic rate adjustment cap of _____% and
have a lifetime reset cap of _____% to ____
%. The 2/28 Loans consist of Initial
Mortgage Loans aggregating $___________.
_____% of the Initial Mortgage Loans in Group
II (the "3/27 Loans") bear interest at a
fixed rate of interest for a period of three
years after origination and thereafter have
semiannual interest rate and payment
adjustments at frequencies and in the same
manner as the Six-Month LIBOR Loans primarily
subject to a _____% periodic rate adjustment
cap and substantially all of which have a
lifetime reset cap of _____% to __ __%. The
3/27 Loans consist of Initial Mortgage Loans
aggregating $_________________ .
_____% of the Initial Mortgage Loans in Group
II were originated by _____________ and
_____% were originated by
_____________________.
All of the Subsequent Mortgage Loans to be
included in Group II have been purchased by
the Seller from _______________________ 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> 12
<TABLE>
<CAPTION>
Final Scheduled
Payment Date
-------------
<S> <C> <C>
Class A-1 Certificates: ____________, _____
Class A-2 Certificates: ____________, _____
Class A-3 Certificates: ____________, _____
Class A-4 Certificates: ____________, _____
Class A-5 Certificates: ____________, _____
Class A-6 Certificates: ____________, _____
Class A-7 Certificates: ____________, _____
Class A-8 Certificates: ____________, _____
</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
__________, 199__ (each such day being a
"Payment Date"), the Trustee will be
required, subject to the availability of
amounts therefor, pursuant to the cash flow
priority hereinafter described, to distribute
to the Owners of the Fixed Rate Group
Certificates (other than the Class A-1
Certificates) of record as of the last day of
the calendar month immediately preceding the
calendar month in which such Payment Date
occurs and to the Owners of the Class A-1
Certificates and the Class A-8 Certificates
of record as of the day immediately preceding
such Payment Date (each such date, the
"Record Date") the "Class A Distribution
Amount" for the related Class which shall be
the sum of (x) Current Interest and (y) the
Principal Distribution Amount for the related
Class (each as defined below).
For each Payment Date, interest due with
respect to the Fixed Rate Group Certificates
(other than the Class A-1 Certificates) will
be interest which has accrued thereon during
the calendar month immediately preceding the
month in which such Payment Date occurs; the
interest due with respect to the Class A-1
Certificates and the Class A-8 Certificates
will be the interest which has accrued
thereon at the applicable Pass- Through Rate
from the preceding Payment Date (or from the
Closing Date in the case of the first Payment
Date) to and including the day prior to the
current Payment Date. Each period referred
to in the prior sentence relating to the
accrual of interest is the "Accrual Period"
for the related Class of Class A
Certificates. All calculations of interest
on the Fixed Rate Group Certificates (other
than the Class A-1 Certificates) will be made
on the basis of a 360-day year assumed to
consist of twelve 30-day months.
Calculations of interest on the Class A-1
Certificates and the Class A-8 Certificates
will be made on the basis of the actual
number of days elapsed in the related Accrual
Period and a year of 360 days.
A "Business Day" is any day other than a
Saturday, Sunday or a day on which banking
institutions in California or New York City
or in the city in which the corporate trust
office of the Trustee is located are
authorized or obligated by law or executive
order to close.
ALLOCATIONS OF INTEREST
AND PRINCIPAL: The Class A Distribution Amount relating to
each Group of Mortgage Loans for each Payment
Date (to the extent funds are available
therefor) shall be allocated among the Class
A Certificates in the following amounts and
in the following order of priority:
(i) First, to the Owners of each of the Class
A Certificates of the related Group, the
related Current Interest on a pro rata basis
(in accordance with the amounts of such
Current Interest) without any priority among
such Class A Certificates; and
S-5
<PAGE> 13
(ii) Second, to the Owners of the related
Class of Class A Certificates (A) the
Principal Distribution Amount (as defined
below) applicable to Group I shall be
distributed as follows: (I) first, to the
Owners of the Class A-1 Certificates until
the Class A-1 Certificate Principal Balance
is reduced to zero; (II) second, to the
Owners of the Class A-2 Certificates until
the Class A-2 Certificate Principal Balance
is reduced to zero; (III) third, to the
Owners of the Class A-3 Certificates, until
the Class A-3 Certificate Principal Balance
is reduced to zero; (IV) fourth, to the
Owners of the Class A-4 Certificates, until
the Class A-4 Certificate Principal Balance
is reduced to zero; (V) fifth, to the Owners
of the Class A-5 Certificates, until the
Class A-5 Certificate Principal Balance is
reduced to zero; (VI) sixth, to the Owners of
the Class A-6 Certificates, until the Class
A-6 Certificate Principal Balance is reduced
to zero; and (VII) seventh, to the Owners of
the Class A-7 Certificates, until the Class
A-7 Certificate Principal Balance is reduced
to zero; and (B) the Principal Distribution
Amount applicable to Group II shall be
distributed to the Owners of the Class A-8
Certificates until the Class A-8 Certificate
Principal Balance is reduced to zero.
See "Description of the Class A
Certificates--Distributions,"
"--Overcollateralization Provisions" and
"--Crosscollateralization Provisions" herein
for a discussion of all transfers and
disbursements of funds held in the
Certificate Account.
"Current Interest" with respect to each Class
of Class A Certificates means, with respect
to any Payment Date (i) the aggregate amount
of interest accrued during the preceding
Accrual Period on the Certificate Principal
Balance of the related Class A Certificates
immediately prior to such Payment Date plus
(ii) the Preference Amount (as defined below)
as it relates to interest previously paid on
such Class of the Class A Certificates prior
to such Payment Date plus (iii) the Carry
Forward Amount, if any, with respect to such
Class of Class A Certificates.
The "Carry Forward Amount" with respect to
any Class of the Class A Certificates for any
Payment Date is the sum of (x) the amount, if
any, by which (i) the Class A Distribution
Amount (as defined herein) allocable to such
Class as of the immediately preceding Payment
Date exceeded (ii) the amount of the actual
distribution made to the Owners of such Class
of Class A Certificates on such immediately
preceding Payment Date plus (y) 30 days'
interest on the interest portion of such
amount, calculated at the related
Pass-Through Rate in effect with respect to
such Class of Class A Certificates as of such
Payment Date.
The Fixed Rate Group Certificates are
"sequential pay" classes such that the Owners
of the Class A-7 Certificates will receive no
payments of principal until the Class A-6
Certificate Principal Balance has been
reduced to zero, the Owners of the Class A-6
Certificates will receive no payments of
principal until the Class A-5 Certificate
Principal Balance has been reduced to zero,
the Owners of the Class A-5 Certificates will
receive no payments of principal until the
Class A-4 Certificate Principal Balance has
been reduced to zero, the Owners of the Class
A-4 Certificates will receive no payments of
principal until the Class A-3 Certificate
Principal Balance has been reduced to zero,
the Owners of the Class A-3 Certificates will
receive no payments of principal until the
Class A-2 Certificate Principal Balance has
been reduced to zero, and the Owners of the
Class A-2 Certificates will receive no
payments of principal until the Class A-1
Certificate Principal Balance has been
reduced to zero.
S-6
<PAGE> 14
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;
(F) the amount of any Subordination
Deficit with respect to the related Mortgage
Loan Group for such Payment Date;
S-7
<PAGE> 15
(G) the portion of the proceeds
received with respect to the related Mortgage
Loan Group by the Trustee upon termination of
the Trust (to the extent such proceeds relate
to principal);
(H) with respect to each Group, any
moneys released from the Pre-Funding Account
as a prepayment of the related Class of Class
A Certificates on the Payment Date which
immediately follows the end of the Funding
Period; and
(I) the amount of any Subordination
Increase Amount with respect to the related
Mortgage Loan Group for such Payment Date to
the extent of any Net Monthly Excess Cash
Flow available for such purpose;
over
(ii) the amount of any Subordination
Reduction Amount with respect to the related
Mortgage Loan Group for such Payment Date.
The "Remittance Period" with respect to any
Monthly Remittance Date is the period
commencing on the second day of the month
preceding the month in which the Monthly
Remittance Date occurs and ending on the
first day of the month in which such Monthly
Remittance Date occurs. A "Monthly
Remittance Date" is any date on which funds
on deposit in the Principal and Interest
Account are required to be remitted by the
Servicers to the Certificate Account, which
is the 20th day of each month, or if such day
is not a Business Day, the next succeeding
Business Day, commencing in __________,
199__. The Prepayment Period with respect to
any Monthly Remittance Date is the period
commencing on the 16th day of the month
preceding the month in which the Monthly
Remittance Date occurs and ending on the 15th
day of the month in which such Monthly
Remittance Date occurs (except that the first
Prepayment Period shall commence on
__________, 199__ and end on __________,
199__).
A "Liquidated Mortgage Loan" is, in general,
a defaulted Mortgage Loan as to which the
Servicer has determined that all amounts that
it expects to recover on such Mortgage Loan
have been recovered (exclusive of any
possibility of a deficiency judgment).
The Owners of the Class A Certificates are
entitled to receive ultimate recovery of
Realized Losses which occur in the related
Mortgage Loan Group to the extent such
Realized Losses create a Subordination
Deficit in the related Mortgage Loan Group,
and payment in recovery of such losses will
be in the form of an Insured Payment on the
next following Payment Date if not covered
through Net Monthly Excess Cashflow from the
related Mortgage Loan Group or
crosscollateralization from the other
Mortgage Loan Group.
A "Subordination Deficit" with respect to a
Mortgage Loan Group and a Payment Date is the
amount, if any, by which (x) the related
Certificate Principal Balance, after taking
into account all distributions to be made on
such Payment Date, exceeds (y) the sum of (i)
the aggregate Loan Balances of the Mortgage
Loans in the related Mortgage Loan Group as
of the close of business on the last day of
the related Prepayment Period and (ii) the
respective amount, if any, on deposit in the
Pre-Funding Account as of the close of
business on the last day of the related
Remittance Period in respect of such Mortgage
Loan Group.
"Preference Amount" means any amount
previously distributed to an Owner on a Class
A Certificate that is recoverable and sought
to be recovered as a voidable preference by a
trustee in bankruptcy under the United States
Bankruptcy Code
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<PAGE> 16
as amended from time to time, in accordance
with a final nonappealable order of a court
having competent jurisdiction.
A "Subordination Increase Amount" with
respect to a Mortgage Loan Group and Payment
Date is the amount of Net Monthly Excess
Cashflow actually applied as an acceleration
of principal on the related Class A
Certificates until the related Subordination
Deficiency Amount (i.e., generally, the
excess, if any, of the Specified Subordinated
Amount over the Subordinated Amount) is
reduced to zero. A "Subordination Reduction
Amount" with respect to a Mortgage Loan Group
and a Payment Date is the amount of principal
on the related Mortgage Loans that would
otherwise be paid to the related Class A
Certificates and is instead available to
satisfy other cash flow priorities of the
Trust, including distributions to the Owners
of the Class R Certificates until the Excess
Subordinated Amount (i.e., generally, the
excess, if any, of the Subordinated Amount
over the Specified Subordinated Amount) is
reduced to zero. Net Monthly Excess
Cashflow, Subordination Deficiency Amount,
Specified Subordinated Amount, Subordinated
Amount and Excess Subordinated Amount are
defined in "Description of the Class A
Certificates--Overcollateralization
Provisions--Overcollateralization from
Cashflow Structure" herein.
SERVICING: ________________________ will each serve as a
Servicer under the Pooling and Servicing
Agreement with respect to certain Mortgage
Loans. Each Servicer will be responsible for
the servicing of the related Mortgage Loans
and will receive from interest collected on
the applicable Mortgage Loans a monthly
servicing fee on each such Mortgage Loan
equal to the Loan Balance as of the beginning
of the related Remittance Period multiplied
by the applicable Servicing Fee Rate (such
product, the "Servicing Fee"). See "The
Pooling and Servicing Agreement -- Servicing"
herein.
Each Servicer is obligated to make cash
advances ("Advances") with respect to
delinquent payments of principal of and
interest on any Mortgage Loan, other than
Balloon Payments with respect to Balloon
Mortgage Loans, serviced by it to the extent
described in "Servicing of Mortgage
Loans--Advances" herein. The Trustee will be
obligated as a successor servicer to make any
such Advance if a Servicer fails in its
obligation to do so, to the extent provided
in the Pooling and Servicing Agreement.
CREDIT ENHANCEMENT: The Credit Enhancement provided for the
benefit of the Owners of the Class A
Certificates consists of (x) the
overcollateralization and
crosscollateralization mechanics which
utilize the internal cash flows of the Trust
and (y) the Certificate Insurance Policies
(as defined below).
Overcollateralization. The credit
enhancement provisions of the Trust result in
a limited acceleration of payment of the
Class A Certificates (in the aggregate)
relative to the amortization of the related
Mortgage Loans until the required level of
overcollateralization is reached. The
accelerated amortization is achieved by the
application of certain excess interest to the
payment of Class A Certificate principal.
This acceleration feature creates, with
respect to each Mortgage Loan Group,
overcollateralization (i.e., the excess of
the aggregate outstanding Loan Balances of
the Mortgage Loans in the related Mortgage
Loan Group, over the aggregate related Class
A Certificate Principal Balance). Once the
required level of overcollateralization is
reached, and subject to the provisions
described in the next paragraph, the
acceleration feature will cease, until
necessary to maintain the required level of
overcollateralization.
The Pooling and Servicing Agreement provides
that, subject to certain floors, caps and
triggers, the required level of
overcollateralization with respect to a
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<PAGE> 17
Mortgage Loan Group may increase or decrease
over time. An increase would result in a
temporary period of accelerated amortization
of the Class A Certificates to increase the
actual level of overcollateralization to its
required level; a decrease would result in a
temporary period of decelerated amortization
to reduce the actual level of
overcollateralization to its required level.
See "Description of the Class A Certificates
-- Overcollateralization Provisions" herein.
As a result of the "sequential pay" feature
of the Fixed Rate Group Certificates, any
such accelerated principal will be paid to
that class of the Fixed Rate Group
Certificates then entitled to receive
distributions of principal.
Crosscollateralization. In addition to the
foregoing, the Pooling and Servicing
Agreement provides for crosscollateralization
through the application of certain excess
amounts generated by one Mortgage Loan Group
to fund shortfalls in Available Funds and the
required overcollateralization level in the
other Mortgage Loan Group, subject to certain
prior debt service and credit enhancement
requirements of such Mortgage Loan Group.
See "Prepayment and Yield Considerations",
"Description of the Class A Certificates--
Overcollateralization Provisions" and
"Description of the Class A Certificates
--Crosscollateralization Provisions" herein
and "Credit Enhancement" in the Prospectus.
Certificate Insurance Policies. [Surety
Name] (the "Certificate Insurer") will issue
the financial guaranty insurance policies
(the "Certificate Insurance Policies"), one
with respect to the Fixed Rate Group
Certificates and one with respect to the
Adjustable Rate Group Certificates, pursuant
to which it will irrevocably and
unconditionally guarantee payment on each
Payment Date to the Trustee for the benefit
of the Owners of each Class of Class A
Certificates of an amount equal to the
Insured Distribution Amount for such Payment
Date. The amount of the actual payment, if
any, made by the Certificate Insurer to the
Owners of the Class A Certificates under the
related Certificate Insurance Policy on each
Payment Date (the "Insured Payment") is the
sum of (i) any shortfall in the amount
required to pay the Subordination Deficit for
such Payment Date from a source other than
the related Certificate Insurance Policy,
(ii) any shortfall in the amount required to
pay Current Interest for such Payment Date
from a source other than the related
Certificate Insurance Policy and (iii) any
shortfall in the amount required to pay the
Preference Amount for such Payment Date from
a source other than the related Certificate
Insurance Policy. The effect of the
Certificate Insurance Policies is to guaranty
the timely payment of interest on, and the
ultimate payment of the principal amount of,
each Class of Class A Certificates. No
payments in respect of principal will be made
under the Certificate Insurance Policies
unless a Subordination Deficit occurs.
Except upon the occurrence of a default by
the Certificate Insurer, the Certificate
Insurer shall have the right to exercise
certain rights of the Owners of the related
Class A Certificates, as specified in the
Pooling and Servicing Agreement, without any
consent of such Owners; and such Owners may
exercise such rights only with the prior
written consent of the Certificate Insurer,
except as provided in the Pooling and
Servicing Agreement. In addition, to the
extent of unreimbursed payments under the
Certificate Insurance Policies, the
Certificate Insurer will be subrogated to the
rights of the Owners of the related Class A
Certificates on which such Insured Payments
were made. In connection with each Insured
Payment on a related Class A Certificate, the
Trustee, as attorney-in-fact for the Owner
thereof, will be required to assign to the
Certificate Insurer the
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<PAGE> 18
rights of such Owner with respect to the
Class A Certificate to the extent of such
Insured Payment.
The Certificate Insurance Policies do not
guarantee any specified rate of prepayments,
nor do the Certificate Insurance Policies
provide funds to redeem the Certificates on
any specified date. The Certificate
Insurer's obligation under the Certificate
Insurance Policies will be discharged to the
extent that funds are received by the Trustee
for distribution to the Owners of the Class A
Certificates. See "The Certificate Insurance
Policies and the Certificate Insurer" herein.
PRE-FUNDING ACCOUNT: On the Closing Date, the Original Pre-Funded
Amount will be deposited in the Pre- Funding
Account which account will be in the name of,
and maintained by, the Trustee on behalf of
the Trust and used to acquire Subsequent
Mortgage Loans for addition to Group I and
Group II. With respect to each Group, during
the period (the "Funding Period") from and
including the Closing Date until the earliest
of (i) the date on which the amount on
deposit in the Pre-Funding Account with
respect to the related Group is less than
$100,000, and (ii) __________, 199__, the
Pre-Funded Amount will be maintained in the
Pre-Funding Account. The Original Pre-Funded
Amount will be reduced during the Funding
Period by the amount thereof used to purchase
Subsequent Mortgage Loans in accordance with
the Pooling and Servicing Agreement. The
amount on deposit in the Pre-Funding Account
at any time is the "Pre-Funded Amount".
Subsequent Mortgage Loans purchased by and
added to the Trust on any date (each, a
"Subsequent Transfer Date") must satisfy the
criteria set forth in the Pooling and
Servicing Agreement. Any Pre-Funded Amount
remaining at the end of the Funding Period
for the related Group will be distributed to
the Owners of the related Class of Class A
Certificates then entitled to receive
distributions of principal on the Payment
Date that immediately follows the end of such
Funding Period in reduction of the
Certificate Principal Balance of such Owners'
Certificates, thus resulting in a partial
principal prepayment of such Class of Class A
Certificates as specified herein under
"Description of the Certificates --
Distributions." All interest and other
investment earnings on amounts on deposit in
the Pre-Funding Account will be deposited in
the Capitalized Interest Account. The
Pre-Funding Account will not be an asset of
the REMIC (as defined herein).
Although no assurance can be given, it is
intended that the principal amount of
Subsequent Mortgage Loans sold to the Trust
and added to the Trust will require
application of substantially all of the
Original Pre-Funded Amount and it is not
intended that there will be any material
amount of principal prepaid to the holders of
any Class of the Class A Certificates from
the Pre-Funding Account. In the event that
the Depositor is unable to sell Subsequent
Mortgage Loans to the Trust in an amount
equal to the Original Pre-Funded Amount,
principal prepayments to Owners of the
related Class of the Class A Certificates
will occur no later than the Payment Date in
________ 199__ in an amount equal to the
Pre-Funded Amount with respect to the related
Mortgage Loan Group remaining at the end of
the Funding Period.
CAPITALIZED INTEREST ACCOUNT: On the Closing Date, cash will be deposited
in a trust account (the "Capitalized Interest
Account") in the name of, and maintained by,
the Trustee on behalf of the Trust. The
amount on deposit in the Capitalized Interest
Account, including reinvestment income
thereon, will be used by the Trustee to fund
the excess, if any, of (i) the sum of the
amount of interest accruing during the
related Accrual Period on the amount by which
the aggregate Certificate Principal Balance
of the related Class of Class A Certificates
exceeds the aggregate Loan Balance of the
Mortgage Loans in the related Group plus the
Trustee Fee and Premium Amount with respect
to each Certificate Insurance Policy accruing
during the related
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<PAGE> 19
Accrual Period on such excess balance over
(ii) the amount of any reinvestment income on
monies on deposit in the Pre-Funding Account;
such amounts on deposit will be so applied by
the Trustee on the Payment Date in ________
199__ to fund such excess, if any. Any
amounts remaining in the Capitalized Interest
Account not needed for such purpose will be
paid to the Depositor at the end of the
Funding Period. The Capitalized Interest
Account will not be an asset of the REMIC (as
defined herein).
MANDATORY PREPAYMENT OF
CERTIFICATES: In the event that at the end of the Funding
Period, not all of the Original Pre-Funded
Amount has been used to acquire Subsequent
Mortgage Loans, then the Owners of the
related Class of Class A Certificates then
entitled to receive distributions of
principal will receive a prepayment no later
than the Payment Date in ________ 199__ in an
amount equal to the portion of the Original
Pre-Funded Amount remaining and allocable to
the related Group.
AUCTION SALE; STEP UP ON
CERTAIN PASS-THROUGH
RATE; TERMINATION: The Pooling and Servicing Agreement requires
that, within ninety days following the date
on which the Outstanding Certificate
Principal Balance of a Mortgage Loan Group
has declined to less than 10% of the Original
Certificate Principal Balance of such
Mortgage Loan Group (such date, with respect
to such Mortgage Loan Group, the "Auction
Sale Bid Date"), the Trustee shall solicit
bids for the purchase of all Mortgage Loans
remaining in such Mortgage Loan Group. In
the event that satisfactory bids are received
as described in the Pooling and Servicing
Agreement, the net sale proceeds will be
distributed to the Owners of the Certificates
of such Mortgage Loan Group in the same order
of priority as interest and principal
distributions. If satisfactory bids are not
received, the Trustee shall decline to sell
the Mortgage Loans and shall not be under any
obligation to solicit any further bids or
otherwise negotiate any further sale of the
Mortgage Loans, in such Mortgage Loan Group.
Such sale and consequent termination of a
Mortgage Loan Group (an "Auction Sale') must
constitute a "qualified liquidation" of the
Classes of Certificates related to such
Mortgage Loan Group under Section 860F of the
Code, including, without limitation, the
requirement that the qualified liquidation
take place over a period not to exceed 90
days. If an Auction Sale with respect to the
Adjustable Rate Group has not occurred by the
90th day following the related Auction Sale
Bid Date (such date, the "Step Up Date"), the
Pass-Through Rate of each Class of the
Adjustable Rate Group Certificates will be
increased as provided under "Certificates
Offered" in this Summary of Terms for each
Payment Date occurring thereafter. If an
Auction Sale does not occur, the Servicers
will have the right, collectively, to
purchase all of the Mortgage Loans in a
Mortgage Loan Group 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 of such Mortgage Loan
Group. Any such purchase by the Servicers
will be required to be made on the same
Monthly Remittance Date, so that such
Mortgage Loan Group would be liquidated on
the next succeeding Payment Date. In
addition, in the event that an Auction Sale
has not occurred with respect to both
Mortgage Loan Groups and the Servicers have
not exercised their right to purchase all of
the Mortgage Loans, the Owners of the Class R
Certificates will have the obligation to
purchase all the Mortgage Loans on the
Monthly Remittance Date in 202___. See "The
Pooling and Servicing Agreement--Auction
Sale; Step Up on Certain Pass-Through Rates;
Termination" herein.
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<PAGE> 20
BOOK-ENTRY REGISTRATION
OF THE CLASS A
CERTIFICATES: The Class A Certificates will initially be
issued in book-entry form. Persons acquiring
beneficial ownership interests in such Class
A Certificates ("Beneficial Owners") may
elect to hold their interests through The
Depository Trust Company ("DTC"), in the
United States, or Centrale de Livraison de
Valeurs Mobilieres, S.A. ("CEDEL") or the
Euroclear System ("Euroclear"), in Europe.
Transfers within DTC, CEDEL or Euroclear, as
the case may be, will be in accordance with
the usual rules and operating procedures of
the relevant system. So long as the Class A
Certificates are Book-Entry Certificates (as
defined herein), such Certificates will be
evidenced by one or more Certificates
registered in the name of Cede & Co.
("Cede"), as the nominee of DTC or one of the
European Depositaries. Cross market
transfers between persons holding directly or
indirectly through DTC, on the one hand, and
counterparties holding directly or indirectly
through CEDEL or Euroclear, on the other,
will be effected by DTC through Citibank N.A.
("Citibank") or Morgan Guaranty Trust Company
of New York ("Morgan", and together with
Citibank, the "European Depositaries"), the
relevant depositaries of CEDEL and Euroclear,
respectively, and each a participating member
of DTC. The Class A Certificates will
initially be registered in the name of Cede.
The interests of the Owners of such
Certificates will be represented by book-
entries on the records of DTC and
participating members thereof. No Beneficial
Owner will be entitled to receive a
definitive certificate representing such
person's interest, except in the event that
Definitive Certificates (as defined herein)
are issued under the limited circumstances
described herein. All references in this
Prospectus Supplement to any Class A
Certificates reflect the rights of Beneficial
Owners only as such rights may be exercised
through DTC and its participating
organizations for so long as such Class A
Certificates are held by DTC. See
"Description of the Class A Certificates --
Book-Entry Registration of the Class A
Certificates" herein, and Annex I hereto, and
"Description of the Certificates--Book- Entry
Registration" in the Prospectus.
RATINGS: It is a condition of issuance of the Class A
Certificates that the Class A Certificates
receive ratings of "AAA" by Standard &
Poor's, A Division of The McGraw- Hill
Companies ("Standard & Poor's"), "Aaa" by
Moody's Investors Service, Inc. ("Moody's"),
and "AAA" by Fitch Investors Service, L.P.
("Fitch"). Standard & Poor's, Moody's and
Fitch are referred to herein collectively as
the "Rating Agencies." A security rating is
not a recommendation to buy, sell or hold
securities, and may be subject to revision or
withdrawal at any time by the assigning
entity. See "Prepayment and Yield
Considerations" and "Ratings" herein. No
person is obligated to maintain any rating on
any Certificate, and, accordingly, there can
be no assurance that the ratings assigned to
any Class of Certificates upon initial
issuance thereof will not be lowered or
withdrawn at any time thereafter.
RISK FACTORS: Credit Considerations. For information with
regard to the Mortgage Loans and their
related risks, see "Risk Factors--Risk of
Higher Delinquencies Associated with
Guidelines" and "The Mortgage Loan Pool"
herein.
Prepayment Considerations. For information
regarding the consequences of prepayments of
the Mortgage Loans and of the failure of the
Depositor to convey Subsequent Mortgage Loans
to the Trust during the Funding Period in an
amount equal to the Original Pre-Funded
Amount, see "Prepayment and Yield
Considerations" and "Risk
Factors--Sensitivity to Prepayments" and
"--The Subsequent Mortgage Loans and the Pre-
Funding Account" herein.
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<PAGE> 21
Other Considerations. For a discussion of
other risk factors that should be considered
by prospective investors in the Class A
Certificates, see "Risk Factors" herein and
in the Prospectus.
FEDERAL TAX ASPECTS: An election will be made to treat the Trust
Estate (exclusive of the Pre-Funding Account
and the Capitalized Interest Account) created
by the Pooling and Servicing Agreement as a
"real estate mortgage investment conduit"
("REMIC"). The Certificates (other than the
Class R Certificates) will constitute
"regular interests" in the REMIC. The Class
R Certificates will be designated as the
"residual interest" in the REMIC.
Owners of the Class A Certificates, including
Owners that generally report income on the
cash method of accounting, will be required
to include interest on the Class A
Certificates in income in accordance with the
accrual method of accounting. The Class A
Certificates may be considered to have been
issued with original issue discount or at a
premium. Any such original issue discount
will be includable in the income of the Owner
as it accrues under a method taking into
account the compounding of interest and using
the Prepayment Assumption. See "Prepayment
and Yield Considerations" and "Certain
Federal Income Tax Consequences" herein.
Premium may be deductible by the Owner either
as it accrues or when principal is received.
No representation is made as to whether the
Mortgage Loans will prepay in accordance with
the Prepayment Assumption, or any other rate.
In general, as a result of the qualification
of the Class A Certificates as regular
interests in a REMIC, the Class A
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
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<PAGE> 22
CONSIDERATIONS: The Class A Certificates will constitute
"mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act
of 1984 ("SMMEA") for so long as they are
rated in one of the two highest rating
categories by one or more nationally
recognized statistical rating organizations.
As such, the Class A Certificates will be
legal investments for certain entities to the
extent provided in SMMEA, subject to state
laws overriding SMMEA. In addition,
institutions whose investment activities are
subject to review by federal or state
regulatory authorities may be or may become
subject to restrictions, which may be
retroactively imposed by such regulatory
authorities, on the investment by such
institutions in certain forms of mortgage
related securities. Furthermore, certain
states have enacted legislation overriding
the legal investment provisions of SMMEA. In
addition, institutions whose activities are
subject to review by federal or state
regulatory authorities may be or may become
subject to restrictions, which may be
retroactively imposed by such regulatory
authorities, on the investment by such
institutions in certain forms of mortgage
related securities.
[Although the Class _____ Certificates are
expected to be rated "AAA" by Standard &
Poor's and "Aaa" by Moody's, the Class A
Certificates will not constitute "mortgage
related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") because the Group _____
Mortgage Loans include second liens.
Accordingly, many institutions with legal
authority to invest in comparably rated
securities based on first home equity loans
may not be legally authorized to invest in
the Class _____ Certificates.]
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<PAGE> 23
RISK FACTORS
Prospective investors in the Class A Certificates should consider the
following risk factors (as well as the risk factors set forth under "Risk
Factors" in the Prospectus) in connection with the purchase of the Class A
Certificates.
SENSITIVITY TO PREPAYMENTS. A majority of the Mortgage Loans may not
be prepaid in whole or, above a certain percentage, in part at any time without
penalty. See "The Portfolio of Mortgage Loans--Prepayment Penalties" herein
for a description of prepayment penalty provisions applicable to the Mortgage
Loans. In addition, all of the Mortgage Loans contain due-on-sale provisions
which, to the extent enforced by the Servicer, will result in prepayment of
such Mortgage Loans. Furthermore, the Seller intends to initiate a refinance
policy as described in "The Portfolio of Mortgage Loans-Prepayment Penalties"
herein which could have an impact on prepayments of the Mortgage Loans. See
"Prepayment and Yield Considerations" herein and "Certain Legal Aspects of
Mortgage Assets--Enforceability of Certain Provisions" in the Prospectus. The
rate of prepayments on fixed rate mortgage loans, such as the Mortgage Loans in
Group I, is sensitive to prevailing interest rates. Generally, if prevailing
interest rates fall significantly below the interest rates on the Mortgage
Loans in Group I, such loans are likely to be subject to higher prepayment
rates than if prevailing rates remain at or above the interest rates on the
Mortgage Loans in Group I. Conversely, if prevailing interest rates rise
significantly above the interest rates on the Mortgage Loans in Group I, the
rate of prepayments is likely to decrease.
The average life of the Class A Certificates, and, if purchased at
other than par, the yields realized by Owners of the Class A Certificates, will
be sensitive to levels of payment (including prepayments relating to the
Mortgage Loans (the "Prepayments")) on the Mortgage Loans. In general, the
yield on a Class A Certificate that is purchased at a premium from the
outstanding principal amount thereof will be adversely affected by a higher
than anticipated level of Prepayments of the Mortgage Loans and enhanced by a
lower than anticipated level. Conversely, the yield on a Class A Certificate
that is purchased at a discount from the outstanding principal amount thereof
will be enhanced by a higher than anticipated level of Prepayments and
adversely affected by a lower than anticipated level. The Servicers have
agreed in the Pooling and Servicing Agreement not to target Mortgagors in their
related Mortgage Loan Group in solicitations to borrowers to refinance their
mortgages, unless such solicitation is consistent with the Seller's refinance
policy. See "Prepayment and Yield Considerations" herein.
[NATURE OF COLLATERAL. Because _____% of the aggregate Loan Balance
of the Initial Mortgage Loans are secured by second liens subordinate to the
rights of the mortgagee or beneficiary under the related first mortgage or deed
of trust, the proceeds from any liquidation, insurance or condemnation
proceedings with respect to such Mortgage Loans will be available to satisfy
the outstanding balance of a Mortgage Loan only to the extent that the claims
of such first mortgagee or beneficiary have been satisfied in full, including
any related foreclosure costs. In addition, a second mortgagee may not
foreclose on the property securing a second mortgage unless it forecloses
subject to the first mortgage, in which case it must either pay the entire
amount due on the first mortgage to the first mortgagee at or prior to the
foreclosure sale or undertake the obligation to make payments on the first
mortgage in the event the mortgagor is in default thereunder. In servicing
second mortgages in its portfolio, it is generally the Servicer's practice to
satisfy the first mortgage at or prior to the foreclosure sale. The Servicer
may also advance funds to keep the first mortgage current until such time as
the Servicer satisfies the first mortgage. The Trust will have no source of
funds (and may not be permitted under the REMIC provisions of the Code) to
satisfy the first mortgage or make payments due to the first mortgagee. The
Servicer generally will be required to advance such amounts in accordance with
the Pooling and Servicing Agreement. See "The Pooling and Servicing
Agreement--Servicing and Sub-Servicing" herein.
An overall decline in the residential real estate market, the general
condition of a Property, or other factors, could adversely affect the values of
the Properties such that the outstanding balances of the Mortgage Loans,
together with any senior liens on the Properties, equal or exceed the value of
the Properties. A decline in the value of a Property would affect the interest
of the Trust in the Property before having any effect on the interest of the
related first mortgagee, and could cause the Trust's interest in the Property
to be extinguished. If such a decline occurs, the actual rates of
delinquencies, foreclosures and losses on the Mortgage Loans could be higher
than those currently experienced in the mortgage lending industry in general.
In addition, adverse economic conditions (which may or
S-16
<PAGE> 24
may not affect real property values) may affect the timely payment by borrowers
of scheduled payments of principal and interest on the Mortgage Loans and,
accordingly, the actual rates of delinquencies, foreclosures and losses with
respect to the Trust.]
THE SUBSEQUENT MORTGAGE LOANS AND THE PRE-FUNDING ACCOUNT. If the
principal amount of eligible Subsequent Mortgage Loans available during the
Funding Period and sold by the Depositor to the Trust is less than 100% of the
Original Pre-Funded Amount, a prepayment of principal to Owners of the related
Class of the Class A Certificates then entitled to receive payments of
principal will occur as described herein. See "Social, Economic and Other
Factors" below. In addition, any conveyance of Subsequent Mortgage Loans is
subject to the following conditions, among others: (i) each such Subsequent
Mortgage Loan must satisfy the representations and warranties specified in the
agreement pursuant to which such Subsequent Mortgage Loans are transferred to
the Trust (each a "Subsequent Transfer Agreement") and in the Pooling and
Servicing Agreement; (ii) the Depositor will not select such Subsequent
Mortgage Loans in a manner that it believes is adverse to the interest of the
Owners of the Certificates or the Certificate Insurer; (iii) the Depositor will
deliver certain opinions of counsel with respect to the validity of the
conveyance of such Subsequent Mortgage Loans; and (iv) as of each cut-off date
(each, a "Subsequent Cut-Off Date") applicable thereto, the Mortgage Loans,
including the Subsequent Mortgage Loans to be conveyed by the Depositor as of
such Subsequent Cut-Off Date, will satisfy the criteria set forth in the
Pooling and Servicing Agreement, as described herein under "The Mortgage Loan
Pool --Conveyance of Subsequent Mortgage Loans."
To the extent that amounts on deposit in the Pre-Funding Account have
not been fully applied to the purchase of Subsequent Mortgage Loans by the
Trust for inclusion in the related Mortgage Loan Group by the end of the
Funding Period, the Owners of the related Class of the Class A Certificates
then entitled to receive payments of principal will receive a prepayment of
principal in an amount equal to the related Pre-Funded Amount remaining in the
Pre-Funding Account on the first Payment Date following the end of the Funding
Period (in no event later than the ________ 199__ Payment Date). Although no
assurances can be given, the Depositor expects that the principal amount of
Subsequent Mortgage Loans sold to the Trust will require the application of
substantially all amounts on deposit in the Pre-Funding Account and that there
will be no material principal prepayment to the Owners of the Class A
Certificates from the Pre- Funding Account.
Each Subsequent Mortgage Loan must satisfy the eligibility criteria
referred to above at the time of its addition. Following the transfer of
Subsequent Mortgage Loans, it is anticipated that the aggregate characteristics
of the Mortgage Loans then held in the related Mortgage Loan Group will not
vary significantly from those of the Initial Mortgage Loans. See "The Mortgage
Loan Pool--Conveyance of Subsequent Mortgage Loans" herein.
The Seller has acquired and identified for sale to the Trust a
sufficient amount of Subsequent Mortgage Loans to fully utilize the Pre-Funding
Amount.
RISK OF HIGHER DELINQUENCIES ASSOCIATED WITH GUIDELINES. The
Underwriting Guidelines (as described herein under "The Portfolio of Mortgage
Loans--Guidelines") are intended to assess the credit quality of a mortgagor
and the value of the mortgaged property and to evaluate the adequacy of such
property as collateral for the mortgage loan. The Originators provide loans
primarily to mortgagors who do not qualify for loans conforming to FNMA and
FHLMC guidelines but who also have substantial equity in their property.
Furthermore, the Underwriting Guidelines do not prohibit a borrower from
obtaining secondary financing at the time of origination of the Originator's
first lien, which financing would reduce the equity the borrower would
otherwise have in the related mortgaged property that is indicated in the
Originators' loan-to-value determination.
As a result of the Underwriting Guidelines, the Mortgage Loans are
likely to experience rates of delinquency, foreclosure and bankruptcy that are
higher, and that may be substantially higher, than those experienced by
mortgage loans underwritten to FNMA and FHLMC conforming guidelines.
Furthermore, changes in the values of Mortgaged Properties may have a greater
effect on the delinquency, foreclosure, bankruptcy and loss experience of the
Mortgage Loans than on mortgage loans originated in a more traditional manner.
No assurance can be given that the values of the Mortgaged Properties have
remained or will remain at the levels in effect on the dates of origination of
the related Mortgage Loans.
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EFFECT OF MORTGAGE LOAN YIELD ON CLASS A-1 AND CLASS A-8 PASS-THROUGH
RATE; BASIS RISK. The Class A-1 Pass- Through Rate is based upon the value of
an index (One-Month LIBOR), while the Coupon Rates on the Group I Mortgage
Loans are fixed. Consequently, the interest which becomes due on such Mortgage
Loans in Group I (net of the Servicing Fees, the Trustee Fees and the Premium
Amount) during any Remittance Period may be less than the amount of interest
that would accrue at One-Month LIBOR plus the margin on the Class A-1
Certificates during the related Accrual Period; the interest payable on the
Class A-1 Certificates is subject to the Fixed Rate Group Available Funds Cap
and will be limited to such amount. The Class A-1 Certificates do not contain
any "carry-forward" or "catch-up" feature if the amount of interest paid is so
limited.
The calculation of the Class A-8 Pass-Through Rate is based upon the
value of an index (One-Month LIBOR) which is different from the value of the
index applicable to a substantial portion of the Initial Mortgage Loans in
Group II (Six-Month LIBOR) as described under "The Mortgage Loan Pool --
Initial Mortgage Loans -- Group II" herein and is subject to the Adjustable
Rate Group Available Funds Cap. The Adjustable Rate Group Available Funds Cap
effectively limits the amount of interest accrued on the Adjustable Rate Group
Certificates to the weighted average of the Coupon Rates on the Mortgage Loans
in Group II, less _____%. _____% of the Initial Mortgage Loans in Group II
adjust semi- annually based upon the London interbank offered rate for
Six-Month United States dollar deposits ("Six-Month LIBOR"), whereas the
Pass-Through Rate on the Class A-8 Certificates adjusts monthly based upon
One-Month LIBOR as described under "Description of the Class A Certificates --
Calculation of One-Month LIBOR" herein, subject to the Adjustable Rate Group
Available Funds Cap. _____% of the Initial Mortgage Loans in Group II are 2/28
Loans that provide for a fixed interest rate for a period of two years
following origination. Thereafter, such Mortgage Loans provide for interest
rate and payment adjustments in a manner similar to the Six-Month LIBOR Loans.
One-Month LIBOR and Six-Month LIBOR may respond to different economic and
market factors, and there is not necessarily a correlation between them. Thus,
it is possible, for example, that One-Month LIBOR may rise during periods in
which Six-Month LIBOR is stable or is falling or that, even if both One-Month
LIBOR and Six-Month LIBOR rise during the same period, One-Month LIBOR may rise
more rapidly than Six-Month LIBOR. Furthermore, even if One-Month LIBOR and
Six-Month LIBOR were at the same level, various factors may cause the
Adjustable Rate Group Available Funds Cap to limit the amount of interest that
would otherwise accrue on the Adjustable Rate Group Certificates. In
particular, the Class A-8 Pass-Through Rate adjusts monthly, while the interest
rates of the Initial Mortgage Loans in Group II adjust less frequently, with
the result that the Adjustable Rate Group Available Funds Cap may limit
increases in the Class A-8 Pass-Through Rate for extended periods in a rising
interest rate environment. In addition, the Initial Mortgage Loans in Group II
are subject to periodic adjustment caps and maximum rate caps which also may
result in the Adjustable Rate Group Available Funds Cap limiting increases in
the Class A-8 Pass-Through Rate. Finally, the Initial Mortgage Loans in Group
II accrue interest on the basis of a 360-day year assumed to consist of twelve
30-day months, while calculations of interest on the Adjustable Rate Group
Certificates will be made on the basis of the actual number of days elapsed in
the related Accrual Period and a year of 360 days. This may result in the
Adjustable Rate Group Available Funds Cap limiting the Class A-8 Pass-Through
Rate in Accrual Periods that have more than 30 days. Consequently, the
interest which becomes due on the Initial Mortgage Loans in Group II (net of
the Servicing Fee, the Premium Amount and the Trustee Fee related to Group II)
during any Remittance Period may not equal the amount of interest that would
accrue at One-Month LIBOR plus the margin on the Adjustable Rate Group
Certificates during the related Accrual Period. Furthermore, if the Available
Funds Cap determines the Class A-8 Pass-Through Rate for a Payment Date, the
value of the Adjustable Rate Group Certificates may be temporarily or
permanently reduced. It is anticipated that Subsequent Mortgage Loans in Group
II will have features similar to the Initial Mortgage Loans in Group II,
resulting in the same limitations on the Class A-8 Pass-Through Rate as are
described above. The Class A-8 Certificates do not contain any "carry-forward"
or "catch-up" feature if the amount of interest paid is limited as described
above.
SOCIAL, ECONOMIC AND OTHER FACTORS. The ability of the Trust to
invest in Subsequent Mortgage Loans is largely dependent upon the ability of
the Seller to originate or purchase additional mortgage loans. The ability of
the Seller to originate or purchase additional mortgage loans may be affected
by a variety of social and economic factors. Economic factors include interest
rates, unemployment levels, the rate of inflation and consumer perception of
economic conditions generally. However, the Seller is unable to determine and
has no basis to predict whether or to what extent economic or social factors
will affect its origination ability or its ability to purchase additional
mortgage loans.
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OTHER LEGAL CONSIDERATIONS. Applicable state laws generally regulate
interest rates and other charges, require certain disclosure, and require
licensing of the Originators. In addition, other state laws, public policy and
general principles of equity relating to the protection of consumers, unfair
and deceptive practices and debt collection practices may apply to the
origination, servicing and collection of the Mortgage Loans. The related
Originator will be required to repurchase any Mortgage Loans which, at the time
of origination, fail to comply with applicable federal and state laws and
regulations, which failure results in a material adverse effect on the Trust,
the Certificate Insurer or the parties to the Pooling and Servicing Agreement.
Depending on the provisions of the applicable law and the specific facts and
circumstances involved, violations of these laws, policies and principles may
limit the ability of the Servicers to collect all or part of the principal of
or interest on the Mortgage Loans, may entitle the Mortgagor to a refund of
amounts previously paid and, in addition, could subject the Seller, the
Servicers or the related Originator to damages and administrative enforcement.
See "Certain Legal Aspects of Mortgage Assets" in the Prospectus.
The Mortgage Loans are also subject to federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z
promulgated thereunder, which require certain disclosures to the
Mortgagors regarding the terms of the Mortgage Loans;
(ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of
age, race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under the
Consumer Credit Protection Act, in the extension of credit; and
(iii) the Fair Credit Reporting Act, which regulates the
use and reporting of information related to the Mortgagor's credit
experience.
Violations of certain provisions of these federal laws may limit the ability of
the related Servicer to collect all or part of the principal of or interest on
the Mortgage Loans and in addition could subject the Originators, the Seller or
the Servicers to damages and administrative enforcement. The Originators will
be required to repurchase any Mortgage Loans which, at the time of origination,
did not comply with such federal laws or regulations. See "Certain Legal
Aspects of the Mortgage Assets" in the Prospectus.
The federal Soldiers' and Sailors' Civil Relief Act of 1940 may affect
the ability of the related Servicer to collect full amounts of interest on
certain Mortgage Loans and could interfere with the ability of the related
Servicer to foreclose on certain properties. See "Certain Legal Aspects of the
Mortgage Assets--Soldiers' and Sailors' Civil Relief Act of 1940" in the
Prospectus.
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 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 of 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
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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 ______% 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,
then the Owners of the Class A Certificates could experience a loss on their
investment.
THE PORTFOLIO OF MORTGAGE LOANS
GENERAL
The Mortgage Loan Pool primarily includes newly originated loans which
were purchased by the Depositor from the Seller, which acquired such loans from
the related Originators.
Each Originator (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 occurring after sale of the related Mortgage Loan to the Trust, may
be required to repurchase such Mortgage Loan from the Trust.
UNDERWRITING GUIDELINES
The Mortgage Loans have been originated by the Originators in
accordance with the underwriting guidelines established by each of them and
reviewed and approved by the Seller (the "Underwriting Guidelines"). The
Underwriting Guidelines are primarily intended to evaluate the value and
adequacy of the mortgaged property as collateral and are also intended to
consider the mortgagor's credit standing and repayment ability. On a
case-by-case basis, the Originator may determine that, based upon compensating
factors, a prospective mortgagor not strictly qualifying under the Underwriting
Guidelines warrants an underwriting exception. Compensating factors may
include, but are not limited to, low loan-to-value ratio, low debt-to-income
ratio, good credit history, stable employment, pride of ownership and time in
residence at the applicant's current address. It is expected that a
substantial number of the Mortgage Loans to be included in the Mortgage Pool
will represent such underwriting exceptions.
Under the Underwriting Guidelines, the Originators review and verify
the loan applicant's sources of income (except under the stated income
programs), calculate the amount of income from all such sources indicated on
the loan application, review the credit history of the applicant and calculate
the debt-to-income ratio to determine the applicant's ability to repay the
loan, and review the mortgaged property for compliance with their Underwriting
Guidelines. The Underwriting Guidelines are applied in accordance with a
procedure which complies with applicable federal and state laws and regulations
and requires (i) an appraisal of the mortgaged property which conforms to FHLMC
and FNMA standards and (ii) a review of such appraisal, which review may be
conducted by the Originator's
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staff appraiser or representative and, depending upon the original principal
balance and loan-to-value ratio of the mortgaged property may include a desk
review of the original appraisal or a drive-by review appraisal of the
mortgaged property. The Underwriting Guidelines permit single-family loans
with loan-to-value ratios at origination of up to 90% for the highest credit
grading category (75% under the stated income programs), depending on the type
and use of the property, the creditworthiness of the mortgagor and the
debt-to-income ratio. Under the Underwriting Guidelines, the maximum combined
loan-to-value ratio for purchase money mortgage loans may differ from those
applicable to refinancings.
All of the Mortgage Loans are based on loan application packages
submitted through mortgage brokerage companies or at the related Originator's
retail branches or are purchased from originators approved by the Originators.
Loan application packages submitted through mortgage brokerage companies,
containing in each case relevant credit, property and underwriting information
on the loan request, are compiled by the applicable mortgage brokerage company
and submitted to the Originator for approval and funding. The mortgage
brokerage companies receive a portion of the loan origination fee charged to
the mortgagor at the time the loan is made.
Each prospective mortgagor completes an application which includes
information with respect to the applicant's liabilities, income, credit history
and employment history, as well as certain other personal information. Each
Originator requires a credit report on each applicant from a credit reporting
company. The applicant must provide to the related Originator or the
originator a letter explaining all late payments on mortgage debt and,
generally, consumer (i.e., non-mortgage) debt. The report typically contains
information relating to such matters as credit history with local and national
merchants and lenders, installment debt payments and any record of defaults,
bankruptcy, repossession, suits or judgments. Self-employed individuals are
generally required to submit their two most recent federal income tax returns.
As part of their quality control systems, each Originator generally reverifies
information with respect to the foregoing matters that has been provided by the
mortgage brokerage company prior to funding a loan and periodically audits
files based on a random sample of closed loans. In the course of their
pre-funding audit, each Originator generally reverifies the income of each
mortgagor or, for a self-employed individual, reviews the income documentation
obtained pursuant to the Underwriting Guidelines (except under stated income
programs). If the loan-to- value ratio is greater than a predetermined level,
the Originators generally verify the source of funds for the down payment;
however, the related Originator may not verify the source of funds if the
loan-to-value ratio is less than such level.
Mortgaged properties that are to secure mortgage loans are generally
appraised by qualified independent appraisers who are approved by the related
Originator. In most cases, below-average properties (including properties
requiring major deferred maintenance) are not acceptable as security for
mortgage loans under the Underwriting Guidelines. Each appraisal includes a
market data analysis based on recent sales of comparable homes in the area and,
where deemed appropriate, replacement cost analysis based on the current cost
of constructing a similar home. Except with respect to purchase money mortgage
loans, every independent appraisal is generally reviewed by the related
Originators before the loan is funded, and a drive-by review or appraisal is
generally performed in connection with loan amounts over a certain
predetermined dollar amount established for each State. With respect to
purchase money mortgage loans, an independent appraisal may be reviewed the
Originator.
The Underwriting Guidelines are less stringent than the standards
generally acceptable to FNMA and FHLMC with regard to the mortgagor's credit
standing and repayment ability. Mortgagors who qualify under the Underwriting
Guidelines generally have payment histories and debt ratios which would not
satisfy FNMA and FHLMC underwriting guidelines and may have a record of major
derogatory credit items such as outstanding judgments or prior bankruptcies.
The Underwriting Guidelines establish the maximum permitted loan-to-value ratio
for each loan type based upon these and other risk factors.
The Mortgage Loans originated by the Originators 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
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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 LTV is at least 5% below the applicable residential loan program
maximum that would otherwise apply. The Underwriting Guidelines permit
one-to-four- family loans to have LTV's at origination of generally up to 90%,
depending on, among other things, the purpose of the mortgage loan, a
mortgagor's credit history, repayment ability and debt service-to-income ratio,
as well as the type and use of the property. With respect to mortgage loans
secured by mortgaged properties acquired by a mortgagor under a "lease option
purchase," the LTV of the related mortgage loan is generally based on the
appraised value at the time of origination of such mortgage loan.
The Underwriting Guidelines require that income be verified for each
applicant and that the source of funds (if any) required to be deposited by the
applicant into escrow under its various programs as follows: Under the Full
Documentation programs, applicants generally are required to submit two written
forms of verification of stable income for 24 months (or, if the LTV is less
than or equal to 65%, for 12 months). Under the Limited Documentation
programs, generally one such form of verification is required for 12 months.
Under the Stated Income Documentation programs, generally an applicant may be
qualified based upon monthly income as stated on the mortgage loan application
if the applicant meets certain criteria. All the foregoing programs typically
require that with respect to each applicant, there be a telephone verification
of the applicant's employment. Verification of the source of funds (if any)
required to be deposited by the applicant into escrow in the case of a purchase
money loan is generally required under the Full Documentation program
guidelines. No such verification is required under the other programs.
The Underwriting Guidelines require title insurance on all mortgage
loans secured by liens on real property. The Underwriting Guidelines also
require that fire and extended coverage casualty insurance be maintained on the
secured property in an amount at least equal to the principal balance of the
related single-family loan or the replacement cost of the property, whichever
is less.
Under the Underwriting Guidelines, various risk categories are used to
grade the likelihood that the mortgagor will satisfy the repayment conditions
of the mortgage loan. These risk categories establish the maximum permitted
loan- to-value ratio and loan amount, given the occupancy status of the
mortgaged property and the mortgagor's credit history and debt ratio. In
general, higher credit risk mortgage loans are graded in categories which
permit higher debt ratios and more (or more recent) major derogatory credit
items such as outstanding judgments or prior bankruptcies; however, the
Underwriting Guidelines establish lower maximum loan-to-value ratios and
maximum loan amounts for loans graded in such categories.
ARCC Performance Assumption Grouping
The Seller, through its manager AMRESCO Residential Credit Corporation
("ARCC"), performs due diligence on all mortgage loan portfolios which it
acquires, including the Mortgage Loans included in the Trust Estate. Part of
ARCC's review includes a review of the credit-grading process of the related
Originators. ARCC has developed Performance Assumption Groupings ("PAGs")
which are similar to a credit-grading criteria. ARCC determines which PAG the
originators' related credit grade most closely matches, and all loans which
the Originator has placed in that credit grade are placed in the related PAG
category. Because there are multiple factors in both the credit grades
identified by the originators and the PAG categories, it is unlikely that any
credit grade designation will match up exactly to any PAG category. ARCC uses
its best efforts to match the categories based upon its projection of asset
performance for the related credit grade and PAG. It should be noted that
while the Originators have specific criteria for credit grades, they have the
discretion to place a loan in a credit grade for which it does not meet all of
the criteria, based upon consideration of all relevant factors. It should
further be noted 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.
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SELLER'S PAG I
The maximum LTV for all eligible properties, owner or
non-owner occupied, purchase money or refinance, should be 90% or
less. The maximum back-end debt ratio should not exceed 50%. The
prospective mortgagor should have approximately five (5) years of
established credit with five (5) trade lines. In the last 12 months,
mortgage credit should show no delinquencies in excess of 30 days, and
in the last 24 months, should show delinquencies only for 30 days or
less. The credit history should reveal no foreclosures. In the last
12 months, installment and revolving accounts should indicate no
delinquencies for major credit, and a maximum of 30 days for minor
credit. In the last 24 months, both major and minor credit should be
a maximum of 30 days delinquent. There should be no evidence of
judgments, charge offs, collections or bankruptcies affecting the
mortgagor. In last 36 months, the prospective mortgagor should have
had only minor collection actions totaling less than $500.
SELLER'S PAG II
The maximum LTV for all eligible properties, owner or
non-owner occupied, purchase money or refinance, should be 85% or
less. The maximum back end debt ratio should not exceed 50%. The
customer should have approximately three (3) years of established
credit with three (3) trade lines. In the last 12 months, mortgage
credit should show no more than two 30-day delinquencies and no 60-day
delinquencies, and all credits should be current at the time of
origination; in the last 24 months, the credit history should show a
maximum of 30 day delinquencies. In the last 12 months, installment
and revolving accounts should include no more than two 30-day
delinquencies for major credit and a maximum of 60 day delinquency for
minor credit. In the last 24 months, the maximum delinquency should
be 60 days for both major and minor credit. In the last 12 months,
there should be no collection action taken against the prospective
mortgagor. In the last 24 months, there should be no judgments or
charge offs against the prospective mortgagor, and discharged
bankruptcies should have reestablished credit with no delinquencies.
In the last 36 months, mortgagor should be subject to only minor
collection actions totaling less than $1,000.
SELLER'S PAG III
The maximum LTV for all eligible properties, owner or
non-owner occupied, purchase money or refinance, should be 80% or
less. The maximum back end debt ratio should not exceed 50%. The
customer should have approximately two (2) years of established credit
with two (2) trade lines. In the last 12 months, mortgage credit
should show no more than three 30-day delinquencies and one 60-day
delinquency. Mortgage credit should be a maximum 30 days delinquent
at the time of origination, and in the last 24 months, a maximum of 60
days delinquent. In the last 12 months, installment and revolving
accounts should show no more than two 60-day delinquencies for major
credit and a maximum delinquency of 90 days for minor credit. In the
last 24 months, installment and revolving accounts should be a maximum
90 days delinquent for both major and minor credit. In the last 12
months, there should be no judgments or charge offs, and only minor
collection actions totaling less than $500 against the prospective
mortgagor. In the last 24 months, the prospective mortgagor is
permitted to have judgments or charge offs totaling less than $500,
and discharged bankruptcies with a maximum 30-day delinquency on
reestablished credit. In the last 36 months, collection actions
totaling less than $2,500 are permitted.
SELLER'S PAG IV
The maximum LTV for all eligible properties, owner or
non-owner occupied, purchase money or refinance, should be 75% or
less. The maximum back-end debt ratio should not exceed 55%. There
is no requirement for an established credit history. In the last 12
months, mortgage credit should include no more than four 30-day
delinquencies and two 60-day delinquencies, and mortgage credit should
be a maximum of 90 days delinquent at the time of origination. In the
last 12 months, installment and revolving accounts should show no more
than two 90-day delinquencies for major credit and a maximum of 90 day
delinquencies for minor credit. In the last 24 months, installment
and revolving accounts should be a maximum 90 days delinquent for both
major and minor credit. In the last 12 months, mortgagor may have
discharged
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bankruptcies with maximum 30 day delinquency on reestablished credit,
and collection actions totaling less than $2,500 are permitted. In
the last 24 months, total judgments and charge offs should be less
than $2,500.
SELLER'S PAG V
The maximum LTV for all eligible properties, owner or
non-owner occupied, purchase money or refinance, should be 65% or
less. The maximum back-end debt ratio should not exceed 55%. There is
no requirement for an established credit history. In the last 12
months, mortgage credit should be a maximum of 120 days delinquent,
and no foreclosure may be pending at the time of origination. In the
last 24 months, mortgage credit should be a maximum of 120 days
delinquent. There are no stipulations regarding other derogatory
information other than that bankruptcies should have been discharged.
Approximately _____%, _____%, _____%, and _____% of the Initial Group
I Mortgage Loans and _____%, _____%, _____%, and _____% of the Initial Group II
Mortgage Loans are in the Seller's PAG II, PAG III, PAG IV, and PAG V,
categories, respectively.
Approximately _____%, _____%, and _____% of the Initial Group I
Mortgage Loans and _____%, _____%, and _____% of the Initial Group II Mortgage
Loans are in the Full Documentation, Limited Documentation and Stated Income
Documentation programs, respectively.
PREPAYMENT PENALTIES
Any Mortgage Loan may be prepaid in full or in part at any time;
however, approximately _____% of the Initial Mortgage Loans in Group I and
_____% of the Initial Mortgage Loans in Group II provide for the payment by the
Mortgagor of a prepayment charge in limited circumstances on certain full or
partial prepayments made for up to five years from the date of execution of the
related Note. The amount of the prepayment charge is as provided in the
related Note. In general, the Note provides that a prepayment charge will
apply if, in any twelve-month period generally during the first five years from
the date of origination of such Mortgage Loan, the Mortgagor prepays an
aggregate amount exceeding 20% of the original principal balance of such
Mortgage Loan. The amount of the prepayment charge will generally be equal to
six months' advance interest calculated on the basis of the rate in effect at
the time of such prepayment on the amount prepaid in excess of 20% of the
original balance of such Mortgage Loan.
The Seller plans to initiate a refinance policy with the Originators
who originated Mortgage Loans for the Trust and for other trusts in which the
Seller or an affiliate of the Seller owns a residual interest in an effort to
retain borrowers who the Seller or the Originators believe are likely to
refinance their loans due to interest rate changes or other reasons. Although
the policy is expected to permit the Originators to solicit such borrowers in
accordance with the Seller's policy, the Depositor believes that this practice
will not likely result in a material change in the prepayment experience of the
Trust because the solicited borrowers would have been expected to refinance
through other originators in any event.
REPRESENTATIONS RELATING TO THE MORTGAGE LOANS
Each Originator will have made representations and warranties in
respect of the Mortgage Loans sold by such Originator to the Seller in a loan
purchase and sale agreement (each, a "Transfer Agreement"), which will be
assigned to the Trust. Such representations and warranties generally include,
among other things, that: (i) the information with respect to each Mortgage
Loan set forth in the related Schedule of Mortgage Loans is true and correct as
of the specified date; (ii) each Mortgaged Property is improved by a
one-to-four family residential 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
S-24
<PAGE> 32
of, each Mortgage Loan when conveyed by such Originator; and (vi) each Mortgage
Loan was originated in accordance with applicable law and is the valid, legal
and binding obligation of the related Mortgagor.
If an Originator cannot cure a breach of any representation or
warranty made by it in respect of a Mortgage Loan that materially and adversely
affects the interests of the Owners or the Certificate Insurer in such Mortgage
Loan within a time period specified in the Transfer Agreement, such Originator
will be obligated under the related Transfer Agreement to purchase from the
Trust such Mortgage Loan at a price (the "Loan Purchase Price") set forth in
the related Transfer Agreement which Loan Purchase Price will be no less than
the principal balance thereof as of the date of purchase plus one month's
interest at the Mortgage Rate (net of the applicable Servicing Fee) (the "Net
Coupon Rate").
As to any such Mortgage Loan required to be repurchased by an
Originator as provided above, rather than repurchase the Mortgage Loan, such
Originator may, at its sole option, remove such Mortgage Loan (a "Deleted
Mortgage Loan") from the Trust and cause the substitution in its place of
another Mortgage Loan of like kind (a "Qualified Replacement Mortgage" as such
term is defined in the Agreement); however, such substitution of a defective
Mortgage Loan may not be made if such substitution would cause the REMIC Trust
not to qualify as a REMIC or result in a prohibited transaction tax under the
Code (generally after two years from the Startup Day).
Upon receipt of notice by a Servicer or upon a Servicer becoming aware
that a representation and warranty made by an Originator in the Transfer
Agreement has been breached, such Servicer will be required to promptly notify
the related Originator, the Certificate Insurer, the Trustee and the Seller of
such breach and request that such Originator cure such breach or honor its
repurchase or substitution obligations for the benefit of the Trust. The
foregoing will constitute the sole remedy available to the Trust for a breach
of representation by an Originator.
THE SERVICERS
The information set forth below concerning the Servicers has been
provided to the Depositor by the related Servicer. Neither the Depositor, the
Seller, the Underwriters nor any of their respective affiliates have made any
independent investigation of such information, nor has either Servicer made any
such investigation with respect to information about the other Servicer.
USE OF PROCEEDS
The Depositor will sell the Initial Mortgage Loans to the Trust
concurrently with delivery of the Certificates. Net proceeds from the sale of
the Class A Certificates will be applied by the Depositor to the purchase of
the Initial Mortgage Loans from the Seller, to the deposit of the Initial
Pre-Funded Amount in the Pre-Funding Account and to the deposit of certain
amounts to the Capitalized Interest Account. Such net proceeds less the
Initial Pre-Funded Amount and the amount deposited in the Capitalized Interest
Account will (together with the Subordinate Certificates retained by the
Depositor or its affiliates) represent the purchase price to be paid by the
Trust to the Depositor for the Initial Mortgage Loans.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware on November 9,
1995 and is a wholly-owned subsidiary of AMRESCO, INC. The Depositor maintains
its principal offices at 700 N. Pearl Street, Suite 2400, Dallas, Texas 75201.
Neither the Depositor nor any of its affiliates will insure or guarantee
distributions on the Certificates.
THE SELLER
The Seller, formerly known as AMRESCO Residential Mortgage
Corporation, was incorporated in the State of Delaware on October 13, 1995 and
is a wholly-owned subsidiary of AMRESCO, INC. The Seller changed its
S-25
<PAGE> 33
name on September 25, 1996. The Seller maintains its principal offices at 700
N. Pearl Street, Suite 2400, Dallas, Texas 75201. Neither the Seller nor any
of its affiliates will insure or guarantee distributions on the Certificates.
THE MORTGAGE LOAN POOLS
GENERAL
The statistical information presented in this Prospectus Supplement
concerning the pool of Mortgage Loans is based on the pool of Initial Mortgage
Loans as of the Cut-Off Date. Subsequent Mortgage Loans are intended to be
purchased by the Trust from the Depositor for inclusion in the Trust from time
to time on or before __________, 199__ from funds on deposit in the Pre-Funding
Account. The Initial Mortgage Loans, any Qualified Replacement Mortgages and
the Subsequent Mortgage Loans are referred to herein collectively as the
"Mortgage Loans." The Subsequent Mortgage Loans, if available, to be purchased
by the Trust will be sold by the Originators to the Seller, by the Seller to
the Depositor and then by the Depositor to the Trust.
This subsection describes generally certain characteristics of the
Initial Mortgage Loans. Unless otherwise specified herein, references herein
to percentages of loan principal balances relating to the Initial Mortgage
Loans refer in each case to the approximate percentage of the aggregate
principal balance of the Initial Mortgage Loans as of the Cut-Off Date, based
on the scheduled principal balances of the Initial Mortgage Loans or the
Initial Mortgage Loans in the applicable Mortgage Loan Group, in each case as
of the Cut-Off Date, after giving effect to all principal payments due on or
prior to the Cut-Off Date. The Initial Mortgage Loan Pool consists of fixed
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
(other than 5/25 Loans which bear fixed rates for five years from origination
and then bear adjustable rates), in the case of Group I, and Mortgage Loans
which bear adjustable interest rates (including 2/28 Loans and 3/27 Loans), in
the case of Group II. The Fixed Rate Group Certificates represent undivided
ownership interests in all Mortgage Loans contained in Group I, and
distributions on the Fixed Rate Group Certificates will be based primarily on
amounts available for distribution in respect of Mortgage Loans in Group I.
The Adjustable Rate Group Certificates represent undivided ownership interests
in all Mortgage Loans contained in Group II, and distributions on the
Adjustable Rate Group Certificates will be based primarily on amounts available
for distribution in respect of Mortgage Loans in Group II.
The Loan-to-Value Ratios shown below were calculated based upon the
appraised values of the Mortgaged Properties at the time of origination (the
"Appraised Values"). No assurance can be given that values of the Mortgaged
Properties have remained or will remain at their levels on the dates of
origination of the related Mortgage Loans. If the residential real estate
market has experienced or should experience an overall decline in property
values such that the outstanding balance of any Mortgage Loan becomes equal to
or greater than the value of the Mortgaged Property, the actual rates of
delinquencies, foreclosures and losses could be higher than those now generally
experienced in the mortgage lending industry.
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.
S-26
<PAGE> 34
INITIAL MORTGAGE LOANS -- GROUP I
The information set forth with respect to Group I is based upon data
provided to the Depositor by each of the related Originators and has been
compiled by the Depositor. Neither the Depositor, the Seller, the Servicers,
the Underwriters, the Originators nor any of their respective affiliates have
made or will have made any representation as to the accuracy or completeness of
such compiled information.
As of the Cut-Off Date, the average Loan Balance of the Initial
Mortgage Loans in Group I was $___________; the weighted average Loan-to-Value
Ratio of the Initial Mortgage Loans in Group I was _____%; the weighted average
remaining term to maturity was _____ months; the weighted average original term
to maturity was _____ months. The remaining terms to maturity as of the
Cut-Off Date of the Initial Mortgage Loans in Group I ranged from _____ months
to 360 months. The minimum and maximum Loan Balances of Initial Mortgage Loans
in Group I as of the Cut-Off Date were $___________ and $___________,
respectively. Balloon Mortgage Loans represent not more than _____% of the
Original Aggregate Loan Balance of the Initial Mortgage Loans in Group I.
______% of the Initial Mortgage Loans in Group I are secured by first lien
mortgages or deeds of trust. No Initial Mortgage Loan in Group I will mature
later than ___________, 202___.
_____% of the Initial Mortgage Loans in Group I bear interest at a
fixed rate for the life of the related Mortgage Loans. The Initial Mortgage
Loans in Group I consist of Mortgage Loans aggregating $___________. The
Coupon Rates of the Initial Mortgage Loans in Group I ranged from _____% per
annum to _____% per annum. The weighted average Coupon Rate of the Initial
Mortgage Loans in Group I was _____% per annum.
_____% of the Initial Mortgage Loans in Group I are 5/25 Loans. The
5/25 Loans are all subject to a _____% periodic rate adjustment cap and
substantially all have a lifetime reset cap of _____% to _____%. The 5/25
Loans consist of Initial Mortgage Loans aggregating $________________.
S-27
<PAGE> 35
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:
<TABLE>
<CAPTION>
% of Aggregate
Number of Group I Aggregate Group I Group I
Geographic Area Mortgage Loans Loan Balance Loan Balance
- --------------- -------------- ------------ ------------
<S> <C> <C> <C>
Alabama
Arizona
California
Colorado
District of Columbia
Florida
Georgia
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maryland
Michigan
Minnesota
Missouri
Nevada
New Jersey
New Mexico
New York
North Carolina
Ohio
Oregon
Pennsylvania
Tennessee
Texas
Utah
Washington
West Virginia
Wisconsin
Wyoming
Total 100.00%
=======
</TABLE>
S-28
<PAGE> 36
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>
5.01 - 10.00%
10.01 - 15.00%
15.01 - 20.00%
20.01 - 25.00%
25.01 - 30.00%
30.01 - 35.00%
35.01 - 40.00%
40.01 - 45.00%
45.01 - 50.00%
50.01 - 55.00%
55.01 - 60.00%
60.01 - 65.00%
65.01 - 70.00%
70.01 - 75.00%
75.01 - 80.00%
80.01 - 85.00%
85.01 - 90.00%
Total: 100.00%
=======
</TABLE>
CUT-OFF DATE COUPON RATES -- INITIAL GROUP I MORTGAGE LOANS
The Coupon Rates borne by the Notes relating to the Initial Mortgage
Loans in Group I were distributed as follows as of the Cut-Off Date:
<TABLE>
<CAPTION>
% of Aggregate
Range of Number of Group I Aggregate Group I Group I
Coupon Rates Mortgage Loans Loan Balance Loan Balance
------------ -------------- ------------ ------------
<S> <C> <C> <C>
6.501 - 7.000%
7.501 - 8.000%
8.001 - 8.500%
8.501 - 9.000%
9.001 - 9.500%
9.501 - 10.000%
10.001 - 10.500%
10.501 - 11.000%
11.001 - 11.500%
11.501 - 12.000%
12.001 - 12.500%
12.501 - 13.000%
13.001 - 13.500%
13.501 - 14.000%
14.001 - 14.500%
14.501 - 15.000%
Total 100.00%
=======
</TABLE>
S-29
<PAGE> 37
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
50,000.01 - 100,000.00
100,000.01 - 150,000.00
150,000.01 - 200,000.00
200,000.01 - 250,000.00
250,000.01 - 300,000.00
300,000.01 - 350,000.00
350,000.01 - 400,000.00
400,000.01 - 450,000.00
450,000.01 - 500,000.00
Total 100.00%
=======
</TABLE>
TYPES OF MORTGAGED PROPERTIES -- INITIAL GROUP I MORTGAGE LOANS
The Mortgaged Properties securing the Initial Mortgage Loans in Group
I as of the Cut-Off Date were of the property types as follows:
<TABLE>
<CAPTION>
% of Aggregate
Number of Group I Aggregate Group I Group I
Property Types Mortgage Loans Loan Balance Loan Balance
-------------- -------------- ------------ ------------
<S> <C> <C> <C>
Single-family
PUD
Townhouses
Condominiums
Manufactured Home
Apartment 2-4 Units
Other
Total 100.00%
=======
</TABLE>
MONTHS SINCE FIRST PAYMENT DATE -- INITIAL GROUP I MORTGAGE LOANS
The distribution of the number of months since the date of origination
of the Initial Mortgage Loans in Group I as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
% of Aggregate
Months Elapsed Number of Group I Aggregate Group I Group I
Since Origination Mortgage Loans Loan Balance Loan Balance
----------------- -------------- ------------ ------------
<S> <C> <C> <C>
0 - 6
7 - 12
Total 100.00%
=======
</TABLE>
S-30
<PAGE> 38
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 Cut-Off 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> <C>
0 - 60
61 - 120
121 - 180
181 - 240
241 - 360
Total 100.00%
=======
</TABLE>
OCCUPANCY STATUS -- INITIAL GROUP I MORTGAGE LOANS
The occupancy status of the Mortgaged Properties securing the Initial
Mortgage Loans in Group I as of the Cut- Off Date was as follows
<TABLE>
<CAPTION>
% of Aggregate
Number of Group I Aggregate Group I Group I
Occupancy Status Mortgage Loans Loan Balance Loan Balance
---------------- -------------- ------------ ------------
<S> <C> <C> <C>
Owner Occupied
Non-Owner Occupied
Total 100.00%
=======
</TABLE>
INITIAL MORTGAGE LOANS -- GROUP II
The information set forth with respect to Group II is based upon data
provided to the Depositor by each of the related Originators and has been
compiled by the Depositor. Neither the Depositor, the Seller, the Servicers,
the Underwriters, the Originators nor any of their respective affiliates have
made or will have made any representation as to the accuracy or completeness of
such compiled information.
As of the Cut-Off Date, the average Loan Balance of the Initial
Mortgage Loans in Group II was $___________; the Coupon Rates of the Initial
Mortgage Loans in Group II ranged from _____% per annum to _____% per annum;
the weighted average Loan-to-Value Ratio of the Initial Mortgage Loans in Group
II was _____%; the weighted average Coupon Rate of the Initial Mortgage Loans
in Group II was _____% per annum; the weighted average remaining term to
maturity was _____ months; and the weighted average original term to maturity
was _____ months. The remaining terms to maturity as of the Cut-Off Date of
the Initial Mortgage Loans in Group II ranged from _____ months to _____
months. The minimum and maximum Loan Balances of Initial Mortgage Loans in
Group II as of the Cut-Off Date were $___________ and $___________,
respectively. None of the Initial Mortgage Loans in Group II provided for
"balloon" payments. No Initial Mortgage Loan in Group II will mature later
than June 1, 2026.
All of the Initial Mortgage Loans in Group II have maximum Coupon
Rates. The weighted average maximum Coupon Rate of the Initial Mortgage Loans
in Group II was _____% per annum, with maximum Coupon Rates that range from
_____% per annum to _____% per annum. The weighted average minimum Coupon Rate
of the Initial Mortgage Loans in Group II was _____% per annum, with minimum
Coupon Rates that range from _____% to _____% per annum. The Initial Mortgage
Loans in Group II have a weighted average gross margin as of the Cut-Off Date
of _____%. The gross margin for the Initial Mortgage Loans in Group II range
from _____% to _____%.
S-31
<PAGE> 39
_____% of the Initial Mortgage Loans in Group II are Six-Month LIBOR
Loans that bear interest at rates that adjust, along with the related monthly
payments, semiannually based on Six-Month LIBOR. _____% of the Six-Month LIBOR
Loans have a semiannual reset cap of _____%, substantially all of which have a
lifetime reset cap of _____% and _____% have a semiannual reset cap of ______%.
_____% of the Initial Mortgage Loans in Group II have a semiannual reset cap
of _____%, substantially all of which have a lifetime reset cap of _____%. The
Six Month LIBOR Loans consist of Initial Mortgage Loans aggregating
$______________.
____% of the Initial Mortgage Loans in Group II are 2/28 Loans that
bear interest at a fixed rate of interest for a period of approximately two
years after origination and thereafter have semiannual interest rate and
payment adjustments at frequencies and in the same manner as the Six-Month
LIBOR Loans. _____% of the 2/28 Loans have a periodic rate adjustment cap of
_____% and substantially all of which have a lifetime reset cap of _____% to
_____%. ___ _% of the 2/28 Loans have a periodic rate adjustment cap of _____%
and have a lifetime reset cap of _____% to _____%. __ __% of the 2/28 Loans
have a periodic rate adjustment cap of _____% and generally have a lifetime
reset cap of _____%. The 2/28 Loans consist of Initial Mortgage Loans
aggregating $______________.
_____% of the Initial Mortgage Loans in Group II are 3/27 Loans that
bear interest at a fixed rate of interest for a period of approximately three
years after origination and thereafter have semiannual interest rate and
payment adjustments at frequencies and in the same manner as the Six-Month
LIBOR Loans primarily subject to a _____% periodic rate adjustment cap and
substantially all of which have a lifetime reset cap of _____% to _____%. The
3/27 Loans consist of Initial Mortgage Loans aggregating $________________.
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES -- INITIAL
GROUP II MORTGAGE LOANS
The geographic distribution of Initial Mortgage Loans in Group II by
state, as of the Cut-Off Date, was as follows:
<TABLE>
<CAPTION>
% of Aggregate
Number of Group II Aggregate Group II Group II
Geographic Area Mortgage Loans Loan Balance Loan Balance
- --------------- -------------- ------------ ------------
<S> <C> <C> <C>
Alabama
Arizona
California
Colorado
District of Columbia
Florida
Georgia
Idaho
Illinois
Indiana
Kansas
Kentucky
Louisiana
Maryland
Michigan
Minnesota
Missouri
Nevada
New Jersey
New Mexico
Ohio
Oregon
Pennsylvania
Texas
Utah
Washington
Wisconsin
Total 100.00%
=======
</TABLE>
S-32
<PAGE> 40
ORIGINAL LOAN-TO-VALUE RATIOS -- INITIAL GROUP II MORTGAGE LOANS
The original Loan-to-Value Ratios of the Initial Mortgage Loans in
Group II as of the Cut-Off Date were distributed as follows:
<TABLE>
<CAPTION>
% of Aggregate
Range of Number of Group II Aggregate Group II Group II
Original LTV's Mortgage Loans Mortgage Loan Balance Mortgage Loan Balance
-------------- -------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
15.01 - 20.00%
25.01 - 30.00%
30.01 - 35.00%
35.01 - 40.00%
40.01 - 45.00%
45.01 - 50.00%
50.01 - 55.00%
55.01 - 60.00%
60.01 - 65.00%
65.01 - 70.00%
70.01 - 75.00%
75.01 - 80.00%
80.01 - 85.00%
85.01 - 90.00%
Total 100.00%
=======
</TABLE>
CUT-OFF DATE COUPON RATES -- INITIAL GROUP II MORTGAGE LOANS
The Coupon Rates borne by the Notes relating to the Initial Mortgage
Loans in Group II were distributed as follows as of the Cut-Off Date:
<TABLE>
<CAPTION>
% of Aggregate
Range of Number of Group II Aggregate Group II Group II
Coupon Rates Mortgage Loans Mortgage Loan Balance Mortgage Loan Balance
-------------- -------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
6.001 - 6.500%
6.501 - 7.000%
7.001 - 7.500%
7.501 - 8.000%
8.001 - 8.500%
8.501 - 9.000%
9.001 - 9.500%
9.501 - 10.000%
10.001 - 10.500%
10.501 - 11.000%
11.001 - 11.500%
11.501 - 12.000%
12.001 - 12.500%
12.501 - 13.000%
13.001 - 13.500%
13.501 - 14.000%
14.001 - 14.500%
14.501 - 15.000%
Total 100.00%
=======
</TABLE>
S-33
<PAGE> 41
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
Range of Number of Group II Aggregate Group II Group II
Loan Balances Mortgage Loans Mortgage Loan Balance Mortgage Loan Balance
-------------- -------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
$0.01 - $50,000.00
50,000.01 - 100,000.00
100,000.01 - 150,000.00
150,000.01 - 200,000.00
200,000.01 - 250,000.00
250,000.01 - 300,000.00
300,000.01 - 350,000.00
350,000.01 - 400,000.00
400,000.01 - 450,000.00
450,000.01 - 500,000.00
Total 100.00%
=======
</TABLE>
TYPES OF MORTGAGED PROPERTIES -- INITIAL GROUP II MORTGAGE LOANS
The Mortgaged Properties securing the Initial Mortgage Loans in Group
II as of the Cut-Off Date were of the property types as follows:
<TABLE>
<CAPTION>
% of Aggregate
Number of Group II Aggregate Group II Group II
Property Types Mortgage Loans Mortgage Loan Balance Mortgage Loan Balance
-------------- -------------- --------------------- ---------------------
<S> <C> <C> <C>
Single Family
PUD
Condominiums
Manufactured Home
Apartment 2-4 Units
Other
Total 100.00%
=======
</TABLE>
MONTHS SINCE ORIGINATION -- INITIAL GROUP II MORTGAGE LOANS
The distribution of the number of months since the date of origination
of the Initial Mortgage Loans in Group II as of the Cut-Off Date was as
follows:
<TABLE>
<CAPTION>
% of Aggregate
Months Elapsed Number of Group II Aggregate Group II Group II
Since Origination Mortgage Loans Mortgage Loan Balance Mortgage Loan Balance
-------------- -------------- --------------------- ---------------------
<S> <C> <C> <C>
0 - 6
Total 100.00%
=======
</TABLE>
S-34
<PAGE> 42
REMAINING TERM TO MATURITY -- INITIAL GROUP II MORTGAGE LOANS
The distribution of the number of months remaining to maturity of the
Initial Mortgage Loans in Group II as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
% of Aggregate
Months Remaining Number of Group II Aggregate Group II Group II
to Maturity Mortgage Loans Mortgage Loan Balance Mortgage Loan Balance
-------------- -------------- --------------------- ---------------------
<S> <C> <C> <C>
0 - 120
121 - 180
181 - 240
241 - 360
Total 100.00%
=======
</TABLE>
OCCUPANCY STATUS INITIAL -- GROUP II MORTGAGE LOANS
The occupancy status of the Mortgaged Properties securing the Initial
Mortgage Loans in Group II as of the Cut- Off Date was as follows:
<TABLE>
<CAPTION>
% of Aggregate
Number of Group II Aggregate Group II Group II
Occupancy Status Mortgage Loans Mortgage Loan Balance Mortgage Loan Balance
---------------- -------------- --------------------- ---------------------
<S> <C> <C> <C>
Owner Occupied
Non Owner Occupied
Total 100.00%
=======
</TABLE>
S-35
<PAGE> 43
MARGINS -- INITIAL GROUP II MORTGAGE LOANS
The margins borne by the Notes relating to the Initial Mortgage Loans
in Group II as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
% of Aggregate
Number of Group II Aggregate Group II Group II
Margins Mortgage Loans Mortgage Loan Balance Mortgage Loan Balance
-------------- -------------- --------------------- ---------------------
<S> <C> <C> <C>
3.500% - 3.750%
3.751% - 4.000%
4.001% - 4.250%
4.251% - 4.500%
4.501% - 4.750%
4.751% - 5.000%
5.001% - 5.250%
5.251% - 5.500%
5.501% - 5.750%
5.751% - 6.000%
6.001% - 6.250%
6.251% - 6.500%
6.501% - 6.750%
6.751% - 7.000%
7.001% - 7.250%
7.251% - 7.500%
7.501% - 7.750%
7.751% - 8.000%
8.001% - 8.250%
Total 100.00%
=======
</TABLE>
MAXIMUM COUPON RATES -- INITIAL GROUP II MORTGAGE LOANS
The maximum Coupon Rates borne by the Notes relating to the Initial
Mortgage Loans in Group II as of the Cut- Off Date was as follows:
<TABLE>
<CAPTION>
% of Aggregate
Maximum Number of Group II Aggregate Group II Group II
Coupon Rates Mortgage Loans Mortgage Loan Balance Mortgage Loan Balance
-------------- -------------- --------------------- ---------------------
<S> <C> <C> <C>
13.001 - 13.500%
13.501 - 14.000%
14.001 - 14.500%
14.501 - 15.000%
15.001 - 15.500%
15.501 - 16.000%
16.001 - 16.500%
16.501 - 17.000%
17.001 - 17.500%
17.501 - 18.000%
18.001 - 18.500%
18.501 - 19.000%
19.001 - 19.500%
19.501 - 20.000%
20.001 - 20.500%
20.501 - 21.000%
21.001 - 21.500%
21.501 - 22.000%
Total 100.00%
=======
</TABLE>
S-36
<PAGE> 44
NEXT RATE ADJUSTMENT DATE CHANGE -- INITIAL GROUP II MORTGAGE LOANS
Next rate adjustment date change for each of the Notes relating to the
Initial Mortgage Loans in Group II as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
% of Aggregate
Date of Next Coupon Number of Group II Aggregate Group II Group II
Rate Change Mortgage Loans Loan Balance Loan Balance
----------- -------------- ------------ ------------
<S> <C> <C> <C>
August 1, 1996
September 1, 1996
October 1, 1996
November 1, 1996
December 1, 1996
March 1, 1998
April 1, 1998
May 1, 1998
June 1, 1998
Total 100.00%
========
</TABLE>
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS
The Pooling and Servicing Agreement permits the Trust to acquire
approximately $__________ and $__________ in aggregate principal balance of
Subsequent Mortgage Loans for addition to Group I and Group II, respectively.
Accordingly, the statistical characteristics of the Mortgage Loan Pool and each
Group will vary as of any Subsequent Cut-Off Date upon the acquisition of
Subsequent Mortgage Loans.
The obligation of the Trust to purchase Subsequent Mortgage Loans on a
Subsequent Transfer Date is subject to the following requirements, among
others: (i) the ratings on the Class A Certificates shall not have been
downgraded by any Rating Agency; (ii) such Subsequent Mortgage Loan may not be
30 or more days contractually delinquent as of the related Subsequent Cut-Off
Date; (iii) the remaining term to maturity of such Subsequent Mortgage Loan may
not exceed 360 months; and (iv) following the purchase of all of the Subsequent
Mortgage Loans by the Trust, the Subsequent Mortgage Loans, as a whole, (a)
will have a weighted average Loan-to-Value Ratio of not more than _____%for the
Fixed Rate Group and _____% for the Adjustable Rate Group; (b) will have a
weighted average gross margin for each Mortgage Loan Group that is not more
than _____ basis points less than the weighted average gross margin for such
Mortgage Loan Group as of the Cut-Off Date; (c) will have no more than _____%
in the case of the Fixed Rate Group and _____% in the case of the Adjustable
Rate Group of such Subsequent Mortgage Loans with Loan-to-Value Ratios in
excess of _____%; (d) will have no more than _____% in the case of the Fixed
Rate Group and _____% in the case of the Adjustable Rate Group with cash out
refinancings; (e) in the case of the Adjustable Rate Group only, will not be
comprised of more than _____% 2/28 Loans and 3/27 Loans; (f) will have weighted
average PAG codes of less than _____ in the case of the Fixed Rate Group and
less than _____ in the case of the Adjustable Rate Group; (g) will have
Mortgage Loans that are not more than _ ___%, in the case of the Fixed Rate
Group, and _____% in the case of the Adjustable Rate Group, that are in PAG IV
and PAG V; and (h) will have no more than _____% of the Fixed Rate Group and
_____% of the Adjustable Rate Group that are non-owner occupied properties.
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The weighted average life of, and, if purchased at other than par
(disregarding, for purposes of this discussion, the effect on an investor's
yield resulting from the timing of the settlement date and those considerations
discussed below under "Payment Lag Feature of Certain Fixed Rate Group
Certificates"), the yield to maturity on the Class A Certificates will be
affected by the rate of payment of principal of the Mortgage Loans in the
related Mortgage Loan Group, including for this purpose Prepayments,
liquidations due to defaults, casualties and condemnations, and repurchases by
the Originators of Mortgage Loans. The actual rate of principal prepayments on
S-37
<PAGE> 45
pools of mortgage loans is influenced by a variety of economic, tax,
geographic, demographic, social, legal and other factors and has fluctuated
considerably in recent years. In addition, the rate of principal prepayments
may differ among pools of mortgage loans at any time because of specific
factors relating to the mortgage loans in the particular pool, including, among
other things, the age of the mortgage loans, the geographic locations of the
properties securing the loans and the extent of the mortgagors' equity in such
properties, changes in the mortgagors' housing needs, job transfers and
unemployment.
As with fixed rate obligations generally, the rate of prepayment on a
pool of mortgage loans with fixed rates such as the Mortgage Loans in Group I
(other than the 5/25 Loans) is affected by prevailing market rates for mortgage
loans of a comparable term and risk level. When the market interest rate is
below the mortgage coupon, mortgagors may have an increased incentive to
refinance their mortgage loans. Depending on prevailing market rates, the
future outlook for market rates and economic conditions generally, some
mortgagors may sell or refinance mortgaged properties in order to realize their
equity in the mortgaged properties, to meet cash flow needs or to make other
investments.
The Mortgage Loans in 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 3/27 Loans may differ
from that of the other Mortgage Loans in Group II and the prepayment behavior
of the 5/25 Loans may differ from that of the other Mortgage Loans in Group I.
As a 2/28 Loan, 3/27 Loan or 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.
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 borrower's finances
are stressed to the point of default. Prepayments may also affect the yield to
the Owners of the Adjustable Rate Group Certificates, if the weighted average
margins are reduced.
In addition to the foregoing factors affecting the weighted average
life of each Class of the Class A Certificates, the subordination provisions of
the Trust result in a limited acceleration of the Class A Certificates relative
to the amortization of the related Mortgage Loans until the related Specified
Subordination Amount is reached. The accelerated amortization is achieved by
the application of certain excess interest and principal to the payment of the
Class A Certificate Principal Balance. This acceleration feature creates
overcollateralization which results from the excess of the aggregate Loan
Balances of the Mortgage Loans over the Class A Certificate Principal Balance.
Once the required level of overcollateralization is reached, the acceleration
feature will cease, unless necessary to maintain the required level of
overcollateralization.
A majority of the Mortgage Loans contain prepayment penalty
provisions. For a discussion of such provisions, see "The Portfolio of
Mortgage Loans--Prepayment Penalties" herein.
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 Certificate
Principal Balance of one or more Classes of the Fixed Rate Group Certificates
is reduced to zero, and may increase the weighted average lives of such
S-38
<PAGE> 46
Certificates. Although a low interest rate environment may facilitate the
refinancing of a Balloon Loan, the receipt and reinvestment by Owners of the
proceeds in such an environment may produce a lower return than that previously
received in respect of the related Balloon Loan. Conversely, a high interest
rate environment may make it more difficult for the mortgagor to accomplish a
refinancing and may result in delinquencies or defaults.
MANDATORY PREPAYMENT
In the event that at the end of the Funding Period, not all of the
Original Pre-Funded Amount has been used to acquire Subsequent Mortgage Loans,
then the related Class of Class A Certificates then entitled to receive
payments of principal will receive a partial prepayment on the Payment Date in
________ 199__ in an amount equal the portion of the Original Pre-Funded Amount
remaining and allocable to each such Class.
Although no assurances can be given, the Depositor expects that the
principal amount of Subsequent Mortgage Loans sold to the Trust will require
the application of substantially all the amount on deposit in the Pre-Funding
Account and that there should be no material principal prepaid to the Owners of
the Class A Certificates on or before the Pre-Funding Payment Date.
PROJECTED PREPAYMENT AND YIELD FOR CLASS A CERTIFICATES
As indicated above, if purchased at other than par, the yield to
maturity on a Class A Certificate will be affected by the rate of the payment
of principal of the Mortgage Loans. If the actual rate of payments on the
Mortgage Loans is slower than the rate anticipated by an investor who purchases
a Class A Certificate at a discount, the actual yield to such investor will be
lower than such investor's anticipated yield. If the actual rate of payments
on the Mortgage Loans is faster than the rate anticipated by an investor who
purchases a Class A Certificate at a premium, the actual yield to such investor
will be lower than such investor's anticipated yield.
The "Final Scheduled Payment Date" for each Class of the Class A
Certificates is as follows: Class A-1, ____________, _____, Class A-2,
____________, _____, Class A-3, ____________, _____, Class A-4, ____________,
_____, Class A-5, ____________, _____, Class A-6, ____________, _____, Class
A-7, ____________, _____, and Class A-8, ____________, _____. These dates are
the dates on which the "Initial Certificate Principal Balance" set forth in the
summary hereof for the related Class as of the Closing Date less all amounts
previously distributed to the Owners on account of principal (such amount as to
any Class of the Class A Certificates and as of any time, the related "Class A
Certificate Principal Balance" and as to the Class A Certificates collectively,
the "Certificate Principal Balance") would be reduced to zero assuming that no
Prepayments are received on the Mortgage Loans in the related Group, that
scheduled monthly payments of principal of and interest on each of the related
Mortgage Loans are timely received and no optional termination or mandatory
termination is exercised. The weighted average life of the Class A
Certificates is likely to be shorter than would be the case if payments
actually made on the Mortgage Loans conformed to the foregoing assumptions, and
the final Payment Date with respect to the Class A Certificates could occur
significantly earlier than the related Final Scheduled Payment Date because (i)
Prepayments are likely to occur, (ii) [the Owners of the Class R Certificates
may cause a termination of the Trust when the outstanding Certificate Principal
Balance is less than 10% of the original Certificate Principal Balance] and
(iii) the Servicers may each purchase all Mortgage Loans serviced by them,
thereby causing a termination of the Trust when the outstanding Certificate
Principal Balance is less than 5% of the Original Certificate Balance.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal
of such security will be repaid to the investor. The weighted average life of
any Class of the Class A Certificates will be influenced by the rate at which
principal of the Mortgage Loans in the related Mortgage Loan Group is paid,
which may be in the form of scheduled amortization or prepayments (for this
purpose, the term "prepayment" includes Prepayments and liquidations due to
default).
Each Accrual Period for the Adjustable Rate Group Certificates will
consist of the actual number of days elapsed from the 25th day of the month
preceding the month of the applicable Payment Date (or, in the case of the
first Accrual Period, from the Closing Date) through the 24th day of the month
of such Payment Date. After the initial Accrual Period, the Pass-Through Rate
of the Adjustable Rate Group 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 of the Adjustable Rate Group Certificates may be
calculated by reference to the Coupon Rates on the Mortgage Loans in the
Adjustable Rate Group. Although the Coupon Rates on the Mortgage Loans in the
Adjustable Rate Group are subject to adjustment, the Coupon Rates adjust less
frequently than the Pass-Through Rate of the Adjustable Rate Group Certificates
which adjust 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
S-39
<PAGE> 47
a lower level of prevailing interest rates, which would be expected to result
in faster prepayments, thereby reducing the weighted average life of the
Adjustable Rate Group Certificates.
Certain of the Mortgage Loans in Group II, including the 2/28 Loans
and the 3/27 Loans, were originated with initial Coupon Rates that were based
on competitive conditions. As a result, the Coupon Rates on such Mortgage
Loans in the Adjustable Rate Group are more likely to adjust on their first,
and possibly subsequent adjustment dates subject to the effects of the
applicable periodic rate cap and lifetime cap. Because the Pass-Through Cap on
each Payment Date, limits on changes in the Coupon Rates of the Mortgage Loans
in the Adjustable Rate Group may limit changes in the Pass- Through Rate of the
Adjustable Rate Group 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 3/27 Loans will not adjust
until approximately the date on which the 37th scheduled monthly payment is
due.
The Adjustable Rate Group Available Funds Cap on a Payment Date will
depend, in part, on the weighted average of the then-current Coupon Rates of
the outstanding Mortgage Loans in the Adjustable Rate Group. If the Mortgage
Loans in the Adjustable Rate Group bearing higher Coupon Rates were to prepay,
the weighted average Coupon Rate of the Mortgage Loans in the Adjustable Rate
Group, and consequently the Adjustable Rate Group Available Funds Cap, would be
lower than otherwise would be the case.
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard. The model used in this Prospectus Supplement
with respect to Group I is the Home Equity Prepayment ("HEP") assumption. HEP
assumes that a pool of loans prepays in the first month of the life of such
loan at a constant prepayment rate that corresponds in CPR (as defined below)
to one-tenth the given HEP percentage and increases by an additional one-tenth
each month thereafter until the tenth month, where it remains at a CPR equal to
the given HEP percentage. The model used in this Prospectus Supplement with
respect to Group II is the Constant Prepayment Rate ("CPR") assumption. The
CPR represents an assumed constant rate of prepayment each month, expressed as
an annual rate, relative to the then outstanding principal balance on a pool of
new mortgage loans for the life of such Mortgage Loans. Neither model purports
to be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Loans. The Depositor believes that no existing statistics of which it
is aware provide a reliable basis for Owners of the Class A Certificates to
predict the amount or the timing of receipt of prepayments on the Mortgage
Loans.
It is very unlikely that the Mortgage Loans will prepay at rates
consistent with HEP or CPR until maturity or that all of the Mortgage Loans in
the related Mortgage Loan Group will prepay at the same rate. There will be
discrepancies between the actual characteristics of the Mortgage Loans included
in the Trust and the assumed characteristics used in preparing the following
tables. Any discrepancy may have an effect upon the percentages of Initial
Certificate Principal Balance outstanding set forth in the table and the
weighted average lives of the Class A Certificates.
Since the tables were prepared on the basis of the assumptions in the
following paragraph, there will likely be discrepancies between the
characteristics of the actual Mortgage Loans and the characteristics of the
Mortgage Loans assumed in preparing the tables. Any such discrepancy will
likely have an effect upon the percentages of the Certificate Principal
Balances outstanding and weighted average lives of the Class A Certificates set
forth in the tables. In addition, since the actual Mortgage Loans in the Trust
have characteristics which differ from those assumed in preparing the tables
set forth below, the distributions of principal on the Class A Certificates may
be made earlier or later than as indicated in the tables.
For the purpose of the tables below, it is assumed that: (i) each
Mortgage Loan Group consists of Mortgage Loans with the characteristics set
forth in the table below, (ii) the Closing Date for the Certificates occurs on
__________, 199__, (iii) distributions on the Certificates are made on the 25th
day of each month regardless of the day on which the Payment Date actually
occurs, commencing in ________ 199__ in accordance with the priorities
described herein, (iv) the difference between the Gross Coupon Rate and the Net
Coupon Rate is equal to the Servicing Fee and the Net Coupon Rate is further
reduced by the Premium Amount and the Trustee Fee, (v) prepayments include 30
day's interest thereon, (vi) no Auction Sale or Servicer Clean-Up Call occurs
for Group I and an Auction Sale occurs on the Auction Sale Bid Date for Group
II, (vii) the "Specified Subordinated Amount" (as defined under "Description of
the Class A Certificates -- Overcollateralization Provisions") for each
Mortgage Loan Group is set initially as specified in the Pooling and Servicing
Agreement and thereafter decreases in accordance with the provisions of the
Pooling and Servicing Agreement, (viii) all of the Pre-Funded Amount is used to
acquire Subsequent Mortgage Loans on __________, 199__ and prior to such date,
each Subsequent Mortgage Loan accrues interest at the related Net Coupon Rates
indicated in the table below, (ix) the
S-40
<PAGE> 48
Coupon Rate for each Mortgage Loan in Group II is adjusted on its next rate
adjustment date (and on subsequent rate adjustment dates, if necessary) to
equal the sum of (a) an assumed final constant level of the applicable index of
_____% per annum, with respect to Six-Month LIBOR and _____% per annum with
respect to One-Year CMT and (b) the respective gross margin (such sum being
subject to the applicable periodic adjustment cap, maximum interest rate and
minimum interest rate (which minimum interest rate will equal the initial
coupon)), (x) One-Month LIBOR remains constant at a rate of _____% per annum,
(xi) the Class A-1 and Class A-8 Pass-Through Rates remain constant at _____%
and _____% per annum, respectively, (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.
S-41
<PAGE> 49
INITIAL GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Original Remaining
Term to Term to
Principal Gross Coupon Net Coupon Maturity Maturity
Balance Rate Rate (in months) (in months)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
</TABLE>
SUBSEQUENT GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
Original Remaining
Term to Term to
Principal Gross Coupon Net Coupon Maturity Maturity
Balance Rate Rate (in months) (in months)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
</TABLE>
INITIAL GROUP II MORTGAGE LOANS
<TABLE>
Months Original Remaining
Gross Net Periodic to Rate Term to Term to
Principal Coupon Coupon Gross Net Rate Next Change Maturity Maturity
Balance Rate Rate Margin Life Cap Cap Reset Frequency (in months) (in months) Index
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Six-Month LIBOR
Six-Month LIBOR
Six-Month LIBOR
Six-Month LIBOR
Six-Month LIBOR
Six-Month LIBOR
</TABLE>
SUBSEQUENT GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
Months Original Remaining
Gross Net Periodic to Rate Term to Term to
Principal Coupon Coupon Gross Net Rate Next Change Maturity Maturity
Balance Rate Rate Margin Life Cap Cap Reset Frequency (in months) (in months) Index
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Six-Month LIBOR
One Year CMT
</TABLE>
S-42
<PAGE> 50
The following tables set forth the percentages of the initial
principal amount of the Class A Certificates that would be outstanding after
each of the dates shown, assuming (1) for the Fixed Rate Certificates, the
Group I Mortgage Loans prepay according to the indicated percentages of the
Prepayment Assumption under each Fixed Rate Certificate below and the Group II
Mortgage Loans prepay at 21% of the Prepayment Assumption and (2) for the
Adjustable Rate Certificates, the Group I Mortgage Loans prepay at 21% of the
Prepayment Assumption and the Group II Mortgage Loans prepay according to the
indicated percentages of the Prepayment Assumption under the Adjustable Rate
Certificate below, except that under the 0% Prepayment Assumption for all
Certificates, the Group I Mortgage Loans and the Group II Mortgage Loans prepay
at 0% of the Prepayment Assumption.
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
Class A-1 Class A-2
Payment Date 0% 15% 18% 20% 22% 24% 28% 0% 15% 18% 20% 22% 24% 28%
-- --- --- --- --- --- --- -- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Balance
June 25, 1997
June 25, 1998
June 25, 1999
June 25, 2000
June 25, 2001
June 25, 2002
June 25, 2003
June 25, 2004
June 25, 2005
June 25, 2006
June 25, 2007
June 25, 2008
June 25, 2009
June 25, 2010
June 25, 2011
June 25, 2012
June 25, 2013
June 25, 2014
June 25, 2015
June 25, 2016
June 25, 2017
June 25, 2018
June 25, 2019
June 25, 2020
June 25, 2021
June 25, 2022
June 25, 2023
June 25, 2024
June 25, 2025
June 25, 2026
June 25, 2027
Weighted Avg
Life(1)
</TABLE>
<TABLE>
<CAPTION>
Class A-3 Class A-4
Payment Date 0% 15% 18% 20% 22% 24% 28% 0% 15% 18% 20% 22% 24% 28%
-- --- --- --- --- --- --- -- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Balance
June 25, 1997
June 25, 1998
June 25, 1999
June 25, 2000
June 25, 2001
June 25, 2002
June 25, 2003
June 25, 2004
June 25, 2005
June 25, 2006
June 25, 2007
June 25, 2008
June 25, 2009
June 25, 2010
June 25, 2011
June 25, 2012
June 25, 2013
June 25, 2014
June 25, 2015
June 25, 2016
June 25, 2017
June 25, 2018
June 25, 2019
June 25, 2020
June 25, 2021
June 25, 2022
June 25, 2023
June 25, 2024
June 25, 2025
June 25, 2026
June 25, 2027
Weighted Avg Life(1)
</TABLE>
- -----------------------------
(1) The weighted average life of the Class A Certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial
respective Certificate Principal Balance for such Class of Class A
Certificate.
S-43
<PAGE> 51
The following tables set forth the percentages of the initial
principal amount of the Class A Certificates that would be outstanding after
each of the dates shown, assuming (1) for the Fixed Rate Certificates, the
Group I Mortgage Loans prepay according to the indicated percentages of the
Prepayment Assumption under each Fixed Rate Certificate below and the Group II
Mortgage Loans prepay at 21% of the Prepayment Assumption and (2) for the
Adjustable Rate Certificates, the Group I Mortgage Loans prepay at 21% of the
Prepayment Assumption and the Group II Mortgage Loans prepay according to the
indicated percentages of the Prepayment Assumption under the Adjustable Rate
Certificate below, except that under the 0% Prepayment Assumption for all
Certificates, the Group I Mortgage Loans and the Group II Mortgage Loans prepay
at 0% of the Prepayment Assumption.
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
Class A-5 Class A-6
Payment Date 0% 15% 18% 20% 22% 24% 28% 0% 15% 18% 20% 22% 24% 28%
-- --- --- --- --- --- --- -- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Balance
June 25, 1997
June 25, 1998
June 25, 1999
June 25, 2000
June 25, 2001
June 25, 2002
June 25, 2003
June 25, 2004
June 25, 2005
June 25, 2006
June 25, 2007
June 25, 2008
June 25, 2009
June 25, 2010
June 25, 2011
June 25, 2012
June 25, 2013
June 25, 2014
June 25, 2015
June 25, 2016
June 25, 2017
June 25, 2018
June 25, 2019
June 25, 2020
June 25, 2021
June 25, 2022
June 25, 2023
June 25, 2024
June 25, 2025
June 25, 2026
June 25, 2027
Weighted Avg Life(1)
Class A-7 Class A-8
Payment Date 0% 15% 18% 20% 22% 24% 28% 0% 15% 18% 20% 22% 24% 28%
-- --- --- --- --- --- --- -- --- --- --- --- --- ---
Initial
Balance
June 25, 1997
June 25, 1998
June 25, 1999
June 25, 2000
June 25, 2001
June 25, 2002
June 25, 2003
June 25, 2004
June 25, 2005
June 25, 2006
June 25, 2007
June 25, 2008
June 25, 2009
June 25, 2010
June 25, 2011
June 25, 2012
June 25, 2013
June 25, 2014
June 25, 2015
June 25, 2016
June 25, 2017
June 25, 2018
June 25, 2019
June 25, 2020
June 25, 2021
June 25, 2022
June 25, 2023
June 25, 2024
June 25, 2025
June 25, 2026
June 25, 2027
Weighted Avg
Life(1)
</TABLE>
- ----------------------------
(1) The weighted average life of the Class A Certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related Payment Date, (ii)
adding the results, and (iii) dividing the sum by the initial
respective Certificate Principal Balance for such Class of Class A
Certificate.
S-44
<PAGE> 52
PAYMENT LAG FEATURE OF CERTAIN FIXED RATE GROUP CERTIFICATES
Pursuant to the Pooling and Servicing Agreement, an amount equal to
Mortgagor payments with respect to each Mortgage Loan in Group I (net of the
Servicing Fee) received by the Servicer during each Remittance Period is to be
remitted to the Trustee on or prior to the related Monthly Remittance Date;
however, the Trustee will not be required to distribute any such amounts to the
Owners until the next succeeding Payment Date. As a result, the monthly
distributions to the Owners of the Fixed Rate Group Certificates (other than
the Class A-1 Certificates) generally reflect an Accrual Period reflecting
Mortgagor payments during the prior calendar month, and the first Payment Date
will not occur until __________, 199__. Thus, the effective yield to the
Owners of the Fixed Rate Group Certificates (other than the Class A-1
Certificates) will be below that otherwise produced by the related Pass-Through
Rate because the distribution of the related Class A Distribution Amount in
respect of any given month will not be made until on or about the 25th day of
the following month.
THE ORIGINATORS
The Mortgage Loan Pool consists of Mortgage Loans purchased or
originated by three originators (the "Originators") with aggregate outstanding
Loan Balances of $___________. The largest Originator of such loans is _______
_______________________________, which originated _____% of the Initial
Mortgage Loans in Group I and _____% of the Initial Mortgage Loans in Group II.
The other Originator is ____________________, which originated _____% of the
Initial Mortgage Loans in Group I and _____% of the Initial Mortgage Loans in
Group II. The Seller has purchased approximately $___________ of mortgage
loans from ________________________, approximately $__________ of which are
expected to be used to satisfy the Pre-Funding Account purchase requirement for
Group I and approximately $__________ of which are expected to be used to
satisfy the Pre-Funding Account purchase requirement for Group II.
FORMATION OF THE TRUST AND TRUST PROPERTY
AMRESCO Residential Securities Corporation Mortgage Loan Trust
199__-__ (the "Trust") will be created and established pursuant to the Pooling
and Servicing Agreement. The Depositor will convey without recourse the
Mortgage Loans to the Trust and the Trust will issue the Class A Certificates
and the Subordinate Certificates.
The property of the Trust will include (a) the Mortgage Loans (other
than payments due on the Mortgage Loans on or prior to the Cut-Off Date with
respect to those Mortgage Loans that were current as of the Cut-Off Date)
together with the related Mortgage Loan documents and the Seller's interest in
any Mortgaged Property which secures a Mortgage Loan and all payments thereon
and proceeds of the conversion, voluntary or involuntary, of the foregoing, (b)
such amounts as may be held by the Trustee in the Certificate Account, the
Pre-Funding Account, the Capitalized Interest Account and any other accounts
held by the Trustee for the Trust together with investment earnings on such
amounts and such amounts as may be held in the name of the Trustee in the
Principal and Interest Account, if any, exclusive of investment earnings
thereon (except as otherwise provided in the Pooling and Servicing Agreement)
whether in the form of cash, instruments, securities or other properties, (c)
the Certificate Insurance Policies, (d) proceeds of all the foregoing
(including, but not by way of limitation, all proceeds of any hazard insurance
and title insurance policy relating to the Mortgage Loans, cash proceeds,
accounts, accounts receivable, notes, drafts, acceptances, chattel paper,
checks, deposit accounts, rights to payment of any and every kind, and other
forms of obligations and receivables which at any time constitute all or part
of or are included in the proceeds of any of the foregoing) to pay the
Certificates as specified in the Pooling and Servicing Agreement and (e)
certain rights of the Seller under the Transfer Agreements (collectively, the
"Trust Estate").
The Class A Certificates will not represent an interest in or an
obligation of, nor will the Mortgage Loans be guaranteed by, the Depositor, the
Trustee, the Seller, the Servicers, the Originators or any of their affiliates.
Prior to its formation, the Trust will have had no assets or
obligations. Upon formation, the Trust will not engage in any business
activity other than acquiring, holding and collecting payments on the Mortgage
Loans, issuing the Certificates and distributing payments thereon. The Trust
will not acquire any receivables or assets other than the Mortgage Loans and
the rights appurtenant thereto and will not have any need for additional
capital resources. To the extent that mortgagors make scheduled payments under
the Mortgage Loans, the Trust will have sufficient liquidity to make
distributions on the Certificates. As the Trust does not have any operating
history and will not engage in any business activity other than issuing the
Certificates and making distributions thereon, there has not been included any
historical or pro forma ratio of earnings to fixed charges with respect to the
Trust.
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ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Initial Mortgage
Loans and the Mortgaged Properties is based upon the pool as constituted at the
close of business on the Cut-Off Date, as adjusted (with respect to all Initial
Mortgage Loans that were current as of the Cut-Off Date) for the scheduled
principal payments due on or before such date. Prior to the issuance of the
Class A Certificates, Initial Mortgage Loans may be removed from the pool as a
result of incomplete documentation or non-compliance with representations and
warranties set forth in the Pooling and Servicing Agreement, if the Depositor
deems such removal necessary or appropriate. A limited number of other Initial
Mortgage Loans may be included in the pool prior to the issuance of the
Certificates.
A current report on Form 8-K will be available to purchasers of the
Class A Certificates and will be filed and incorporated by reference into the
Registration Statement together with the Pooling and Servicing Agreement with
the Securities and Exchange Commission within fifteen days after the initial
issuance of the Class A Certificates. In the event Initial Mortgage Loans are
removed from or added to the pool as set forth in the preceding paragraph, such
removal or addition will be noted in the current report on Form 8-K. A current
report on Form 8-K will also be filed within fifteen days of the end of the
Funding Period reflecting the additions to the Trust.
DESCRIPTION OF THE CLASS A CERTIFICATES
GENERAL
Each Certificate will represent certain undivided, fractional
ownership interests in the Trust Estate created and held pursuant to the
Pooling and Servicing Agreement, subject to the limits and the priority of
distribution described therein.
As described in "The Mortgage Loan Pool" herein, the Mortgage Loan
Pool is divided into two Groups, Group I, which contains only fixed rate
Mortgage Loans, and Group II, which contains only adjustable rate Mortgage
Loans. For each Mortgage Loan Group, the related Class of Class A Certificates
will evidence the right to receive on each Payment Date the Class A
Distribution Amount for such Class of Class A Certificates, in each case until
the related Class A Certificate Principal Balance is reduced to zero.
PAYMENT DATES
On each Payment Date, the Owners of each Class of the Class A
Certificates will be entitled to receive, from amounts then on deposit in the
certificate account established and maintained by the Trustee in accordance
with the Pooling and Servicing Agreement (the "Certificate Account") and until
the Certificate Principal Balance of such Class of Class A Certificates is
reduced to zero, the Class A Distribution Amount as of such Payment Date, as
described below. Distributions will be made in immediately available funds to
Owners of Class A Certificates by wire transfer or otherwise, to the account of
such Owner at a domestic bank or other entity having appropriate facilities
therefor, if such Owner has so notified the Trustee, or by check mailed to the
address of the person entitled thereto as it appears on the register (the
"Register") maintained by the Trustee as registrar (the "Registrar").
Beneficial Owners may experience some delay in the receipt of their payments
due to the operations of DTC. See "Risk Factors--Book Entry Registration" in
the Prospectus, "Description of the Class A Certificates--Book Entry
Registration of the Class A Certificates" herein and "Description of the
Certificates--Book Entry Registration" in the Prospectus.
The Pooling and Servicing Agreement will provide that an Owner will be
required to send its Certificate to the Trustee prior to receiving the final
distribution on such Owner's Certificate. The Pooling and Servicing Agreement
additionally will provide that, in any event, any Certificate as to which the
final distribution thereon has been made shall be deemed canceled for all
purposes under or pursuant to the Pooling and Servicing Agreement and the
Certificate Insurance Policy.
Each Owner of record of the related Class of the Class A Certificates
will be entitled to receive such Owner's Percentage Interest in the amounts due
such Class on such Payment Date. The "Percentage Interest" of a Class A
Certificate as of any date of determination will be equal to the percentage
obtained by dividing the principal balance of such Certificate as of the
Cut-Off Date by the Certificate Principal Balance for the related Class of the
Class A Certificates as of the Cut-Off Date.
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DISTRIBUTIONS
Upon receipt, the Trustee will be required to deposit into the
Certificate Account, (i) the total of the principal and interest collections on
the Mortgage Loans, including any Net Liquidation Proceeds, required to be
remitted by the Servicers, together with any Substitution Amount and any Loan
Purchase Price, (ii) the related Capitalized Interest Requirement and any
Pre-Funding Account Earnings, (iii) any Insured Payment, and (iv) the proceeds
of any liquidation of the Trust Estate. The Trustee will also be required to
deposit into the Certificate Account any Pre-Funded Amounts to be distributed
as a prepayment at the end of the Funding Period.
The Pooling and Servicing Agreement establishes a pass-through rate on
each Class of the Class A Certificates (each, a "Pass-Through Rate") as set
forth in the Summary herein under "Certificates Offered." The Pass-Through
Rate of Fixed Rate Group Certificates will be as set forth on the cover hereof;
provided, that, (i) the Pass-Through Rate with respect to the Class A-1
Certificates will equal the lesser of (a) the London interbank offered rate for
one-month United States dollar deposits (calculated as described under "--
Calculation of One-Month LIBOR" below) as of the second to last business day
prior to the immediately preceding Payment Date (or as of the second to last
business day prior to the Closing Date with respect to the ________ 199__
Payment Date) (the "One-Month LIBOR Determination Date") plus _____% per annum
and (b) the Fixed Rate Group Available Funds Cap and (ii) on each Payment Date
after the Clean-Up Call Date, the Class A-7 Pass-Through Rate will be equal to
the lesser of (a) _____% per annum and (b) the Fixed Rate Group Available Funds
Cap. The Pass-Through Rate with respect to the Class A-8 Certificates will
equal the lesser of (i) with respect to any Payment Date which occurs on or
prior to the Clean-Up Call Date, One-Month LIBOR as of the One-Month LIBOR
Determination Date plus _____% per annum (and for any Payment Date after the
Clean-Up Call Date, One-Month LIBOR plus _____% per annum), and (ii) the
Adjustable Rate Group Available Funds Cap.
On each Payment Date, the Trustee is required to make the following
disbursements and transfers from moneys then on deposit in the Certificate
Account as specified below in the following order of priority of each such
transfer and disbursement:
(i) First, out of Total Monthly Excess Spread, the Trustee shall
disburse the Premium Amount to the Certificate Insurer;
(ii) Second, to the Trustee, the Trustee Fees and reimbursable
expenses with respect to such Mortgage Loan Group then due;
(iii) Third, the Trustee shall allocate an amount equal to the sum
of (x) the Total Monthly Excess Spread with respect to such
Mortgage Loan Group and Payment Date plus (y) any
Subordination Reduction Amount with respect to such Mortgage
Loan Group and Payment Date (net of the Trustee Fees with
respect to such Mortgage Loan Group and the amounts payable to
the Certificate Insurer with respect to such Mortgage Loan
Group (the "Premium Amount") as described in clauses (i) and
(ii) above) (such net sum being the "Total Monthly Excess
Cashflow" with respect to such Mortgage Loan Group and Payment
Date) in the following order of priority:
(A) first, such Total Monthly Excess Cashflow shall be
allocated to the payment of the Class A Distribution
Amount pursuant to clauses (v)(A) and (B) below on
such Payment Date with respect to the related
Mortgage Loan Group in an amount equal to the amount,
if any, by which (x) the sum of (i) the related
Current Interest and (ii) the Subordination Deficit,
if any, for such Payment Date exceeds (y) the
Available Funds with respect to such Mortgage Loan
Group for such Payment Date (the amount of such
difference with respect to a Mortgage Loan Group
being an "Available Funds Shortfall" for such
Mortgage Loan Group);
(B) second, any portion of the Total Monthly Excess
Cashflow with respect to such Mortgage Loan Group
remaining after the application described in clause
(A) above shall be allocated against any Available
Funds Shortfall with respect to the other Mortgage
Loan Group;
(C) third, any portion of the Total Monthly Excess
Cashflow with respect to such Mortgage Loan Group
remaining after the allocations described in clauses
(A) and (B) above shall 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
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(D) fourth, any portion of the Total Monthly Excess
Cashflow with respect to such Mortgage Loan Group
remaining after the allocations described in clauses
(A), (B) and (C) above shall be paid to the
Certificate Insurer in respect of any Reimbursement
Amount with respect to the other Mortgage Loan Group;
(iv) Fourth, the amount, if any, of the Total Monthly Excess
Cashflow with respect to such Mortgage Loan Group on a Payment
Date remaining after the allocations described in clause (iii)
above (the "Net Monthly Excess Cashflow" with respect to such
Mortgage Loan Group for such Payment Date) is required to be
applied in the following order or priority:
(A) first, such Net Monthly Excess Cashflow shall be used
to reduce to zero, through the allocation of a
Subordination Increase Amount to the payment of the
Class A Distribution Amount pursuant to clause (v)
below, any Subordination Deficiency Amount (as
defined in the Pooling and Servicing Agreement) with
respect to such Mortgage Loan Group as of such
Payment Date;
(B) second, any Net Monthly Excess Cashflow remaining
after the application described in clause (A) above
shall be used to reduce to zero, through the payment
of a Subordination Increase Amount, the Subordination
Deficiency Amount, if any, with respect to the other
Mortgage Loan Group; and
(C) third, any Net Monthly Excess Cashflow remaining
after the application described in clauses (A) and
(B) above shall be paid to the Servicers to the
extent of any unreimbursed Delinquency Advances and
Servicing Advances to the extent deemed by the
Servicer to be nonrecoverable and unreimbursed
Servicing Fees; and
(v) Fifth, following the making by the Trustee of all allocations,
transfers and disbursements described above from amounts then
on deposit in the Certificate Account with respect to the
related Mortgage Loan Group, the Trustee shall distribute:
(A) To the Owners of the Class A Certificates of the
related Group, the related Current Interest, on a pro
rata basis without any priority among such Class A
Certificates;
(B) To the Owners of the related Class of Class A
Certificates, (i) the Principal Distribution Amount
applicable to Group I shall be distributed as
follows: (a) first, to the Owners of the Class A-1
Certificates until the Class A-1 Certificate
Principal Balance is reduced to zero; (b) second, to
the Owners of the Class A-2 Certificates, until the
Class A-2 Certificate Principal Balance is reduced to
zero; (c) third, to the Owners of the Class A-3
Certificates, until the Class A-3 Certificate
Principal Balance is reduced to zero; (d) fourth, to
the Owners of the Class A-4 Certificates, until the
Class A-4 Certificate Principal Balance is reduced to
zero; (e) fifth, to the Owners of the Class A-5
Certificates until the Class A-5 Certificate
Principal Balance is reduced to zero; (f) sixth, to
the Owners of the Class A-6 Certificates, until the
Class A-6 Certificate Principal Balance is reduced to
zero; and (g) seventh, to the Owners of the Class A-7
Certificates, until the Class A-7 Certificate
Principal Balance is reduced to zero; and (ii) the
Principal Distribution Amount applicable to Group II
shall be distributed to the Owners of the Class A-8
Certificates until the Class A-8 Certificate
Principal Balance is reduced to zero; and
(C) To the Owners of the Subordinate Certificates, all
remaining distributable amounts as specified in the
Pooling and Servicing Agreement.
"Total Net Monthly Excess Spread" as to either Mortgage Loan Group and
any Payment Date equals the excess, if any, of (x) the interest which is
collected on the Mortgage Loans during a Remittance Period (net of the related
Servicing Fee, the related Premium Amount and of certain miscellaneous
administrative amounts) plus the interest portion of any Delinquency Advances
and any Compensating Interest over (y) the sum of the Class A Current Interest.
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"Available Funds" as to any Mortgage Loan Group and Payment
Date is the amount on deposit in the Certificate Account on such Payment Date
(net of Total Monthly Excess Cashflow and disregarding the amounts of any
Insured Payments with respect to a Mortgage Loan Group to be made on such
Payment Date).
"Total Available Funds" as to any Mortgage Loan Group and Payment Date
is (x) the amount on deposit in the Certificate Account (net of Total Monthly
Excess Cashflow) on such Payment Date plus (y) any amounts of Total Monthly
Excess Cashflow with respect to a Mortgage Loan Group to be applied on such
Payment Date (disregarding the amount of any Insured Payment with respect to a
Mortgage Loan Group to be made on such Payment Date) plus, (z) any deposit to
the Certificate Account from the Pre-Funding Account and Capitalized Interest
Account expected to be made in accordance with the Pooling and Servicing
Agreement.
The Trustee or Paying Agent shall (i) receive as attorney-in-fact of
each Owner of Class A Certificates any Insured Payment from the Certificate
Insurer and (ii) disburse the same to each Owner of Class A Certificates. The
Pooling and Servicing Agreement will provide that to the extent the Certificate
Insurer makes Insured Payments, either directly or indirectly (as by paying
through the Trustee or Paying Agent), to the Owners of such Class A
Certificates, if any, the Certificate Insurer will be subrogated to the rights
of such Owners of Class A Certificates with respect to such Insured Payments,
and shall receive reimbursement for such Insured Payments as provided in the
Pooling and Servicing Agreement, but only from the sources and in the manner
provided in the Pooling and Servicing Agreement for the payment of the Class A
Distribution Amount to Owners of Class A Certificates, if any; such subrogation
and reimbursement will have no effect on the Certificate Insurer's obligations
under the Certificate Insurance Policy.
The Pooling and Servicing Agreement provides that the term "Available
Funds" does not include Insured Payments and does not include any amounts that
cannot be distributed to the Owners of Class A Certificates, if any, by the
Trustee as a result of proceedings under the United States Bankruptcy Code.
Each Owner of a Class A Certificate will be required promptly to
notify the Trustee in writing upon the receipt of a court order relating to a
Preference Amount and will be required to enclose a copy of such order with
such notice to the Trustee.
OVERCOLLATERALIZATION PROVISIONS
Overcollateralization Resulting from Cash Flow Structure. The Pooling
and Servicing Agreement requires that, on each Payment Date, Net Monthly Excess
Cashflow (as defined above) be applied with respect to each Mortgage Loan Group
on such Payment Date as an accelerated payment of principal on the related
Class A Certificates, but only to the limited extent hereafter described.
This has the effect of accelerating the amortization of the Class A
Certificates relative to the amortization of the related Mortgage Loans. To
the extent that any Net Monthly Excess Cashflow is not so used for either
Mortgage Loan Group, the Pooling and Servicing Agreement provides that it will
be used to reimburse the Servicers with respect to certain amounts owing to
them, and, thereafter, paid to the Owners of the Class R Certificates.
Pursuant to the Pooling and Servicing Agreement, Net Monthly Excess
Cashflow will be applied as an accelerated payment of principal on the Class A
Certificates until the Subordinated Amount has increased to the level required.
"Subordinated Amount" means, with respect to each Payment Date and each
Mortgage Loan Group, the excess, if any, of (x) the sum of (i) the aggregate
Loan Balances of the related Mortgage Loans [in such Mortgage Loan Group] as of
the close of business on the last day of the preceding Remittance Period and
(ii) any amount on deposit in the Pre-Funding Account with respect to such
Mortgage Loan Group at such time exclusive of any Pre-Funding Account Earnings
(as defined in the Pooling and Servicing Agreement) over (y) the related
Certificate Principal Balance as of such Payment Date (after taking into
account the payment of the related Class A Principal Distribution Amount
(except for any Subordination Deficit or Subordination Increase Amount) on such
Payment Date). Any amount of Net Monthly Excess Cashflow actually applied as
an accelerated payment of principal with respect to a Mortgage Loan Group is a
"Subordination Increase Amount." The required level of the Subordinated Amount
with respect to a Mortgage Loan Group and Payment Date is the related
"Specified Subordinated Amount." The Pooling and Servicing Agreement
generally provides that the Specified Subordinated Amount with respect to a
Mortgage Loan Group may, over time, decrease, or increase, subject to certain
floors, caps and triggers, including triggers that allow the related Specified
Subordinated Amount to decrease or "step down" based on the performance on the
related Mortgage Loans with respect to certain tests specified in the Pooling
and Servicing Agreement based on delinquency rates and cumulative losses. If
certain delinquency and/or loss levels set forth in the Pooling and Servicing
Agreement are exceeded, the "Specified Subordinated Amount" may become
unlimited. Net Monthly
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Excess Cashflow will then be applied to the payment in reduction of principal
of the related Class A Certificates during the period that the related Mortgage
Loan Group is unable to meet certain tests specified in the Pooling and
Servicing Agreement based on delinquency rates and cumulative losses.
In the event that the Specified Subordinated Amount is permitted to
decrease or "step down" on a Payment Date in the future or in the event that an
Excess Subordinated Amount otherwise exists, the Pooling and Servicing
Agreement provides that some or all of the principal which would otherwise be
distributed to the Owners of the Class A Certificates on such Payment Date
shall be available to satisfy other cash flow priorities of the Trust,
including distributions to the Owners of the Class R Certificates over the
period specified in the Pooling and Servicing Agreement until the Excess
Subordinated Amount is reduced to zero. This has the effect of decelerating
the amortization of related Class A Certificates relative to the amortization
of the related Mortgage Loans and of reducing the related Subordinated Amount.
With respect to any Payment Date, the excess, if any, of (x) the related
Subordinated Amount on such Payment Date after taking into account all
distributions to be made on such Payment Date (except for any distributions of
related Subordination Reduction Amounts as described in the next sentence) over
(y) the related Specified Subordinated Amount is the "Excess Subordinated
Amount" for such Payment Date. If, on any Payment Date, the Excess
Subordinated Amount is, or, after taking into account all other distributions
to be made on such Payment Date would be, greater than zero (i.e., the related
Subordinated Amount is or would be greater than the related Specified
Subordinated Amount), then any amounts relating to principal which would
otherwise be distributed to the Owners of the Class A Certificates on such
Payment Date shall instead be distributed to the Owners of the Class R
Certificates (to the extent available therefor) in an amount equal to the
lesser of (x) the related Excess Subordinated Amount and (y) the amount
available for distribution on account of principal with respect to the related
Class A Certificates on such Payment Date; such amount being a "Subordination
Reduction Amount." As a result of the cash flow structure of the Trust,
Subordination Reduction Amounts may result even prior to the occurrence of any
decrease or "step down" in the related Specified Subordinated Amount. This is
because the Owners of the Class A Certificates will generally be entitled to
receive 100% of collected principal, even though the Class A Certificate
Principal Balance will, following the accelerated amortization resulting from
the application of the Net Monthly Excess Cashflow, represent less than 100% of
the aggregate Loan Balance. Accordingly, with respect to a Mortgage Loan
Group, in the absence of the provisions relating to Subordination Reduction
Amounts, the Subordinated Amount would increase above the Specified
Subordinated Amount requirements even without the further application of any
Net Monthly Excess Cashflow.
The Pooling and Servicing Agreement provides generally that, on any
Payment Date, all amounts collected on account of scheduled principal with
respect to the related Remittance Period and unscheduled principal with respect
to the related Prepayment Period (other than any such amount applied to the
payment of a Subordination Reduction Amount) will be distributed to the Owners
of the related Class A Certificates on such Payment Date. If any Mortgage Loan
became a Liquidated Loan during such prior Remittance Period, the Net
Liquidation Proceeds related thereto and allocated to principal may be less
than the principal balance of the related Mortgage Loan; the amount of any such
insufficiency is a "Realized Loss." In addition, the Pooling and Servicing
Agreement provides that the principal balance of any Mortgage Loan which
becomes a Liquidated Loan shall thenceforth equal zero. The Pooling and
Servicing Agreement does not contain any requirement that the amount of any
Realized Loss be distributed to the Owners of the related Class A Certificates
on the Payment Date which immediately follows the event of loss; i.e., the
Pooling and Servicing Agreement does not require the current recovery of
losses. However, the occurrence of a Realized Loss will reduce the related
Subordinated Amount (and may result in a Subordination Deficit as described
below under "-- Overcollateralization and the Certificate Insurance Policies"),
which to the extent that such reduction causes such Subordinated Amount to be
less than the related Specified Subordinated Amount applicable to the related
Payment Date, will require the payment of a Subordination Increase Amount on
such Payment Date (or, if insufficient funds are available on such Payment
Dates, on subsequent Payment Dates, until the Subordinated Amount equals the
related Specified Subordinated Amount). The effect of the foregoing is to
allocate losses to the Owners of the Subordinate Certificates by reducing, or
eliminating entirely, payments of Total Monthly Excess Spread and of
Subordination Reduction Amounts which such Owners would otherwise receive.
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
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and Servicing Agreement requires the Trustee to make a claim for an Insured
Payment under the related Certificate Insurance Policy not later than the second
Business Day prior to any Payment Date as to which the Trustee has determined
that a Subordination Deficit will occur for the purpose of applying the proceeds
of such Insured Payment as a payment of principal to the Owners of the related
Class A Certificates on such Payment Date. No payments in respect of principal
will be made under such Certificate Insurance Policy unless a Subordination
Deficit occurs. Each Certificate Insurance Policy is thus similar to the
subordination provisions described above insofar as such Certificate Insurance
Policy guarantees ultimate, rather than current, payment of the amounts of any
Realized Losses to the Owners of the Class A Certificates. Investors in the
Class A Certificates should realize that, under extreme loss or delinquency
scenarios applicable to the related Mortgage Loan Group that occur when no
Subordination Deficit exists, they may temporarily receive no distributions of
principal when they would otherwise be entitled thereto under the principal
allocation provisions described herein. Nevertheless, the exposure to risk of
loss of principal to the Owners of the Class A Certificates depends in part on
the ability of the Certificate Insurer to satisfy its obligations under the
relevant Certificate Insurance Policy.
CROSSCOLLATERALIZATION PROVISIONS
In addition to the use of Total Monthly Excess Cashflow with respect
to a Mortgage Loan Group to pay related Available Funds Shortfalls, such Total
Monthly Excess Cashflow will be available to pay Available Funds Shortfalls for
the other Mortgage Loan Group as described in clauses (iii)(A) and (iii)(B)
under the caption "-- Distributions" above. Furthermore, in addition to the
use of Net Monthly Excess Cashflow with respect to a Mortgage Loan Group to
distribute related Subordination Increase Amounts in reduction of related
Subordination Deficits, such Net Monthly Excess Cashflow will be available to
distribute Subordination Increase Amounts in reduction of Subordination
Deficiency Amounts related to the other Mortgage Loan Group as described in
clauses (iv) (A) and (iv) (B) under the caption "-- Distributions" above. The
occurrence of a disproportionate amount of Available Funds Shortfalls with
respect to one of the Mortgage Loan Groups may result in the continuation of
Subordination Deficiencies with respect to the other Mortgage Loan Group to the
extent that Net Monthly Excess Cashflow with respect to the better-performing
Mortgage Loan Group is diminished due to the allocation of Total Monthly Excess
Cashflow from such Mortgage Loan Group to cover Available Funds Shortfalls
occurring in the other Mortgage Loan Group.
PRE-FUNDING ACCOUNT
On the Closing Date, the Original Pre-Funded Amount will be deposited
in the Pre-Funding Account, which account shall be in the name of and
maintained by the Trustee and shall be part of the Trust Estate. During the
Funding Period, the Pre-Funded Amount will be maintained in the Pre-Funding
Account. The Original Pre-Funded Amount will be reduced during the Funding
Period by the amount thereof used to purchase Subsequent Mortgage Loans in
accordance with the Pooling and Servicing Agreement. Any Pre-Funded Amount
remaining at the end of the Funding Period for the related Group will be
distributed to the Owners of the related Class of Class A Certificates then
entitled to receive payments of interest on the Payment Date that immediately
follows the end of such Funding Period in reduction of the Certificate
Principal Balance of such Owner's Certificates, thus resulting in a principal
prepayment of such Class of Class A Certificates.
Amounts on deposit in the Pre-Funding Account will be invested in the
investments permitted by the Pooling and Servicing Agreement (the "Eligible
Investments"). All interest and any other investment earnings on amounts on
deposit in the Pre-Funding Account will be deposited in the Capitalized
Interest Account prior to each Payment Date during the Funding Period. The
Pre-Funding Account will not be an asset of the REMIC.
CAPITALIZED INTEREST ACCOUNT
On the Closing Date cash will be deposited in the Capitalized Interest
Account, which account shall be in the name of and maintained by the Trustee
and shall be part of the Trust. The amount on deposit in the Capitalized
Interest Account, including reinvestment income thereon and amounts deposited
thereto from the Pre-Funding Account, will be used by the Trustee to fund the
excess, if any, of (i) the sum of the amount of interest accruing at the
weighted average Pass-Through Rate in the case of the Fixed Rate Group
Certificates and the applicable Pass-Through Rate on the Adjustable Rate Group
Certificates on the amount by which the aggregate Certificate Principal Balance
of the related Class(es) of Class A Certificates exceeds the aggregate Loan
Balance of the Mortgage Loans in the related Group plus the related Premium
Amount accruing on such excess balance over (ii) the amount of any reinvestment
income on monies on deposit in the Pre-Funding Account; such amounts on deposit
will be so applied by the Trustee on each Payment Date in the Funding Period to
fund such excess, if any. Any amounts remaining in
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the Capitalized Interest Account at the end of the Funding Period and not needed
for such purpose will be paid to the Depositor and will not thereafter be
available for distribution to the Owners of the Class A Certificates.
Amounts on deposit in the Capitalized Interest Account will be
invested in Eligible Investments. The Capitalized Interest Account will not be
an asset of the REMIC.
CALCULATION OF ONE-MONTH LIBOR
On each One-Month LIBOR Determination Date (as defined above), the
Trustee will determine One-Month LIBOR for the next Accrual Period for the
Class A-1 and Class A-8 Certificates.
"One-Month LIBOR" means, as of any One-Month LIBOR Determination Date,
the rate for deposits in United States dollars for a period equal to the
relevant Accrual Period (commencing on the first day of such Accrual Period)
which appears in the Telerate Page 3750 as of 11:00 a.m., London time, on such
date. If such rate does not appear on Telerate Page 3750, the rate for that
day will be determined on the basis of the rates at which deposits in United
States dollars are offered by the Reference Banks at approximately 11:00 a.m.,
London time, on that day to prime banks in the London interbank market for a
period equal to the relevant Accrual Period (commencing on the first day of
such Accrual Period). The Trustee will request the principal London office of
each of the Reference Banks to provide a quotation of its rate. If at least
two such quotations are provided, the rate for that day will be the arithmetic
mean of the quotations. If fewer than two quotations are provided as
requested, the rate for that day will be the arithmetic mean of the rates
quoted by major banks in New York City, selected by the Trustee, at
approximately 11:00 a.m., New York City time, on that day for loans in United
States dollars to leading European banks for a period equal to the relevant
Accrual Period (commencing on the first day of such Accrual Period).
"Telerate Page 3750" means the display page currently so designated on
the Dow Jones Telerate Service (or such other page as may replace that page on
that service for the purpose of displaying comparable rates or prices) and
"Reference Banks" means leading banks selected by the Trustee and engaged in
transactions in Eurodollar deposits in the international Eurocurrency market.
BOOK ENTRY REGISTRATION OF THE CLASS A CERTIFICATES
The Class A Certificates will be book-entry Certificates (the
"Book-Entry Certificates"). Persons acquiring beneficial ownership interests
in such Book-Entry Certificates ("Beneficial Owners") may elect to hold their
Book-Entry Certificates directly through DTC in the United States, or CEDEL or
Euroclear (in Europe) if they are Participants of such systems ("Participants")
, or indirectly through organizations which are Participants. The Book-Entry
Certificates will be issued in one or more certificates per class of Class A
Certificates which in the aggregate equal the principal balance of such Class A
Certificates and will initially be registered in the name of Cede & Co., the
nominee of DTC. CEDEL and Euroclear will hold omnibus positions on behalf of
their Participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank will act as depositary for CEDEL and
Morgan will act as depositary for Euroclear (in such capacities, individually
the "Relevant Depositary" and collectively the "European Depositaries").
Investors may hold such beneficial interests in the Book-Entry Certificates in
minimum denominations representing principal amounts of $1,000 and in integral
multiples in excess thereof. Except as described below, no Beneficial Owner
will be entitled to receive a physical certificate representing such
Certificate (a "Definitive Certificate"). Unless and 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
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operations (the "Rules"), DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to such Certificates and is
required to receive and transmit distributions of principal of, and interest on,
such Certificates. Participants and indirect Participants with whom Beneficial
Owners have accounts with respect to Book-Entry Certificates are similarly
required to make book-entry transfers and receive and transmit such
distributions on behalf of their respective Beneficial Owners. Accordingly,
although Beneficial Owners will not possess certificates, the Rules provide a
mechanism by which Beneficial Owners will receive distributions and will be able
to transfer their interest.
Beneficial Owners will not receive or be entitled to receive
certificates representing their respective interests in the Class A
Certificates, except under the limited circumstances described below. Unless
and until Definitive Certificates are issued, Beneficial Owners who are not
Participants may transfer ownership of Class A Certificates only through
Participants and indirect Participants by instructing such Participants and
indirect Participants to transfer such Class A Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Class A
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of such Class A Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and indirect Participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Beneficial Owners.
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or CEDEL Participants on such business day. Cash received in CEDEL
or Euroclear as a result of sales of securities by or through a CEDEL
Participant (as defined below) or Euroclear Participant (as defined below) to a
DTC Participant will be received with value on the DTC settlement date but will
be available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlements in DTC. For information with respect to tax
documentation procedures relating to the Certificates, see "Certain Federal
Income Tax Consequences -- Taxation of Certain Foreign Investors" and "--
Backup Withholding" in the Prospectus and "Global Clearance, Settlement and Tax
Documentation Procedures--Certain U.S. Federal Income Tax Documentation
Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC
rules. Transfers between CEDEL Participants and Euroclear Participants will
occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
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,
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CEDEL is subject to regulation by the Luxembourg Monetary Institute. CEDEL
Participants are recognized financial institutions around the world, including
underwriters, securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. Indirect access to CEDEL is also
available to others, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a CEDEL Participant,
either directly or indirectly.
Euroclear was created in 1968 to hold securities for Participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including
United States dollars. Euroclear includes various other services, including
securities lending and borrowing and interfaces with domestic markets in
several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by the Brussels,
Belgium office of Morgan Guaranty Trust Company of New York (the "Euroclear
Operator"), under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the "Cooperative"). All operations are conducted by
the Euroclear Operator, and all Euroclear Securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments
with respect to securities in Euroclear. All securities in Euroclear are held
on a fungible basis without attribution of specific certificates to specific
securities clearance accounts. The Euroclear Operator acts under the Terms and
Conditions only on behalf of Euroclear Participants, and has no record of or
relationship with persons holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Payment Date by the Trustee to DTC. DTC will be responsible for crediting the
amount of such payments to the accounts of the applicable DTC Participants in
accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing such payment to the Beneficial Owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be
responsible for disbursing funds to the Beneficial Owners of the Book-Entry
Certificates that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distributions with respect
to Certificates held through CEDEL or Euroclear will be credited to the cash
accounts of CEDEL Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. Because DTC can only act
on behalf of Financial Intermediaries, the ability of a Beneficial Owner to
pledge Book-Entry Certificates to persons or entities that do not participate
in the Depository system, or otherwise take actions in respect of such
Book-Entry Certificates, may be limited due to the lack of physical
certificates for such Book-Entry Certificates. In addition, issuance of the
Book-Entry Certificates in book-entry form may reduce the liquidity of such
Certificates in the secondary market since certain potential investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates.
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.
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DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
Owners of the Book-Entry Certificates under the Pooling and Servicing Agreement
only at the direction of one or more Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates are credited, to the extent that such
actions are taken on behalf of Financial Intermediaries whose holdings include
such Book-Entry Certificates. CEDEL or the Euroclear Operator, as the case may
be, will take any action permitted to be taken by an Owner under the Pooling and
Servicing Agreement on behalf of a CEDEL Participant or Euroclear Participant
only in accordance with its relevant rules and procedures and subject to the
ability of the Relevant Depositary to effect such actions on its behalf through
DTC. DTC may take actions, at the direction of the related Participants, with
respect to some Class A Certificates which conflict with actions taken with
respect to other Class A Certificates.
Definitive Certificates will be issued to Beneficial Owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as a nominee and
depository with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor, at its
sole option, elects to terminate a book-entry system through DTC or (c) DTC, at
the direction of the Beneficial Owners representing a majority of the
outstanding Percentage Interests of the Class A Certificates, advises the
Trustee in writing that the continuation of a book-entry system through DTC (or
a successor thereto) is no longer in the best interests of Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Beneficial
Owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
Owners under the Pooling and Servicing Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Certificates among Participants
of DTC, CEDEL and Euroclear, they are under no obligation to perform or
continue to perform such procedures and such procedures may be discontinued at
any time.
ASSIGNMENT OF RIGHTS
An Owner may pledge, encumber, hypothecate or assign all or any part
of its right to receive distributions under any Certificate, but such pledge,
encumbrance, hypothecation or assignment shall not constitute a transfer of an
ownership interest sufficient to render the transferee an Owner of the Trust
without compliance with the provisions of the Pooling and Servicing Agreement
described above. Notwithstanding the foregoing, the Pooling and Servicing
Agreement provides that the Certificate Insurer may, in connection with a
subrogation of the Certificate Insurer to the rights of the Owners of the Class
A Certificates to an amount equal to Insured Payments for which the Certificate
Insurer has not received reimbursement, be considered to be an "Owner" to the
extent (but only to the extent) of such rights.
THE CERTIFICATE INSURANCE POLICIES AND THE CERTIFICATE INSURER
The following information has been supplied by the Certificate Insurer
for inclusion in this Prospectus Supplement. No representation is made by the
Underwriters, the Seller, the Servicers, the Depositor or any of their
affiliates as to the accuracy or completeness of such information.
The Certificate Insurer, in consideration of the payment of the
premiums and subject to the terms of the Certificate Insurance Policies, will
unconditionally and irrevocably guarantee to any Owner that an amount equal to
each full and complete Insured Payment will be received by the Trustee or its
successor, as trustee for the Owners, on behalf of the Owners from the
Certificate Insurer, for distribution by the Trustee to each Owner of each
Owner's proportionate share of the Insured Payment. The Certificate Insurer's
obligations under the Certificate Insurance Policies with respect to a
particular Insured Payment shall be discharged to the extent funds equal to the
applicable Insured Payment are received by the Trustee, whether or not such
funds are properly applied by the Trustee. Insured Payments shall be made only
at the time set forth in such Certificate Insurance Policy and no accelerated
Insured Payments shall be made regardless of any acceleration of the Offered
Certificates, unless such acceleration is at the sole option of the Certificate
Insurer.
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Notwithstanding the foregoing paragraph, the Certificate Insurance
Policies do not cover shortfalls, if any, attributable to the liability of the
Trust, any REMIC created within the Trust or the Trustee for withholding taxes,
if any (including interest and penalties in respect of any such liability).
The Certificate Insurer will pay any Insured Payment that is a
Preference Amount on the second Business Day following receipt on a Business Day
by the Fiscal Agent (as described below) of (i) a certified copy of the order
requiring the return of such Preference Amount, (ii) an opinion of counsel
satisfactory to the Certificate Insurer that such order is final and not subject
to appeal, (iii) an assignment in such form as is reasonably required by the
Certificate Insurer, irrevocably assigning to the Certificate Insurer all rights
and claims of the Owner relating to or arising under the Offered Certificates
against the debtor which made such preference payment or otherwise with respect
to such Preference Amount, (iv) appropriate instruments to effect the
appointment of the Certificate Insurer as agent for such Owner in any legal
proceeding related to such preference payment, such instruments being in a form
satisfactory to the Certificate Insurer and (v) a Notice (as described below);
provided, that if such documents are received after 5:00 p.m. New York City time
on such Business Day, they will be deemed to be received on the following
Business Day. Such payments shall be disbursed to the receiver or trustee in
bankruptcy named in the final order of the court exercising jurisdiction on
behalf of the Owner and not to any Owner directly unless such Owner has returned
principal or interest paid on the Offered Certificates to such receiver or
trustee in bankruptcy, in which case such payment shall be disbursed to such
Owner.
The Certificate Insurer will pay any other amount payable under a
Certificate Insurance Policy no later than 12:00 noon, New York City time, on
the later of the Payment Date on which the Deficiency Amount is due or the
second Business Day following receipt in New York, New York, on a Business Day
by______________________________________________________, 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 __________, 199__ among AMRESCO Residential Securities Corporation,
as Depositor, AMRESCO Residential Securities Corporation, as Seller,
________________________________and ___________________________, as
Servicers, and the Trustee, as Trustee, without regard to any
amendment or supplement thereto, unless the Certificate Insurer shall
have consented in writing thereto.
"Business Day" means any day other than a Saturday, a Sunday
or a day on which banking institutions in California, New York City or
in the city in which the corporate trust office of the Trustee under
the Agreement is located are authorized or obligated by law or
executive order to close.
"Deficiency Amount" means with respect to the related Mortgage
Loan Group and Payment Date, the excess of (i) the sum of the related
Current Interest and the then existing Subordination Deficit for the
related Mortgage Loan Group, if any, over (ii) the Total Available
Funds (net of the Premium Amount for such Mortgage Loan Group) for
such Mortgage Loan Group.
"Insured Payment" means (i) as of any Payment Date an amount
equal to the Deficiency Amount plus (ii) any Preference Amount then
due and owing under the Certificate Insurance Policy.
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"Mortgage Loan Group" means Group I or Group II, as the case
may be.
"Notice" means the telephonic or telegraphic notice, promptly
confirmed in writing by telecopy substantially in the form of Exhibit
A attached to the Certificate Insurance Policy, the original of which
is subsequently delivered by registered or certified mail, from the
Trustee specifying the Insured Payment which shall be due and owing on
the applicable Payment Date.
"Owner" means each Owner (as defined in the Agreement) who, on
the applicable Payment Date, is entitled under the terms of the
applicable Offered Certificate to payment under the Certificate
Insurance Policy.
"Preference Amount" means any amount previously distributed to
an Owner on a Offered Certificate that is recoverable and sought to be
recovered as a voidable preference by a trustee in bankruptcy pursuant
to the United States Bankruptcy Code (11 U.S.C.) as amended from time
to time, in accordance with a final nonappealable order of a court
having competent jurisdiction.
Capitalized terms used in each Certificate Insurance Policy and not
otherwise defined therein will have the respective meanings set forth in the
Agreement as of the date of execution of such Certificate Insurance Policy,
without giving effect to any subsequent amendment to or modification of the
Agreement unless such amendment or modification has been approved in writing by
the Certificate Insurer.
Any notice under a Certificate Insurance Policy or service of process
on the Fiscal Agent of the Certificate Insurer may be made at the address
listed below for the Fiscal Agent of the Certificate Insurer or such other
address as the Certificate Insurer shall specify in writing to the Trustee.
The notice address of the Fiscal Agent is ____________________________,
Attention: ___________________________________________________________, or such
other address as the Fiscal Agent shall specify to the Trustee in writing.
Each Certificate Insurance Policy is being issued under and pursuant
to, and shall be construed under, the laws of the State of New York, without
giving effect to the conflict of laws principles thereof.
The insurance provided by each Certificate Insurance Policy is not
covered by the Property/Casualty Insurance Security Fund specified in Article
76 of the New York Insurance Law.
The Certificate Insurance Policies are not cancelable for any reason.
The premium on a Certificate Insurance Policy is not refundable for any reason
including payment, or provision being made for payment, prior to the maturity
of the Offered Certificates.
The Certificate Insurer, formerly known as [Surety Name], is the
principal operating subsidiary of [Surety Name], a New York Stock Exchange
listed company. [Surety Name] is not obligated to pay the debts of or claims
against the Certificate Insurer. The Certificate Insurer is domiciled in the
State of New York and licensed to do business in all 50 states, the District of
Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern
Mariana Islands, the Virgin Islands of the United States and the Territory of
Guam. The Certificate Insurer has one European branch in the Republic of
France.
All information regarding the Certificate Insurer, a wholly owned
subsidiary of [Surety Name], including the financial statements of the
Certificate Insurer for the year ended December 31, 199___, prepared in
accordance with generally accepted accounting principles, included in the
Annual Report on Form 10-K of [Surety Name] for the year ended December 31,
1995, is hereby incorporated by reference into this Prospectus Supplement and
shall be deemed to be a part hereof. Any statement contained in a document
incorporated by reference herein shall be modified or superseded for purposes
of this Prospectus Supplement to the extent that a statement contained herein
or in any other subsequently filed document which also is incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus Supplement.
The tables below present selected financial information of the
Certificate Insurer determined in accordance with statutory accounting
practices prescribed or permitted by insurance regulatory authorities ("SAP")
and generally accepted accounting principles ("GAAP"):
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<TABLE>
<CAPTION>
SAP
---------------------------------------------
December 31, December 31, December 31,
1994 1995 1996
------------ ------------ -----------
(Audited) (Audited) (Unaudited)
(In millions)
<S> <C> <C> <C>
Admitted Assets
Liabilities
Capital and Surplus
</TABLE>
<TABLE>
<CAPTION>
GAAP
---------------------------------------------
December 31, December 31, December 31,
1994 1995 1996
------------ ------------ -----------
(Audited) (Audited) (Unaudited)
(In millions)
<S> <C> <C> <C>
Assets
Liabilities
Shareholder's Equity
</TABLE>
-------------------------------
Audited financial statements of the Certificate Insurer as of December
31, 1995 and 1994 and for each of the three years in the period ended December
31, 1995 are included herein as Appendix B. Unaudited financial statements of
the Certificate Insurer as of the three month period ended March 31, 1996 are
included herein as Appendix C. Such financial statements have been prepared on
the basis of generally accepted accounting principles. Copies of the
Certificate Insurer's 1995 year-end audited financial statements prepared in
accordance with statutory accounting practices are available from the
Certificate Insurer. The address of the Certificate Insurer is _______
_____________________________________________.
A copy of the Annual Report on Form 10-K of [Surety Name] is available
from the Certificate Insurer or the Securities and Exchange Commission. The
address of the Certificate Insurer is _______________
______________________________.
The Certificate Insurer does not accept any responsibility for the
accuracy or completeness of this Prospectus Supplement or any information or
disclosure contained herein, or omitted herefrom, other than with respect to
the accuracy of the information regarding the Certificate Insurance Policies
and the Certificate Insurer under the heading "THE CERTIFICATE INSURANCE
POLICIES AND THE CERTIFICATE INSURER" and in Appendix B and Appendix C.
Moody's rates the claims paying ability of the Certificate Insurer
"Aaa".
Standard & Poor's rates the claims paying ability of the Certificate
Insurer "AAA".
Fitch Investors Service, L.P. rates the claims paying ability of the
Certificate Insurer "AAA".
Each rating of the Certificate Insurer should be evaluated
independently. The ratings reflect the respective rating agency's current
assessment of the creditworthiness of the Certificate Insurer and its ability
to pay claims on its policies of insurance. Any further explanation as to the
significance of the above ratings may be obtained only from the applicable
rating agency.
The above ratings are not recommendations to buy, sell or hold the
Offered Certificates, and such ratings may be subject to revision or withdrawal
at any time by the rating agencies. Any downward revision or withdrawal of any
of the above ratings may have an adverse effect on the market price of the
Offered Certificates. The Certificate Insurer does not guaranty the market
price of the Offered Certificates nor does it guaranty that the ratings on the
Offered Certificates will not be reversed or withdrawn.
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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, the Trustee or the
Custodian that any representations and warranties contained in a Transfer
Agreement with respect to the Mortgage Loans that were assigned to the Trust
were untrue in any material respect as of the Closing Date with the result that
the interests of the Owners or of the Certificate Insurer are materially and
adversely affected, or the value of the related Mortgage Loan is materially and
adversely affected, the party discovering such breach is required to give
prompt written notice to certain other parties thereto.
Upon the earliest to occur of the Seller's discovery of or its receipt
of notice of a breach described above from any of the other parties pursuant to
the related Transfer Agreement, the related Originator will be required
promptly to (i) cure such breach in all material respects or, within the time
period specified in the related Transfer Agreement, to (ii) substitute in lieu
of each affected Mortgage Loan a Qualified Replacement Mortgage (as such term
is defined in the Pooling and Servicing Agreement) and deliver any Substitution
Amount to the related Servicer for deposit into its Principal and Interest
Account on behalf of the Trust as part of the Monthly Remittance remitted by
such Servicer on the related Monthly Remittance Date or (iii) purchase such
Mortgage Loan from the Trust at a purchase price equal to the Loan Purchase
Price (as defined below) thereof. Notwithstanding any provision of the Pooling
and Servicing Agreement to the contrary, with respect to any Mortgage Loan
which is not in default or as to which no default is imminent, no such
repurchase or substitution will be made unless the Originator obtains for the
Trustee and the Certificate Insurer an opinion of counsel experienced in
federal income tax matters and acceptable to the Certificate Insurer to the
effect that such a repurchase or substitution would not constitute a Prohibited
Transaction for the Trust or otherwise subject the Trust to tax and would not
jeopardize the status of the REMIC Pool as a REMIC (a "REMIC Opinion"),
addressed to the Trustee and the Certificate Insurer and acceptable to the
Trustee and the Certificate Insurer. Any Mortgage Loan as to which repurchase
or substitution was delayed pursuant to the Pooling and Servicing Agreement
shall be repurchased or substituted for (subject to compliance with the
provisions of the Pooling and Servicing Agreement) upon the earlier of (a) the
occurrence of a default or imminent default with respect to such Mortgage Loan
and (b) receipt by the Trustee and the Certificate Insurer of a REMIC Opinion.
In connection with any breach of a representation, warranty or covenant or
defect in documentation giving rise to such repurchase or substitution
obligation, the Seller may request the Originator, to cause to be delivered to
the Trustee and the Certificate Insurer a REMIC Opinion, if a favorable opinion
can be rendered, as a result of any such repurchase or substitution. The
obligation of the Originator so to cure, substitute or purchase any such
Mortgage Loan in respect of a breach that has not been remedied constitutes the
sole remedy available to the Owners, the Seller, the Trustee and the
Certificate Insurer.
"Loan Purchase Price" means generally the outstanding principal
balance of the related Mortgage Loan on the Cut-Off Date, less any principal
amounts previously distributed to the Owners relating to such Mortgage Loan
(such amount, the "Loan Balance" of such Mortgage Loan) as of the date of
purchase (assuming that the Monthly Remittance remitted by the Servicer on such
Monthly Remittance Date has already been remitted), plus one month's interest
at the Net Coupon Rate.
ASSIGNMENT OF MORTGAGE LOANS
Pursuant to the Pooling and Servicing Agreement, the Seller on the
Closing Date will transfer, assign, set over and otherwise convey without
recourse to the Depositor and the Depositor will transfer, assign, set over and
otherwise convey without recourse to the Trustee in trust all of its respective
right, title and interest in and to each Mortgage Loan and all its respective
right, title and interest in and to principal and interest due on each such
Mortgage Loan on or after the Cut-Off Date; provided, however, that the
Depositor will reserve and retain all its right, title and interest in and to
principal (including Prepayments) and interest due on each Initial Mortgage
Loan on or prior to the Cut-Off Date (except with respect to Initial Mortgage
Loans that were delinquent on the Cut-Off Date, which payments are not being
retained by the Depositor). Purely as a protective measure and not to be
construed as contrary to the parties' intent that the transfer on the Closing
Date is a sale, the Seller has also been deemed to have granted to the
Depositor and the Depositor has also been deemed to have granted to the Trustee
a security interest in the Trust Estate in the event that the transfer of the
Trust Estate is deemed to be a loan and not a sale.
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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 ____________)
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
"________________, as Trustee of AMRESCO Residential Securities
Corporation Mortgage Loan Trust 199__-__ under the Pooling and
Servicing Agreement dated as of __________, 199__" provided, however,
that the Depositor shall not be required to cause to be recorded any
assignment of Mortgage for a Mortgage with respect to which the
Mortgaged Property is located in California or the original recording
information is lacking;
(iii) if not delivered on the Closing Date, deliver the title
insurance policy or title searches, the original Mortgages and such
recorded assignments, together with originals or duly certified copies
of any and all prior assignments, to the Trustee within 15 days of
receipt thereof by the Depositor (but in any event, with respect to
any Mortgage as to which original recording information has been made
available to the Depositor within two years after the Closing Date
with respect to the Initial Mortgage Loans, or Subsequent Transfer
Date with respect to the Subsequent Mortgage Loans); and
(iv) furnish to the Trustee and the Certificate Insurer, at
the Depositor's expense, a tax opinion and an opinion of counsel with
respect to the sale and perfection of all Subsequent Mortgage Loans
delivered to the Trust in form and substance satisfactory to the
Trustee and the Certificate Insurer.
The Trustee will agree, for the benefit of the Owners, to review the
documents contained in each Mortgage Loan File held by the Trustee ("File")
within 45 days after the Closing Date or Subsequent Transfer Date (or the date
of receipt of any documents delivered to the Trustee after such date) to
ascertain that all required documents (or certified copies of documents) have
been executed and received.
If the Trustee during such 45-day period finds any document
constituting a part of a File which is not properly executed, has not been
received, or is unrelated to the Mortgage Loans, or that any Mortgage Loan does
not conform in a material respect to the description thereof as set forth in
the Schedule of Mortgage Loans, the Trustee will be required to promptly notify
the Depositor, the Seller, the Owners and the Certificate Insurer. The Seller
will agree in the Pooling and Servicing Agreement to request that the related
Originator use reasonable efforts to remedy a material defect in a document
constituting part of a File of which it is so notified by the Trustee. If,
however, within the time period set forth in the related Transfer Agreement
after the Trustee's notice to it respecting such defect the related Originator
or other party to a Transfer Agreement shall not have remedied the defect and
the defect materially and adversely affects the interest in the related
Mortgage Loan of the Owners or of the Certificate Insurer, the Seller will
request the related Originator within the time period specified in the related
Transfer Agreement to (i) substitute in lieu of such Mortgage Loan another
Mortgage Loan of like kind (a "Qualified Replacement Mortgage," as such term is
defined in the Pooling and Servicing Agreement) and deliver any "Substitution
Amount" (the excess, if any, of the Loan Balance of a Mortgage Loan being
replaced over the outstanding principal balance of a replacement Mortgage Loan
plus accrued and unpaid interest) to the related Servicer for deposit into its
Principal and Interest Account on behalf of the Trust as part of the Monthly
Remittance remitted by the Servicer on such Monthly Remittance Date or (ii)
purchase such Mortgage Loan at a purchase price equal to the Loan Purchase
Price thereof, which purchase price shall be delivered to the related Servicer
for deposit in the related Principal and Interest Account along with the
Monthly Remittance remitted by such Servicer on such Monthly Remittance Date.
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In addition to the foregoing, the Trustee has agreed to provide an
updated exception report during the 12th month after the Closing Date
indicating the current status of the exceptions previously noted by the Trustee
(the "Final Certification"). After delivery of the Final Certification, the
Trustee shall provide to the Certificate Insurer and the related Servicer no
less frequently than monthly updated certifications indicating the then current
status of exceptions, until all such exceptions have been eliminated.
SERVICING
Each Servicer will be obligated under the Pooling and Servicing
Agreement to service and administer the Mortgage Loans identified as being
serviced by it as described therein and with reasonable care, and using that
degree of skill and attention that such Servicer exercises with respect to
comparable mortgage loans that it services for itself or others, and shall have
full power and authority, acting alone, to do or cause to be done any and all
things in connection with such servicing and administration which it may deem
necessary or desirable. Consistent with the foregoing, each Servicer will be
permitted to, in its discretion, (i) waive any assumption fees, late payment
charges, charges for checks returned for insufficient funds or other fees which
may be collected in the ordinary course of servicing the Mortgage Loans, (ii)
if a Mortgagor is in default or about to be in default because of a Mortgagor's
financial condition, arrange with the Mortgagor a schedule for the payment of
delinquent payments due on the related Mortgage Loan, or (iii) modify payments
of monthly principal and interest on any Mortgage Loan becoming subject to the
terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended, in
accordance with such Servicer's general policies with respect to comparable
mortgage loans subject to such Act.
Each Servicer will be paid a monthly fee from interest collected with
respect to each Mortgage Loan serviced by it (as well as from any Liquidation
Proceeds from a Liquidated Mortgage Loan ("Liquidation Proceeds") that are
applied to accrued and unpaid interest) equal to the Loan Balance thereof
multiplied by the applicable Servicing Fee Rate (such product, the "Servicing
Fee"). The "Servicing Fee Rate" for each Mortgage Loan will be the rate
provided in the Pooling and Servicing Agreement, not to exceed _____% 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 principal and interest due on the related
Mortgage Loans, other than "Balloon Payments" (i.e., the final payment of
principal due with respect to a Balloon Mortgage Loan), after the Cut-Off Date
and past due interest and principal on any Mortgage Loan, other than Balloon
Payments, that was delinquent as of the Cut-Off Date, including any
Prepayments, the proceeds of any liquidation of a Mortgage Loan (including any
insurance proceeds) net of expenses and unreimbursed Delinquency Advances and
Servicing Advances ("Net Liquidation Proceeds"), any income from REO Properties
received thereafter (net of unreimbursed Servicing Advances and Delinquency
Advances), but net of (i) the Servicing Fee with respect to each Mortgage Loan
and other servicing compensation, (ii) principal collected and interest accrued
on any Mortgage Loan prior to the Cut-Off Date if such Mortgage Loan was
current as of the Cut-Off Date, which amounts shall be delivered to the Seller,
(iii) late payments received on any Mortgage Loan in respect of unreimbursed
Servicing Advances and Delinquency Advances and (iv) reimbursements for past
Delinquency Advances which the Servicer has determined in its good faith
business judgment are not recoverable from the related Mortgagor or Mortgage
Loan proceeds (all such net amounts being referred to herein as the "Daily
Collections").
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Each Servicer may make withdrawals for its own account (or for the
account of the Seller in the case of clause (i) below) from the amounts on
deposit in the related Principal and Interest Account with respect to the
related Mortgage Loan Group, only for the following purposes:
(i) to withdraw interest paid with respect to any Mortgage
Loans that had accrued for periods on or prior to the Cut-Off Date and
principal due on all current Mortgage Loans on the Cut-Off Date, which
shall be paid to the Seller;
(ii) to withdraw investment earnings on amounts on deposit in
its respective Principal and Interest Account;
(iii) to reimburse itself for unrecovered Delinquency
Advances and Servicing Advances to the extent permitted in the Pooling
and Servicing Agreement;
(iv) to withdraw amounts that have been deposited to its
respective Principal and Interest Account in error; and
(v) to clear and terminate its respective Principal and
Interest Account following the termination of the Trust Estate.
Each Servicer will remit to the Trustee for deposit in the Certificate
Account the Monthly Remittance Amount not later than the related Monthly
Remittance Date.
Subject to the following limitations, each Servicer will be required
to advance on any Mortgage Loan serviced by it prior to each Payment Date its
own funds or other funds made available to it under the Pooling and Servicing
Agreement as set forth in the next paragraph, for such Payment Date, in an
amount equal to the aggregate of payments of principal and interest on the
Mortgage Loans serviced by it in the related Mortgage Loan Group (adjusted to
the applicable Net Coupon Rate) that became due during the related Remittance
Period and delinquent 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
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failure by a Servicer to make a Delinquency Advance as required under the
Pooling and Servicing Agreement with respect to the Certificates will
constitute an event of default thereunder for such Servicer, in which case the
Trustee, as successor servicer, or the successor servicer will be obligated to
make any such Delinquency Advance, in accordance with the terms of the Pooling
and Servicing Agreement.
Each Servicer will be required to pay all customary, reasonable and
necessary "out of pocket" costs and expenses incurred in the performance of its
servicing obligations, including, but not limited to, (i) expenditures in
connection with a foreclosed Mortgage Loan prior to the liquidation thereof,
including, without limitation, expenditures for real estate property taxes,
hazard insurance premiums, property restoration or preservation ("Preservation
Expenses"), (ii) the cost of any enforcement or judicial proceedings, including
foreclosures and (iii) the cost of the management and liquidation of Property
acquired in satisfaction of the related Mortgage, to the extent such expenses
are, in its good faith business judgment, recoverable. Such costs will
constitute "Servicing Advances." Each Servicer may recover a Servicing Advance
(x) to the extent permitted by the Mortgage Loans or, if not theretofore
recovered from the Mortgagor on whose behalf such Servicing Advance was made,
from Liquidation Proceeds realized upon the liquidation of the related Mortgage
Loan or (y), to the extent that such Servicing Advance is determined by the
Servicer in its good faith business judgment to be non-recoverable from such
proceeds from Net Monthly Excess Cashflow and certain other Mortgage Loan
proceeds as specified in the Pooling and Servicing Agreement.
A full month's interest at the related Net Coupon Rate will be due to
the Trust on the outstanding Loan Balance of each Mortgage Loan as of the
beginning of each Remittance Period. If a Prepayment in full of a Mortgage
Loan occurs during any calendar month, any difference between the interest
collected from the Mortgagor in connection with such prepayment and the full
month's interest at the Net Coupon Rate ("Compensating Interest") (but not in
excess of the aggregate Servicing Fee, and any Prepayment Interest Excess for
such period) will be required to be deposited to the Principal and Interest
Account on the Monthly Remittance Date by the related Servicer and shall be
included in the Monthly Remittance to be made available to the Trustee on the
next succeeding Monthly Remittance Date.
When a Mortgagor prepays all or a portion of a Mortgage Loan between
scheduled monthly payment dates ("Due Dates"), the Mortgagor pays interest on
the amount prepaid only to the date of prepayment. Prepayments received from
the 2nd day through the 15th day of a month are included in the distribution on
the 25th day of the same month, and accordingly no shortfall in interest
distributed to the Owners of the Certificates results. Conversely, Prepayments
received from the 16th day to the last day of a month are not distributed until
the 25th day of the following month, and accordingly an interest shortfall (a
"Prepayment Interest Shortfall") would result. In order to mitigate the effect
of any such shortfall in interest distributions to the Owners of the
Certificates on any Payment Date, the amount of the Servicing Fee otherwise
payable to the related Servicer for such month shall, to the extent of such
shortfall, be deposited by the Servicer in the Group I Certificate Account (as
defined below) (if the Prepayment Interest Shortfall occurred with respect to a
Group I Mortgage Loan) or in the Group II Certificate Account (as defined
below) (if the Prepayment Interest Shortfall occurred with respect to a Group
II Mortgage Loan) for distribution to the Owners of the Fixed Rate Group
Certificates or Adjustable Rate Group Certificates as applicable, on such
Payment Date. However, any such reduction in the Servicing Fee will be made
only to the extent of the Servicing Fee otherwise payable to such Servicer with
respect to Scheduled Payments having the Due Date to which such Payment Date
relates. Any such deposit by the related Servicer will be reflected in the
distributions to the Owners of the Certificates made on the Payment Date on
which the Prepayment received would be distributed. Subject to the
availability thereof to fund Compensating Interest requirements referred to in
the previous paragraph, the Servicers will be permitted to retain any
Prepayment Interest Excess due to prepayments received in the month in which
they are distributed.
Each Servicer will have the right and the option, but not the
obligation, to purchase for its own account any Mortgage Loan serviced by it
which becomes delinquent, in whole or in part, as to four consecutive monthly
installments or any Mortgage Loan as to which enforcement proceedings have been
brought by such Servicer. The purchase price for any such Mortgage Loan is
equal to the Loan Purchase Price thereof, which purchase price shall be
deposited in the related Principal and Interest Account.
Each Servicer, with respect to Mortgage Loans serviced by it, shall
foreclose upon or otherwise comparably convert the ownership on behalf of the
Trust of Mortgaged Properties relating to defaulted Mortgage Loans as to which
no satisfactory arrangements can be made for collection of delinquent payments
and which the related Servicer has not purchased from the Trust. Each Servicer
will be required to sell any REO Property managed by it within 23 months of its
acquisition by the Trust, unless an appropriate extension is obtained, or an
opinion of counsel is obtained
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to the effect that the holding by the Trust of such REO Property for any
greater period will not result in the imposition of taxes on "Prohibited
Transactions" of the Trust as defined in Section 860F of the Code or cause the
Trust to fail to qualify as a REMIC under the REMIC Provisions at any time that
any Certificates are outstanding, in which case such Servicer shall sell any
REO Property by the end of any extended period specified in any such opinion or
such extension as applicable.
Notwithstanding the generality of the foregoing provisions, each
Servicer will be required to manage, conserve, protect and operate each REO
Property managed by it for the Owners solely for the purpose of its prompt
disposition and sale in a manner which does not cause such REO Property to fail
to qualify as "foreclosure property" within the meaning of Section 860G(a)(8)
of the Code or result in the receipt by the Trust of any "income from
non-permitted assets" within the meaning of Section 860F(a)(2)(B) of the Code
or any "net income from foreclosure property" which is subject to taxation
under the REMIC Provisions. Pursuant to its efforts to sell such REO Property,
the related Servicer will be required to either itself or through an agent
selected by such Servicer protect and conserve such REO Property in the same
manner and to such extent as is customary in the locality where such REO
Property is located and may, incident to its conservation and protection of the
interests of the Owners and after consultation with the holder of a majority in
interest of the Class R Certificates, rent the same, or any part thereof, as
such Servicer deems to be in the best interest of the Owners and the
Certificate Insurer for the period prior to the sale of such REO Property.
If so required by the terms of any Mortgage Loan, the related Servicer
will be required to cause hazard insurance to be maintained with respect to the
related Mortgaged Property and to advance sums (such Advances to be treated as
Servicing Advances) on account of the premiums therefor if not paid by the
Mortgagor if permitted by the terms of such Mortgage Loan.
Each Servicer will have the right under the Pooling and Servicing
Agreement to accept applications of Mortgagors for consent to (i) partial
releases of Mortgages, (ii) alterations and (iii) removal, demolition or
division of Mortgaged Properties. No application for approval may be
considered by such Servicer unless: (i) the provisions of the related Note and
Mortgage have been complied with; (ii) the loan-to-value ratio and
debt-to-income ratio after any release does not exceed the maximum
loan-to-value ratio and debt-to-income ratio established in accordance with the
Guidelines set forth herein to be applicable to such Mortgage Loan; and (iii)
the lien priority of the related Mortgage is not affected.
Each Servicer will be permitted under the Pooling and Servicing
Agreement to enter into subservicing agreements for any servicing and
administration of Mortgage Loans with any institution which is acceptable to
the Certificate Insurer and a majority of Percentage Interests of the Class R
Owners and meeting the requirements of the Pooling and Servicing Agreement.
Notwithstanding any subservicing agreement, each Servicer will not be
relieved of its obligations under the Pooling and Servicing Agreement and such
Servicer will be obligated to the same extent and under the same terms and
conditions as if it alone were servicing and administering the Mortgage Loans.
Each Servicer shall be entitled to enter into any agreement with a subservicer
for indemnification of such Servicer by such subservicer and nothing contained
in such subservicing agreement shall be deemed to limit or modify the Pooling
and Servicing Agreement.
Each Servicer (except the Trustee if it is required to succeed any
Servicer under the Pooling and Servicing Agreement) will agree to indemnify and
hold the Trustee, the Certificate Insurer, the Seller and the Depositor
harmless against any and all claims, losses, penalties, fines, forfeitures,
legal fees and related costs, judgments, and any other costs, fees and expenses
that the Trustee, the Certificate Insurer, the Seller and the Depositor may
sustain in any way related to the failure of such Servicer to perform its
duties and service the Mortgage Loans in compliance with the terms of the
Pooling and Servicing Agreement. A party against whom any such claim is
brought shall immediately notify the other parties and the Rating Agencies if a
claim is made by a third party with respect to the Pooling and Servicing
Agreement, and such Servicer may assume the defense of any such claim and, upon
a determination that the claim results from the Servicer's failure to perform
in accordance with the Pooling and Servicing Agreement, pay all expenses in
connection therewith, including reasonable counsel fees, and promptly pay,
discharge and satisfy any judgment or decree which may be entered against such
Servicer, the Trustee, the Certificate Insurer, the Seller or the Depositor in
respect of such claim.
Each Servicer will be required to deliver to the Trustee, the
Certificate Insurer, the Seller, the Depositor and the Rating Agencies: (1) on
or before April 15 of each year, commencing in 1997, an officers' certificate
stating, as to each signer thereof, that (i) a review of the activities of such
Servicer during such preceding calendar year and
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of performance under the Pooling and Servicing Agreement has been made under
such officers' supervision, and (ii) to the best of such officers' knowledge,
based on such review, such Servicer has fulfilled all its obligations under the
Pooling and Servicing Agreement for such year, or, if there has been a default
in the fulfillment of all such obligation, specifying each such default known to
such officers and the nature and status thereof including the steps being taken
by such Servicer to remedy such default; and (2) on or before April 15 of any
year commencing in 1997, a letter or letters of a firm of independent,
nationally recognized certified public accountants reasonably acceptable to the
Certificate Insurer dated as of the date of the Servicer's fiscal audit for each
subsequent letter stating that such firm has examined the Servicer's overall
servicing operations in accordance with the requirements of the Uniform Single
Attestation Program for Mortgage Bankers, and stating such firm's conclusions
relating thereto.
REMOVAL AND RESIGNATION OF A SERVICER
The Certificate Insurer or the Owners, the Trustee or the Seller (in
each case with the consent of the Certificate Insurer), will have the right
pursuant to the Pooling and Servicing Agreement, to remove any Servicer upon
the occurrence of, and in certain cases after notice and expiration of the
related cure period: (a) certain acts of bankruptcy or insolvency on the part
of such Servicer; (b) certain failures on the part of such Servicer to perform
its obligations under the Pooling and Servicing Agreement; (c) the failure to
cure material breaches of such Servicer's obligations in the Pooling and
Servicing Agreement; or (d) if the loss and/or delinquency levels of the
related Mortgage Loans are at certain specified levels.
No Servicer is permitted to resign from the obligations and duties
imposed on it under the Pooling and Servicing Agreement except (i) upon
determination that its duties thereunder are no longer permissible under
applicable law or are in material conflict by reason of applicable law with any
other activities carried on by it, the other activities of such Servicer so
causing such conflict being of a type and nature carried on by such Servicer on
the date of the Pooling and Servicing Agreement or (ii) upon written consent of
the Certificate Insurer, the Seller and the Trustee and confirmation from the
Rating Agencies that the Class A Certificate ratings (absent the Certificate
Insurance Policies) are not reduced. Any such determination permitting the
resignation of such Servicer pursuant to clause (i) above is required to be
evidenced by an opinion of counsel to such effect which shall be delivered to
the Trustee and the Certificate Insurer.
Upon removal or resignation of a Servicer, the Trustee (x) shall
solicit bids for a successor Servicer and (y) pending the appointment of a
successor Servicer as a result of soliciting such bids, shall serve as
Servicer. The Trustee, if it is unable to obtain a qualifying bid and is
prevented by law from acting as servicer, will be required to appoint, or
petition a court of competent jurisdiction to appoint, any housing and home
finance institution, bank or mortgage servicing institution designated as an
approved servicer meeting the requirements of the Pooling and Servicing
Agreement, and acceptable to the Certificate Insurer and the Owners of the
Class R Certificates (provided that if the Certificate Insurer and such Owners
cannot agree as to the acceptability of such successor Servicer, the decision
of the Certificate Insurer shall control) as the successor to such Servicer in
the assumption of all or any part of the responsibilities, duties or
liabilities of such Servicer.
No removal or resignation of a Servicer will become effective until
the Trustee or a successor Servicer shall have assumed a Servicer's
responsibilities and obligations in accordance with the Pooling and Servicing
Agreement.
REPORTING REQUIREMENTS
On each Payment Date the Trustee is required to report in writing to
each Owner and the Certificate Insurer:
(i) the amount of the distribution with respect to the
related Class of the Class A Certificates and the Subordinate
Certificates (based on a Certificate in the original principal amount
of $1000);
(ii) the amount of such distribution allocable to
principal on the Mortgage Loans in each Group, separately identifying
the aggregate amount of any Prepayments or other recoveries of
principal included therein, any Pre-Funded Amounts distributed as a
Prepayment at the end of the Funding Period (based on a Certificate in
the original principal amount of $1000) and any Subordination Increase
Amount with respect to each such Group;
(iii) the amount of such distribution allocable to interest
on the related Mortgage Loans in each Group (based on a Certificate in
the original principal amount of $1000);
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(iv) if the distribution (net of any Insured Payment) to
the Owners of any Class of the Class A Certificates on such Payment
Date was less than the related Class A Distribution Amount on such
Payment Date, the Carry-Forward Amount and the allocation thereof to
the related Classes of the Class A Certificates resulting therefrom;
(v) the amount of any Insured Payment included in the
amounts distributed to the Owners of each Class of the Class A
Certificates on such Payment Date;
(vi) the principal amount of each Class of the Class A
Certificate (based on a Certificate in the original principal amount
of $1000) which will be outstanding after giving effect to any payment
of principal on such Payment Date;
(vii) the aggregate Loan Balance of all Mortgage Loans, the
aggregate Loan Balance of the Mortgage Loans in each Group and, the
aggregate Loan Balance of the Initial Mortgage Loans and the
Subsequent Mortgage Loans, in each case after giving effect to any
payment of principal on such Payment Date;
(viii) the Subordinated Amount and Subordination Deficit for
each Group, if any, remaining after giving effect to all distributions
and transfers on such Payment Date;
(ix) based upon information furnished by the Depositor
such information as may be required by Section 6049(d)(7)(C) of the
Code and the regulations promulgated thereunder to assist the Owners
in computing their market discount;
(x) the total of any Substitution Amounts or Loan
Purchase Price amounts included in such distribution with respect to
each Group;
(xi) the weighted average Coupon Rate of the Mortgage
Loans with respect to each Group;
(xii) such other information as the Certificate Insurer may
reasonably request with respect to delinquent Mortgage Loans;
(xiii) the largest Mortgage Loan balance outstanding;
(xiv) for Payment Dates during the Funding Period, the
remaining Pre-Funded Amount allocable to each Mortgage Loan Group; and
(xv) the Servicing Fees, Trustee Fees and Premium Amount
allocable to each Group.
Certain obligations of the Trustee to provide information to the
Owners are conditioned upon such information being received from the Servicers.
In addition, on each Payment Date the Trustee will be required to
distribute to the Depositor, the Underwriters, the Rating Agencies, each Owner
and the Certificate Insurer, together with the information described above, the
following information prepared by the related Servicer and furnished to the
Trustee for such purpose and with respect to each Mortgage Loan Group:
(a) the number and aggregate principal balances of
Mortgage Loans (i) 30-59 days delinquent, (ii) 60-89 days delinquent
and (ii) 90 or more days delinquent, as of the close of business on
the last day of the Remittance Period (taking into account any
payments received from Mortgages on or prior to the related
Determination Date) and the Class A Certificate Principal Balance as
of such Payment Date and the number and aggregate Loan Balances of all
Mortgage Loans and related data;
(b) the status and the number and dollar amounts of all
Mortgage Loans in foreclosure proceedings as of the related
Determination Date;
(c) the number of Mortgagors and the Loan Balances of the
related Mortgages involved in bankruptcy proceedings as of the related
Determination Date;
(d) the existence and status of any Mortgaged Properties
as to which title has been taken in the name of, or on behalf of the
Trustee, as of the related Determination Date;
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(e) the book value of any real estate acquired through
foreclosure or grant of a deed-in-lieu of foreclosure as of the
related Determination Date; and
(f) the amount of cumulative Realized Losses.
REMOVAL OF TRUSTEE FOR CAUSE
The Trustee may be removed upon the occurrence of any one of the
following events (whatever the reason for such event and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body) on the part of the Trustee: (1) failure to
make distributions of available amounts; (2) certain breaches of covenants and
representations by the Trustee; (3) certain acts of bankruptcy or insolvency on
the part of the Trustee; and (4) failure to meet the standards of Trustee
eligibility as set forth in the Pooling and Servicing Agreement.
If any such event occurs and is continuing, then and in every such
case (i) the Certificate Insurer or (ii) with the prior written consent of the
Certificate Insurer (which is required not to be unreasonably withheld) (x) the
Depositor or (y) the Owners of a majority of the Percentage Interests
represented by the Class A Certificates or, if there are no Class A
Certificates then outstanding, by a majority of the Percentage Interests
represented by the Subordinate Certificates, may appoint a successor trustee.
GOVERNING LAW
The Pooling and Servicing Agreement and each Certificate will be
construed in accordance with and governed by the laws of the State of New York
applicable to agreements made and to be performed therein.
AMENDMENTS
The Trustee, the Depositor, the Seller and the Servicers with the
consent of the Certificate Insurer may, at any time and from time to time and
without notice to or the consent of the Owners, amend the Pooling and Servicing
Agreement, and the Trustee will be required to consent to such amendment, for
the purposes of (i) if accompanied by a favorable opinion of counsel
experienced in federal income tax matters, removing the restriction against the
transfer of a Class R Certificate to a Disqualified Organization (as such term
is defined in the Code), (ii) complying with the requirements of the Code
including any amendments necessary to maintain REMIC status, (iii) curing any
ambiguity, (iv) correcting or supplementing any provisions therein which are
inconsistent with any other provisions therein or (v) for any other purpose,
provided that in the case of clause (v), (A) the Seller delivers an opinion of
counsel acceptable to the Trustee that such amendment will not adversely affect
in any material respect the interest of the Owners and (B) such amendment will
not result in a withdrawal or reduction of the rating of the Class A
Certificates without regard to the Certificate Insurance Policy.
Notwithstanding anything to the contrary, no such amendment shall (a) change in
any manner the amount of, or delay the timing of, payments which are required
to be distributed to any Owner without the consent of the Owner of such
Certificate, (b) reduce the percentages of Percentage Interest which are
required to consent to any such amendments, without the consent of the Owners
of all Certificates of the Class or Classes affected then outstanding or (c)
which affects in any manner the terms or provisions of the Certificate
Insurance Policy.
The Trustee will be required to furnish written notification of the
substance of any such amendment to each Owner in the manner set forth in the
Pooling and Servicing Agreement.
TERMINATION OF THE TRUST
The Pooling and Servicing Agreement provides that the Trust will
terminate upon the payment to the Owners of all Certificates and the
Certificate Insurer from amounts other than those available under the
Certificate Insurance Policy of all amounts required to be paid to such Owners
and the Certificate Insurer upon the last to occur of (a) the final payment or
other liquidation (or any advance made with respect thereto) of the last
Mortgage Loan, (b) the disposition of all property acquired in respect of any
Mortgage Loan remaining in the Trust Estate and (c) at any time when a
Qualified Liquidation of the Trust Estate is effected as described below. To
effect a termination pursuant to clause (c) above, the Owners of all
Certificates then outstanding will be required (i) unanimously to direct the
Trustee on behalf of the REMIC to adopt a plan of complete liquidation, as
contemplated by Section 860F(a)(4) of the Code and (ii) to furnish to the
Trustee an opinion of counsel experienced in federal income tax matters
acceptable to the Certificate Insurer and the Trustee to the effect that such
liquidation constitutes a Qualified Liquidation.
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AUCTION SALE; STEP UP ON CERTAIN PASS-THROUGH RATES; TERMINATION
AUCTION SALE. The Pooling and Servicing Agreement requires that, within
90 days of the Auction Sale Bid Date, with respect to a Mortgage Loan Group,
the Trustee shall solicit bids for the purchase of all Mortgage Loans remaining
in such Mortgage Loan Group. In the event that satisfactory bids are received
as described in the Pooling and Servicing Agreement, the net sale proceeds will
be distributed to the Owners of the Certificates related to such Mortgage Loan
Group, in the same order of priority as interest and principal distributions.
If satisfactory bids are not received, the Trustee shall decline to sell the
Mortgage loans and shall not be under any obligation to solicit any further
bids or otherwise negotiate any further sale of the Mortgage Loans in such
Mortgage Loan Group. The Auction Sale must constitute a "qualified
liquidation" of the Classes of Certificates related to such Mortgage Loan Group
under Section 860F of the Code, including, without limitation, the requirement
that the qualified liquidation takes place over a period not to exceed 90 days.
STEP UP ON CERTAIN PASS-THROUGH RATES. If an Auction Sale with respect
to the Adjustable Rate Group has not occurred by the Step Up Date, the
Pass-Through Rate on each Class of the Adjustable Rate Group Certificates will
be increased as provided in "Summary of Terms--Certificates Offered" herein,
for each Payment Date occurring thereafter.
OPTIONAL TERMINATION BY SERVICERS. If an Auction Sale with respect to
a Mortgage Loan Group does not occur, the Servicers will also have the right,
collectively, to purchase all of the Mortgage Loans in such Mortgage Loan Group
they are servicing on any Monthly Remittance Date when the outstanding
Certificate Principal Balance related to such Mortgage Loan Group has declined
to 5% of the Original Certificate Principal Balance of such Mortgage Loan
Group.
MANDATORY PURCHASE. In the event that an Auction Sale has not
occurred with respect to both Mortgage Loan Groups, and the Servicers fail to
exercise their respective option to purchase all of the Mortgage Loans in both
Mortgage Loan Groups, the Owners of the Class R Certificates will be required
to purchase all of the Mortgage Loans in both Mortgage loan Groups on the
Monthly Remittance Date in June 2027.
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
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and (ii) compliance with the Pooling and Servicing Agreement, the REMIC will be
treated as a REMIC, the Class A Certificates will be treated as "regular
interests" in the REMIC and the Class R Certificates will be the sole "residual
interest" in the REMIC. Except as indicated below and in the Prospectus, for
federal income tax purposes, regular interests in a REMIC are treated as debt
instruments issued by the REMIC on the date on which those interests are
created, and not as ownership interests in the REMIC or its assets. Owners of
the Class A Certificates that otherwise report income under a cash method of
accounting will be required to report income with respect to such Class A
Certificates under an accrual method.
The prepayment assumption for each Class of the Class A Certificates
for calculating original issue discount is 21% HEP for the Fixed Rate Group
Certificates and 21% HEP for the Adjustable Group Certificates. See
"Prepayment and Yield Considerations -- Projected Prepayment and Yield for
Class A Certificates" herein.
As a result of the qualification of certain specified assets of the
Trust as a REMIC, the Trust will not be subject to federal income tax except
with respect to (i) income from prohibited transactions, (ii) "net income from
foreclosure property" and (iii) certain contributions to the Trust after the
Closing Date (see "Certain Federal Income Tax Consequences" in the Prospectus).
The total income of the Trust (exclusive of any income that is taxed at the
REMIC level) will be taxable to the Beneficial Owners of the Certificates.
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 (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
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compensation for such person's services under the Agreement and reimbursement
of such person's reasonable expenses in connection therewith; and
(6) the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933.
The Trust Estate must also meet the following requirements:
(i) the corpus of the Trust Estate must consist solely of a
fixed pool of assets of the type that have been included in other
investment pools;
(ii) certificates in such other investment pools must have
been rated in one of the three highest rating categories of Standard &
Poor's, Moody's, Fitch or D&P for at least one year prior to the
Plan's acquisition of Class A Certificates; and
(iii) certificates evidencing interests in such other
investment pools must have been purchased by investors other than
Plans for at least one year prior to the Plan's acquisition of the
Class A Certificates.
Moreover, the Exemptions provide relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire certificates in a trust in which
the fiduciary (or its affiliate) is a mortgagor on the receivables held in the
trust; provided that, among other requirements, (i) in the case of an
acquisition in connection with the initial issuance of certificates, at least
fifty percent of each class of certificates in which Plans have invested is
acquired by persons independent of the Restricted Group and at least fifty
percent of the aggregate interest in the trust is acquired by persons
independent of the Restricted Group; (ii) such fiduciary (or its affiliate) is
a mortgagor with respect to five percent or less of the fair market value of
the obligations contained in the trust; (iii) the Plan's investment in
certificates of any class does not exceed twenty-five percent of all of the
certificates of that class outstanding at the time of the acquisition; and (iv)
immediately after the acquisition, no more than twenty-five percent of the
assets of the Plan with respect to which such person is a fiduciary are
invested in certificates representing an interest in one or more trusts
containing assets sold or serviced by the same entity. The Exemptions do not
apply to Plans sponsored by the Depositor, the Certificate Insurer, the
Underwriters, the Trustee, the related Servicer, any mortgagor with respect to
Mortgage Loans included in the Trust Estate constituting more than five percent
of the aggregate unamortized principal balance of the assets in the Trust
Estate, or any affiliate of such parties (the "Restricted Group"). As of the
date hereof, there is no single Mortgage Loan included in the Trust Estate that
constitutes more than five percent of the aggregate unamortized principal
balance of the assets of the Trust Estate.
It is believed that the Exemptions will apply to the acquisition and
holding of Certificates by Plans and that all conditions of the Exemptions as
they relate to the acquisition and holding by Plans of the Certificates other
than those within the control of the investors will be met after such time.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the possible applicability of the
Exemptions, or other exemptive relief, and all of the potential consequences in
their specific circumstances, prior to making an investment in the Class A
Certificates. Each Plan fiduciary should determine whether under the general
fiduciary standards of investment procedure and diversification an investment
in the Class A Certificates is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
RATINGS
It is a condition of the issuance of the Class A Certificates that the
Class A Certificates receive ratings of "AAA" by Standard & Poor's, "Aaa" by
Moody's and "AAA" by Fitch. The ratings assigned to the Class A Certificates
will be based primarily on the claims-paying ability of the Certificate
Insurer. Explanations of the significance of such ratings may be obtained from
Moody's, 99 Church Street, New York, New York 10007, Standard & Poor's, 25
Broadway, New York, New York 10004 and Fitch Investors Services, One State
Street Plaza, 33rd Floor, New York, New York 10004. Such ratings will be the
views only of such rating agencies. There is no assurance that any such
ratings will continue for any period of time or that such ratings will not be
revised or withdrawn. Any such revision or withdrawal of such ratings may have
an adverse effect on the market price of the Class A Certificates. A security
rating is not a recommendation to buy, sell or hold securities.
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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
<TABLE>
<S> <C>
Underwriters Percentage Interest
------------ -------------------
[Underwriter] _____%
[Underwriter] _____%
[Underwriter] _____%
</TABLE>
CLASS A-2 CERTIFICATES
<TABLE>
<S> <C>
Underwriters Percentage Interest
------------ -------------------
[Underwriter] _____%
[Underwriter] _____%
[Underwriter] _____%
</TABLE>
CLASS A-3 CERTIFICATES
<TABLE>
<S> <C>
Underwriters Percentage Interest
------------ -------------------
[Underwriter] _____%
[Underwriter] _____%
[Underwriter] _____%
</TABLE>
CLASS A-4 CERTIFICATES
<TABLE>
<S> <C>
Underwriters Percentage Interest
------------ -------------------
[Underwriter] _____%
[Underwriter] _____%
[Underwriter] _____%
</TABLE>
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CLASS A-5 CERTIFICATES
<TABLE>
<S> <C>
Underwriters Percentage Interest
------------ -------------------
[Underwriter] _____%
[Underwriter] _____%
[Underwriter] _____%
</TABLE>
CLASS A-6 CERTIFICATES
<TABLE>
<S> <C>
Underwriters Percentage Interest
------------ -------------------
[Underwriter] _____%
[Underwriter] _____%
[Underwriter] _____%
</TABLE>
CLASS A-7 CERTIFICATES
<TABLE>
<S> <C>
Underwriters Percentage Interest
------------ -------------------
[Underwriter] _____%
[Underwriter] _____%
[Underwriter] _____%
</TABLE>
CLASS A-8 CERTIFICATES
<TABLE>
<S> <C>
Underwriters Percentage Interest
------------ -------------------
[Underwriter] _____%
[Underwriter] _____%
[Underwriter] _____%
</TABLE>
The Underwriters are collectively committed to purchase all of the
Class A Certificates if any Class A Certificates are purchased. The
Underwriters intend to act as market makers in the Class A Certificates,
subject to applicable provisions of federal and state securities laws and other
regulatory requirements, but are under no obligation to do so. The
Underwriters and any dealers that participate with the Underwriters in the
distribution of the Class A Certificates may be deemed to be underwriters, and
any discounts or commissions received by them and any profit on the resale of
the Class A Certificates by them may be deemed to be underwriting discounts or
commissions, under the Securities Act.
The Depositor has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or
contribute to payments which the Underwriters may be required to make in
respect thereof.
REPORT OF EXPERTS
The consolidated balance sheets of the Certificate Insurer, [Surety
Name] (formerly known as [Surety Name]) as of December 31, 1995 and 1994 and
the related consolidated statements of income, changes in shareholder's equity,
and cash flows for each of the three years in the period ended December 31,
1995, appearing in Appendix B of this
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Prospectus Supplement, have been audited by ______________________________,
independent accountants, as set forth in their report included therein, and are
included in reliance upon such report and upon the authority of such firm as
experts in accounting and auditing.
CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Seller by ________________________ 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
__________________________. Certain legal matters relating to the validity of
the issuance of the Certificates will be passed upon for the Underwriters by
__________________________. Legal matters relating to the Policy will be
passed upon for the Certificate Insurer by ______________________________.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered AMRESCO
Residential Securities Corporation Mortgage Loan Trust 199__-__ Mortgage Loan
Pass-Through Certificates, Class A (the "Global Securities") will be available
only in book-entry form. Investors in the Global Securities may hold such
Global Securities through any of DTC, CEDEL or Euroclear. The Global
Securities will be tradeable as home market instruments in both the European
and U.S. domestic markets. Initial settlement and all secondary trades will
settle in same-day funds.
Secondary market trading between investors through CEDEL and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of CEDEL and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of CEDEL and
Euroclear (in such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their Participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, CEDEL and
Euroclear will hold positions on behalf of their Participants through their
Relevant Depositary which in turn will hold such positions in their accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practices. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the
settlement date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to
the securities custody accounts on the settlement date against payment in
same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between
DTC Participants will be settled using the procedures generally applicable to
mortgage loan asset-backed certificates issues in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC, Seller and CEDEL or Euroclear Participants. When
Global Securities are to be transferred from the account of a DTC Participant
to the account of a CEDEL Participant or a Euroclear Participant, the purchaser
will send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear will instruct the Relevant Depositary, as the case may be, to receive
the Global Securities against payment. Payment will include interest accrued
on the Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in
such accrual period and a year assumed to consist of 360 days. For
transactions settling on
I-1
<PAGE> 82
the 31st of the month, payment will include interest accrued to and excluding
the first day of the following month. Payment will then be made by the
Relevant Depositary to the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the CEDEL Participant's or
Euroclear Participant's account. The securities credit will appear the next
day (European time) and the cash debt will be back- valued to, and the interest
on the Global Securities will accrue from, the value date (which would be the
preceding day when settlement occurred in New York). If settlement is not
completed on the intended value date (i.e., the trade fails), the CEDEL or
Euroclear cash debt will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Global Securities are credited to their account one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit
to them, CEDEL Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day,
assuming they cleared the overdraft when the Global Securities were credited to
their accounts. However, interest on the Global Securities would accrue from
the value date. Therefore, in many cases the investment income on the Global
Securities earned during that one-day period may substantially reduce or offset
the amount of such overdraft charges, although the result will depend on each
CEDEL Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for crediting Global
Securities to the respective European Depositary for the benefit of CEDEL
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two
DTC Participants.
Trading between CEDEL or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, CEDEL Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. In these cases
CEDEL or Euroclear will instruct the respective Depositary, as appropriate, to
credit the Global Securities to the DTC Participant's account against payment.
Payment will include interest accrued on the Global Securities from and
including the last coupon payment to and excluding the settlement date on the
basis of the actual number of days in such accrual period and a year assumed to
consist to 360 days. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. The payment will then be reflected in the account of CEDEL
Participant or Euroclear Participant the following day, and receipt of the cash
proceeds in the CEDEL Participant's or Euroclear Participant's account would be
back-valued to the value date (which would be the preceding day, when
settlement occurred in New York). Should the CEDEL Participant or Euroclear
Participant have a line of credit with its respective clearing system and elect
to be in debt in anticipation of receipt of the sale proceeds in its account,
the back-valuation will extinguish any overdraft incurred over that one-day
period. If settlement is not completed on the intended value date (i.e., the
trade fails), receipt of the cash proceeds in the CEDEL Participant's or
Euroclear Participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase
Global Securities from DTC Participants for delivery to CEDEL Participants or
Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the trade is reflected in their CEDEL or Euroclear accounts)
in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which would give the
Global Securities sufficient time to be reflected in their CEDEL or Euroclear
account in order to settle the sale side of the trade; or
I-2
<PAGE> 83
(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> 84
================================================================================
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
<TABLE>
<S> <C>
Summary of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-15
The Portfolio of Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-18
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-35
The Depositor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-35
The Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-35
The Mortgage Loan Pools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-35
Prepayment and Yield Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-47
The Originators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-53
Formation of the Trust and Trust Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-53
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-54
Description of the Class A Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-54
The Certificate Insurance Policies and the Certificate Insurer . . . . . . . . . . . . . . . . . . . . . . . . . . S-64
The Pooling and Servicing Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-67
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-77
ERISA Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-78
Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-79
Legal Investment Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-79
Underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-80
Report of Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-81
Certain Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-81
Global Clearance, Settlement and Tax
Documentation Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annex I
Index to Location of Principal Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Audited Financial Statements for the
Certificate Insurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
Unaudited Financial Statements for the
Certificate Insurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-1
PROSPECTUS
Summary of Prospectus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Description of the Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
The Trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Credit Enhancement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Servicing of the Mortgage Loans and Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
The Depositor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Certain Legal Aspects of the Mortgage Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Legal Investment Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
ERISA Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Index to Location of Principal Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
</TABLE>
AMRESCO Residential
Securities Corporation Mortgage
Loan Trust 199__-__
$
-------------
Mortgage Loan Pass-Through
Certificates, Series 199__-__
$
-------------
Class A-1 Certificates
$
-------------
Class A-2 Certificates
$
-------------
Class A-3 Certificates
$
-------------
Class A-4 Certificates
$
-------------
Class A-5 Certificates
$
-------------
Class A-6 Certificates
$
-------------
Class A-7 Certificates
$
-------------
Class A-8 Adjustable Rate Group
Certificates
----------------------
PROSPECTUS SUPPLEMENT
----------------------
[Underwriter]
[Underwriters]
___________, 199__
================================================================================
<PAGE> 85
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Accrual Period S-5
Actuarial Loans S-26
Adjustable Rate Certificates S-1
Adjustable Rate Group Available Funds Cap S-1
Appraised Values S-26
Available Funds S-49
Balloon Mortgage Loans S-62
Balloon Payments S-61
Beneficial Owners S-13
Book-Entry Certificates S-52
Business Day S-5
Capitalized Interest Account S-11
Carry Forward Amount S-6
CEDEL S-13
CEDEL Participants S-53
Cede S-13
Certificate Account S-46
Certificate Insurance Policy S-10
Certificate Insurer S-10
Certificate Principal Balance S-39
Certificates S-2
Citibank S-13
Class S-1
Class A Certificate Principal Balance S-39
Class A Certificates S-1
Class A Distribution Amount S-5
Class A-1 Certificates S-1
Class A-2 Certificates S-1
Class A-3 Certificates S-1
Class A-4 Certificates S-1
Class A-5 Certificates S-1
Class A-6 Certificates S-1
Class A-7 Certificates S-1
Class A-8 Certificates S-1
Class R Certificates S-2
Clean-Up Call Date S-1
Closing Date S-2
Code S-14
Compensating Interest S-63
Cooperative S-54
Coupon Rates S-3
Current Interest S-6
Cut-Off Date S-2
D&P S-69
Daily Collections S-61
Definitive Certificate S-52
Deleted Mortgage Loan S-25
Depositor S-1
DTC S-13
DTC Participants S-53
Due Dates S-63
ERISA S-69
Euroclear S-13
Euroclear Operator S-54
Euroclear Participants S-54
European Depositaries S-13
Excess Subordinated Amount S-50
Exemption S-69
File S-60
Final Certification S-61
Final Scheduled Payment Dates S-39
Financial Intermediary S-52
Fiscal Agent S-56
Fitch S-69
Fixed Rate Certificates S-1
Fixed Rate Group Available Funds Cap S-1
Funding Period S-11
GAAP S-57
Initial Certificate Principal Balance S-39
Initial Mortgage Loans S-2
Insurance Policy S-10
Insured Payment S-10
Liquidated Mortgage Loan S-8
Liquidation Proceeds S-61
Loan Balance S-59
Loan Purchase Price S-25
Loan-to-Value Ratios S-29
Monthly Remittance Date S-8
Moody's S-13
Morgan S-13
Mortgage Loan Group S-1
Mortgage Loans S-26
Mortgaged Properties S-2
Mortgages S-2
Net Coupon Rate S-25
Net Liquidation Proceeds S-61
Net Monthly Excess Cashflow S-48
Notes S-2
One-Month LIBOR S-1
Original Aggregate Loan Balance S-2
Original Pre-Funded Amount S-2
Originators S-45
Owners S-3
Participants S-52
Pass-Through Rate S-47
Payment Date S-5
Percentage Interest S-46
Plan S-69
Preference Amount S-8
Premium Amount S-47
Prepaid Installments S-62
Prepayment Interest Excess S-61
Prepayment Interest Shortfall S-63
Prepayments S-16
Preservation Expenses S-63
Pre-Funded Amount S-11
Pre-Funding Account S-2
Principal and Interest Account S-61
Principal Distribution Amount S-7
Qualified Replacement Mortgage S-25
Rating Agencies S-13
REMIC S-14
REMIC Opinion S-59
REO Property S-62
Realized Loss S-50
Record Date S-5
Reference Banks S-52
Register S-46
Registrar S-46
Relevant Depositary S-52
Remittance Period S-8
Restricted Group S-70
Rules S-53
SAP S-57
Seller S-1
Servicer S-1
Servicers S-1
Servicing Advance S-63
Servicing Fee Rate S-61
Six-Month LIBOR Loan S-4
Specified Subordinated Amount S-49
Standard & Poor's S-13
Subordinate Certificates S-2
Subordinated Amount S-49
Subordination Deficit S-8
Subordination Increase Amount S-49
Subordination Reduction Amount S-50
Subsequent Cut-Off Date S-17
Subsequent Mortgage Loans S-2
Subsequent Transfer Agreement S-17
Subsequent Transfer Date S-11
Substitution Amount S-60
sequential pay S-6
Telerate Page 3750 S-52
Terms and Conditions S-54
Total Available Funds S-49
Total Monthly Excess Cashflow S-47
Transfer Agreement S-24
Trust S-45
Trust Estate S-45
Underwriters S-71
Weighted average life S-39
</TABLE>
A-1
<PAGE> 86
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 87
APPENDIX B
AUDITED FINANCIAL STATEMENTS FOR THE CERTIFICATE INSURER
[Surety Name]
CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1995 and 1994
and for the years ended
December 31, 1995, 1994 and 1993
B-1
<PAGE> 88
APPENDIX C
UNAUDITED FINANCIAL STATEMENTS FOR THE CERTIFICATE INSURER
C-1
<PAGE> 89
Subject to Completion, Dated June 24, 1997
PROSPECTUS SUPPLEMENT
(To Prospectus Dated _______________, 1997)
AMRESCO RESIDENTIAL SECURITIES CORPORATION MORTGAGE LOAN TRUST 199__-__
$_________________ _____% NOTES
$___________________ _____% CLASS A CERTIFICATES
--------------------
[___________________________]
Servicers
AMRESCO RESIDENTIAL SECURITIES CORPORATION
Depositor
AMRESCO
AMRESCO Residential Credit Corporation
Seller
The AMRESCO Residential Securities Corporation Mortgage Loan 199_-__
Trust (the "Trust") was formed pursuant to a trust agreement dated as of
________ 1, 199__ (the "Trust Agreement"), among the Depositor, the Seller, the
Servicers and _______, as Owner Trustee (the "Owner Trustee"). The Trust is
issuing (i) its ____% Notes (the "Notes") pursuant to an indenture dated as of
________ 1, 199__, between the Trust and _________, as Indenture Trustee (the
"Indenture Trustee"), and (ii) its Class A Certificates (the "Class A
Certificates") and one or more classes of Subordinated Certificates (the
"Subordinated Certificates" and, together with the Class A Certificates, the
"Certificates") pursuant to the Trust Agreement. Only the Notes and the Class
A Certificates are offered hereby and are referred to collectively as the
"Offered Securities."
[SURETY NAME]
On or before the issuance of the Offered Securities, the Depositor
will obtain from _______________________ (the "Insurer") a financial guaranty
insurance policy relating to the Offered Securities (the "Insurance Policy") in
favor of the Trustee. The Insurance Policy will in accordance with its terms
provide for 100% coverage of the principal amount of, and scheduled interest
due on, the Offered Securities.
The assets of the Trust consist of fixed rate single family mortgage
loans (the "Initial Mortgage Loans") and all monies due after _____________,
199__ (the "Cut-Off Date"), security interests in the properties which secure
the Mortgage Loans (the "Mortgaged Properties"), an insurance policy, funds on
deposit in certain trust accounts, including a Pre-Funding Account providing
for the purchase of Subsequent Mortgage Loans, and certain other property. All
the Mortgage Loans are secured solely by first lien mortgages or deeds of
trust. The rights of the holders of the Class A Certificates will be
subordinated to the rights of the holders of the Notes.
FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENT IN THE
OFFERED SECURITIES, SEE "RISK FACTORS" BEGINNING ON PAGE S-__ AND "PREPAYMENT
AND YIELD CONSIDERATIONS" BEGINNING ON PAGE S-__ HEREIN AND "RISK FACTORS"
BEGINNING ON PAGE 7 IN THE PROSPECTUS.
____________________
(Cover continued on next page)
THE NOTES REPRESENT OBLIGATIONS OF, AND CLASS
A CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN, THE TRUST ONLY AND
DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS
OF THE DEPOSITOR, THE SELLER, THE SERVICERS, THE TRUSTEE OR ANY OF THEIR
AFFILIATES. NEITHER THE OFFERED SECURITIES NOR THE MORTGAGE LOANS
ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STAT
SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
____________________
The Offered Securities will be purchased by the Underwriters from the
Depositor and will be offered by the Underwriters from time to time to the
public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. Proceeds to the Depositor from the sale of the
Offered Securities will be approximately $___________, plus accrued interest,
to, but not including, the Closing Date, before deducting expenses payable by
the Depositor estimated to be approximately $_______.
The Offered Securities are offered subject to prior sale, when, as,
and if accepted by the Underwriters and subject to the Underwriters' right to
reject orders in whole or in part. It is expected that delivery of the Offered
Securities will be made in book-entry form through the facilities of The
Depository Trust Company ("DTC"), CEDEL S.A. and the Euroclear System on or
about __________, 199__. The Offered Securities will be offered in Europe and
the United States of America.
[UNDERWRITER]
[UNDERWRITER]
[UNDERWRITER]
The date of this Prospectus Supplement is ___________, 199__
<PAGE> 90
(Cover continued from previous page)
The Initial Mortgage Loans will be transferred to the Trust pursuant to a
Pooling and Servicing Agreement dated _________ 1, 199_, between the Trust, the
Depositor, the Servicers and the Seller. The Pooling and Servicing Agreement
provides that Mortgage Loans (the "Subsequent Mortgage Loans") may be purchased
by the Trust from the Depositor from time to time on or before __________,
1996, from funds on deposit in the Pre-Funding Account. On the Closing Date an
aggregate cash amount of approximately $__________ will be deposited with the
Trustee in the Pre-Funding Account to be used to acquire Subsequent Mortgage
Loans.
It is a condition to issuance of the Offered Securities that the Offered
Securities be rated "Aaa" by Moody's and "AAA" by Standard and Poor's.
Interest on and principal of the Notes are required to be paid, and
distributions on the Class A Certificates are required to be made, on the 25th
day of each month (or, if such day is not a business day, the next business
day) beginning __________, 199__ (each, a "Payment Date"). On any Payment Date
on or prior to the Clean-Up Call Date (as defined herein), the Pass-Through
Rate for the Class A Certificates is _____% per annum, and, thereafter, will be
_____%.
The yield to investors on the Offered Securities sold at prices other than
par may be sensitive to the rate and timing of principal payments (including
prepayments, repurchases, defaults and liquidations) on the Mortgage Loans
which may vary over time. See "Prepayment and Yield Considerations" herein and
"Risk Factors" and "Yield, Prepayment and Maturity Considerations" in the
Prospectus.
For a description of certain tax consequences of owning the Notes and the
Class A Certificates, see "Certain Federal Income Tax Consequences" herein and
in the Prospectus.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE CLASS A
CERTIFICATES, INCLUDING PURCHASES OF THE CLASS A CERTIFICATES TO STABILIZE ITS
MARKET PRICE AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING" IN THIS PROSPECTUS SUPPLEMENT.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED SECURITIES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS TO WHICH IT RELATES. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT THE
OFFERED SECURITIES. ADDITIONAL INFORMATION IS CONTAINED IN THE PROSPECTUS
DATED __________, 1997, 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 Offered Securities. This Prospectus Supplement and the related
Prospectus, which form a part of the Registration Statement, omit certain
information contained in such Registration Statement pursuant to the Rules and
Regulations of the Commission. The Registration Statement can be inspected and
copied at the Public Reference Room of the Commission at 450 Fifth Street,
N.W., Washington, D.C., and the Commission's regional offices at Seven World
Trade Center, 13th Floor, New York, New York 10048, and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials can be obtained at prescribed rates from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 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 Offered Securities and the Trust
will be sent by the Trustee to the Owners of the Offered Securities. So long
as any of the Offered Securities is in book-entry form, such reports will be
sent to Cede & Co., as the nominee of DTC and as Owner of such Offered
Securities. DTC will supply such reports to Beneficial Owners of any such
Offered Securities in accordance with its procedures. The Depositor will file
or cause to be filed with the Commission such periodic reports with respect to
the trust as are required under the Securities Exchange Act of 1934 and the
rules and regulations of the Commission thereunder. It is the Depositor's
intent to suspend the filing of such reports as soon as such reports are no
longer statutorily required.
<PAGE> 91
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<S> <C>
SUMMARY OF TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-13
THE PORTFOLIO OF MORTGAGE LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-16
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-16
Underwriting Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-16
Prepayment Penalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-20
Representations Relating to the Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-20
The Servicers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-21
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-21
THE DEPOSITOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-21
THE SELLER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-21
THE MORTGAGE LOAN POOL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-21
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-21
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-22
Conveyance of Subsequent Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-26
PREPAYMENT AND YIELD CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-27
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-27
Mandatory Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-27
Projected Prepayment and Yield for Notes and Class A Certificates . . . . . . . . . . . . . . . . . . . . . . S-28
Payment Lag Feature of Class A Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-32
THE ORIGINATORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-32
FORMATION OF THE TRUST AND TRUST PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-32
Capitalization of the Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-33
The Owner Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-33
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-33
DESCRIPTION OF THE OFFERED SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-34
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-34
Payment Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-34
Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-34
Optional Redemption of Notes; Optional Prepayment of Certificates . . . . . . . . . . . . . . . . . . . . . . S-35
Overcollateralization Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-36
Pre-funding Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-37
Capitalized Interest Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-38
BOOK ENTRY REGISTRATION OF THE OFFERED SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-38
Assignment of Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-41
THE INSURANCE POLICY AND THE INSURER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-41
THE INDENTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-41
Modification of Indenture Without Noteholder Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-41
Modification of Indenture With Noteholder Consent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-42
Events of Default; Rights Upon Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-42
Certain Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-44
Annual Compliance Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-44
Indenture Trustee's Annual Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-44
Satisfaction and Discharge of Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-44
THE TRUST AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-45
Liability of the Depositor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-45
Termination of Trust Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-45
Dissolution upon Bankruptcy of Depositor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-46
Amendments Without Consent of the Owners of the Certificates or Notes . . . . . . . . . . . . . . . . . . . . S-46
Amendments With Consent of the Insurer and the Owners of the Certificates . . . . . . . . . . . . . . . . . . S-46
No Petition Covenant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-47
THE POOLING AND SERVICING AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-47
Covenant of the Seller to Take Certain Actions With Respect to the Mortgage Loans in Certain Situations . . . S-47
Assignment of Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-47
Servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-49
Removal and Resignation of a Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-53
Reporting Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-53
Removal of Trustee for Cause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-55
Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-55
Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-55
Termination of the Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-55
Optional Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-56
CERTAIN FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-56
Taxation of the Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-56
Taxation of Class A Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-56
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-57
RATINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-59
LEGAL INVESTMENT CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-59
UNDERWRITING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-59
REPORT OF EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-60
CERTAIN LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-60
</TABLE>
<PAGE> 92
<TABLE>
<CAPTION>
PROSPECTUS
<S> <C>
SUMMARY OF PROSPECTUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
DESCRIPTION OF THE CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Classes of Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Distributions of Principal and Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Book Entry Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
List of Owners of Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
THE TRUSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Mortgage-Backed Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Other Mortgage Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
CREDIT ENHANCEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SERVICING OF MORTGAGE LOANS AND CONTRACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Payments on Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Collection and Other Servicing Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Primary Mortgage Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Standard Hazard Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Title Insurance Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Claims Under Primary Mortgage Insurance Policies and Standard Hazard Insurance Policies; Other Realization Upon
Defaulted Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Servicing Compensation and Payment of Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Master Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Assignment of Mortgage Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Evidence as to Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
The Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Administration of the Certificate Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Forward Commitments; Pre-Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Servicer Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Rights Upon Servicer Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
THE DEPOSITOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Soldiers' and Sailors' Civil Relief Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
The Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
The Title I Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
LEGAL INVESTMENT MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
CERTAIN FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Federal Income Tax Consequences For REMIC Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Taxation of Regular Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Taxation of Residual Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Treatment of Certain Items of REMIC Income and Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Tax-Related Restrictions on Transfer of Residual Certificates . . . . . . . . . . . . . . . . . . . . . . . . . 58
Sale or Exchange of a Residual Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Taxes That May Be Imposed on the REMIC Pool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Liquidation of the REMIC Pool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Administrative Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Limitations on Deduction of Certain Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Taxation of Certain Foreign Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Backup Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Reporting Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Federal Income Tax Consequences for Certificates as to Which No REMIC Election Is Made . . . . . . . . . . . . 63
Standard Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Premium and Discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Stripped Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Reporting Requirements and Backup Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Taxation of Certain Foreign Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Taxation of Securities Classified as Partnership Interests . . . . . . . . . . . . . . . . . . . . . . . . . . 69
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
</TABLE>
<PAGE> 93
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Reference is made to the Index to Location of
Principal Defined Terms for the location of certain capitalized terms.
ISSUER: AMRESCO Residential Securities Corporation
Mortgage Loan Trust 199__-__ (the "Trust")
formed pursuant to a Trust Agreement dated as
of _______, 199__ (the "Trust Agreement"),
between the Depositor and _________, as
trustee of the Trust (the "Owner Trustee").
OFFERED SECURITIES: ______% Notes due __________ 1, 20__ (the
"Notes") to be issued pursuant to an
indenture dated as of ________, 199__,
between the Trust and _______, as indenture
trustee (the "Indenture Trustee").
$__________ ____% Mortgage Loan Pass-Through
Certificates, Series 199__-__.(the "Class A
Certificate")(1). The Class A Certificates
and one or more classes of Subordinated
Certificates (the "Subordinated
Certificates") will be issued pursuant to the
Trust Agreement. Only the Class A
Certificates are offered hereby.
(1) The Pass-Through Rate with respect to
the Class A Certificates shall be _____% as
of any Payment Date after the Payment Date on
which the outstanding Class A Certificate
Principal Balance has declined to less than
10% of the original Class A Certificate
Principal Balance ("Clean-Up Call Date").
The Notes and the Class A Certificates are
collectively referred to as the "Offered
Securities".
DEPOSITOR: AMRESCO Residential Securities Corporation
(the "Depositor"), a Delaware corporation.
SELLER: AMRESCO Residential Capital Markets, Inc.
(the "Seller"), a Delaware corporation.
SERVICERS: [________________________________________]
OWNER TRUSTEE:
INDENTURE TRUSTEE:
CUT-OFF DATE: As of the close of business on _____________,
199__.
CLOSING DATE: On or about __________, 199__.
DENOMINATIONS: The Notes and the Class A Certificates are
issuable in book entry form in minimum
original principal amounts of $1,000 and
integral multiples thereof.
THE MORTGAGE LOANS: The mortgage loans to be conveyed to the
Trust by the Depositor on the Closing Date
(the "Initial Mortgage Loans") consist of
_____ fixed and adjustable rate conventional
mortgage loans evidenced by promissory notes
(the "Notes") secured by first lien deeds of
trust, security deeds or mortgages (the
"Mortgages"), which are located in _____
states and the District of Columbia. The
properties securing
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the Initial Mortgage Loans (the "Mortgaged
Properties") consist primarily of
single-family residences (which may be
attached, detached, part of a two-to-four
family dwelling, a condominium unit or a unit
in a planned unit development). The Mortgaged
Properties may be owner-occupied and non-owner
occupied investment properties. No
Loan-to-Value Ratio (based upon appraisals
made at the time of origination) exceeded 90%
as of the Cut-Off Date. The Initial Mortgage
Loans are not insured by either primary or
pool mortgage insurance policies; however,
certain distributions due to the Owners of the
Offered Securities (the "Owners") are insured
by the Insurer pursuant to the Insurance
Policy. See "Credit Enhancement" herein. The
Mortgage Loans are not guaranteed by the
Seller or any affiliate thereof.
Unless otherwise noted, all statistical
percentages in this Prospectus Supplement are
measured by the aggregate principal balance
of the Initial Mortgage Loans (the "Original
Aggregate Loan Balance") as of the Cut-Off
Date. The statistical characteristics of the
Mortgage Loans will vary upon the transfer of
Subsequent Mortgage Loans.
As of the Cut-Off Date, the average Loan
Balance of the Mortgage Loans was
$___________; the interest rates (the "Coupon
Rates") of the Mortgage Loans ranged from
_____% to _____%; the weighted average
Loan-to-Value Ratio of such Mortgage Loans
was _____%; the weighted average Coupon Rate
of such Mortgage Loans was _____%; the
weighted average remaining term to maturity
of such Mortgage Loans was _____ months. The
remaining terms to maturity as of the Cut-Off
Date of the Mortgage Loans ranged from _____
months to _____ months. The maximum Loan
Balance of the Mortgage Loans as of the
Cut-Off Date was $___________. Mortgage
Loans requiring "balloon" payments
represented not more than _____% of the
Original Aggregate Loan Balance of the
Mortgage Loans. No Mortgage Loan will mature
later than _____________, 20__. As a
percentage of the Original Aggregate Loan
Balance of the Mortgage Loans, _____% were
secured by mortgages on single-family
dwellings, _____% by mortgages on two-to-four
unit dwellings, _____% by mortgages on
condominiums, _____% by mortgages on planned
unit developments and _____% by mobile homes.
Each of the Mortgage Loans bear interest at a
fixed rate for the life of such Mortgage
Loan. The Mortgage Loans were originated as
to ____% by Long Beach and as to ____% by
______. See "The Mortgage Loan Pool --
Mortgage Loans" herein.
On the Closing Date, an aggregate cash amount
of approximately $__________ (the "Original
Pre-Funded Amount") will be deposited in a
trust account in the name of the Indenture
Trustee (the "Pre-Funding Account"). It is
intended that additional Mortgage Loans
satisfying the criteria specified in the
Pooling and Servicing Agreement (the
"Subsequent Mortgage Loans") will be
purchased by the Trust from the Depositor
from time to time on or before ____ __,
199__, from funds on deposit in the
Pre-Funding Account. As a result, the
aggregate principal balance of the Mortgage
Loans will increase by an amount equal to the
aggregate principal balance of the Subsequent
Mortgage Loans so purchased and the amount in
the Pre-Funding Account will decrease by the
same amount.
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As described below, on the Closing Date, cash
will be deposited in the Capitalized Interest
Account (as defined herein) held by the
Indenture Trustee. Funds in the Capitalized
Interest Account will be applied by the
Indenture Trustee to cover shortfalls in
interest during the Funding Period (as
described under "Pre-Funding Account")
attributable to the provisions allowing for
purchase of Subsequent Mortgage Loans.
THE NOTES
A. MATURITY DATE The Maturity Date of the Notes is __________,
202__, although it is anticipated that the
actual final payment of principal of the
Notes may occur earlier than the Maturity
Date. See "Prepayment and Yield
Considerations" herein.
B. PAYMENT OF PRINCIPAL
AND INTEREST On the 25th day of each month, or if such day
is not a Business Day, then the next
succeeding Business Day, commencing
_________, 199__ (each such day being a
"Payment Date"), the Indenture Trustee is
required to pay, to the extent of available
funds, to the Owners of the Notes of record
as of the last day of the month immediately
preceding the month in which such Payment
Date occurs (each such date, a "Record Date")
the "Note Amount", which shall be the sum of
(x) Current Interest and (y) the Note
Principal Payment (each as defined below).
For each Payment Date, interest due with
respect to the Notes will be interest which
has accrued thereon during the period from
the preceding Payment Date (or from the
Closing Date in the case of the first Payment
Date) to and including the day prior to the
current Payment Date (the "Accrual Period"
for the Notes). All calculations of interest
will be made on the basis of a 360-day year
assumed to consist of twelve 30- day months.
A "Business Day" is any day other than a
Saturday, Sunday or a day on which banking
institutions in California, [______]or New
York City or in the city in which the
corporate trust office of the Trustee is
located are authorized or obligated by law or
executive order to close.
C. OPTIONAL REDEMPTION The Notes are subject to redemption (i) in
whole, but not in part, on any Payment Date
on or after the Clean-up Call Date in each
case at a redemption price equal to the then
outstanding Note Principal Balance, plus
accrued and unpaid interest thereon.
THE CERTIFICATES
A. FINAL SCHEDULED
PAYMENT DATE: The Final Scheduled Payment Date for Class A
Certificates is ________, 20__, although it
is anticipated that the actual final Payment
Date for each Class may occur earlier than
the Final Scheduled Payment Date. See
"Prepayment and Yield Considerations" herein.
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B. DISTRIBUTIONS OF
PRINCIPAL AND
INTEREST: On each Payment Date, the Trustee will be
required to distribute, to the extent of
available funds, to the Owners of the
Certificates of record as of the last day of
the calendar month immediately preceding the
calendar month in which such Payment Date
occurs (the "Record Date") the "Class A
Distribution Amount" which shall be the sum
of (x) Current Interest and (y) the Class A
Principal Distribution Amount (each as
defined below).
For each Payment Date, interest due with
respect to the Class A Certificates will be
interest which has accrued thereon during the
calendar month immediately preceding the
month in which such Payment Date occurs (the
"Accrual Period" for the Class A
Certificates). All calculations of interest
on the Class A Certificates will be made on
the basis of a 360-day year assumed to
consist of twelve 30-day months.
C. OPTIONAL PREPAYMENT: The Class A Certificates are subject to
optional repurchase in whole, but not in
part, on any Payment Date on or after the
Clean-up Call Date in each case at a purchase
price equal to the then outstanding
Certificate Principal Balance, plus accrued
and unpaid interest.
CERTAIN DEFINITIONS: "Current Interest" with respect to the Notes
and the Class A Certificates means, with
respect to any Payment Date, (i) the
aggregate amount of interest accrued on the
Note Principal Balance or the Class A
Certificate Principal Balance during the
Accrual Period immediately prior to such
Payment Date plus (ii) the Preference Amount
(as defined below) as it relates to interest
previously paid on the Notes or the Class A
Certificates prior to such Payment Date plus
(iii) the Carry Forward Amount, if any, with
respect to the Notes or the Class A
Certificates.
The "Carry Forward Amount" with respect to
the Notes or the Class A Certificates for any
Payment Date is the sum of (x) the amount, if
any, by which (i) Note Amount or the Class A
Distribution Amount (as defined herein) as of
the immediately preceding Payment Date
exceeded (ii) the amount of the actual
distribution made to the Owners of the Notes
or Class A Certificates on such immediately
preceding Payment Date plus (y) 30 days'
interest on the interest portion of such
amount, calculated at the interest rate or
Pass-Through Rate in effect with respect to
the Notes or Class A Certificates as of such
Payment Date.
The "Principal Distribution Amount" for each
Payment Date shall be the lesser of:
(a) the Total Available Funds (as
defined below) plus any related
Insured Payments actually made
by the Insurer minus the related
Current Interest; and
(b) the sum of:
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<PAGE> 97
(A) the Preference Amount with
respect to principal owed to the
Owners of the Notes and the
Class A Certificates that
remains unpaid as of such
Payment Date;
(B) all scheduled installments of
principal actually collected or
advanced by the Servicers during
the related Remittance Period
and all unscheduled collections
of principal (other than Prepaid
Installments) actually collected
by the Servicers during the
related Prepayment Period;
(C) the principal portion of the
Loan Purchase Price with respect
to each Mortgage Loan that was
repurchased on or prior to the
related Monthly Remittance Date,
to the extent such amount is
actually received by the Trustee
on or prior to the related
Monthly Remittance Date;
(D) any Substitution Amounts (i.e.,
the excess, if any, of the Loan
Balance of a Mortgage Loan being
replaced over the outstanding
principal balance of a
replacement Mortgage Loan)
delivered on the related Monthly
Remittance Date in connection
with a substitution of a
Mortgage Loan, to the extent
such Substitution Amounts are
actually received by the Trustee
on or prior to the related
Monthly Remittance Date;
(E) all Net Liquidation Proceeds
actually collected by the
Servicers with respect to the
Mortgage Loans during the
related Prepayment Period (to
the extent such Net Liquidation
Proceeds are related to
principal) to the extent such
Net Liquidation Proceeds are
actually received by the Trustee
on or prior to the related
Monthly Remittance Date;
(F) any moneys released from the
Pre-Funding Account on the
Payment Date which immediately
follows the end of the Funding
Period; and
(G) the portion of the proceeds
received by the Trustee upon
termination of the Trust (to the
extent such proceeds relate to
principal).
"Total Available Funds" as to any Payment
Date is (x) the amount on deposit in the
Certificate Account plus (y) any deposit to
the Certificate Account expected to be made
on that Payment Date from the Pre-Funding
Account and the Capitalized Interest Account.
The "Note Principal Payment" for each Payment
Date is equal to (i) ____% of the Principal
Distribution Amount for such Payment Date
plus (ii) the amount of any Subordination
Increase Amount for such Payment Date less
(iii) the amount of any Subordination
Reduction Amount for such Payment Date.
The "Class A Principal Distribution Amount"
for each Payment Date is equal to the
Principal Distribution Amount for such
Payment Date less the sum of (i) the
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<PAGE> 98
Note Principal Payment for such Payment Date
and (ii) the amount of any Subordination
Reduction Amount for such Payment Date.
The "Remittance Period" with respect to any
Monthly Remittance Date is the period
commencing on the second day of the month
preceding the month in which the Monthly
Remittance Date occurs and ending on the
first day of the month in which such Monthly
Remittance Date occurs. A "Monthly
Remittance Date" is any date on which funds
on deposit in the Principal and Interest
Account are required to be remitted by the
Servicers to the Certificate Account, which
is the 20th day of each month, or if such day
is not a Business Day, the next succeeding
Business Day, commencing in __________,
199__. The Prepayment Period with respect to
any Monthly Remittance Date is the period
commencing on the 16th day of the month
preceding the month in which the Monthly
Remittance Date occurs and ending on the 15th
day of the month in which such Monthly
Remittance Date occurs (except that the first
Prepayment Period shall commence on
__________ 2, 199__ and end on __________ 15,
199__).
"Preference Amount" means any amount
previously distributed to an Owner on a Note
or a Class A Certificate that is recoverable
and sought to be recovered as a voidable
preference by a trustee in bankruptcy under
the United States Bankruptcy Code as amended
from time to time, in accordance with a final
nonappealable order of a court having
competent jurisdiction.
A "Subordination Increase Amount" with
respect to a Payment Date is the amount
required to reduce the Subordination
Deficiency Amount (i.e., generally, the
excess, if any, of the Specified Subordinated
Amount over the Subordinated Amount) to zero.
A "Subordination Reduction Amount" with
respect to a Payment Date is the amount
required to reduce the Excess Subordinated
Amount (i.e., generally, the excess, if any,
of the Subordinated Amount over the Specified
Subordinated Amount) to zero. Subordination
Deficiency Amount, Specified Subordinated
Amount, Subordinated Amount and Excess
Subordinated Amount are defined in
"Description of the Offered
Securities--Overcollateralization
Provisions--Overcollateralization Resulting
from Cashflow Structure" herein.
SERVICING: [____________________] will act as Servicers
under the Pooling and Servicing Agreement
with respect to Mortgage Loans and will be
responsible for the servicing of the Mortgage
Loans and will receive from interest
collected on the Mortgage Loans a monthly
servicing fee on each Mortgage Loan equal to
the Loan Balance as of the beginning of the
related Remittance Period multiplied by the
applicable Servicing Fee Rate (such product,
the "Servicing Fee"). See "The Pooling and
Servicing Agreement -- Servicing" herein.
Each Servicer is obligated to make cash
advances ("Advances") with respect to
delinquent payments of principal of and
interest on any Mortgage Loan serviced by it
to the extent described in "Servicing of
Mortgage Loans--Advances" herein. The
Trustee will be obligated as a successor
servicer to make any such Advance if a
Servicer fails in its obligation to do so, to
the extent provided in the Pooling and
Servicing Agreement.
CREDIT ENHANCEMENT: The Credit Enhancement provided for the
benefit of the Owners of the Notes and the
Class A Certificates consists of (x) the
overcollateralization mechanics which
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utilize the internal cash flows of the Trust
and (y) the Insurance Policy (as defined
below).
Overcollateralization. The credit
enhancement provisions of the Trust result in
a limited acceleration of the Notes relative
to the amortization of the related Mortgage
Loans until the required level of
overcollateralization is reached. The
accelerated amortization is achieved by the
application, in certain circumstances, of
excess interest and excess principal to the
payment of the Notes. This acceleration
feature creates overcollateralization (i.e.,
the excess of the aggregate outstanding Loan
Balance of the Mortgage Loans over the sum of
the Note Principal Balance and Class A
Certificate Principal Balance). Once the
required level of overcollateralization is
reached, and subject to the provisions
described in the next paragraph, the
acceleration feature will cease, until
necessary to maintain the required level of
overcollateralization.
The Indenture provides that, subject to
certain floors, caps and triggers, the
required level of overcollateralization may
increase or decrease over time. An increase
would result in a temporary period of
accelerated amortization of the Notes to
increase the actual level of
overcollateralization to its required level;
a decrease would result in a temporary period
of decelerated amortization to reduce the
actual level of overcollateralization to its
required level and may result in no payments
of principal being allocated to the Notes or
the Class A Certificates during certain other
periods. See "Description of the Offered
Securities--Overcollateralization Provisions"
herein. Such credit enhancement provisions
also have an effect on the weighted average
lives of the Notes and the Class A
Certificates. See "Prepayment and Yield
Considerations" herein.
Insurance Policy. _______________________
(the "Insurer") will issue a Financial
Guaranty Insurance Policy (the "Insurance
Policy") pursuant to which it will
irrevocably and unconditionally guarantee
payment on each Payment Date to the Indenture
Trustee of an amount equal to the Insured
Distribution Amount for such Payment Date.
The amount of the actual payment, if any,
made by the Insurer under the Insurance
Policy on each Payment Date (the "Insured
Payment") is the sum of (i) any shortfall in
the amount required to pay the Subordination
Deficit for such Payment Date from a source
other than the Insurance Policy, (ii) any
shortfall in the amount required to pay
Current Interest for such Payment Date from a
source other than the Insurance Policy and
(iii) any shortfall in the amount required to
pay the Preference Amount for such Payment
Date from a source other than the Insurance
Policy. The effect of the Insurance Policy
is to guarantee the timely payment of
interest on, and the ultimate payment of the
principal amount of, the Notes and Class A
Certificates; however, so long as the Notes
are outstanding, Insured Payments with
respect to a Subordination Deficit will be
applied to pay the principal of the Notes.
No payments in respect of principal will be
made under the Insurance Policy unless a
Subordination Deficit occurs.
A "Subordination Deficit" with respect to a
Payment Date is the amount, if any, by which
(x) the sum of (i) the Note Principal Balance
and (ii) the Class A Certificate Principal
Balance, after taking into account all
distributions to be made on such Payment
Date, exceeds (y) the sum of (i) the
aggregate Loan Balances of the Mortgage Loans
as of the close of business on the last day
of the related Prepayment Period and (ii) the
amount, if any, on deposit in the Pre-Funding
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<PAGE> 100
Account as of the close of business on the
last day of the related Remittance Period.
Except upon the occurrence of a Insurer
Default, the Insurer shall have the right to
exercise certain rights of the Owners of the
Notes and the Class A Certificates, as
specified in the Indenture and the Trust
Agreement, without any consent of such
Owners; and such Owners may exercise such
rights only with the prior written consent of
the Insurer, except as provided in the
Indenture and Trust Agreement. In addition,
to the extent of unreimbursed payments under
the Insurance Policy, the Insurer will be
subrogated to the rights of the Owners of the
Notes and Class A Certificates on which such
Insured Payments were made. In connection
with each Insured Payment on a Note or a
Class A Certificate, the Indenture Trustee,
as attorney-in-fact for the Owner thereof,
will be required to assign to the Insurer the
rights of such Owner with respect to the Note
or the Class A Certificate to the extent of
such Insured Payment.
The Insurance Policy does not guarantee any
specified rate of prepayments, nor does the
Insurance Policy provide funds to redeem the
Notes or the Certificates on any specified
date. The Insurer's obligation under the
Insurance Policy will be discharged to the
extent that funds are received by the
Indenture Trustee for distribution to the
Owners of the Notes or the Class A
Certificates. See "The Insurance Policy and
the Insurer" herein.
PRE-FUNDING ACCOUNT: On the Closing Date, the Original Pre-Funded
Amount will be deposited in the Pre- Funding
Account which account will be in the name of,
and maintained by, the Indenture Trustee on
behalf of the Trust and used to acquire
Subsequent Mortgage Loans. During the period
(the "Funding Period") from and including the
Closing Date until the earlier of (i) the
date on which the amount on deposit in the
Pre-Funding Account is less than $100,000 and
(ii) _________ __, 199__, the Pre-Funded
Amount will be maintained in the Pre-Funding
Account. The Original Pre-Funded Amount will
be reduced during the Funding Period by the
amount thereof used to purchase Subsequent
Mortgage Loans in accordance with the Pooling
and Servicing Agreement. The amount on
deposit in the Pre-Funding Account at any
time is the "Pre-Funded Amount". Subsequent
Mortgage Loans purchased on any date (each, a
"Subsequent Transfer Date") must satisfy the
criteria set forth in the Pooling and
Servicing Agreement. Any Pre-Funded Amount
remaining at the end of the Funding Period
will be applied to reduce the outstanding
principal amount of the Notes and the Class A
Certificates on the Payment Date that
immediately follows the end of the Funding
Period, thus resulting in a partial principal
prepayment of the Notes and the Class A
Certificates. All interest and other
investment earnings on amounts on deposit in
the Pre-Funding Account will be deposited in
the Capitalized Interest Account.
Although no assurance can be given, it is
intended that the principal amount of
Subsequent Mortgage Loans sold to the Trust
will require application of substantially all
the Original Pre-Funded Amount, and it is not
intended that there will be any material
amount of principal prepaid to the Owners of
the Notes and the Class A Certificates from
the Pre-Funding Account. If the Depositor is
unable to sell Subsequent Mortgage Loans to
the Trust in an amount equal to the Original
Pre-Funded Amount, principal prepayments to
Owners of the Notes and the Class A
Certificates will occur no later than the
Payment Date in __________,
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<PAGE> 101
199__, in an amount equal to the Pre-Funded
Amount remaining at the end of the Funding
Period.
CAPITALIZED INTEREST ACCOUNT: On the Closing Date, cash will be deposited
in a trust account (the "Capitalized Interest
Account") in the name of, and maintained by,
the Indenture Trustee on behalf of the Trust.
The amount on deposit in the Capitalized
Interest Account, including reinvestment
income thereon, will be used by the Indenture
Trustee to fund the excess, if any, of (i)
the amount of interest accruing during the
related Accrual Period at the Class A
Pass-Through Rate on the amount by which the
sum of (i) the Note Principal Balance and
(ii) the Class A Certificate Principal
Balance exceeds the aggregate Loan Balance of
the Mortgage Loans plus the Trustee and
Insurer fees accruing during the related
Accrual Period on such excess balance over
(ii) the amount of any reinvestment income on
monies on deposit in the Pre-Funding Account;
such amounts on deposit will be so applied by
the Trustee on each Payment Date in the
Funding Period to fund such excess, if any.
Any amounts remaining in the Capitalized
Interest Account not needed for such purpose
will be paid to the Depositor at the end of
the Funding Period.
OPTIONAL TERMINATION: The Owners of Subordinated Certificates will
have the right to purchase all the Mortgage
Loans on any Monthly Remittance Date after
the Clean-Up Call Date. If such Owners do
not exercise such right, the Servicers will
also have the right, collectively, to
purchase all the Mortgage Loans they are
servicing on any Remittance Date when the
outstanding Class A Certificate Principal
Balance has declined to 5% or less of the
original Class A Certificate Principal
Balance. Any such purchase by the Servicers
will be required to be made on the same
Remittance Date, so that the Trust would be
liquidated on the next succeeding Payment
Date. See "The Pooling and Servicing
Agreement--Optional Termination" herein.
BOOK-ENTRY REGISTRATION: The Notes and the Class A Certificates will
initially be issued in book-entry form.
Persons acquiring beneficial ownership
interests in Notes or Class A Certificates
("Beneficial Owners") may elect to hold their
interests through The Depository Trust Company
("DTC"), in the United States, or Centrale de
Livraison de Valeurs Mobilieres, S.A.
("CEDEL") or the Euroclear System
("Euroclear"), in Europe. Transfers within
DTC, CEDEL or Euroclear, as the case may be,
will be in accordance with the usual rules and
operating procedures of the relevant system.
So long as the Notes or Class A Certificates
are Book-Entry Certificates (as defined
herein), they will be evidenced by one or more
Notes or Certificates registered in the name
of Cede & Co. ("Cede"), as the nominee of DTC
or one of the European Depositories. Cross
market transfers between persons holding
directly or indirectly through DTC, on the one
hand, and counterparties holding directly or
indirectly through CEDEL or Euroclear, on the
other, will be effected by DTC through
Citibank N.A. ("Citibank") or Morgan Guaranty
Trust Company of New York ("Morgan", and
together with Citibank, the "European
Depositories"), the relevant depositaries of
CEDEL and Euroclear, respectively, and each a
participating member of DTC. The Notes and the
Class A Certificates will initially be
registered in the name of Cede. The interests
of the Owners thereof will be represented by
book-entries on the records of DTC and
participating members thereof. No Beneficial
Owner will be entitled to receive a definitive
note or certificate representing such person's
interest, except in the event that Definitive
Notes or Certificates are issued under the
limited circumstances described herein. All
references in this Prospectus Supplement to
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the rights of Beneficial Owners reflect only
as such rights may be exercised through DTC
and its participating organizations for so
long as the Notes or Class A Certificates are
held by DTC. See "Book-Entry Registration"
herein, and Annex I hereto, and "Description
of the Securities--Book-Entry Registration" in
the Prospectus.
RATINGS: It is a condition of issuance of the Offered
Securities that the Offered Securities
receive ratings of "AAA" by Standard &
Poor's, a Division of The McGraw Hill
Companies, Inc. ("Standard & Poor's"), and
"Aaa" by Moody's Investors Service
("Moody's"). Standard & Poor's and Moody's
are referred to herein collectively as the
"Rating Agencies." A security rating is not
a recommendation to buy, sell or hold
securities, and may be subject to revision or
withdrawal at any time by the assigning
entity. See "Prepayment and Yield
Considerations" and "Ratings" herein.
RISK FACTORS: Credit Considerations. For information with
regard to the Mortgage Loans and their
related risks, see "Risk Factors--Risk of
Higher Delinquencies Associated with
Guidelines" and "The Mortgage Loan Pool"
herein.
Prepayment Considerations. For information
regarding the consequences of prepayments of
the Mortgage Loans and of the failure of the
Depositor to convey to the Trust during the
Funding Period Subsequent Mortgage Loans in
an amount equal to the Original Pre-Funded
Amount, see "Prepayment and Yield
Considerations" and "Risk
Factors--Sensitivity to Prepayments" and
"--The Subsequent Mortgage Loans and the Pre-
Funding Account" herein.
Other Considerations. For a discussion of
other risk factors that should be considered
by prospective investors, see "Risk Factors"
herein and in the Prospectus.
FEDERAL TAX ASPECTS: In the opinion of _________, (i) the Trust
will not be treated as an association taxable
as a corporation or as a "publicly traded
partnership" taxable as a corporation and
(ii) the Notes will be treated as debt. The
Depositors, the Seller and the Servicer have
agreed, and by the purchase of Notes and the
Class A Certificates, the Owners of the Notes
and the Class A Certificates will agree, to
treat the Trust as a partnership for purposes
of Federal and state income taxes, with the
partners of the partnership being the Owners
of Class A Certificate and the Subordinated
Certificates. See "Certain Federal Income
Tax Consequences" herein and in the
Prospectus.
The Notes may be considered to have been
issued with original issue discount or at a
premium. Any such original issue discount
will be includable in the income of the Owner
as it accrues under a method taking into
account the compounding of interest and using
the Prepayment Assumption. See "Prepayment
and Yield Considerations" and "Certain
Federal Income Tax Consequences" herein.
Premium may be deductible by the Owner either
as it accrues or when principal is received.
No representation is made as to whether the
Mortgage Loans will prepay in accordance with
the Prepayment Assumption, or any other rate.
The Notes will not be treated as qualifying
real property loans within the meaning of
Code section 593(d)(1) or assets described in
Code section 7701(a)(19)(C), and probably
will not be treated as "real estate assets"
within the meaning of Code section
856(c)(6)(B). Income derived from the Notes
probably will not be treated
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as "interest on obligations secured by
mortgages on real property or on interests in
real property" within the meaning of Code
section 856(c)(3)(B).
For any Owner of Class A Certificates that is
a "real estate investment trust" within the
meaning of Code section 856, the Class A
Certificates will be treated as "real estate
assets" within the meaning of Code section
856(c)(6)(B). No comparable authority
exists, however, that would allow a thrift
institution that is an Owner of Class A
Certificates to treat the Class A
Certificates as qualifying real property
loans within the meaning of Code section
593(d)(1) or assets described in Code section
7701(a)(19)(C). If the Class A Certificates
were treated as indebtedness, the Class A
Certificates would not be treated as
qualifying real property loans within the
meaning of Code section 593(d)(1) and assets
described in Code section 7701(a)(19)(C) and
probably would not be treated as "real estate
assets" within the meaning of Code section
856(c)(6)(B). In addition, in that case,
income derived from the Class A Certificates
probably would not be treated as "interest on
obligations secured by mortgages on real
property or on interests in real property"
within the meaning of Code section
856(c)(3)(B). See "Certain Federal Income
Tax Consequences" herein and in the
Prospectus.
ERISA CONSIDERATIONS: A fiduciary of any employee benefit plan or
other retirement arrangement subject to the
Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or Section 4975
of the Code (a "Plan") should review
carefully with its legal advisors whether the
purchase or holding of the Offered Securities
could give rise to a transaction that is
prohibited or is not otherwise permitted
either under ERISA or Section 4975 of the
Code or whether there exists any statutory or
administrative exemption applicable to an
investment therein.
The U.S. Department of Labor has issued to
the Underwriters individual prohibited
transaction exemptions which generally exempt
from the application of certain of the
prohibited transaction provisions of Section
406 of ERISA and the excise taxes imposed on
such prohibited transactions by Sections
4975(a) and (b) of the Code transactions
relating to the purchase, sale and holding of
pass-through certificates underwritten by the
Underwriters and the servicing and operation
of related asset pools, provided that certain
conditions are satisfied.
A fiduciary of a Plan should review the
sections entitled "ERISA Considerations" in
the Prospectus and this Supplement and
consider the issues discussed therein, and
should consult with its legal advisors prior
to making an investment in the Class A
Certificates.
LEGAL INVESTMENT
CONSIDERATIONS: The Offered Securities will constitute
"mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act
of 1984 ("SMMEA") for so long as they are
rated in one of the two highest rating
categories by one or more nationally
recognized statistical rating organizations.
As such, the Offered Securities will be legal
investments for certain entities to the
extent provided in SMMEA, subject to state
laws overriding SMMEA. In addition,
institutions 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
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states have enacted legislation overriding the
legal investment provisions of SMMEA. In
addition, institutions whose activities are
subject to review by federal or state
regulatory authorities may be or may become
subject to restrictions, which may be
retroactively imposed by such regulatory
authorities, on the investment by such
institutions in certain forms of mortgage
related securities.
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RISK FACTORS
Prospective investors in the Offered Securities should consider the
following risk factors (as well as the risk factors set forth under "Risk
Factors" in the Prospectus).
SUBORDINATION OF CLASS A CERTIFICATES. Distributions on the Class A
Certificates, which represent equity in the assets of the Trust, are
subordinated to payments on the Notes. If on any Payment Date, the credit
enhancement provided by the Insurance Policy is unavailable and the amount
available for payment to the Owners of Notes and Class A Certificates, is
insufficient to pay the Note Amount and the Class A Distribution Amount for
such Payment Date, the rights of the Owners of the Certificates to receive
distributions on account of the Class A Certificates are subordinated to the
rights of the Owners of the Notes to be paid the Note Amount in full.
SENSITIVITY TO PREPAYMENTS. ____% of the Mortgage Loans may not be
prepaid in whole or, above a certain percentage, in part at any time without
penalty. See "The Portfolio of Mortgage Loans--Prepayment Penalties" for a
description of prepayment penalty provisions applicable to the Mortgage Loans.
In addition, all the Mortgage Loans contain due-on-sale provisions which, to
the extent enforced by the Servicer, will result in prepayment of such Mortgage
Loans. See "Prepayment and Yield Considerations" herein and "Certain Legal
Aspects of Mortgage Assets--Enforceability of Certain Provisions" in the
Prospectus. The rate of prepayments on fixed rate mortgage loans is sensitive
to prevailing interest rates. Generally, if prevailing interest rates fall
significantly below the interest rates on the Mortgage Loans, such loans are
likely to be subject to higher prepayment rates than if prevailing rates remain
at or above the interest rates on the Mortgage Loans. Conversely, if
prevailing interest rates rise significantly above the interest rates on the
Mortgage Loans, the rate of prepayments is likely to decrease. The average
life of the Notes and the Class A Certificates, and, if purchased at other than
par, the yields realized by Owners of the Notes and the Class A Certificates,
will be sensitive to levels of payment (including prepayments (the
"Prepayments")) on the Mortgage Loans. In general, the yield on a Notes or a
Class A Certificate that is purchased at a premium from the outstanding
principal amount thereof will be adversely affected by a higher than
anticipated level of Prepayments of the Mortgage Loans and enhanced by a lower
than anticipated level. Conversely, the yield on a Note or a Class A
Certificate that is purchased at a discount from the outstanding principal
amount thereof will be enhanced by a higher than anticipated level of
Prepayments and adversely affected by a lower than anticipated level. See
"Prepayment and Yield Considerations" herein.
THE SUBSEQUENT MORTGAGE LOANS AND THE PRE-FUNDING ACCOUNT. If the
principal amount of eligible Subsequent Mortgage Loans available during the
Funding Period and sold by the Depositor to the Trust is less than 100% of the
Original Pre-Funded Amount, a prepayment of principal to Owners of the Notes
and the Class A Certificates will occur as described herein. See "Social,
Economic and Other Factors" below. In addition, any conveyance of Subsequent
Mortgage Loans is subject to the following conditions, among others: (i) each
such Subsequent Mortgage Loan must satisfy the representations and warranties
specified in the agreement pursuant to which such Subsequent Mortgage Loans are
transferred to the Trust (each a "Subsequent Transfer Agreement") and in the
Pooling and Servicing Agreement; (ii) the Depositor will not select such
Subsequent Mortgage Loans in a manner that it believes is adverse to the
interest of the Owners of the Notes and the Class A Certificates or the
Insurer; (iii) the Depositor will deliver certain opinions of counsel with
respect to the validity of the conveyance of such Subsequent Mortgage Loans;
and (iv) as of each cut-off date (each, a "Subsequent Cut-Off Date") applicable
thereto, the Mortgage Loans, including the Subsequent Mortgage Loans to be
conveyed by the Depositor as of such Subsequent Cut-Off Date, will satisfy the
criteria set forth in the Pooling and Servicing Agreement, as described herein
under "The Mortgage Loan Pool--Conveyance of Subsequent Mortgage Loans."
To the extent that amounts on deposit in the Pre-Funding Account have
not been fully applied to the purchase of Subsequent Mortgage Loans by the
Trust by the end of the Funding Period, the Owners of the Notes and the Class A
Certificates will receive a prepayment of principal in an amount equal to the
Pre-Funded Amount remaining in the Pre- Funding Account on the first Payment
Date following the end of the Funding Period (in no event later than the
____________ Payment Date). Although no assurances can be given, the Depositor
expects that the principal amount of Subsequent Mortgage Loans sold to the
Trust will require the application of substantially all amounts on deposit in
the Pre-Funding Account and that there will be no material principal prepayment
to the Owners of Notes and the Class A Certificates from the Pre-Funding
Account.
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Each Subsequent Mortgage Loan must satisfy the eligibility criteria
referred to above at the time of its addition. Subsequent Mortgage Loans may,
however, have been originated or purchased by the Depositor using credit
criteria different from those which were applied to the Initial Mortgage Loans
and may be of a different credit quality. Therefore, following the transfer of
Subsequent Mortgage Loans, the aggregate characteristics of the Mortgage Loans
may vary from those of the Initial Mortgage Loans. See "The Mortgage Loan
Pool--Conveyance of Subsequent Mortgage Loans."
SOCIAL, ECONOMIC AND OTHER FACTORS. The ability of the Trust to
invest in Subsequent Mortgage Loans is largely dependent upon the ability of
the Seller to purchase additional mortgage loans. _______________ has entered
into a forward commitment with the Seller to sell on or prior to __________,
199__ sufficient mortgage loans to satisfy the full Pre-Funded Amount.
However, the ability of ___________ to originate or purchase additional
mortgage loans may be affected as a result of a variety of social and economic
factors. Economic factors include interest rates, unemployment levels, the
rate of inflation and consumer perception of economic conditions generally.
The Depositor is unable to determine and has no basis to predict whether or to
what extent economic or social factors will affect the originator's origination
ability and the availability of Subsequent Mortgage Loans.
RISK OF HIGHER DELINQUENCIES ASSOCIATED WITH GUIDELINES. The
Servicer's Guidelines (as described herein under "The Portfolio of Mortgage
Loans--Guidelines") are intended to assess the credit quality of a mortgagor
and the value of the mortgaged property and to evaluate the adequacy of such
property as collateral for the mortgage loan. The Originators provide loans
primarily to mortgagors who do not qualify for loans conforming to FNMA and
FHLMC guidelines but who also have substantial equity in their property.
Furthermore, the Originators' Guidelines do not prohibit a borrower from
obtaining secondary financing at the time of origination of the Originator's
first lien, which financing would reduce the equity the borrower would
otherwise have in the related mortgaged property that is indicated in the
Originators' loan-to-value determination.
As a result of the Guidelines, the Mortgage Loans are likely to
experience rates of delinquency, foreclosure and bankruptcy that are higher,
and that may be substantially higher, than those experienced by mortgage loans
underwritten to FNMA and FHLMC conforming guidelines. Furthermore, changes in
the values of Mortgaged Properties may have a greater effect on the
delinquency, foreclosure, bankruptcy and loss experience of the Mortgage Loans
than on mortgage loans originated in a more traditional manner. No assurance
can be given that the values of the Mortgaged Properties have remained or will
remain at the levels in effect on the dates of origination of the related
Mortgage Loans.
OTHER LEGAL CONSIDERATIONS. Applicable state laws generally regulate
interest rates and other charges, require certain disclosure, and require
licensing of the Originators. In addition, other state laws, public policy and
general principles of equity relating to the protection of consumers, unfair
and deceptive practices and debt collection practices may apply to the
origination, servicing and collection of the Mortgage Loans. The related
Originator will be required to repurchase any Mortgage Loans which, at the time
of origination, did not comply with applicable federal and state laws and
regulations. Depending on the provisions of the applicable law and the
specific facts and circumstances involved, violations of these laws, policies
and principles may limit the ability of the Servicers to collect all or part of
the principal of or interest on the Mortgage Loans, may entitle the Mortgagor
to a refund of amounts previously paid and, in addition, could subject the
Seller, the Servicers or the related Originator to damages and administrative
enforcement. See "Certain Legal Aspects of Mortgage Assets" in the Prospectus.
The Mortgage Loans are also subject to federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z
promulgated thereunder, which require certain disclosures to the
Mortgagors regarding the terms of the Mortgage Loans;
(ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of
age, race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under the
Consumer Credit Protection Act, in the extension of credit; and
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(iii) the Fair Credit Reporting Act, which
regulates the use and reporting of information related to the
Mortgagor's credit experience.
Violations of certain provisions of these federal laws may limit the ability of
the related Servicer to collect all or part of the principal of or interest on
the Mortgage Loans and in addition could subject the Originators, the Seller or
the Servicers to damages and administrative enforcement. The Originators will
be required to repurchase any Mortgage Loans which, at the time of origination,
did not comply with such federal laws or regulations. See "Certain Legal
Aspects of the Mortgage Assets" in the Prospectus.
The federal Soldiers' and Sailors' Civil Relief Act of 1940 may affect
the ability of the related Servicer to collect full amounts of interest on
certain Mortgage Loans and could interfere with the ability of the related
Servicer to foreclose on certain properties. See "Certain Legal Aspects of the
Mortgage Assets--Soldiers' and Sailors' Civil Relief Act of 1940" in the
Prospectus.
It is possible that some of the Mortgage Loans will be subject to the
Riegle Community Development and Regulatory Improvement Act of 1944 (the
"Riegle Act") which incorporates the Home Ownership and Equity Protection Act
of 1944. 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 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 before
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. In the event of an insolvency of the
Seller, however, it is possible that a bankruptcy trustee or a creditor of the
Seller may argue that the transaction between the Seller and the Depositor was
a pledge of such Mortgage Loans in connection with a borrowing by the Seller
rather than a true sale. Such an attempt, even if unsuccessful, could result
in delays in distributions on the Certificates.
On the Closing Date, the Trustee and the Seller will have received an
opinion of ________, counsel to the Seller, with respect to the true sale of
the Initial Mortgage Loans from the Seller to the Depositor and from the
Depositor to the Trustee, in form and substance satisfactory to the Trustee,
the Insurer and the Rating Agencies.
RISK OF HIGHER DEFAULT RATES ASSOCIATED WITH CALIFORNIA REAL PROPERTY.
Because _____% by principal amount of the Mortgaged Properties relating to
Initial Mortgage Loans are located in the State of California, an overall
decline in the related residential real estate markets could adversely affect
the values of the Mortgaged Properties securing such Mortgage Loans causing the
Loan Balances of the related Mortgage Loans to equal or exceed the value of
such Mortgaged Properties.
The standard hazard insurance policy required to be maintained under
the terms of each Mortgage Loan does not insure against physical damage arising
from earth movement (including earthquakes, landslides and mudflows). See
"Servicing of Mortgage Loans and Contracts--Standard Hazard Insurance" in the
Prospectus.
RISK ASSOCIATED WITH THE INSURER. If the protection afforded by
overcollateralization is insufficient and if, upon the occurrence of a
Subordination Deficit, the Insurer is unable to meet its obligations under the
Insurance Policy, then the Owners of the Notes and Class A Certificates could
experience a loss on their investment.
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THE PORTFOLIO OF MORTGAGE LOANS
GENERAL
The Mortgage Loan Pool primarily includes newly originated loans which
were purchased by the Depositor from the Seller, which acquired such loans from
the related Originators or another party who purchased the loans directly from
the related Originator.
Each Originator and other party from whom the Seller purchased
Mortgage Loans has made certain representations and warranties with respect to
Mortgage Loans originated or sold by it, as specified below, and, upon a breach
of such representations and warranties occurring after sale of the related
Mortgage Loan to the Trust, may be required to repurchase such Mortgage Loan
from the Trust.
UNDERWRITING GUIDELINES
The Mortgage Loans have been originated by the Originators in
accordance with the underwriting guidelines established by each of them and
reviewed and approved by the Seller (the "Underwriting Guidelines"). The
Underwriting Guidelines are primarily intended to evaluate the value and
adequacy of the mortgaged property as collateral and are also intended to
consider the mortgagor's credit standing and repayment ability. On a
case-by-case basis, the Originator may determine that, based upon compensating
factors, a prospective mortgagor not strictly qualifying under the Underwriting
Guidelines warrants an underwriting exception. Compensating factors may
include, but are not limited to, low loan-to-value ratio, low debt-to-income
ratio, good credit history, stable employment, pride of ownership and time in
residence at the applicant's current address. It is expected that a
substantial number of the Mortgage Loans to be included in the Mortgage Pool
will represent such underwriting exceptions.
Under the Underwriting Guidelines, the Originators review and verify
the loan applicant's sources of income (except under the stated income
programs), calculate the amount of income from all such sources indicated on
the loan application, review the credit history of the applicant and calculate
the debt-to-income ratio to determine the applicant's ability to repay the
loan, and review the mortgaged property for compliance with their Underwriting
Guidelines. The Underwriting Guidelines are applied in accordance with a
procedure which complies with applicable federal and state laws and regulations
and requires (i) an appraisal of the mortgaged property which conforms to FHLMC
and FNMA standards and (ii) a review of such appraisal, which review may be
conducted by the Originator's staff appraiser or representative and, depending
upon the original principal balance and loan-to-value ratio of the mortgaged
property may include a desk review of the original appraisal or a drive-by
review appraisal of the mortgaged property. The Underwriting Guidelines permit
single-family loans with loan-to-value ratios at origination of up to 90% for
the highest credit grading category (75% under the stated income programs),
depending on the type and use of the property, the creditworthiness of the
mortgagor and the debt-to-income ratio. Under the Underwriting Guidelines, the
maximum combined loan-to-value ratio for purchase money mortgage loans may
differ from those applicable to refinancings.
All of the Mortgage Loans are based on loan application packages
submitted through mortgage brokerage companies or at the related Originator's
retail branches or are purchased from originators approved by the Originators.
Loan application packages submitted through mortgage brokerage companies,
containing in each case relevant credit, property and underwriting information
on the loan request, are compiled by the applicable mortgage brokerage company
and submitted to the Originator for approval and funding. The mortgage
brokerage companies receive a portion of the loan origination fee charged to
the mortgagor at the time the loan is made.
Each prospective mortgagor completes an application which includes
information with respect to the applicant's liabilities, income, credit history
and employment history, as well as certain other personal information. Each
Originator requires a credit report on each applicant from a credit reporting
company. The applicant must provide to the related Originator or the
originator a letter explaining all late payments on mortgage debt and,
generally, consumer (i.e., non-mortgage) debt. The report typically contains
information relating to such matters as credit history with local and national
merchants and lenders, installment debt payments and any record of defaults,
bankruptcy, repossession, suits or judgments. Self-employed individuals are
generally required to submit their two
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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 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 LTV is at least 5% below the applicable residential
loan program maximum that would otherwise apply. The Underwriting Guidelines
permit one-to-four-family loans to have LTV's at origination of generally up to
90%, depending on, among other things, the purpose of the mortgage loan, a
mortgagor's credit history, repayment ability and debt service-to-income ratio,
as well as the type and use of the property. With respect to mortgage loans
secured by mortgaged properties acquired by a mortgagor under a "lease option
purchase," the LTV of the related mortgage loan is generally based on the
appraised value at the time of origination of such mortgage loan.
The Underwriting Guidelines require that income be verified for each
applicant and that the source of funds (if any) required to be deposited by the
applicant into escrow under its various programs as follows: Under the Full
Documentation programs, applicants generally are required to submit two written
forms of verification of stable income for 24 months (or, if the LTV is less
than or equal to 65%, for 12 months). Under the Limited Documentation
programs, generally one such form of verification is required for 12 months.
Under the Stated Income Documentation programs, generally an applicant may be
qualified based upon monthly income as stated on the mortgage loan application
if the applicant meets certain criteria. All the foregoing programs typically
require that with respect to each applicant, there be a telephone verification
of the applicant's employment. Verification of the source of funds
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<PAGE> 110
(if any) required to be deposited by the applicant into escrow in the case of a
purchase money loan is generally required under the Full Documentation program
guidelines. No such verification is required under the other programs.
The Underwriting Guidelines require title insurance on all mortgage
loans secured by liens on real property. The Underwriting Guidelines also
require that fire and extended coverage casualty insurance be maintained on the
secured property in an amount at least equal to the principal balance of the
related single-family loan or the replacement cost of the property, whichever
is less.
Under the Underwriting Guidelines, various risk categories are used to
grade the likelihood that the mortgagor will satisfy the repayment conditions
of the mortgage loan. These risk categories establish the maximum permitted
loan- to-value ratio and loan amount, given the occupancy status of the
mortgaged property and the mortgagor's credit history and debt ratio. In
general, higher credit risk mortgage loans are graded in categories which
permit higher debt ratios and more (or more recent) major derogatory credit
items such as outstanding judgments or prior bankruptcies; however, the
Underwriting Guidelines establish lower maximum loan-to-value ratios and
maximum loan amounts for loans graded in such categories.
ARCC Performance Assumption Grouping
The Seller, through its manager AMRESCO Residential Credit Corporation
("ARCC"), performs due diligence on all mortgage loan portfolios which it
acquires, including the Mortgage Loans included in the Trust Estate. Part of
ARCC's review includes a review of the credit-grading process of the related
Originators. ARCC has developed Performance Assumption Groupings ("PAGs")
which are similar to a credit-grading criteria. ARCC determines which PAG the
originators' related credit grade most closely matches, and all loans which
the Originator has placed in that credit grade are placed in the related PAG
category. Because there are multiple factors in both the credit grades
identified by the originators and the PAG categories, it is unlikely that any
credit grade designation will match up exactly to any PAG category. ARCC uses
its best efforts to match the categories based upon its projection of asset
performance for the related credit grade and PAG. It should be noted that
while the Originators have specific criteria for credit grades, they have the
discretion to place a loan in a credit grade for which it does not meet all of
the criteria, based upon consideration of all relevant factors. It should
further be noted that ARCC does not make any attempt to determine how
individual loans would fall under the PAG criteria described below, but only
associates the existing credit grades of the Originator to the various PAG
categories.
SELLER'S PAG I
The maximum LTV for all eligible properties, owner or
non-owner occupied, purchase money or refinance, should be 90% or
less. The maximum back-end debt ratio should not exceed 50%. The
prospective mortgagor should have approximately five (5) years of
established credit with five (5) trade lines. In the last 12 months,
mortgage credit should show no delinquencies in excess of 30 days, and
in the last 24 months, should show delinquencies only for 30 days or
less. The credit history should reveal no foreclosures. In the last
12 months, installment and revolving accounts should indicate no
delinquencies for major credit, and a maximum of 30 days for minor
credit. In the last 24 months, both major and minor credit should be
a maximum of 30 days delinquent. There should be no evidence of
judgments, charge offs, collections or bankruptcies affecting the
mortgagor. In last 36 months, the prospective mortgagor should have
had only minor collection actions totaling less than $500.
SELLER'S PAG II
The maximum LTV for all eligible properties, owner or
non-owner occupied, purchase money or refinance, should be 85% or
less. The maximum back end debt ratio should not exceed 50%. The
customer should have approximately three (3) years of established
credit with three (3) trade lines. In the 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
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<PAGE> 111
include no more than two 30-day delinquencies for major credit and a
maximum of 60 day delinquency for minor credit. In the last 24
months, the maximum delinquency should be 60 days for both major and
minor credit. In the last 12 months, there should be no collection
action taken against the prospective mortgagor. In the last 24
months, there should be no judgments or charge offs against the
prospective mortgagor, and discharged bankruptcies should have
reestablished credit with no delinquencies. In the last 36 months,
mortgagor should be subject to only minor collection actions totaling
less than $1,000.
SELLER'S PAG III
The maximum LTV for all eligible properties, owner or
non-owner occupied, purchase money or refinance, should be 80% or
less. The maximum back end debt ratio should not exceed 50%. The
customer should have approximately two (2) years of established credit
with two (2) trade lines. In the last 12 months, mortgage credit
should show no more than three 30-day delinquencies and one 60-day
delinquency. Mortgage credit should be a maximum 30 days delinquent
at the time of origination, and in the last 24 months, a maximum of 60
days delinquent. In the last 12 months, installment and revolving
accounts should show no more than two 60-day delinquencies for major
credit and a maximum delinquency of 90 days for minor credit. In the
last 24 months, installment and revolving accounts should be a maximum
90 days delinquent for both major and minor credit. In the last 12
months, there should be no judgments or charge offs, and only minor
collection actions totaling less than $500 against the prospective
mortgagor. In the last 24 months, the prospective mortgagor is
permitted to have judgments or charge offs totaling less than $500,
and discharged bankruptcies with a maximum 30-day delinquency on
reestablished credit. In the last 36 months, collection actions
totaling less than $2,500 are permitted.
SELLER'S PAG IV
The maximum LTV for all eligible properties, owner or
non-owner occupied, purchase money or refinance, should be 75% or
less. The maximum back-end debt ratio should not exceed 55%. There
is no requirement for an established credit history. In the last 12
months, mortgage credit should include no more than four 30-day
delinquencies and two 60-day delinquencies, and mortgage credit should
be a maximum of 90 days delinquent at the time of origination. In the
last 12 months, installment and revolving accounts should show no more
than two 90-day delinquencies for major credit and a maximum of 90 day
delinquencies for minor credit. In the last 24 months, installment
and revolving accounts should be a maximum 90 days delinquent for both
major and minor credit. In the last 12 months, mortgagor may have
discharged bankruptcies with maximum 30 day delinquency on
reestablished credit, and collection actions totaling less than $2,500
are permitted. In the last 24 months, total judgments and charge offs
should be less than $2,500.
SELLER'S PAG V
The maximum LTV for all eligible properties, owner or
non-owner occupied, purchase money or refinance, should be 65% or
less. The maximum back-end debt ratio should not exceed 55%. There is
no requirement for an established credit history. In the last 12
months, mortgage credit should be a maximum of 120 days delinquent,
and no foreclosure may be pending at the time of origination. In the
last 24 months, mortgage credit should be a maximum of 120 days
delinquent. There are no stipulations regarding other derogatory
information other than that bankruptcies should have been discharged.
Approximately _____%, _____%, _____%, and _____% of the Initial Group
I Mortgage Loans and _____%, _____%, _____%, and _____% of the Initial Group II
Mortgage Loans are in the Seller's PAG II, PAG III, PAG IV, and PAG V,
categories, respectively.
Approximately _____%, _____%, and _____% of the Initial Group I
Mortgage Loans and _____%, _____%, and _____% of the Initial Group II Mortgage
Loans are in the Full Documentation, Limited Documentation and Stated Income
Documentation programs, respectively.
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<PAGE> 112
PREPAYMENT PENALTIES
Any Mortgage Loan may be prepaid in full or in part at any time;
however, approximately _____% of the Initial Mortgage Loans in Group I and
_____% of the Initial Mortgage Loans in Group II provide for the payment by the
Mortgagor of a prepayment charge in limited circumstances on certain full or
partial prepayments made for up to five years from the date of execution of the
related Note. The amount of the prepayment charge is as provided in the
related Note. In general, the Note provides that a prepayment charge will
apply if, in any twelve-month period generally during the first five years from
the date of origination of such Mortgage Loan, the Mortgagor prepays an
aggregate amount exceeding 20% of the original principal balance of such
Mortgage Loan. The amount of the prepayment charge will generally be equal to
six months' advance interest calculated on the basis of the rate in effect at
the time of such prepayment on the amount prepaid in excess of 20% of the
original balance of such Mortgage Loan.
The Seller plans to initiate a refinance policy with the Originators
who originated Mortgage Loans for the Trust and for other trusts in which the
Seller or an affiliate of the Seller owns a residual interest in an effort to
retain borrowers who the Seller or the Originators believe are likely to
refinance their loans due to interest rate changes or other reasons. Although
the policy is expected to permit the Originators to solicit such borrowers in
accordance with the Seller's policy, the Depositor believes that this practice
will not likely result in a material change in the prepayment experience of the
Trust because the solicited borrowers would have been expected to refinance
through other originators in any event.
REPRESENTATIONS RELATING TO THE MORTGAGE LOANS
Each Originator will have made representations and warranties in
respect of the Mortgage Loans sold by such Originator to the Seller in a loan
purchase and sale agreement (each, a "Transfer Agreement"), which will be
assigned to the Trust. Such representations and warranties generally include,
among other things, that: (i) the information with respect to each Mortgage
Loan set forth in the related Schedule of Mortgage Loans is true and correct as
of the specified date; (ii) each Mortgaged Property is improved by a
one-to-four family residential dwelling, which may include condominiums,
townhouses and manufactured housing permanently attached to foundations; (iii)
each Mortgage Loan had, at the time of origination, either an attorney's
certification of title or a title search or title policy; (iv) as of the
Cut-Off Date each Mortgage Loan was secured by a valid and subsisting first
lien of record on the Mortgaged Property subject in all cases only to the
exceptions to title set forth in the title insurance policy, if any, with
respect to the related Mortgage Loan; (v) each Originator held good and
indefeasible title to, and was the sole owner of, each Mortgage Loan when
conveyed by such Originator; and (vi) each Mortgage Loan was originated in
accordance with applicable law and is the valid, legal and binding obligation
of the related Mortgagor.
If an Originator cannot cure a breach of any representation or
warranty made by it in respect of a Mortgage Loan that materially and adversely
affects the interests of the Owners or the Certificate Insurer in such Mortgage
Loan within a time period specified in the Transfer Agreement, such Originator
will be obligated under the related Transfer Agreement to purchase from the
Trust such Mortgage Loan at a price (the "Loan Purchase Price") set forth in
the related Transfer Agreement which Loan Purchase Price will be no less than
the principal balance thereof as of the date of purchase plus one month's
interest at the Mortgage Rate (net of the applicable Servicing Fee) (the "Net
Coupon Rate").
As to any such Mortgage Loan required to be repurchased by an
Originator as provided above, rather than repurchase the Mortgage Loan, such
Originator may, at its sole option, remove such Mortgage Loan (a "Deleted
Mortgage Loan") from the Trust and cause the substitution in its place of
another Mortgage Loan of like kind (a "Qualified Replacement Mortgage" as such
term is defined in the Agreement); however, such substitution of a defective
Mortgage Loan may not be made if such substitution would cause the REMIC Trust
not to qualify as a REMIC or result in a prohibited transaction tax under the
Code (generally after two years from the Startup Day).
Upon receipt of notice by a Servicer or upon a Servicer becoming aware
that a representation and warranty made by an Originator in the Transfer
Agreement has been breached, such Servicer will be required to promptly notify
the related Originator, the Certificate Insurer, the Trustee and the Seller of
such breach and request that such
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<PAGE> 113
Originator cure such breach or honor its repurchase or substitution obligations
for the benefit of the Trust. The foregoing will constitute the sole remedy
available to the Trust for a breach of representation by an Originator.
THE SERVICERS
The information set forth below concerning the Servicers has been
provided to the Depositor by the related Servicer. Neither the Depositor, the
Seller, the Underwriters nor any of their respective affiliates have made any
independent investigation of such information, nor has either Servicer made any
such investigation with respect to information about the other Servicer.
USE OF PROCEEDS
The Depositor will sell the Initial Mortgage Loans to the Trust
concurrently with delivery of the Notes and the Certificates. Net proceeds
from the sale of the Notes and the Class A Certificates will be applied by the
Depositor to the purchase of the Initial Mortgage Loans from the Seller, to the
deposit of the Initial Pre-Funded Amount in the Pre- Funding Account and to the
deposit of certain amounts to the Capitalized Interest Account. Such net
proceeds less the Initial Pre-Funded Amount and the amount deposited in the
Capitalized Interest Account will (together with the Subordinated Certificates
retained by the Depositor or its affiliates) represent the purchase price to be
paid by the Trust to the Depositor for the Initial Mortgage Loans.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware on November 9,
1995, and is a wholly-owned subsidiary of AMRESCO, Inc. The Depositor
maintains its principal offices at 700 N. Pearl Street, Suite 2400, Dallas,
Texas 75201. Neither the Depositor nor any of its affiliates will insure or
guarantee distributions on the Certificates.
THE SELLER
The Seller, formerly known as AMRESCO Residential Mortgage
Corporation, was incorporated in the State of Delaware on October 13, 1995,
and is a wholly-owned subsidiary of AMRESCO, Inc. The Seller changed its name
on September 25, 1996. The Seller maintains its principal offices at 700 N.
Pearl Street, Suite 2400, Dallas, Texas 75201. Neither the Seller nor any of
its affiliates will insure or guarantee distributions on the Certificates.
THE MORTGAGE LOAN POOL
GENERAL
The statistical information presented in this Prospectus Supplement
concerning the pool of Mortgage Loans is based on the pool of Initial Mortgage
Loans as of the Cut-Off Date. Subsequent Mortgage Loans are intended to be
purchased by the Trust from the Depositor from time to time on or before
__________ ___, 199__, from funds on deposit in the Pre-Funding Account. The
Initial Mortgage Loans, any Qualified Replacement Mortgages and the Subsequent
Mortgage Loans are referred to herein collectively as the "Mortgage Loans."
The Subsequent Mortgage Loans, if available, to be purchased by the Trust will
be sold by the Originator to the Seller, by the Seller to the Depositor and
then by the Depositor to the Trust.
This subsection describes generally certain characteristics of the
Initial Mortgage Loans. Unless otherwise specified herein, references herein
to percentages of Initial Mortgage Loans refer in each case to the approximate
percentage of the aggregate principal balance of the Initial Mortgage Loans as
of the Cut-Off Date, based on the scheduled principal balances of the Initial
Mortgage Loans as of the Cut-Off Date, and giving effect to all payments due on
or prior to the Cut-Off Date. The Initial Mortgage Loan Pool consists of fixed
rate Mortgage Loans with remaining terms to maturity of not more than 360
months (including both fully amortizing Mortgage Loans and Balloon Loans). The
Initial Mortgage Loans have the characteristics set forth below as of the
Cut-Off Date.
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<PAGE> 114
Percentages expressed herein based on Loan Balances and number of Initial
Mortgage Loans have been rounded, and in the tables set forth herein the sum of
the percentages may not equal the respective totals due to such rounding.
The Loan-to-Value Ratios shown below were calculated based upon the
appraised values of the Mortgaged Properties at the time of origination (the
"Appraised Values"). No assurance can be given that values of the Mortgaged
Properties have remained or will remain at their levels on the dates of
origination of the related Mortgage Loans. If the residential real estate
market has experienced or should experience an overall decline in property
values such that the outstanding balance of any Mortgage Loan becomes equal to
or greater than the value of the Mortgaged Property, the actual rates of
delinquencies, foreclosures and losses could be higher than those now generally
experienced in the mortgage lending industry.
All the Mortgage Loans are "Actuarial Loans", which provide that
interest is charged to the Mortgagors thereunder, and payments are due from
such Mortgagors, as of a scheduled day of each month which is fixed at the time
of origination. Scheduled monthly payments made by the Mortgagors on the
Actuarial Loans either earlier or later than the scheduled due dates thereof
will not affect the amortization schedule or the relative application of such
payments to principal and interest.
MORTGAGE LOANS
The information set forth is based upon data provided to the Depositor
by the Servicers. Neither the Depositor, the Seller, the Underwriters,
Originators nor any of their respective affiliates have made or will have made
any representation as to the accuracy or completeness of such information.
As of the Cut-Off Date, the average Loan Balance of the Mortgage Loans
was $___________; the weighted average Loan-to-Value Ratio of the Mortgage
Loans was _____%; the weighted average remaining term to maturity was _____
months; the weighted average original term to maturity was _____ months. The
remaining terms to maturity as of the Cut-Off Date of the Mortgage Loans ranged
from _____ months to _____ months. The minimum and maximum Loan Balances of
Mortgage Loans as of the Cut-Off Date were $___________ and $___________,
respectively. Mortgage Loans containing "balloon" payments represented not
more than _____% of the Original Aggregate Loan Balance of Mortgage Loans. No
Mortgage Loan will mature later than _____________, 202__.
All the Mortgage Loans bear interest at a fixed rate for the life of
the related Mortgage Loans. The Mortgage Loans consist of _____ Mortgage Loans
aggregating $___________. The Coupon Rates of the Mortgage Loans ranged from
_____% to _____%. The weighted average Coupon Rate of the Initial Mortgage
Loans was _____%.
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<PAGE> 115
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
The geographic distribution of Mortgage Loans by state, as of the
Cut-Off Date, was as follows:
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
GEOGRAPHIC AREA MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
---------- ---- -------- ----- ---- ------- ---- -------
<S> <C> <C> <C>
Arizona
California
Colorado
Delaware
Florida
Georgia
Illinois
Indiana
Kansas
Louisiana
Maryland
Michigan
Minnesota
Missouri
Nevada
New Mexico
North Carolina
Ohio
Oregon
Pennsylvania
Texas
Utah
Washington
Wisconsin
Wyoming
Total 100.00%
=======
</TABLE>
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<PAGE> 116
ORIGINAL LOAN-TO-VALUE RATIOS
The original loan-to-value ratios as of the date of origination of the
Mortgage Loans (based upon appraisals made at the time of origination thereof)
(the "Loan-to-Value Ratios") as of the Cut-Off Date were distributed as
follows:
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
ORIGINAL LTVS MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
-------- ---- -------- ----- ---- ------- ---- -------
<S> <C> <C> <C>
5.001 - 10.000%
10.001 - 15.000%
20.001 - 25.000%
25.001 - 30.000%
35.001 - 40.000%
40.001 - 45.000%
45.001 - 50.000%
50.001 - 55.000%
55.001 - 60.000%
60.001 - 65.000%
65.001 - 70.000%
70.001 - 75.000%
75.001 - 80.000%
80.001 - 85.000%
85.001 - 90.000%
Total: 100.00%
======
</TABLE>
CUT-OFF DATE COUPON RATES
The Coupon Rates borne by the Notes relating to the Mortgage Loans
were distributed as follows as of the Cut- Off Date:
<TABLE>
<CAPTION>
RANGE OF NUMBER OF AGGREGATE % OF AGGREGATE
COUPON RATES MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
------ ----- -------- ----- ---- ------- ---- -------
<S> <C> <C> <C>
8.01 - 8.50%
8.51 - 9.00%
9.01 - 9.50%
9.51 - 10.00%
10.01 - 10.50%
10.51 - 11.00%
11.01 - 11.50%
11.51 - 12.00%
12.01 - 12.50%
12.51 - 13.00%
13.01 - 13.50%
13.51 - 14.00%
Total: 100.00%
======
</TABLE>
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<PAGE> 117
CUT-OFF DATE LOAN BALANCES
The distribution of the outstanding principal amounts of the Mortgage
Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
RANGE OF LOAN BALANCES MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
----- -- ---- -------- -------- ----- ---- ------- ---- -------
<S> <C> <C> <C> <C>
$0.00 - $50,000
50,001 - $100,000
100,001 - $150,000
150,001 - $200,000
200,001 - $250,000
250,001 - $300,000
300,001 - $350,000
450,001 - $500,000
Total 100.00%
=======
</TABLE>
TYPES OF MORTGAGED PROPERTIES
The Mortgaged Properties securing the Mortgage Loans as of the Cut-Off
Date were of the property types as follows:
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
PROPERTY TYPES MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
-------- ----- -------- ----- ---- ------- ---- -------
<S> <C> <C> <C>
Single-family
PUD
Condominiums
2-4 Family
Mobile Home
Total 100.00%
=======
</TABLE>
DISTRIBUTION OF MONTHS SINCE FIRST PAYMENT DATE
The distribution of the number of months since the date of origination
of the Mortgage Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
MONTHS ELAPSED NUMBER OF AGGREGATE % OF AGGREGATE
SINCE ORIGINATION MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
----- ----------- -------- ----- ---- ------- ---- -------
<S> <C> <C> <C>
0 - 6
Total 100.00%
=======
</TABLE>
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<PAGE> 118
DISTRIBUTION OF REMAINING TERM TO MATURITY
The distribution of the number of months remaining to maturity of the
Mortgage Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
MONTHS REMAINING NUMBER OF AGGREGATE % OF AGGREGATE
TO MATURITY MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
-- -------- -------- ----- ---- ------- ---- -------
<S> <C> <C> <C>
109 - 120
169 - 180
229 - 240
349 - 360
Total 100.00%
=======
</TABLE>
OCCUPANCY STATUS
The occupancy status of the Mortgaged Properties securing the Mortgage
Loans as of the Cut-Off Date was as follows
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE % OF AGGREGATE
OCCUPANCY STATUS MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
--------- ------ -------- ----- ---- ------- ---- -------
<S> <C> <C> <C>
Owner Occupied
Non-Owner Occupied
Total 100.00%
=======
</TABLE>
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS
The Pooling and Servicing Agreement permits the Trust to acquire
approximately $__________ in aggregate principal balance of Subsequent Mortgage
Loans. Accordingly, the statistical characteristics of the Mortgage Loan Pool
will vary as of any Subsequent Cut-Off Date upon the acquisition of Subsequent
Mortgage Loans.
The obligation of the Trust to purchase Subsequent Mortgage Loans on a
Subsequent Transfer Date is subject to the following requirements, among others
(which may be waived or modified by the Insurer): (i) such Subsequent Mortgage
Loan may not be 30 or more days contractually delinquent as of the related
Subsequent Cut-Off Date; (ii) the remaining term to maturity of such Subsequent
Mortgage Loan may not exceed ___ months; (iii) no Subsequent Mortgage Loan will
have a Coupon Rate less than ____%; and (iv) following the purchase of such
Subsequent Mortgage Loans by the Trust, the Mortgage Loans (including the
Subsequent Mortgage Loans) (a) will have a weighted average Coupon Rate of at
least _____%; (b) will have a weighted average Loan-to-Value Ratio of not more
than ____%; (c) will not have any Balloon Loans; (d) will not have a weighted
average remaining term to stated maturity of more than ___ months; and (e) will
have no Mortgage Loan with a principal balance in excess of $_______.
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<PAGE> 119
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The weighted average life of, and, if purchased at other than par
(disregarding, for purposes of this discussion, the effect on an investor's
yield resulting from the timing of the settlement date and those considerations
discussed below under "Payment Lag Feature of Class A Certificates"), the yield
to maturity on the Notes and the Class A Certificates will be affected by the
rate of payment of principal of the Mortgage Loans, including for this purpose
Prepayments, liquidations due to defaults, casualties and condemnations, and
repurchases by the Originators of Mortgage Loans or other party to a Transfer
Agreement. The actual rate of principal prepayments on pools of mortgage loans
is influenced by a variety of economic, tax, geographic, demographic, social,
legal and other factors and has fluctuated considerably in recent years. In
addition, the rate of principal prepayments may differ among pools of mortgage
loans at any time because of specific factors relating to the mortgage loans in
the particular pool, including, among other things, the age of the mortgage
loans, the geographic locations of the properties securing the loans and the
extent of the mortgagors' equity in such properties, changes in the mortgagors'
housing needs, job transfers and unemployment.
As with fixed rate obligations generally, the rate of prepayment on a
pool of mortgage loans with fixed rates is affected by prevailing market rates
for mortgage loans of a comparable term and risk level. When the market
interest rate is below the mortgage coupon, mortgagors may have an increased
incentive to refinance their mortgage loans. Depending on prevailing market
rates, the future outlook for market rates and economic conditions generally,
some mortgagors may sell or refinance mortgaged properties in order to realize
their equity in the mortgaged properties, to meet cash flow needs or to make
other investments.
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.
In addition to the foregoing factors affecting the weighted average
life of the Notes and the Class A Certificates, the subordination provisions of
the Trust result in a limited acceleration of the Notes relative to the
amortization of the related Mortgage Loans until the related Specified
Subordination Amount is reached. The accelerated amortization is achieved by
the application of certain excess interest and principal to the payment of the
Notes. This acceleration feature creates overcollateralization equal to the
excess of the aggregate Loan Balances of the Mortgage Loans over the sum of the
Note Principal Balance and the Class A Certificate Principal Balance. Once the
required level of overcollateralization is reached, the acceleration feature
will cease, unless necessary to maintain the required level of
overcollateralization.
A majority of the Mortgage Loans contain prepayment penalty
provisions. For a discussion of such provisions, see "The Portfolio of
Mortgage Loans--Prepayment Penalties" herein.
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 Note Principal
Balance is reduced to zero, and may increase the weighted average lives of such
Securities. Although a low interest rate environment may facilitate the
refinancing of a Balloon Loan, the receipt and reinvestment by Owners of the
proceeds in such an environment may produce a lower return than that previously
received in respect of the related Balloon Loan. Conversely, a high interest
rate environment may make it more difficult for the mortgagor to accomplish a
refinancing and may result in delinquencies or defaults.
MANDATORY PREPAYMENT
In the event that at the end of the Funding Period, not all the
Original Pre-Funded Amount has been used to acquire Subsequent Mortgage Loans,
then the Notes and the Class A Certificates will receive a partial prepayment
on the Payment Date in __________ 199__.
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<PAGE> 120
Although no assurances can be given, the Depositor expects that the
principal amount of Subsequent Mortgage Loans sold to the Trust will require
the application of substantially all the amount on deposit in the Pre-Funding
Account and that there should be no material principal prepaid to the Owners of
the Notes and the Class A Certificates.
PROJECTED PREPAYMENT AND YIELD FOR NOTES AND CLASS A CERTIFICATES
As indicated above, if purchased at other than par, the yield to
maturity on a Note or a Class A Certificate will be affected by the rate of the
payment of principal of the Mortgage Loans. If the actual rate of payments on
the Mortgage Loans is slower than the rate anticipated by an investor who
purchases a Note or a Class A Certificate at a discount, the actual yield to
such investor will be lower than such investor's anticipated yield. If the
actual rate of payments on the Mortgage Loans is faster than the rate
anticipated by an investor who purchases a Note or a Class A Certificate at a
premium, the actual yield to such investor will be lower than such investor's
anticipated yield.
The Maturity Date of the Notes is _______ and the "Final Scheduled
Payment Date" for the Class A Certificates is _______________. These dates are
the dates on which the "Initial Note Principal Balance" and the "Initial Class
A Certificate Principal Balance" would be reduced to zero assuming that no
Prepayments are received on the Mortgage Loans, that scheduled monthly payments
of principal of and interest on the related Mortgage Loans are timely received
and Subordination Increase Amounts will be paid to the Owners of the Notes.
The Maturity Date for the Notes and the Final Scheduled Payment Date for the
Class A Certificates is the thirteenth Payment Date following the calendar
month in which the Loan Balances of all Mortgage Loans which may be purchased
at the end of the Funding Period with an original term of 360 months will have
been reduced to zero assuming that the Mortgage Loans pay in accordance with
their terms. The weighted average life of the Notes and the Class A
Certificates is likely to be shorter than would be the case if payments
actually made on the Mortgage Loans conformed to the foregoing assumptions, and
the final Payment Date with respect to the Notes and the Class A Certificates
could occur significantly earlier because (i) Prepayments are likely to occur,
(ii) the Owners of the Subordinated Certificates may cause a termination of the
Trust when the outstanding Class A Certificate Principal Balance is less than
10% of the original Class A Certificate Principal Balance and (iii) the
Servicers may each purchase all Mortgage Loans serviced by them, thereby
causing a termination of the Trust when the outstanding Class A Certificate
Principal Balance is less than 5% of the Original Class A Certificate Balance.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal
of such security will be repaid to the investor. The weighted average life of
the Notes and the Class A Certificates will be influenced by the rate at which
principal of the Mortgage Loans is paid, which may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
Prepayments and liquidations due to default).
The tables at various Home Equity Prepayment ("HEP") assumptions. HEP
assumes that a pool of loans prepays in the first month of the life of such
loan at a constant prepayment rate that corresponds in CPR to one-tenth the
given HEP percentage and increases by an additional one-tenth each month
thereafter until the tenth month, where it remains at a CPR equal to the given
HEP percentage. The "Constant Prepayment Rate" or "CPR" represents an assumed
annualized rate of prepayment relative to the then outstanding principal
balance on a pool of new mortgage loans. The Prepayment Assumption does not
purport to be a historical description of prepayment experience or a prediction
of the anticipated rate of prepayment of any pool of mortgage loans, including
the Mortgage Loans. The Depositor believes that no existing statistics of
which it is aware provide a reliable basis for Owners of the Notes or Class A
Certificates to predict the amount or the timing of receipt of prepayments on
the Mortgage Loans.
It is very unlikely that the Mortgage Loans will prepay at rates
consistent with the Prepayment Assumption until maturity or that all the
Mortgage Loans will prepay at the same rate. There will be discrepancies
between the actual characteristics of the Mortgage Loans included in the Trust
and the assumed characteristics used in preparing the following tables. Any
discrepancy may have an effect upon the percentages of Initial Certificate
Principal Balance outstanding set forth in the table and the weighted average
lives of the Notes and the Class A Certificates.
Because the tables were prepared on the basis of the assumptions in
the following paragraph, there will likely be discrepancies between the
characteristics of the actual Mortgage Loans and the characteristics of the
Mortgage Loans assumed in preparing the tables. Any such discrepancy will
likely have an effect upon the percentages of the Principal Balances
outstanding and weighted average lives of the Notes and the Class A
Certificates set forth in the tables. In addition, since the actual Mortgage
Loans in the Trust have characteristics which differ from those assumed in
preparing the tables set forth below, the distributions of principal on the
Notes and the Class A Certificates may be made earlier or later than as
indicated in the tables.
S-28
<PAGE> 121
For the purpose of the tables below, it is assumed that: (i) Mortgage
Loans have the characteristics set forth in the table below, (ii) the Closing
Date occurs on __________, 199__, (iii) distributions are made on the 25th day
of each month regardless of the day on which the Payment Date actually occurs,
commencing in _______ 199__ in accordance with the priorities described herein,
(iv) the difference between the Gross Coupon Rate and the Net Coupon Rate is
equal to the Servicing Fee and the Net Coupon Rate is further reduced by the
Premium Amount and the Trustee Fee, (v) prepayments include 30 day's interest
thereon, (vi) optional termination or mandatory termination is exercised on the
date on which the Outstanding Certificate Principal Balance has declined to
less than 10% of the original Principal Balance, (vii) the "Specified
Subordinated Amount" (as defined under "Description of the Offered
Securities--Overcollateralization Provisions") is set initially as specified in
the Indenture and thereafter decreases in accordance with the provisions of the
Indenture, (viii) all the Pre-Funded Amount is used to acquire Subsequent
Mortgage Loans on _________ 199__, and prior to such date, the Pre-Funded
Amount accrues interest at a rate of _____% per annum, (ix) all Mortgage Loans
pay on their respective due dates in accordance with their respective terms and
(x) the Initial Note Principal Balance and Initial Class A Certificate
Principal Balance is as set forth and under "Summary of Terms--Securities
Offered" herein.
S-29
<PAGE> 122
INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
Original Remaining
Term to Term to
Principal Gross Coupon Net Coupon Maturity Maturity
Balance Rate Rate (in months) (in months)
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SUBSEQUENT MORTGAGE LOANS
Original Remaining
Gross Net Periodic Monthly Rate Term to Term to
Principal Coupon Coupon Gross Net Rate to Next Change Maturity Maturity
Balance Rate Rate Margin Life Cap Cap Reset Frequency (in months) (in months) Index
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
S-30
<PAGE> 123
The following tables set forth the percentages of the initial
principal amount of the Notes and the Class A Certificates that would be
outstanding after each of the dates shown, based on a rate equal to 0%, 10%,
22%, 26% and 30% of the Prepayment Assumption (as defined above).
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL PRINCIPAL BALANCE
Notes Class A Certificates
Payment Date 0% 10% 22% 26% 30% 0% 10% 22% 26% 30%
-- ---- --- --- --- -- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Balance
__________, 1997
__________, 1998
__________, 1999
__________, 2000
__________, 2001
__________, 2002
__________, 2003
__________, 2004
__________, 2005
__________, 2006
__________, 2007
__________, 2008
__________, 2009
__________, 2010
__________, 2011
__________, 2012
__________, 2013
__________, 2014
__________, 2015
__________, 2016
__________, 2017
__________, 2018
__________, 2019
__________, 2020
__________, 2021
__________, 2022
__________, 2023
__________, 2024
__________, 2025
__________, 2026
__________, 2027
Weighted Avg Life(1)
</TABLE>
_____________________________
(1) The weighted average life of the Notes and the Class A Certificates is
determined by (i) multiplying the amount of each principal payment by
the number of years from the date of issuance to the related Payment
Date, (ii) adding the results and (iii) dividing the sum by the
initial respective Note Principal Balance and Class A Certificate
Principal Balance for such Class of Class A Certificate.
S-31
<PAGE> 124
PAYMENT LAG FEATURE OF CLASS A CERTIFICATES
An amount equal to Mortgagor payments with respect to each Mortgage
Loan (net of the Servicing Fee) received by the Servicer during each Remittance
Period is to be remitted to the Trustee on or prior to the related Monthly
Remittance Date; however, the Trustee will not be required to distribute any
such amounts to the Owners of Class A Certificates until the next succeeding
Payment Date. As a result, the monthly distributions to the Owners of the
Class A Certificates generally reflect an Accrual Period with respect to
Mortgagor payments during the prior calendar month, and the first Payment Date
will not occur until _________, 199__. Thus, the effective yield to the Owners
of the Class A Certificates will be below that otherwise produced by the
related Pass-Through Rate because the distribution of the related Class A
Distribution Amount in respect of any given month will not be made until on or
about the 25th day of the following month.
THE ORIGINATORS
The Mortgage Loan Pool consists of _____ Initial Mortgage Loans
purchased or originated by two originators (the "Originators") with aggregate
outstanding Loan Balances of $___________. The largest Originator of such
loans is ______________________________, which originated ____% of the Mortgage
Loans and has committed to the Seller to originate all Subsequent Mortgage
Loans. The other Originator is ______________ ________________, which
originated _____% of the Mortgage Loans.
FORMATION OF THE TRUST AND TRUST PROPERTY
AMRESCO Residential Securities Corporation Mortgage Loan Trust
199__-__ (the "Trust") will be created and established as a business trust
under Delaware law pursuant to the Trust Agreement. The Trust may not engage
in any activity other than (i) acquiring, holding and managing the Mortgage
Loans and the other assets of the Trust and the proceeds therefrom, (ii)
issuing the Notes and the Certificates, (iii) making payments on the Notes and
the Certificates and (iv) engaging in other activities incidental to the
foregoing. The Depositor will convey without recourse the Mortgage Loans to
the Trust and the Trust will issue: (i) the Notes pursuant to the Indenture;
and (ii) the Class A Certificates and the Subordinated Certificates pursuant to
the Trust Agreement.
The property of the Trust will include (a) the Mortgage Loans (other
than payments due on the Mortgage Loans on or prior to the Cut-Off Date with
respect to those Mortgage Loans that were current as of the Cut-Off Date)
together with the related Mortgage Loan documents and the Seller's interest in
any Mortgaged Property which secures a Mortgage Loan and all payments thereon
and proceeds of the conversion, voluntary or involuntary, of the foregoing, (b)
such amounts as may be held by the Indenture Trustee in the Certificate
Account, the Pre-Funding Account, the Capitalized Interest Account and any
other accounts held by the Indenture Trustee for the Trust together with
investment earnings on such amounts and such amounts as may be held in the name
of the Indenture Trustee in the Principal and Interest Account, if any,
exclusive of investment earnings thereon (except as otherwise provided in the
Pooling and Servicing Agreement) whether in the form of cash, instruments,
securities or other properties, (c) the Insurance Policy, (d) proceeds of all
the foregoing (including, but not by way of limitation, all proceeds of any
hazard insurance and title insurance policy relating to the Mortgage Loans,
cash proceeds, accounts, accounts receivable, notes, drafts, acceptances,
chattel paper, checks, deposit accounts, rights to payment of any and every
kind, and other forms of obligations and receivables which at any time
constitute all or part of or are included in the proceeds of any of the
foregoing) to pay the Certificates as specified in the Pooling and Servicing
Agreement and (e) certain rights of the Seller under the Transfer Agreements
(collectively, the "Trust Estate").
The Notes will be secured by a pledge of the property of the Trust to
the Indenture Trustee.
The Class A Certificates will not represent an interest in or an
obligation of, nor will the Mortgage Loans be guaranteed by, the Depositor, the
Seller, the Servicers or any of their affiliates.
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<PAGE> 125
Prior to its formation the Trust will have had no assets or
obligations. Upon formation, the Trust will not engage in any business
activity other than acquiring, holding and collecting payments on the Mortgage
Loans, issuing the Notes and the Certificates and distributing payments
thereon. The Trust will not acquire any receivables or assets other than the
Mortgage Loans and the rights appurtenant thereto and will not have any need
for additional capital resources. To the extent that mortgagors make scheduled
payments under the Mortgage Loans, the Trust will have sufficient liquidity to
pay the Notes and to make distributions on the Certificates. As the Trust does
not have any operating history and will not engage in any business activity
other than issuing the Notes and the Certificates and making distributions
thereon, there has not been included any historical or pro forma ratio of
earnings to fixed charges with respect to the Trust..
CAPITALIZATION OF THE TRUST
The following table illustrates the anticipated capitalization of the
Trust as of the Cut-off Date (based on the approximate original principal
amounts of Offered Securities set forth herein and without regard to the
Subordinated Certificates), as if the issuance and sale of the Offered
Securities had taken place on such date:
<TABLE>
<S> <C>
______% Notes $
Class A Certificates
_____________
Total $
</TABLE>
THE OWNER TRUSTEE
______________ is the Owner Trustee under the Trust Agreement.
___________ is a _________ banking corporation and its principal offices are
located at ____________________________, ____________, _________. The Owner
Trustee's liability in connection with the issuance and sale of the Notes and
the Certificates is limited solely to the express obligations of the Owner
Trustee set forth in the Trust Agreement. The Owner Trustee may resign at any
time, in which event the Depositor or its successor will be obligated to
appoint a successor trustee. The Depositor may remove the Owner Trustee under
certain circumstances. Any resignation or removal of the Owner Trustee will
not become effective until acceptance of the appointment by a successor
trustee.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Initial Mortgage
Loans and the Mortgaged Properties is based upon the pool as constituted at the
close of business on the Cut-Off Date, as adjusted (with respect to all
Mortgage Loans that were current as of the Cut-Off Date) for the scheduled
principal payments due on or before such date. Prior to the issuance of the
Offered Securities, Initial Mortgage Loans may be removed from the pool as a
result of incomplete documentation or non-compliance with representations and
warranties set forth in the Pooling and Servicing Agreement, if the Depositor
deems such removal necessary or appropriate. A limited number of other Initial
Mortgage Loans may be included in the pool prior to the issuance of the Offered
Securities.
A current report on Form 8-K will be available to purchasers of the
Offered Securities and will be filed with the Securities and Exchange
Commission and incorporated by reference into the Registration Statement
together with the forms of the Pooling and Servicing Agreement and the
Indenture within fifteen days after the initial issuance of the Offered
Securities. In the event Initial Mortgage Loans are removed from or added to
the pool as set forth in the preceding paragraph, such removal or addition will
be noted in the current report on Form 8-K. A current report on Form 8-K will
also be filed within fifteen days of the end of the Funding Period reflecting
the additions to the Mortgage Loans.
S-33
<PAGE> 126
DESCRIPTION OF THE OFFERED SECURITIES
GENERAL
The Notes will be issued pursuant to an Indenture to be dated as of
________ 1, 199__ (the "Indenture"), between the Issuer and
______________________ as Indenture Trustee (the "Indenture Trustee"). The
Class A Certificates, together with the Subordinated Certificates (the Class A
Certificates and the Subordinated Certificates are referred to as the
"Certificates"), will be issued pursuant to the Trust Agreement. Only the
Notes and the Class A Certificates (collectively, the "Offered Securities") are
offered hereby. The following summary describes certain terms of the Notes,
the Class A Certificates, the Indenture, the Trust Agreement and the Pooling
and Servicing Agreement. Reference is made to the accompanying Prospectus for
important additional information regarding the terms of the Offered Securities
and the underlying documents. Forms of the Indenture, the Trust Agreement and
the Pooling and Servicing Agreement have been filed a exhibits to the
Registration Statement of which the Prospectus forms a part. The summary does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, the provisions of the Notes, the Certificates, the Indenture,
the Trust Agreement and the Pooling and Servicing Agreement. Where particular
provisions or terms used in any of such documents are referred to, the actual
provisions (including definitions of terms) are incorporated by reference as
part of such summaries. The Certificates represent undivided fractional
ownership interests in the equity of the Trust subject to the limits and
priority of distribution described herein. The Notes and the Class A
Certificates will also have the benefit of an irrevocable financial guaranty
insurance policy (the "Insurance Policy") to be issued on or before the date of
issuance of the Offered Securities by _______________ (the "Insurer") in favor
of the Indenture Trustee.
PAYMENT DATES
On each Payment Date, the Owners of the Notes and Class A Certificates
will be entitled to receive, from amounts then on deposit in the certificate
account established and maintained by the Indenture Trustee in accordance with
the Indenture (the "Certificate Account") and until the Note Principal Balance
and the Class A Certificate Principal Balance are reduced to zero, the Note
Amount and the Class A Distribution Amount, respectively, as of such Payment
Date, as described below. Distributions will be made in immediately available
funds by wire transfer or otherwise, to the account of Owners of Notes and
Class A Certificates at domestic banks or other entities having appropriate
facilities therefor, if the Owner has so notified the Trustee, or by check
mailed to the address of the person entitled thereto as it appears on the
register (the "Register") maintained by the Trustee as registrar (the
"Registrar"). Beneficial Owners may experience some delay in the receipt of
their payments due to the operations of DTC. See "Risk Factors--Book Entry
Registration" in the Prospectus,"Book Entry Registration of the Offered
Securities" herein and "Description of the Securities--Book Entry Registration"
in the Prospectus.
An Owner will be required to send its Note or Class A Certificate to
the Trustee prior to receiving the final payment or distribution. In any
event, any Note or Class A Certificate as to which the final payment or
distribution has been made shall be deemed canceled for all purposes under or
pursuant to the Insurance Policy.
Each Owner of the Notes of the Class A Certificates will be entitled
to receive such Owner's Percentage Interest in the amounts due on such Payment
Date. The "Percentage Interest" of a Note or a Class A Certificate as of any
date of determination will be equal to the percentage obtained by dividing the
principal balance of such Note or Certificate as of the Cut-Off Date by the
Note Principal Balance or the Class A Certificate Principal Balance as of the
Cut-Off Date.
DISTRIBUTIONS
Upon receipt, the Trustee will be required to deposit into the
Certificate Account, (i) the total of the principal and interest collections on
the Mortgage Loans, including any Net Liquidation Proceeds, required to be
remitted by the Servicers, together with any Substitution Amount and any Loan
Purchase Price, (ii) any Insured Payment, and (iii) the proceeds of any
liquidation of the Trust Estate. The Trustee will also be required to deposit
into the Certificate Account any Pre-Funded Amounts to be distributed as a
prepayment at the end of the Funding Period.
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<PAGE> 127
The Pooling and Servicing Agreement establishes a pass-through rate
on the Class A Certificates (the "Pass-Through Rate") as set forth in the
Summary herein under "Offered Securities."
On each Payment Date, the Trustee is required to make the following
disbursements and transfers from moneys then on deposit in the Certificate
Account as specified below in the following order of priority of each such
transfer and disbursement:
(i) First, to the Insurer the Premium Amount for such
Payment Date;
(ii) Second, to the Trustee the Trustee Fees and
reimbursable expenses then due;
(iii) Third, to the Owners of the Notes on a pro rata basis
without any priority among the Notes:
(A) the Current Interest; and
(B) Note Principal Payment Amount until the Note
Principal Balance is reduced to zero;
(iv) Fourth, to the Owners of the Class A Certificates on
a pro rata basis without any priority among the Class
A Certificates:
(A) the Current Interest;
(B) the Class A Principal Distribution Amount
until the Class A Certificate Principal
Balance is reduced to zero; and
(v) Fifth, to the Owners of the Subordinated
Certificates, all remaining distributable amounts.
The Trustee or Paying Agent shall (i) receive as attorney-in-fact of
each Owner of Notes and Class A Certificates any Insured Payment from the
Insurer and (ii) disburse the same to each Owner of Notes and Class A
Certificates. The Indenture and Trust Agreement will provide that to the
extent the Insurer makes Insured Payments, either directly or indirectly (as by
paying through the Trustee or Paying Agent), to the Owners of Notes or Class A
Certificates, the Insurer will be subrogated to the rights of such Owners with
respect to such Insured Payments, and shall receive reimbursement for such
Insured Payments as provided in the Indenture and Trust Agreement; such
subrogation and reimbursement will have no effect on the Insurer's obligations
under the Insurance Policy.
The term "Available Funds" does not include Insured Payments and does
not include any amounts that cannot be distributed to the Owners of the Notes
or the Class A Certificates, if any, by the Trustee as a result of proceedings
under the United States Bankruptcy Code.
Each Owner of a Note or a Class A Certificate will be required
promptly to notify the Trustee in writing upon the receipt of a court order
relating to a Preference Amount and will be required to enclose a copy of such
order with such notice to the Trustee.
OPTIONAL REDEMPTION OF NOTES; OPTIONAL PREPAYMENT OF CERTIFICATES
The Notes are subject to redemption in whole, but not in part, on any
Payment Date on or after the Clean-up Call Date in each case at a redemption
price equal to the then outstanding Note Principal Balance, plus accrued and
unpaid interest thereon.
The Class A Certificates are subject to optional repurchase in whole,
but not in part, on any Payment Date on or after the Clean-up Call Date in each
case at a purchase price equal to the then outstanding Class A Certificate
Principal Balance, plus accrued and unpaid interest.
S-35
<PAGE> 128
OVERCOLLATERALIZATION PROVISIONS
Overcollateralization Resulting from Cash Flow Structure. The
Indenture provides, on each Payment Date, for an accelerated payment of
principal on the Notes, but only to the limited extent hereafter described,
which has the effect of accelerating the amortization of the Notes relative to
the amortization of the related Mortgage Loans.
An accelerated payment of principal of the Notes is required until the
Subordinated Amount has increased to the level required. "Subordinated Amount"
means, with respect to each Payment Date, the excess, if any, of (x) the sum of
(i) the aggregate Loan Balances of the Mortgage Loans as of the close of
business on the last day of the preceding Remittance Period and (ii) any amount
on deposit in the Pre-Funding Account at such time exclusive of any Pre-Funding
Account Earnings (as defined in the Indenture) over (y) the sum of (i) the Note
Principal Balance and (ii) the Class A Certificate Principal Balance as of such
Payment Date (after taking into account the payment of the Note Principal
Payment (except for any Subordination Deficit or Subordination Increase Amount)
and Class A Principal Distribution Amount on such Payment Date). Any amount
actually applied as an accelerated payment of principal of the Notes is a
"Subordination Increase Amount." The required level of the Subordinated Amount
with respect to a Payment Date is the "Specified Subordinated Amount." The
Indenture generally provides that the Specified Subordinated Amount may, over
time, decrease, or increase, subject to certain floors, caps and triggers,
including triggers that allow the Specified Subordinated Amount to decrease or
"step down" based on the performance of the related Mortgage Loans with respect
to certain tests specified in the Indenture based on delinquency rates and
cumulative losses. If certain delinquency and/or loss levels set forth in the
Indenture are exceeded, the "Specified Subordinated Amount" may become
unlimited and accelerate payment in reduction of principal of the Notes during
the period that the Mortgage Loans are unable to meet certain tests specified
in the Indenture based on delinquency rates and cumulative losses.
If the Specified Subordinated Amount is permitted to decrease or "step
down" on a Payment Date in the future or in the event that an Excess
Subordinated Amount otherwise exists, the Indenture provides that some of or
all the principal which would otherwise be distributed to the Owners of the
Notes on such Payment Date shall be distributed to the Owners of the
Subordinated Certificates until the Excess Subordinated Amount is reduced to
zero. This has the effect of decelerating the amortization of the Notes and
the Class A Certificates relative to the amortization of the related Mortgage
Loans and of reducing the related Subordinated Amount. With respect to any
Payment Date, the excess, if any, of (x) the Subordinated Amount on such
Payment Date after taking into account all distributions to be made on such
Payment Date (except for any distributions of Subordination Reduction Amounts
as described in the next sentence) over (y) the Specified Subordinated Amount
is the "Excess Subordinated Amount" for such Payment Date. If, on any Payment
Date, the Excess Subordinated Amount is, or, after taking into account all
other distributions to be made on such Payment Date would be, greater than zero
(i.e., the Subordinated Amount is or would be greater than the Specified
Subordinated Amount), then any amounts relating to principal which would
otherwise be distributed to the Owners of Notes on such Payment Date shall
instead be distributed to the Owners of the Subordinated Certificates (to the
extent available therefor) in an amount equal to the lesser of (x) the related
Excess Subordinated Amount and (y) the amount available for distribution on
account of principal on such Payment Date; such amount being a "Subordination
Reduction Amount." As a result of the cash flow structure of the Trust,
Subordination Reduction Amounts may result even prior to the occurrence of any
decrease or "step down" in the related Specified Subordinated Amount. This is
because the Owners of the Notes and the Class A Certificates will generally be
entitled to receive ___% of collected principal, even though the sum of (i) the
Note Principal Balance and (ii) the Class A Certificate Principal Balance will,
following any accelerated amortization, represent less than ___% of the
aggregate Loan Balance. Accordingly, in the absence of the provisions relating
to Subordination Reduction Amounts, the Subordinated Amount would automatically
increase above the Specified Subordinated Amount requirements.
Generally, on any Payment Date, ____% of all amounts collected on
account of scheduled principal with respect to the related Remittance Period
and unscheduled principal with respect to the related Prepayment Period (other
than any such amount applied to the payment of a Subordination Reduction
Amount) will be distributed to the Owners of the Notes and the Class A
Certificates on such Payment Date. If any Mortgage Loan became a Liquidated
Loan during such prior Remittance Period, the Net Liquidation Proceeds related
thereto and allocated to principal may be less than the principal balance of
the related Mortgage Loan; the amount of any such insufficiency is a "Realized
S-36
<PAGE> 129
Loss." In addition, the principal balance of any Mortgage Loan which becomes a
Liquidated Loan shall thenceforth equal zero. There is not any requirement
that the amount of any Realized Loss be distributed to the Owners of the Notes
and the Class A Certificates on the Payment Date which immediately follows the
event of loss; i.e., current recovery of losses is not required. Nevertheless,
the occurrence of a Realized Loss will reduce the related Subordinated Amount
(and may result in a Subordination Deficit as described below under
"--Overcollateralization and the Insurance Policy"), which, to the extent that
such reduction causes such Subordinated Amount to be less than the related
Specified Subordinated Amount applicable to the related Payment Date, will
require the payment of a Subordination Increase Amount on such Payment Date
(or, if insufficient funds are available on such Payment Date, on subsequent
Payment Dates, until the Subordinated Amount equals the related Specified
Subordinated Amount). The effect of the foregoing is to allocate losses to the
Owners of the Subordinated Certificates by reducing, or eliminating entirely,
payments which such Owners would otherwise receive.
Overcollateralization and the Insurance Policy. A "Subordination
Deficit" with respect to a Payment Date is the amount, if any, by which (x) the
sum of (i) the Note Principal Balance and Class A Certificate Principal Balance
with respect to a Payment Date, after taking into account all distributions to
be made on such Payment Date (except for any Subordination Deficit and
Subordination Increase Amount), exceeds (y) the sum of (a) the aggregate Loan
Balances of the Mortgage Loans as of the close of business on the last day of
the related Prepayment Period and (b) the amount, if any, on deposit in the
Pre-Funding Account on such Payment Date exclusive of Pre-Funding Account
Earnings. The Trustee is required to make a claim for an Insured Payment under
the Insurance Policy not later than the second Business Day prior to any
Payment Date as to which the Trustee has determined that a Subordination
Deficit will occur for the purpose of applying the proceeds of such Insured
Payment as a payment of principal on such Payment Date. No payments in respect
of principal will be made under the Insurance Policy unless a Subordination
Deficit occurs. The Insurance Policy is thus similar to the subordination
provisions described above insofar as the Insurance Policy guarantees ultimate,
rather than current, payment of the amounts of any Realized Losses to the
Owners of the Notes and the Class A Certificates. Investors should realize
that, under extreme loss or delinquency scenarios that occur when no
Subordination Deficit exists, they may temporarily receive no distributions of
principal when they would otherwise be entitled thereto under the principal
allocation provisions described herein. Nevertheless, the exposure to risk of
loss of principal to the Owners of the Notes and the Class A Certificates
depends in part on the ability of the Insurer to satisfy its obligations under
the Insurance Policy.
PRE-FUNDING ACCOUNT
On the Closing Date, the Original Pre-Funded Amount will be deposited
in the Pre-Funding Account, which account shall be in the name of and
maintained by the Indenture Trustee and shall be part of the Trust Estate.
During the Funding Period, the Pre-Funded Amount will be maintained in the
Pre-Funding Account. The Original Pre-Funded Amount will be reduced during the
Funding Period by the amount thereof used to purchase Subsequent Mortgage
Loans. Any Pre- Funded Amount remaining at the end of the Funding Period will
be distributed to the Owners of the Notes and Class A Certificates on the
Payment Date that immediately follows the end of the Funding Period, thus
resulting in a principal prepayment of the Notes and the Class A Certificates.
Amounts on deposit in the Pre-Funding Account will be invested in the
investments permitted by the Pooling and Servicing Agreement (the "Eligible
Investments"). All interest and any other investment earnings on amounts on
deposit in the Pre-Funding Account will be deposited in the Capitalized
Interest Account prior to each Payment Date during the Funding Period.
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CAPITALIZED INTEREST ACCOUNT
On the Closing Date cash will be deposited in the Capitalized Interest
Account, which account shall be in the name of and maintained by the Trustee
and shall be part of the Trust. The amount on deposit in the Capitalized
Interest Account, including reinvestment income thereon and amounts deposited
thereto from the Pre-Funding Account, will be used by the Trustee to fund the
excess, if any, of (i) the sum of the amount of interest accruing at the Class
A Pass-Through Rate on the amount by which the sum of (i) the Note Principal
Balance and (ii) the Class A Certificate Principal Balance exceeds the
aggregate Loan Balance of the Mortgage Loans plus the Trustee Fees and Premium
Amount accruing on such excess balance over (ii) the amount of any reinvestment
income on monies on deposit in the Pre-Funding Account; such amounts on deposit
will be so applied by the Trustee on each Payment Date in the Funding Period to
fund such excess, if any. Any amounts remaining in the Capitalized Interest
Account at the end of the Funding Period and not needed for such purpose will
be paid to the Depositor and will not thereafter be available for distribution
to the Owners of the Notes or Class A Certificates.
Amounts on deposit in the Capitalized Interest Account will be
invested in Eligible Investments.
BOOK ENTRY REGISTRATION OF THE OFFERED SECURITIES
The Notes and the Class A Certificates will be book-entry Certificates
(the "Book-Entry Certificates"). Persons acquiring beneficial ownership
interests in such Book-Entry Certificates ("Beneficial Owners") may elect to
hold their Book-Entry Certificates directly through DTC in the United States,
or CEDEL or Euroclear (in Europe) if they are Participants of such systems
("Participants") , or indirectly through organizations which are Participants.
The Book- Entry Certificates will be issued in one or more certificates which
in the aggregate equal the principal balance of the Notes and Class A
Certificates and will initially be registered in the name of Cede & Co., the
nominee of DTC. CEDEL and Euroclear will hold omnibus positions on behalf of
their Participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank will act as depositary for CEDEL and
Morgan will act as depositary for Euroclear (in such capacities, individually
the "Relevant Depositary" and collectively the "European Depositaries").
Investors may hold such beneficial interests in the Book-Entry Certificates in
minimum denominations representing principal amounts of $1,000 and in integral
multiples in excess thereof. Except as described below, no Beneficial Owner
will be entitled to receive a physical certificate representing such
Certificate (a "Definitive Certificate"). Unless and until definitive
Certificates are issued, it is anticipated that the only "Owner" of such
Book-Entry Certificates will be Cede & Co., as nominee of DTC. Beneficial
Owners will not be Owners as that term is used in the Pooling and Servicing
Agreement. Beneficial Owners are only permitted to exercise their rights
indirectly through Participants and DTC.
The Beneficial Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary (each, a "Financial Intermediary") that maintains
the Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's Ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a DTC Participant and on
the records of CEDEL or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Book-Entry Certificates from the Trustee through DTC and DTC
Participants. While such Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to such Certificates and is required to receive and transmit
distributions of principal of, and interest on, such Certificates.
Participants and indirect Participants with whom Beneficial Owners have
accounts with respect to Book-Entry Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Beneficial Owners. Accordingly, although Beneficial Owners
will not possess certificates, the Rules provide a mechanism by which
Beneficial Owners will receive distributions and will be able to transfer their
interest.
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Beneficial Owners will not receive or be entitled to receive
certificates representing their respective interests except under the limited
circumstances described below. Unless and until Definitive Certificates are
issued, Beneficial Owners who are not Participants may transfer ownership of
Notes and Class A Certificates only through Participants and indirect
Participants by instructing such Participants and indirect Participants to
transfer such Notes and Class A Certificates, by book-entry transfer, through
DTC for the account of the purchasers of such Notes and Class A Certificates,
which account is maintained with their respective Participants. Under the
Rules and in accordance with DTC's normal procedures, transfers of ownership of
such Notes and Class A Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and indirect Participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Beneficial Owners.
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or CEDEL Participants on such business day. Cash received in CEDEL
or Euroclear as a result of sales of securities by or through a CEDEL
Participant (as defined below) or Euroclear Participant (as defined below) to a
DTC Participant will be received with value on the DTC settlement date but will
be available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlements in DTC. For information with respect to tax
documentation procedures relating to the Certificates, see "Certain Federal
Income Tax Consequences -- Taxation of Certain Foreign Investors" and "--
Backup Withholding" in the Prospectus and "Global Clearance, Settlement and Tax
Documentation Procedures--Certain U.S. Federal Income Tax Documentation
Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC
rules. Transfers between CEDEL Participants and Euroclear Participants will
occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC
in accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross-market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its Participants ("DTC Participants"), some of which
(and/or their representatives) own DTC. In accordance with its normal
procedures, DTC is expected to record the positions held by each DTC
Participant in the Book-Entry Certificates, whether held for its own account or
as a nominee for another person. In general, beneficial ownership of
Book-Entry Certificates will be subject to the rules, regulations and
procedures governing DTC and DTC Participants as in effect from time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participant organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes
in accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. 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,
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brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for Participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including
United States dollars. Euroclear includes various other services, including
securities lending and borrowing and interfaces with domestic markets in
several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by the Brussels,
Belgium office of Morgan Guaranty Trust Company of New York (the "Euroclear
Operator"), under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the "Cooperative"). All operations are conducted by
the Euroclear Operator, and all Euroclear Securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments
with respect to securities in Euroclear. All securities in Euroclear are held
on a fungible basis without attribution of specific certificates to specific
securities clearance accounts. The Euroclear Operator acts under the Terms and
Conditions only on behalf of Euroclear Participants, and has no record of or
relationship with persons holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Payment Date by the Trustee to DTC. DTC will be responsible for crediting the
amount of such payments to the accounts of the applicable DTC Participants in
accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing such payment to the Beneficial Owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be
responsible for disbursing funds to the Beneficial Owners of the Book-Entry
Certificates that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distributions with respect
to Certificates held through CEDEL or Euroclear will be credited to the cash
accounts of CEDEL Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. Because DTC can only act
on behalf of Financial Intermediaries, the ability of a Beneficial Owner to
pledge Book-Entry Certificates to persons or entities that do not participate
in the Depository system, or otherwise take actions in respect of such
Book-Entry Certificates, may be limited due to the lack of physical
certificates for such Book-Entry Certificates. In addition, issuance of the
Book-Entry Certificates in book-entry form may reduce the liquidity of such
Certificates in the secondary market since certain potential investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates.
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.
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DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
Owners of the Book-Entry Certificates under the Pooling and Servicing Agreement
only at the direction of one or more Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates are credited, to the extent that such
actions are taken on behalf of Financial Intermediaries whose holdings include
such Book-Entry Certificates. CEDEL or the Euroclear Operator, as the case may
be, will take any action permitted to be taken by an Owner under the Pooling
and Servicing Agreement on behalf of a CEDEL Participant or Euroclear
Participant only in accordance with its relevant rules and procedures and
subject to the ability of the Relevant Depositary to effect such actions on its
behalf through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Class A Certificates which conflict with
actions taken with respect to other Class A Certificates.
Definitive Certificates will be issued to Beneficial Owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as a nominee and
depository with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor, at its
sole option, elects to terminate a book-entry system through DTC or (c) DTC, at
the direction of the Beneficial Owners representing a majority of the
outstanding Percentage Interests of the Notes and Class A Certificates, advises
the Trustee in writing that the continuation of a book-entry system through DTC
(or a successor thereto) is no longer in the best interests of Beneficial
Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Beneficial
Owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
Owners under the Pooling and Servicing Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Notes and Class A Certificates
among Participants of DTC, CEDEL and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
ASSIGNMENT OF RIGHTS
An Owner may pledge, encumber, hypothecate or assign all or any part
of its right to receive distributions under any Note or Class A Certificate,
but such pledge, encumbrance, hypothecation or assignment shall not constitute
a transfer of an ownership interest sufficient to render the transferee an
Owner of the Trust without compliance with the provisions of the Pooling and
Servicing Agreement described above. Notwithstanding the foregoing, the
Pooling and Servicing Agreement provides that the Insurer may, in connection
with a subrogation of the Insurer to the rights of the Owners of the Notes and
the Class A Certificates to an amount equal to Insured Payments for which the
Insurer has not received reimbursement, be considered to be an "Owner" to the
extent (but only to the extent) of such rights.
THE INSURANCE POLICY AND THE INSURER
The following information has been supplied by the Insurer for
inclusion in this Prospectus Supplement. No representation is made by the
Underwriters, the Seller, the Servicers, the Depositor or any of their
affiliates as to the accuracy or completeness of such information.
[TO BE SUPPLIED.]
THE INDENTURE
In addition to the provisions of the Indenture summarized elsewhere in
this Prospectus Summary, there is set forth below a summary of certain other
provisions of the Indenture.
MODIFICATION OF INDENTURE WITHOUT NOTEHOLDER CONSENT
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The Trust and the Indenture Trustee may, without the consent of the
Owners of the Notes, but with the prior written consent of the Insurer, enter
into one or more supplemental indentures for any of the following purposes: (i)
to correct or amplify the description of the collateral or add additional
collateral; (ii) to provide for the assumption of the Notes and the Indenture
obligations by a permitted successor to the Trust; (iii) to add additional
covenants for the benefit of the Owners of the Notes, or to surrender any
rights or power conferred upon the Trust; (iv) to convey, transfer, assign,
mortgage or pledge any property to or with the Indenture Trustee; (v) to cure
any ambiguity or correct or supplement any provision in the Indenture or in any
supplemental indenture, which may be inconsistent with any other provision of
the Indenture or in any supplemental indenture; (vi) to provide for the
appointment of a successor Indenture Trustee or to add to or change any of the
provisions of this Indenture as shall be necessary and permitted to facilitate
the administration by more than one trustee; (vii) to modify, eliminate or add
to the provisions of the Indenture in order to comply with the Trust Indenture
Act of 1939, as amended; and (viii) to add any provisions to, change in any
manner, or eliminate any of the provisions of, the Indenture or modify in any
manner the rights of the Owners of the Notes under the Indenture; provided that
any action specified in this clause (viii) shall not, as evidenced by an
opinion of counsel, adversely affect in any material respect the interests of
any Owner of the Notes unless consent is obtained as described below.
MODIFICATION OF INDENTURE WITH NOTEHOLDER CONSENT
With the consent of the Owners of a majority in aggregate Percentage
Interest (a "Majority in Voting Interest") of the Notes, and with the prior
written consent of the Insurer, the Trust and the Indenture Trustee may execute
a supplemental indenture to add provisions to, change in any manner or
eliminate any provisions of, the Indenture, or modify (except as provided
below) in any manner the rights of the Owners of the Notes.
Without the consent of the Owner of each outstanding Note affected
thereby and the written consent of the Insurer, however, no supplemental
indenture may: (i) change the due date of any installment of principal of or
interest on any Note or reduce the principal amount thereof, the interest rate
specified thereon or the redemption price with respect thereto or change any
place of payment where or the coin or currency in which any Note or any
interest thereon is payable; (ii) impair the right to institute suit for the
enforcement of certain provisions of the Indenture regarding payment; (iii)
reduce the percentage of the aggregate amount of the outstanding Notes the
consent of the Owners of which is required for any such supplemental indenture
or the consent of the Owners of which is required for any waiver of compliance
with certain provisions of the Indenture or of certain defaults thereunder and
their consequences as provided for in the Indenture; (iv) modify or alter the
provisions of the Indenture regarding the voting of Notes held by the Trust,
any other obligor on the Notes, the Depositor, the Seller, the Servicers or an
affiliate of any of them; (v) reduce the percentage of the aggregate
outstanding amount of the Notes the consent of the Owners of which is required
to direct the Indenture Trustee to sell or liquidate the assets of the Trust if
the proceeds of such sale would be insufficient to pay the principal amount and
accrued but unpaid interest on the outstanding Notes; (vi) decrease the
percentage of the aggregate principal amount of the Notes required to amend the
sections of the Indenture which specify the applicable percentage of aggregate
principal amount of the Notes necessary to amend the Indenture or certain other
related agreements; or (vii) permit the creation of any lien ranking prior to
or on a parity with the lien of the Indenture with respect to any of the
collateral for the Notes, or, except as otherwise permitted or contemplated in
the Indenture, terminate the lien of the Indenture on any such collateral or
deprive the holder of any Note of the security afforded by the lien of the
Indenture.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
"Events of Default" under the Indenture will consist of: (i) any
failure to make any required payment of interest on the Notes, which failure
continues unremedied for five days; (ii) any failure (a) to make any required
payment of principal on the Notes or (b) to observe or perform in any material
respect any other covenants or agreements in the Indenture, which failure in
the case of a default described under (ii)(b) immediately above materially and
adversely affects the rights of the Owners of the Notes, and which failure in
either case continues unremedied or 30 days after the giving of written notice
of such failure to the Trust and the Depositor or the Servicers, as applicable,
by the Indenture Trustee or the Insurer or by the Owners of not less than 25%
of the principal amount of the Notes, with the consent of the Insurer; (iii)
failure to pay the unpaid principal balance of the Notes on the final scheduled
Payment Date; and (iv) certain events of insolvency, readjustment of debt,
marshaling of assets and
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liabilities or similar proceedings and certain actions by the Trust indicating
its insolvency, reorganization pursuant to bankruptcy proceedings or inability
to pay its obligations. Nevertheless, the amount of principal required to be
distributed to the Owners of the Notes under the Indenture is generally limited
to amounts available therefor in the Certificate Account. Therefore, the
failure to pay principal on the Notes will not result in the occurrence of an
Event of Default until the final scheduled Payment Date.
If any Event of Default should occur and be continuing with respect to
the Notes, the Insurer (so long as the Insurer has not failed to satisfy its
obligations under the Insurance Policy), or the Indenture Trustee or the
Majority in Voting Interest of the Notes then outstanding (in each case, with
the consent of the Insurer), may declare the principal of the Notes to be
immediately due and payable. Such declaration may, under certain
circumstances, be rescinded by the Insurer (so long as the Insurer has not
failed to satisfy its obligations under the Insurance Policy) or (with the
Insurer's prior written consent) the Majority in Voting Interest of the Notes
then outstanding.
If the Notes have been declared to be due and payable following an
Event of Default with respect thereto, the Indenture Trustee shall, at the
direction of the Insurer (so long as the Insurer is not in default under the
Insurance Policy) and may, with the consent of the Insurer, either sell the
assets of the Trust or elect to have the Trust maintain possession of the
assets of the Trust and continue to apply distributions on the Mortgage Loans
as if there had been no declaration of acceleration. The Indenture Trustee,
however, is prohibited from selling the assets of the Trust following an Event
of Default, unless (a)(i) the Owners of all the outstanding Notes consent to
such sale, (ii) the proceeds of such sale are sufficient to pay in full the
principal of and the accrued interest on the outstanding Notes at the date of
such sale, or (iii) the Indenture Trustee determines that the proceeds of the
Mortgage Loans would not be sufficient on an ongoing basis to make all payments
on the Notes as such payments would have become due if the Notes had not been
declared due and payable, and (b) the Indenture Trustee obtains the consent of
the Insurer. Following a declaration upon an Event of Default that the Notes
are immediately due and payable, repayment in full of the accrued interest on
and unpaid principal balance of the Notes will be made prior to any further
payment of principal of or interest on the Class A Certificates
Subject to the provisions of the Indenture relating to the duties of
the Indenture Trustee, if an Event of Default occurs and is continuing with
respect to the Notes, the Indenture Trustee will be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the Owners of Notes, if the Indenture Trustee reasonably
believes it will not be adequately indemnified against the costs, expenses and
liabilities which might be incurred by it in complying with such request.
Subject to such provisions for indemnification and certain limitations
contained in the Indenture, the Insurer will have the right to direct the time,
method and place of conducting any proceeding or any remedy available to the
Indenture Trustee.
No holder of any Note will have the right to institute any proceeding
with respect to the Indenture, unless (i) such Owner previously has given to
the Indenture Trustee and the Insurer written notice of a continuing Event of
Default, (ii) the Owners of not less than 25% of the principal amount of the
Notes have made written request of the Indenture Trustee to institute such
proceeding in its own name as Indenture Trustee, (iii) such Owner or Owners
have offered the Indenture Trustee reasonable indemnity, (iv) the Indenture
Trustee has for 60 days failed to institute such proceeding, (v) no direction
inconsistent with such written request has been given to the Indenture Trustee
during such 60-day period by the Owners of a Majority in Voting Interest of the
Notes and (vi) such Owner has obtained the written consent of the Insurer.
In addition, the Indenture Trustee and the Owners of the Notes will
covenant that they will not at any time institute against the Trust any
bankruptcy, reorganization or other proceeding under any federal or state
bankruptcy or similar law.
Neither the Indenture Trustee nor the Owner Trustee in its individual
capacity, nor any Owner of a Certificate representing an ownership interest in
the Trust including, without limitation, the Depositor, the Servicers or the
Seller nor any of their respective owners, beneficiaries, agents, officers,
directors, employees, affiliates, successors or assigns will, in the absence of
an express agreement to the contrary, be personally liable for the payment of
the principal of or interest on the Notes or for the agreements of the Trust
contained in the Indenture.
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CERTAIN COVENANTS
The Trust may not consolidate with or merge into any other entity,
unless (i) the entity formed by or surviving such consolidation or merger is
organized under the laws of the United States, any state or the District of
Columbia, (ii) such entity expressly assumes the Trust's obligation to make due
and punctual payments upon the Notes and the performance or observance of every
agreement and covenant of the Trust under the Indenture, (iii) no Event of
Default shall have occurred and be continuing immediately after such merger or
consolidation, (iv) the Insurer shall have consented to such transaction, (v)
the Trust has received an opinion of counsel to the effect that such
consolidation or merger would have no material adverse tax consequence to the
Trust or to any Owner of Notes or Certificates and (vi) such merger or
consolidation does not result in the rating of the Notes or the Class A
Certificates being downgraded.
The Trust will not, among other things (i) except as expressly
permitted by the Indenture, the Pooling and Servicing Agreement or certain
related documents (collectively, the "Related Documents"), sell, transfer,
exchange or otherwise dispose of any of the assets of the Trust, (ii) claim any
credit on or make any deduction from the principal and interest payable in
respect of the Notes (other than amounts withheld under the Code or applicable
state law) or assert any claim against any present or former Owner of Notes
because of the payment of taxes levied or assessed upon the Trust, (iii)
dissolve or liquidate in whole or in part, (iv) permit the validity or
effectiveness of the Indenture to be impaired or permit any person to be
released from any covenants or obligations with respect to the Notes under the
Indenture except as may be expressly permitted thereby or (v) permit any lien,
charge, excise, claim, security interest, mortgage or other encumbrance to be
created on or extend to or otherwise arise upon or burden the assets of the
Trust or any part thereof, or any interest therein or the proceeds thereof.
The Trust may not engage in any activity other than as specified under
"Formation of the Trust and Trust Property" herein. The Trust will not incur,
assume or guarantee any indebtedness other than indebtedness incurred pursuant
to the Notes and the Indenture or otherwise in accordance with the Related
Documents.
ANNUAL COMPLIANCE STATEMENT
The Trust will be required to file annually with the Indenture Trustee
a written statement as to the fulfillment of its obligations under the
Indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT
Pursuant to the Trust Indenture Act of 1939, the Indenture Trustee may
be required to mail each year to the Owners of Notes, a brief report relating
to its eligibility and qualification to continue as the Indenture Trustee under
the Indenture, any amounts advanced by it under the Indenture, the amount,
interest rate and maturity date of certain indebtedness owing by the Trust to
the Indenture Trustee in its individual capacity, the property and funds
physically held by the Indenture Trustee as such and any action taken by it
that materially affects the Notes and that has not been previously reported.
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture will be discharged with respect to the collateral
securing the Notes upon the delivery to the Indenture Trustee for cancellation
of all the Notes or, with certain limitations, upon deposit with the Indenture
Trustee of funds sufficient for the payment in full of all the Notes.
Pursuant to the Indenture, the Indenture Trustee is required at all
times to be a banking corporation organized and doing business under the laws
of the United States of America or of any State, authorized under such laws to
exercise corporate trust powers, having a combined capital and surplus of at
least $50,000,000, whose long-term deposits, if any, are rated at least "____"
by S&P and "______" by Moody's, or such lower rating as may be approved in
writing by the Insurer, S&P and Moody's subject to supervision or examination
by federal or state authority and reasonably acceptable to the Insurer. If at
any time the Indenture Trustee shall cease to be eligible in accordance with
the provisions described in this paragraph, the Indenture Trustee shall give
notice of such ineligibility
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to the Insurer and shall resign, upon the request of the Insurer or the
Majority in Voting Interest of the Notes, in the manner and with the effect
specified in the Indenture.
Any resignation or removal of the Indenture Trustee and appointment of
a successor trustee shall become effective upon the acceptance of appointment
by such successor trustee.
The Indenture Trustee, or any successor trustee or trustees, may
resign at any time by giving written notice to Depositor, the Seller, the
Servicers, the Insurer and all Owners of Notes in the manner set forth in the
Indenture. Upon receiving notice of resignation, the Depositor, with the
consent of the Insurer, is required to promptly appoint a successor trustee or
trustees meeting the eligibility requirements set forth above in the manner set
forth in the Indenture. The Depositor will deliver a copy of the instrument
used to appoint a successor trustee to the Owners of Notes. If no successor
trustee shall have been appointed and have accepted appointment within 60 days
after the giving of such notice of resignation, the resigning trustee may
petition any court of competent jurisdiction for the appointment of a successor
trustee. Such court may thereupon, after such notice, if any, as it may deem
proper and prescribe, appoint a successor trustee.
The Majority in Voting Interest of the Notes or, if the Indenture
Trustee fails to perform in accordance with the terms of the Indenture, the
Insurer, may remove the Indenture Trustee under the conditions set forth in the
Indenture and appoint a successor trustee in the manner set forth therein.
At any time, for the purpose of meeting any legal requirements of any
jurisdiction in which any assets of the Trust or property securing the same may
at the time be located, the Depositor and the Indenture Trustee acting jointly
shall have the power and shall execute and deliver all instruments to appoint
one or more persons approved by the Indenture Trustee and the Insurer to act as
co-trustee or co-trustees, jointly with the Indenture Trustee, or separate
trustee or separate trustees, of all or any part of the assets of the Trust,
and to vest in such person or persons, in such capacity, such title to the
assets of the Trust, or any part thereof, and, subject to the provisions of the
Indenture, such powers, duties, obligations, rights and trusts as the Servicer
and the Trustee may consider necessary or desirable.
THE TRUST AGREEMENT
In addition to the provisions of the Trust Agreement summarized
elsewhere is this Prospectus Summary, there is set forth below a summary of
certain other provisions of the Trust Agreement.
LIABILITY OF THE DEPOSITOR
Under the Trust Agreement, the Depositor agrees to be jointly and
severally liable directly to an injured party for all losses, claims, damages
or liabilities (other than certain tax liabilities and those losses incurred by
an Owner of Certificates in its capacity as an investor in the Certificates or
by an Owner of Notes in its capacity as an investor in the Notes) to the extent
that the Depositor would be liable if the Trust were a partnership under the
Uniform Limited Partnership Act in which the Depositor was a general partner.
TERMINATION OF TRUST AGREEMENT
The Trust Agreement and the Trust shall terminate and be in no further
force or effect on the earlier of: (i) the final distribution by the Owner
Trustee of all moneys or other property or proceeds of the assets of the Trust
in accordance with the terms of the Indenture, the Pooling and Servicing
Agreement and the Trust Agreement or (ii) at the time described below under
"--Dissolution upon Bankruptcy of Depositor".
Notice of any termination of the Trust, specifying the Payment Date
upon which the Owners of the Certificates are to surrender their Certificates
for payment of the final distribution and cancellation, is required to be given
by the Owner Trustee by letter to the Insurer and the Owners of the
Certificates mailed within five business days of receipt of notice of such
termination from the Servicers given pursuant to the Pooling and Servicing
Agreement.
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If all the Owners of the Certificates shall not surrender their
Certificates for cancellation within six months after the date specified in the
above mentioned written notice, the Owner Trustee is required to give a second
written notice to the remaining Owners of the Certificate to surrender their
Certificates for cancellation and receive the final distribution with respect
thereto. If within one year after the second notice all the Certificates shall
not have been surrendered for cancellation, the Owner Trustee may take
appropriate steps, or may appoint an agent to take appropriate steps, to
contact the remaining Owners of the Certificate concerning surrender of their
Certificates. Subject to applicable laws with respect to escheat of funds, any
funds remaining in the Trust after exhaustion of such remedies in the preceding
sentence shall be deemed property of the Depositor and distributed by the Owner
Trustee to the Depositor.
DISSOLUTION UPON BANKRUPTCY OF DEPOSITOR
The Trust Agreement shall be terminated 90 days after the occurrence
of certain events of insolvency or reorganization or inability to pay its
obligations with respect to the Depositor, unless, before the end of such 90
day period, the Owner Trustee shall have received written instructions from (a)
each Owner of the Certificates (other than the Depositor) and (b) each Owner of
the Notes, to the effect that each such party disapproves of the liquidation of
the Mortgage Loans and termination of the Trust. Promptly after the occurrence
of any such event with respect to either Depositor: (i) such Depositor shall
give the Insurer, the Indenture Trustee and the Owner Trustee written notice of
such event; (ii) the Owner Trustee shall, upon the receipt of such written
notice from the Depositor, give prompt written notice to the Owners of the
Certificate and the Indenture Trustee of the occurrence of such event; and
(iii) the Indenture Trustee shall, upon receipt of written notice of such event
from the Owner Trustee or the Depositor, give prompt written notice to the
Owners of the Note of the occurrence of such event; provided, however, that any
failure to give such notice shall not prevent or delay in any manner a
termination of the Trust. Upon such termination, the Owner Trustee shall
direct the Indenture Trustee promptly to sell the assets of the Trust in a
commercially reasonable manner and on commercially reasonable terms. The
proceeds of any such sale, disposition or liquidation of the assets of the
Trust shall be treated as collections on the Mortgage Loans and deposited in
the Certificate Account pursuant to the Indenture.
AMENDMENTS WITHOUT CONSENT OF THE OWNERS OF THE CERTIFICATES OR NOTES
The Trust Agreement may be amended by the Depositor and the Owner
Trustee without the consent of any of the Owners of the Notes or the
Certificates (but with the prior written consent of the Insurer), to (i) cure
any ambiguity, (ii) correct or supplement any provision in the Trust Agreement
that may be defective or inconsistent with any other provision in the Trust
Agreement, (iii) add or supplement any credit enhancement for the benefit of
the Owners of the Notes or the Certificates, (iv) add to the covenants,
restrictions or obligations of the Depositor or the Owner Trustee, (v) evidence
and provide for the acceptance of the appointment of a successor trustee with
respect to the assets of the Trust or add to or change any provisions as shall
be necessary to facilitate the administration of the trusts by more than one
trustee, and (vi) add, change or eliminate any other provision of the Trust
Agreement in any manner that shall not, as evidenced by an opinion of counsel,
adversely affect in any material respect the interests of the Owners of the
Notes or the Certificates.
AMENDMENTS WITH CONSENT OF THE INSURER AND THE OWNERS OF THE CERTIFICATES
The Trust Agreement may be amended from time to time by the Depositor
and the Owner Trustee with the consent of a Majority in Voting Interest of
Class A Certificates and of the Subordinated Certificates, voting separately,
and with the consent of the Insurer, for the purpose of adding any provisions
to or changing in any manner or eliminating any of the provisions of the Trust
Agreement, or of modifying in any manner the rights of the Certificates;
provided, however, that no such amendment shall (a) increase or reduce in any
manner the amount of, or accelerate or delay the timing of, collections of
payments on Mortgage Loans or distributions that shall be required to be made
on any Certificate or the Class A Pass-Through Rate or (b) reduce the aforesaid
percentage required to consent to any such amendment, without the consent of
the Owners of all the Certificates then outstanding.
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NO PETITION COVENANT
The Owner Trustee and the Owners of the Certificates will covenant
that they will not prior to the date which is one year and one day after
termination of the Trust Agreement institute at any time against the Trust or
the Depositor any bankruptcy, reorganization or other proceeding under any
federal or state bankruptcy or similar law.
THE POOLING AND SERVICING AGREEMENT
In addition to the provisions of the Pooling and Servicing Agreement
summarized elsewhere in the Prospectus and this Supplement, there is set forth
below a summary of certain other provisions of the Pooling and Servicing
Agreement.
COVENANT OF THE SELLER TO TAKE CERTAIN ACTIONS WITH RESPECT TO THE MORTGAGE
LOANS IN CERTAIN SITUATIONS
Pursuant to the Pooling and Servicing Agreement, upon the discovery by
the Depositor, Seller, a Servicer, the Insurer or the Trustee that any
representations and warranties contained in a Transfer Agreement with respect
to the Mortgage Loans that were assigned to the Trust were untrue in any
material respect as of the Closing Date with the result that the interests of
the Owners or of the Insurer are materially and adversely affected, or the
value of the related Mortgage Loan is materially and adversely affected, the
party discovering such breach is required to give prompt written notice to
certain other parties thereto.
Upon the earliest to occur of the Seller's discovery of or its receipt
of notice of a breach described above from any of the other parties pursuant to
the related Transfer Agreement, the Originator or other party to the related
Transfer Agreement will be required promptly to (i) cure such breach in all
material respects or, within the time period specified in the related Transfer
Agreement, to (ii) substitute in lieu of each affected Mortgage Loan a
Qualified Replacement Mortgage (as such term is defined in the Pooling and
Servicing Agreement) and deliver any Substitution Amount to the related
Servicer for deposit into its Principal and Interest Account on behalf of the
Trust as part of the Monthly Remittance remitted by such Servicer on the
related Monthly Remittance Date or (iii) purchase such Mortgage Loan from the
Trust at a purchase price equal to the Loan Purchase Price (as defined below)
thereof.
"Loan Purchase Price" means generally the outstanding principal
balance of the related Mortgage Loan on the Cut-Off Date, less any principal
amounts previously distributed relating to such Mortgage Loan (such amount, the
"Loan Balance" of such Mortgage Loan) as of the date of purchase (assuming that
the Monthly Remittance remitted by the Servicer on such Monthly Remittance Date
has already been remitted), plus one month's interest at the Net Coupon Rate.
ASSIGNMENT OF MORTGAGE LOANS
Pursuant to the Pooling and Servicing Agreement, the Seller on the
Closing Date and on each Subsequent Transfer Date will transfer, assign, set
over and otherwise convey without recourse to the Depositor and the Depositor
will transfer, assign, set over and otherwise convey without recourse to the
Trustee in trust all its respective right, title and interest in and to each
Mortgage Loan and all its respective right, title and interest in and to
principal and interest due on each such Mortgage Loan on or after the
applicable Cut-Off Date; provided, however, that the Depositor will reserve and
retain all its right, title and interest in and to principal (including
Prepayments) and interest due on each Mortgage Loan on or prior to the Cut-Off
Date (except with respect to Mortgage Loans that were delinquent on such
Cut-Off Date, which payments are not being retained by the Depositor). Purely
as a protective measure and not to be construed as contrary to the parties'
intent that such transfers are sales, the Seller has also been deemed to have
granted to the Depositor and the Depositor has also been deemed to have granted
to the Trustee a security interest in the Trust Estate in the event that the
transfer of the Trust Estate is deemed to be a loan and not a sale.
In connection with the transfer and assignment of the Initial Mortgage
Loans on the Closing Date and the Subsequent Mortgage Loans on each Subsequent
Transfer Date, the Depositor will be required to:
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(i) deliver without recourse to the Trustee on the Closing
Date with respect to each Initial Mortgage Loan or on each Subsequent
Transfer Date with respect to each Subsequent Mortgage Loan identified
in the related schedule of Mortgage Loans (A) the original Notes,
endorsed in blank or to the order of the Trustee, (B) the original
title insurance policy or any one of an original title binder, an
original preliminary title report, or an original title commitment, or
a copy certified by the issuer of any of the foregoing, or the
attorney's opinion of title, (C) originals or certified copies of all
intervening recorded assignments, showing a complete chain of title
from origination to the Trustee, if any, including warehousing
assignments, with evidence of recording thereon, (D) originals of all
assumption, modification, written assurance or substitution
agreements, if any and (E) either: (1) the original Mortgage, with
evidence of recording thereon (if such original Mortgage has been
returned to the custodian holding for the Seller from the applicable
recording office) or (2) a copy of the Mortgage certified by the
public recording office in those instances where the original recorded
Mortgage has been lost;
(ii) cause the Servicer, within 60 days following the
Closing Date with respect to the Initial Mortgage Loans, or the
Subsequent Transfer Date with respect to the Subsequent Mortgage
Loans, to submit for recording in the appropriate jurisdictions,
assignments of the Mortgages to "_____________
___________________________, as Trustee of AMRESCO Residential
Securities Corporation Mortgage Loan Trust 199__-__ under the Pooling
and Servicing Agreement dated as of _____________, 199__"; provided,
however, that the Depositor shall not be required to prepare any
assignment of Mortgage for a Mortgage with respect to which the
Mortgaged Property is located in California or the original recording
information is lacking;
(iii) if not delivered on the Closing Date or the Subsequent
Transfer Date, deliver the title insurance policy or title searches,
the original Mortgages and such recorded assignments, together with
originals or duly certified copies of any and all prior assignments,
to the Trustee within 15 days of receipt thereof by the Depositor (but
in any event, with respect to any Mortgage as to which original
recording information has been made available to the Depositor within
two years after the Closing Date with respect to the Initial Mortgage
Loans, or Subsequent Transfer Date with respect to the Subsequent
Mortgage Loans); and
(iv) furnish to the Trustee and the Insurer, at the
Depositor's expense, a tax opinion and an opinion of counsel with
respect to the sale and perfection of all Subsequent Mortgage Loans
delivered to the Trust in form and substance satisfactory to the
Trustee and the Insurer.
The Trustee will agree, for the benefit of the Owners, to review the
documents contained in each Mortgage Loan File held by the Trustee ("File")
within 45 days after the Closing Date or Subsequent Transfer Date (or the date
of receipt of any documents delivered to the Trustee after such date) to
ascertain that all required documents (or certified copies of documents) have
been executed and received.
If the Trustee during such 45-day period finds any document
constituting a part of a File which is not properly executed, has not been
received, or is unrelated to the Mortgage Loans, or that any Mortgage Loan does
not conform in a material respect to the description thereof as set forth in
the Schedule of Mortgage Loans, the Trustee will be required to promptly notify
the Depositor, the Seller, the Owners and the Insurer. The Seller will agree
in the Pooling and Servicing Agreement to request that the related Originator
or other party to a Transfer Agreement use reasonable efforts to remedy a
material defect in a document constituting part of a File of which it is so
notified by the Trustee. If, however, within the time period set forth in the
related Transfer Agreement after the Trustee's notice to it respecting such
defect the related Originator or other party to a Transfer Agreement shall not
have remedied the defect and the defect materially and adversely affects the
interest in the related Mortgage Loan of the Owners or of the Insurer, the
Seller will request the related Originator or other party to a Transfer
Agreement within the time period specified in the related Transfer Agreement to
(i) substitute in lieu of such Mortgage Loan another Mortgage Loan of like kind
(a "Qualified Replacement Mortgage," as such term is defined in the Pooling and
Servicing Agreement) and deliver any "Substitution Amount" (the excess, if any,
of the Loan Balance of a Mortgage Loan being replaced over the outstanding
principal balance of a replacement Mortgage Loan plus accrued and unpaid
interest) to the related Servicer for deposit into its Principal and Interest
Account on behalf of the Trust as part of the Monthly Remittance remitted by
the Servicer on such Monthly Remittance Date or (ii) purchase such Mortgage
Loan at a purchase price
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equal to the Loan Purchase Price thereof, which purchase price shall be
delivered to the related Servicer for deposit in the related Principal and
Interest Account along with the Monthly Remittance remitted by such Servicer on
such Monthly Remittance Date.
In addition to the foregoing, the Trustee has agreed to provide an
updated exception report during the 12th month after the Closing Date
indicating the current status of the exceptions previously noted by the Trustee
(the "Final Certification"). After delivery of the Final Certification, the
Trustee shall provide to the Insurer and the related Servicer no less
frequently than monthly updated certifications indicating the then current
status of exceptions, until all such exceptions have been eliminated.
SERVICING
Each Servicer will be obligated under the Pooling and Servicing
Agreement to service and administer the Mortgage Loans identified as being
serviced by it as described therein and with reasonable care, and using that
degree of skill and attention that such Servicer exercises with respect to
comparable mortgage loans that it services for itself or others, and shall have
full power and authority, acting alone, to do or cause to be done any and all
things in connection with such servicing and administration which it may deem
necessary or desirable. Consistent with the foregoing, each Servicer will be
permitted to, in its discretion, (i) waive any assumption fees, late payment
charges, charges for checks returned for insufficient funds or other fees which
may be collected in the ordinary course of servicing the Mortgage Loans, (ii)
if a Mortgagor is in default or about to be in default because of a Mortgagor's
financial condition, arrange with the Mortgagor a schedule for the payment of
delinquent payments due on the related Mortgage Loan, or (iii) modify payments
of monthly principal and interest on any Mortgage Loan becoming subject to the
terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended, in
accordance with such Servicer's general policies with respect to comparable
mortgage loans subject to such Act.
Each Servicer will be paid a monthly fee from interest collected with
respect to each Mortgage Loan serviced by it (as well as from any Liquidation
Proceeds from a Liquidated Mortgage Loan ("Liquidation Proceeds") that are
applied to accrued and unpaid interest) equal to the Loan Balance thereof
multiplied by the applicable Servicing Fee Rate (such product, the "Servicing
Fee"). The "Servicing Fee Rate" for each Mortgage Loan will be the rate
provided in the Pooling and Servicing Agreement, not to exceed __% 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 principal and interest due on the related
Mortgage Loans after the Cut-Off Date and past due interest and principal on
any Mortgage Loan that was delinquent as of the Cut-Off Date, including any
Prepayments, the proceeds of any liquidation of a Mortgage Loan (including any
insurance proceeds) net of expenses and unreimbursed Delinquency Advances and
Servicing Advances ("Net
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Liquidation Proceeds"), any income from REO Properties received thereafter (net
of unreimbursed Servicing Advances and Delinquency Advances), but net of (i)
the Servicing Fee with respect to each Mortgage Loan and other servicing
compensation, (ii) principal collected and interest accrued on any Mortgage
Loan prior to the Cut-Off Date if such Mortgage Loan was current as of the
Cut-Off Date, which amounts shall be delivered to the Seller, (iii) late
payments received on any Mortgaged Loan in respect of unreimbursed Servicing
Advances and Delinquency Advances and (iv) reimbursements for past Delinquency
Advances which the Servicer has determined in its good faith business judgment
are not recoverable from the related Mortgagor or Mortgage Loan proceeds (all
such net amounts being referred to herein as the "Daily Collections").
Each Servicer may make withdrawals for its own account (or for the
account of the Seller in the case of clause (i) below) from the amounts on
deposit in the related Principal and Interest Account only for the following
purposes:
(i) to withdraw interest paid with respect to any Mortgage
Loans that had accrued for periods on or prior to the Cut-Off Date and
principal due on all current Mortgage Loans on the Cut-Off Date, which
shall be paid to the Seller;
(ii) to withdraw investment earnings on amounts on deposit in
its respective Principal and Interest Account;
(iii) to reimburse itself for unrecovered Delinquency
Advances and Servicing Advances to the extent permitted in the Pooling
and Servicing Agreement;
(iv) to withdraw amounts that have been deposited to its
respective Principal and Interest Account in error; and
(v) to clear and terminate its respective Principal and
Interest Account following the termination of the Trust Estate.
Each Servicer will remit to the Trustee for deposit in the Certificate
Account the Monthly Remittance Amount not later than the related Monthly
Remittance Date.
Subject to the following limitations, each Servicer will be required
to advance on any Mortgage Loan serviced by it prior to each Payment Date its
own funds as set forth in the next paragraph, for such Payment Date, in an
amount equal to the aggregate of payments of principal and interest on the
Mortgage Loans serviced by it (adjusted to the applicable Net Coupon Rate) that
became due during the related Remittance Period and delinquent on the related
Determination Date, together with an amount equivalent to interest on the
principal balance of the Mortgage Loan related to each Mortgaged Property
(each, an "REO Property") acquired by the Trust through liquidation (any such
advance, a "Delinquency Advance"). The Net Coupon Rate is the rate equal to
the excess of the Coupon Rate over the applicable Servicing Fee Rate.
Delinquency Advances are intended to maintain a regular flow of
scheduled interest and principal payments on the Certificates rather than to
guarantee or insure against losses. Each Servicer is obligated to make
Delinquency Advances with respect to delinquent payments of principal of or
interest on each Mortgage Loan serviced by it (with such payments of interest
adjusted to the related Net Coupon Rate) to the extent that such Delinquency
Advances are, in its good faith business judgment, recoverable from future
payments and collections or insurance payments or proceeds of liquidation of
the related Mortgage Loan. Each Servicer shall be permitted to fund its
payment of Delinquency Advances on any Business Day, or to reimburse itself for
any Delinquency Advances paid from such Servicer's own funds, from collections
on the related Mortgage Loan deposited to the related Principal and Interest
Account subsequent to the related Remittance Period (including "Prepaid
Installments" (i.e., early payments of scheduled principal and interest
intended by the borrower to be treated as such)) and shall deposit into the
related Principal and Interest Account with respect thereto (i) collections
from the Mortgagor whose delinquency gave rise to the shortfall which resulted
in such Delinquency Advance net of any such Delinquency Advance and (ii) Net
Liquidation Proceeds recovered on account of the related Mortgage Loan to the
extent of the amount of aggregate
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Delinquency Advances related thereto. Previously unreimbursed
Delinquency Advances that the Servicer determines to be unrecoverable
may be reimbursed to the Servicer out of any Mortgagor payments prior
to their deposit to the related Principal and Interest Account or from
funds on deposit in the related Principal and Interest Account. All
Delinquency Advances will be included with the distribution on the
related Payment Date. Any failure by a Servicer to make a Delinquency
Advance as required under the Pooling and Servicing Agreement will
constitute an event of default thereunder for such Servicer, in which
case the Trustee, as successor servicer, or the successor servicer
will be obligated to make any such Delinquency Advance, in accordance
with the terms of the Pooling and Servicing Agreement.
Each Servicer will be required to pay all customary, reasonable and
necessary "out of pocket" costs and expenses incurred in the performance of its
servicing obligations, including, but not limited to, (i) expenditures in
connection with a foreclosed Mortgage Loan prior to the liquidation thereof,
including, without limitation, expenditures for real estate property taxes,
hazard insurance premiums, property restoration or preservation ("Preservation
Expenses"), (ii) the cost of any enforcement or judicial proceedings, including
foreclosures and (iii) the cost of the management and liquidation of Property
acquired in satisfaction of the related Mortgage, to the extent such expenses
are, in its good faith business judgment, recoverable. Such costs will
constitute "Servicing Advances." Each Servicer may recover a Servicing Advance
(x) to the extent permitted by the Mortgage Loans or, if not theretofore
recovered from the Mortgagor on whose behalf such Servicing Advance was made,
from Liquidation Proceeds realized upon the liquidation of the related Mortgage
Loan or (y), to the extent that such Advance is determined by the Servicer in
its good faith business judgment to be non-recoverable from such proceeds from
Net Monthly Excess Cashflow and certain other Mortgage Loan proceeds as
specified in the Pooling and Servicing Agreement.
A full month's interest at the related Net Coupon Rate will be due to
the Trust on the outstanding Loan Balance of each Mortgage Loan as of the
beginning of each Remittance Period. If a Prepayment of a Mortgage Loan occurs
during any calendar month, any difference between the interest collected from
the Mortgagor in connection with such prepayment and the full month's interest
at the Net Coupon Rate ("Compensating Interest") (but not in excess of the
aggregate Servicing Fee, and any Prepayment Interest Excess) will be required
to be deposited to the Principal and Interest Account on the Monthly Remittance
Date by the Servicer and shall be included in the Monthly Remittance to be made
available to the Trustee on the next succeeding Monthly Remittance Date.
When a Mortgagor prepays all or a portion of a Mortgage Loan between
scheduled monthly payment dates ("Due Dates"), the Mortgagor pays interest on
the amount prepaid only to the date of prepayment. Prepayments received from
the 2nd day through the 15th day of a month are included in the distribution on
the 25th day of the same month, and accordingly no shortfall in interest
results. Conversely, Prepayments received from the 16th day to the last day of
a month are not distributed until the 25th day of the following month, and
accordingly an interest shortfall (a "Prepayment Interest Shortfall") would
result. In order to mitigate the effect of any such shortfall in interest
distributions on any Payment Date, the amount of the Servicing Fee otherwise
payable to the related Servicer for such month shall, to the extent of such
shortfall, be deposited by the Servicer in the Certificate Account Any such
reduction in the Servicing Fee will be made only to the extent of the Servicing
Fee otherwise payable to such Servicer with respect to Scheduled Payments
having the Due Date to which such Payment Date relates. Any such deposit by
the related Servicer will be reflected in the distributions made on the Payment
Date on which the Prepayment received would be distributed. Subject to the
availability thereof to fund Compensating Interest requirements referred to in
the previous paragraph, the Servicers will be permitted to retain any
Prepayment Interest Excess due to prepayments received in the month in which
they are distributed.
Each Servicer will have the right and the option, but not the
obligation, to purchase for its own account any Mortgage Loan serviced by it
which becomes delinquent, in whole or in part, as to four consecutive monthly
installments or any Mortgage Loan as to which enforcement proceedings have been
brought by such Servicer. The purchase price for any such Mortgage Loan is
equal to the Loan Purchase Price thereof, which purchase price shall be
deposited in the related Principal and Interest Account.
Each Servicer, with respect to Mortgage Loans serviced by it, shall
foreclose upon or otherwise comparably convert the ownership on behalf of the
Trust of Mortgaged Properties relating to defaulted Mortgage Loans as to
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which no satisfactory arrangements can be made for collection of delinquent
payments and which the related Servicer has not purchased from the Trust.
If so required by the terms of any Mortgage Loan, the related Servicer
will be required to cause hazard insurance to be maintained with respect to the
related Mortgaged Property and to advance sums (such Advances to be treated as
Servicing Advances) on account of the premiums therefor if not paid by the
Mortgagor if permitted by the terms of such Mortgage Loan.
Each Servicer will have the right under the Pooling and Servicing
Agreement to accept applications of Mortgagors for consent to (i) partial
releases of Mortgages, (ii) alterations and (iii) removal, demolition or
division of Mortgaged Properties. No application for approval may be
considered by such Servicer unless: (i) the provisions of the related Note and
Mortgage have been complied with; (ii) the loan-to-value ratio and
debt-to-income ratio after any release does not exceed the maximum
loan-to-value ratio and debt-to-income ratio established in accordance with the
Guidelines set forth herein to be applicable to such Mortgage Loan; and (iii)
the lien priority of the related Mortgage is not affected.
Each Servicer will be permitted under the Pooling and Servicing
Agreement to enter into subservicing agreements for any servicing and
administration of Mortgage Loans with any institution which is acceptable to
the Insurer and a majority of Percentage Interests of the Owners of the
Subordinated Certificates and meeting the requirements of the Pooling and
Servicing Agreement.
Notwithstanding any subservicing agreement, each Servicer will not be
relieved of its obligations under the Pooling and Servicing Agreement and such
Servicer will be obligated to the same extent and under the same terms and
conditions as if it alone were servicing and administering the Mortgage Loans.
Each Servicer shall be entitled to enter into any agreement with a subservicer
for indemnification of such Servicer by such subservicer and nothing contained
in such subservicing agreement shall be deemed to limit or modify the Pooling
and Servicing Agreement.
Each Servicer (except the Trustee if it is required to succeed any
Servicer under the Pooling and Servicing Agreement) will agree to indemnify and
hold the Trustee, the Insurer, the Seller, the Depositor, each other Servicer
and each Owner harmless against any and all claims, losses, penalties, fines,
forfeitures, legal fees and related costs, judgments, and any other costs, fees
and expenses that the Trustee, the Insurer, the Seller, the Depositor, each
other Servicer and any Owner may sustain in any way related to the failure of
such Servicer to perform its duties and service the Mortgage Loans in
compliance with the terms of the Pooling and Servicing Agreement. A party
against whom any such claim is brought shall immediately notify the other
parties and the Rating Agencies and each Owner if a claim is made by a third
party with respect to the Pooling and Servicing Agreement, and such Servicer
may assume (with the consent of the Trustee) the defense of any such claim and,
upon a determination that the claim results from the Servicer's failure to
perform in accordance with the Pooling and Servicing Agreement, pay all
expenses in connection therewith, including reasonable counsel fees, and
promptly pay, discharge and satisfy any judgment or decree which may be entered
against such Servicer, the Trustee, the Insurer and/or Owner in respect of such
claim.
Each Servicer will be required to deliver to the Trustee, the Insurer,
the Seller, the Depositor and the Rating Agencies: (1) on or before April 15
of each year, commencing in 1997, an officers' certificate stating, as to each
signer thereof, that (i) a review of the activities of such Servicer during
such preceding calendar year and of performance under the Pooling and Servicing
Agreement has been made under such officers' supervision, and (ii) to the best
of such officers' knowledge, based on such review, such Servicer has fulfilled
all its obligations under the Pooling and Servicing Agreement for such year,
or, if there has been a default in the fulfillment of all such obligations,
specifying each such default known to such officers and the nature and status
thereof including the steps being taken by such Servicer to remedy such
default; and (2) on or before April 15 of any year commencing in 199__, a
letter or letters of a firm of independent, nationally recognized certified
public accountants reasonably acceptable to the Insurer dated as of the date of
the Servicer's fiscal audit for each subsequent letter stating that such firm
has examined the Servicer's overall servicing operations in accordance with the
requirements of the Uniform Single Attestation Program for Mortgage Bankers,
and stating such firm's conclusions relating thereto.
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REMOVAL AND RESIGNATION OF A SERVICER
The Insurer or the Owners, the Trustee or the Seller (in each case
with the consent of the Insurer), will have the right pursuant to the Pooling
and Servicing Agreement, to remove any Servicer upon the occurrence of, and in
certain cases after notice and expiration of the related cure period: (a)
certain acts of bankruptcy or insolvency on the part of such Servicer; (b)
certain failures on the part of such Servicer to perform its obligations under
the Pooling and Servicing Agreement; (c) the failure to cure material breaches
of such Servicer's obligations in the Pooling and Servicing Agreement; or (d)
if the loss and/or delinquency levels of the related Mortgage Loans are at
certain specified levels.
No Servicer is permitted to resign from the obligations and duties
imposed on it under the Pooling and Servicing Agreement except (i) upon
determination that its duties thereunder are no longer permissible under
applicable law or are in material conflict by reason of applicable law with any
other activities carried on by it, the other activities of such Servicer so
causing such conflict being of a type and nature carried on by such Servicer on
the date of the Pooling and Servicing Agreement or (ii) upon written consent of
the Insurer, the Seller and the Trustee and confirmation from the Rating
Agencies that the Class A Certificate ratings (absent the Insurance Policy) are
not reduced. Any such determination permitting the resignation of such
Servicer pursuant to clause (i) above is required to be evidenced by an opinion
of counsel to such effect which shall be delivered to the Trustee and the
Insurer.
Upon removal or resignation of a Servicer, the Trustee (x) shall
solicit bids for a successor servicer and (y) pending the appointment of a
successor Servicer as a result of soliciting such bids, shall serve as
Servicer. The Trustee, if it is unable to obtain a qualifying bid and is
prevented by law from acting as servicer, will be required to appoint, or
petition a court of competent jurisdiction to appoint, any housing and home
finance institution, bank or mortgage servicing institution designated as an
approved servicer meeting the requirements of the Pooling and Servicing
Agreement, and acceptable to the Insurer and the Owners of the Subordinated
Certificates (provided that if the Insurer and such Owners cannot agree as to
the acceptability of such successor Servicer, the decision of the Insurer shall
control) as the successor to such Servicer in the assumption of all or any part
of the responsibilities, duties or liabilities of such Servicer.
No removal or resignation of a Servicer will become effective until
the Trustee or a successor servicer shall have assumed a Servicer's
responsibilities and obligations in accordance with the Pooling and Servicing
Agreement.
REPORTING REQUIREMENTS
On each Payment Date the Trustee is required to report in writing to
each Owner and the Insurer:
(i) the amount of the distribution with respect to the
Notes, the Class A Certificates and the Subordinated Certificates
(based on an original principal amount of $1,000);
(ii) the amount of such distribution allocable to
principal on the Mortgage Loans, separately identifying the aggregate
amount of any Prepayments or other recoveries of principal included
therein, any Pre- Funded Amounts distributed as a Prepayment at the
end of the Funding Period (based on an original principal amount of
$1,000) and any Subordination Increase Amount;
(iii) the amount of such distribution allocable to interest
on Mortgage Loans (based on an original principal amount of $1,000);
(iv) if the distribution (net of any Insured Payment) to
the Owners of the Notes or the Class A Certificates on such Payment
Date was less than the related Distribution Amount on such Payment
Date, the Carry-Forward Amount and the allocation thereof;
(v) the amount of any Insured Payment included in the
amounts distributed to the Owners of the Notes and the Class A
Certificates on such Payment Date;
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(vi) the principal amount of the Notes and the Class A
Certificate (based on an original principal amount of $1,000) which
will be outstanding after giving effect to any payment of principal on
such Payment Date;
(vii) the aggregate Loan Balance of all Mortgage Loans, the
aggregate Loan Balance of the Initial Mortgage Loans and the
Subsequent Mortgage Loans, in each case after giving effect to any
payment of principal on such Payment Date;
(viii) the Subordinated Amount and Subordination Deficit, if
any, remaining after giving effect to all distributions and transfers
on such Payment Date;
(ix) based upon information furnished by the Depositor
such information as may be required by Section 6049(d)(7)(C) of the
Code and the regulations promulgated thereunder to assist the Owners
in computing their market discount;
(x) the total of any Substitution Amounts or Loan
Purchase Price amounts included in such distribution;
(xi) the weighted average Coupon Rate of the Mortgage
Loans;
(xii) such other information as the Insurer may reasonably
request with respect to delinquent Mortgage Loans;
(xiii) the largest Mortgage Loan balance outstanding;
(xiv) for Payment Dates during the Funding Period, the
remaining Pre-Funded Amount; and
(xv) the Servicing Fees, Trustee Fees and Premium Amount.
Certain obligations of the Trustee to provide information to the
Owners are conditioned upon such information being received from the Servicers.
In addition, on each Payment Date the Trustee will be required to
distribute to the Depositor, the Underwriters, the Rating Agencies, each Owner
and the Insurer, together with the information described above, the following
information prepared by the related Servicer and furnished to the Trustee for
such purpose:
(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 business day of the calendar month next preceding the Payment
Date and the number and aggregate Loan Balances of all Mortgage Loans
and related data;
(b) the status and the number and dollar amounts of all
Mortgage Loans in foreclosure proceedings as of the close of business
on the last business day of the calendar month next preceding such
Payment Date;
(c) the number of Mortgagors and the Loan Balances of the
related Mortgages involved in bankruptcy proceedings as of the close
of business on the last business day of the calendar month next
preceding such Payment Date;
(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 close of business of the last business day of the
month next preceding the Payment Date;
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(e) the book value of any real estate acquired
through foreclosure or grant of a deed in lieu of foreclosure
as of the close of business on the last business day of the
calendar month next preceding the Payment Date; and
(f) the amount of cumulative Realized Losses.
REMOVAL OF TRUSTEE FOR CAUSE
The Trustee may be removed upon the occurrence of any one of the
following events (whatever the reason for such event and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body) on the part of the Trustee: (1) failure to
make distributions of available amounts; (2) certain breaches of covenants and
representations by the Trustee; (3) certain acts of bankruptcy or insolvency on
the part of the Trustee; and (4) failure to meet the standards of Trustee
eligibility as set forth in the Pooling and Servicing Agreement.
If the Insurer or (ii) with the prior written consent of the Insurer
(which is required not to be unreasonably withheld) (x) the Depositor or (y)
the Owners of a majority of the Percentage Interests represented by the Class A
Certificates or, if there are no Class A Certificates then outstanding, by a
majority of the Percentage Interests represented by the Subordinated
Certificates, may appoint a successor trustee.
GOVERNING LAW
The Pooling and Servicing Agreement and each Certificate will be
construed in accordance with and governed by the laws of the State of New York
applicable to agreements made and to be performed therein.
AMENDMENTS
The Trustee, the Depositor, the Seller and the Servicers with the
consent of the Insurer may, at any time and from time to time and without
notice to or the consent of the Owners, amend the Pooling and Servicing
Agreement, and the Trustee will be required to consent to such amendment, for
the purposes of (i) curing any ambiguity, (ii) correcting or supplementing any
provisions therein which are inconsistent with any other provisions therein or
(iii) for any other purpose, provided that in the case of clause (iv), (A) the
Seller delivers an opinion of counsel acceptable to the Trustee that such
amendment will not adversely affect in any material respect the interest of the
Owners and (B) such amendment will not result in a withdrawal or reduction of
the ratings of the Class A Certificates without regard to the Insurance Policy.
Notwithstanding anything to the contrary, no such amendment shall (a) change in
any manner the amount of, or delay the timing of, payments which are required
to be distributed to any Owner without the consent of the Owner of such
Certificate, (b) reduce the percentages of Percentage Interest which are
required to consent to any such amendments, without the consent of the Owners
of all Certificates of the Class or Classes affected then outstanding or (c)
which affects in any manner the terms or provisions of the Insurance Policy.
The Trustee will be required to furnish written notification of the
substance of any such amendment to each Owner in the manner set forth in the
Pooling and Servicing Agreement.
TERMINATION OF THE TRUST
The Pooling and Servicing Agreement provides that the Trust will
terminate upon the payment to the Owners of all Certificates and the Insurer
from amounts other than those available under the Insurance Policy of all
amounts required to be paid to such Owners and the Insurer upon the last to
occur of (a) the final payment or other liquidation (or any advance made with
respect thereto) of the last Mortgage Loan, (b) the disposition of all property
acquired in respect of any Mortgage Loan remaining in the Trust Estate.
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OPTIONAL TERMINATION
BY OWNERS OF SUBORDINATED CERTIFICATES OR THE INSURER. At their
option, the Owners of a majority of the Percentage Interest represented by the
Certificates then outstanding or in certain limited circumstances the Insurer
may, on any Payment Date after the Clean-Up Call Date, purchase from the Trust
all (but not fewer than all) remaining Mortgage Loans, in whole only, and other
property acquired by foreclosure, deed in lieu of foreclosure, or otherwise
then constituting the Trust Estate by payment of an amount (i) agreed upon
between the Insurer and such Subordinated Certificate Owners, or (ii) in the
absence of such agreement at a price equal to 100% of the aggregate Loan
Balance of the related Mortgage Loans as of the day of purchase minus amounts
remitted from the Principal and Interest Account to the Certificate Account
representing collections of principal on the Mortgage Loans during the current
Remittance Period, plus one month's interest on such amount computed at the
Adjusted Pass-Through Rate (as defined in the Pooling and Servicing Agreement);
provided, that such amount shall in any event include all accrued and unpaid
Servicing Fees plus the aggregate amount of any unreimbursed Delinquency
Advances and Servicing Advances and Delinquency Advances which any Servicer has
theretofore failed to remit together with Reimbursement Amounts then owed to
the Insurer.
BY SERVICERS. If the Subordinated Certificate Owners do not exercise
their right to purchase all the Mortgage Loans after the Clean-Up Call Date,
the Servicers will also have the right, collectively, to purchase all the
Mortgage Loans they are servicing on any Remittance Date when the outstanding
Class A Certificate Principal Balance has declined to 5% of the original Class
A Certificate Principal Balance.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of certain of the material anticipated
federal income tax consequences of the purchase, ownership and disposition of
the Notes and Class A Certificates is to be considered only in connection with
"Certain Federal Income Tax Consequences" in the Prospectus. The discussion
herein and in the Prospectus is based upon laws, regulations, rulings and
decisions now in effect, all of which are subject to change. The discussion
below and in the Prospectus does not purport to deal with all federal tax
consequences applicable to all categories of investors, some of which may be
subject to special rules. Investors should consult their own tax advisors in
determining the federal, state, local and any other tax consequences to them of
the purchase, ownership and disposition of the Notes and the Class A
Certificates.
TAXATION OF THE NOTES
See "Certain Federal Income Tax Consequences--Federal Income Tax
Consequences for Certificates as to Which No REMIC Election Is Made" in the
Prospectus.
TAXATION OF CLASS A CERTIFICATES
In the opinion of ___________, (i) the Trust will not be treated as an
association taxable as a corporation or as a "publicly traded partnership"
taxable as a corporation and (ii) the Notes will be treated as debt. The
Depositors, the Seller and the Servicer have agreed, and by the purchase of
Notes and the Class A Certificates, the Owners of the Notes and the Class A
Certificates will agree, to treat the Trust as a partnership for purposes of
Federal and state income taxes, with the partners of the partnership being the
Owners of Class A Certificate and the Subordinated Certificates. See "Certain
Federal Income Tax Consequences" herein and in the Prospectus.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(here, the Trust Agreement and related documents). The Trust Agreement
provides that any deductions attributable to the amortization of premium on the
Mortgage Loans and certain amounts payable to the Indenture Trustee, the Owner
Trustee, the Servicer or the Representative will be specially allocated to the
Owners of the Subordinated Certificates in proportion to their holding of such
Certificates. A portion of the net income of the Trust for each month,
computed without taking into account the specially allocated deductions
described above, equal to the sum of (i) the excess of (x) the Class A
Pass-Through Rate on the Class A Certificate Principal
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Balance for such month and all preceding months over (y) all amounts allocated
to the Owners of the Class A Certificates pursuant to this clause for all
preceding months; and (ii) any Trust income corresponding to the portions of
any excess of the principal amount of the Certificates over their initial issue
price that accrues for such month (determined in a manner as if the Class A
Certificates were indebtedness and such excess were original issue discount)
shall be allocated to the Owners of the Class A Certificates in proportion to
their holdings of Class A Certificates. Any remaining net income and any net
loss (computed without taking into account the deductions otherwise specially
allocated as described above) of the Trust will be allocable to the Owners of
the Subordinated Certificates in proportion to their holding of Subordinated
Certificates.
Treasury regulations govern whether partnership allocations will be
respected by the IRS. It is believed that these allocations will be valid
under these Regulations. No assurance can be given that the IRS would not
require a greater amount of income to be allocated to the Owners of any Class
of Certificates. Moreover, even under the foregoing method of allocation,
Owners may be allocated income equal to the amounts described above even though
the Trust might not have sufficient cash to make current cash distributions of
such amount. Thus, cash basis Owners will in effect be required to report
income from the Class A Certificates on the accrual basis. In addition,
because tax allocations and tax reporting will be done on a uniform basis for
all Owners of Certificates, while Owners of Certificates may be purchasing
Certificates at different times and at different prices, Certificates may be
required to report on their tax returns taxable income that is greater or less
than the amount reported to them by the Trust. See generally, "Certain Federal
Income Tax Consequences--Federal Income Tax Consequences for Certificates as
the Which No REMIC Election Is Made--Taxation of Securities Classified as
Partnership Interests" in the Prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain requirements on those employee benefit plans and
individual retirement arrangements to which it applies ("Plan") and on those
persons who are fiduciaries with respect to such Plans. Any Plan fiduciary
which proposes to cause a Plan to acquire any of the Class A Certificates
should consult with counsel with respect to the consequences under ERISA and
the Code of the Plan's acquisition and ownership of such Certificates. See
"ERISA Considerations" in the Prospectus.
The Department of Labor has issued to the Underwriters individual
prohibited transaction exemptions PTE 89-88, 54 Fed. Reg. 42.582 (Oct. 17,
1989), PTE 89-89, 54 Fed. Reg. 42.589 (Oct. 17, 1989), and PTE 90-32, 55 Fed.
Reg. 23.147 (June 6, 1990) (the "Exemptions"); which generally exempt from the
application of the prohibited transaction provisions of Section 406(a), Section
406(b)(1) and Section 406(b)(2) of ERISA and the excise taxes imposed pursuant
to Sections 4975(a) and (b) of the Code, with respect to the initial purchase,
the holding and the subsequent resale by Plans of certificates in pass-through
trusts that consist of certain receivables, loans and other obligations that
meet the conditions and requirements of the Exemptions. The loans covered by
the Exemptions include mortgage loans such as the Mortgage Loans.
Among the conditions that must be satisfied for the Exemptions to
apply are the following:
(1) the acquisition of the Offered Securities by a Plan is on
terms (including the price for the certificates) that are at least as
favorable to the Plan as they would be in an arm's-length transaction
with an unrelated party;
(2) the rights and interests evidenced by the Offered
Securities acquired by the Plan are not subordinated to the rights and
interests evidenced by other Certificates of the Trust Estate;
(3) the Offered Securities acquired by the Plan have received
a rating at the time of such acquisition that is one of the three
highest generic rating categories from either Standard & Poor's,
Moody's, Duff & Phelps Credit Rating Co. ("D&P") or Fitch Investors
Service, Inc. ("Fitch");
(4) the Trustee must not be an affiliate of any other member
of the Restricted Group (as defined below);
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(5) the sum of all payments made to and retained by any
Underwriter in connection with the distribution of the Offered
Securities represents not more than reasonable compensation for
underwriting the Offered Securities; the sum of all payments made to
and retained by the Seller pursuant to the assignment of the Mortgage
Loans to the Trust Estate represents not more than the fair market
value of such loans; the sum of all payments made to and retained by
any Servicer represents not more than reasonable compensation for such
person's services under the Agreement and reimbursement of such
person's reasonable expenses in connection therewith; and
(6) the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933.
The Trust Estate must also meet the following requirements:
(i) the corpus of the Trust Estate must consist
solely of a fixed pool of assets of the type that have been
included in other investment pools;
(ii) certificates in such other investment pools must
have been rated in one of the three highest rating categories
of Standard & Poor's, Moody's, Fitch or D&P for at least one
year prior to the Plan's acquisition of Class A Certificates;
and
(iii) certificates evidencing interests in such other
investment pools must have been purchased by investors other
than Plans for at least one year prior to the Plan's
acquisition of the Class A Certificates.
Moreover, the Exemptions provide relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire certificates in a trust in which
the fiduciary (or its affiliate) is a mortgagor on the receivables held in the
trust; provided that, among other requirements, (i) in the case of an
acquisition in connection with the initial issuance of certificates, at least
fifty percent of each class of certificates in which Plans have invested is
acquired by persons independent of the Restricted Group and at least fifty
percent of the aggregate interest in the trust is acquired by persons
independent of the Restricted Group; (ii) such fiduciary (or its affiliate) is
a mortgagor with respect to five percent or less of the fair market value of
the obligations contained in the trust; (iii) the Plan's investment in
certificates of any class does not exceed twenty-five percent of all of the
certificates of that class outstanding at the time of the acquisition; and (iv)
immediately after the acquisition, no more than twenty-five percent of the
assets of the Plan with respect to which such person is a fiduciary are
invested in certificates representing an interest in one or more trusts
containing assets sold or serviced by the same entity. The Exemptions do not
apply to Plans sponsored by the Depositor, the Insurer, the Underwriters, the
Trustee, the related Servicer, any mortgagor with respect to Mortgage Loans
included in the Trust Estate constituting more than five percent of the
aggregate unamortized principal balance of the assets in the Trust Estate, or
any affiliate of such parties (the "Restricted Group"). As of the date hereof,
there is no single Mortgage Loan included in the Trust Estate that constitutes
more than five percent of the aggregate unamortized principal balance of the
assets of the Trust Estate.
It is believed that the Exemptions will apply to the acquisition and
holding of Offered Securities by Plans and that all conditions of the
Exemptions as they relate to the acquisition and holding by Plans of the Class
A-1 Certificates other than those within the control of the investors will be
met. It is further believed that the Exemptions will apply to the acquisition
and holding of Offered Securities by Plans following the expiration of the
Funding Period and that all conditions of the Exemptions as they relate to the
acquisition and holding by Plans of the Offered Securities other than those
within the control of the investors will be met after such time.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the possible applicability of the
Exemptions, or other exemptive relief, and all of the potential consequences in
their specific circumstances, prior to making an investment in the Offered
Securities. Each Plan fiduciary should determine whether under the general
fiduciary standards of investment procedure and diversification an investment
in the Offered Securities is appropriate for the Plan, taking into account the
overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
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RATINGS
It is a condition of the issuance of the Offered Securities that the
Offered Securities receive ratings of "AAA" by Standard & Poor's and "Aaa" by
Moody's. The ratings will be based primarily on the claims-paying ability of
the Insurer. Explanations of the significance of such ratings may be obtained
from Moody's, 99 Church Street, New York, New York 10007 and Standard & Poor's,
25 Broadway, New York, New York 10004. Such ratings will be the views only of
such rating agencies. There is no assurance that any such ratings will
continue for any period of time or that such ratings will not be revised or
withdrawn. Any such revision or withdrawal of such ratings may have an adverse
effect on the market price of the Offered Securities. A security rating is not
a recommendation to buy, sell or hold securities.
LEGAL INVESTMENT CONSIDERATIONS
The Offered Securities will constitute "mortgage related securities"
for purposes of SMMEA for so long as they are rated in one of the two highest
rating categories by one or more nationally recognized statistical rating
organizations. As such, the Offered Securities will be legal investments for
certain entities to the extent provided in SMMEA, subject to state laws
overriding SMMEA. In addition, institutions whose investment activities are
subject to review by federal or state regulatory authorities may be or may
become subject to restrictions, which may be retroactively imposed by such
regulatory authorities, on the investment by such institutions in certain forms
of mortgage related securities. Furthermore, certain states have enacted
legislation overriding the legal investment provisions of SMMEA.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement relating to the Certificates (the "Underwriting Agreement"), the
Depositor has agreed to cause the Trust to sell to each of the Underwriters
named below (the "Underwriters"), and each of the Underwriters has severally
agreed to purchase, the principal amount or Percentage Interest of the Class A
Certificates set forth opposite its name below:
NOTES
Underwriters Percentage Interest
CLASS A CERTIFICATES
Underwriters Percentage Interest
The Underwriters are collectively committed to purchase all the
Offered Securities if any Offered Securities are purchased. The Underwriters
intend to act as market makers in the Offered Securities, subject to applicable
provisions of federal and state securities laws and other regulatory
requirements, but are under no obligation to do so. The Underwriters and any
dealers that participate with the Underwriters in the distribution of the
Offered Securities may be deemed to be underwriters, and any discounts or
commissions received by them and any profit on the resale of the Offered
Securities by them may be deemed to be underwriting discounts or commissions,
under the Securities Act.
The Depositor has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or
contribute to payments which the Underwriters may be required to make in
respect thereof.
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REPORT OF EXPERTS
The consolidated balance sheets of the Insurer,
_______________________ as of December 31, 199__ and 199__, and the related
consolidated statements of income, changes in shareholder's equity, and cash
flows for each of the three years in the period ended December 31, 199__,
appearing in Appendix B of this Prospectus Supplement, have been audited by
________________________, independent accountants, as set forth in their report
included therein, and are included in reliance upon such report and upon the
authority of such firm as experts in accounting and auditing.
CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Offered Securities will be passed upon for the Seller by __________,
Washington, D.C. and by L. Keith Blackwell, Esquire, General Counsel for the
Depositor. Certain legal matters relating to insolvency issues and certain
federal income tax matters concerning the Offered Securities will be passed
upon for the Depositor by ____________. Certain legal matters relating to the
validity of the issuance of the Offered Securities will be passed upon for the
Underwriters by ______________. Legal matters relating to the Policy will be
passed upon for the Insurer by _______________, ____________.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered AMRESCO
Residential Securities Corporation Mortgage Loan Trust 199__-__ Notes and
Mortgage Loan Pass-Through Certificates, Class A (the "Global Securities") will
be available only in book-entry form. Investors in the Global Securities may
hold such Global Securities through any of DTC, CEDEL or Euroclear. The Global
Securities will be tradeable as home market instruments in both the European
and U.S. domestic markets. Initial settlement and all secondary trades will
settle in same-day funds.
Secondary market trading between investors through CEDEL and Euroclear
will be conducted in the ordinary way in accordance with the normal rules and
operating procedures of CEDEL and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of CEDEL and
Euroclear (in such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their Participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, CEDEL and
Euroclear will hold positions on behalf of their Participants through their
Relevant Depositary which in turn will hold such positions in their accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practices. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the
settlement date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to
the securities custody accounts on the settlement date against payment in
same-day funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between
DTC Participants will be settled using the procedures generally applicable to
mortgage loan asset-backed certificates issues in same-day funds.
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.
I-1
<PAGE> 154
Trading between DTC, Seller and CEDEL or Euroclear Participants. When
Global Securities are to be transferred from the account of a DTC Participant
to the account of a CEDEL Participant or a Euroclear Participant, the purchaser
will send instructions to CEDEL or Euroclear through a CEDEL Participant or
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear will instruct the Relevant Depositary, as the case may be, to receive
the Global Securities against payment. Payment will include interest accrued
on the Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in
such accrual period and a year assumed to consist of 360 days. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. Payment will
then be made by the Relevant Depositary to the DTC Participant's account
against delivery of the Global Securities. After settlement has been
completed, the Global Securities will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the CEDEL Participant's or Euroclear Participant's account. The securities
credit will appear the next day (European time) and the cash debt will be
back-valued to, and the interest on the Global Securities will accrue from, the
value date (which would be the preceding day when settlement occurred in New
York). If settlement is not completed on the intended value date (i.e., the
trade fails), the CEDEL or Euroclear cash debt will be valued instead as of the
actual settlement date.
CEDEL Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within CEDEL or Euroclear. Under this
approach, they may take on credit exposure to CEDEL or Euroclear until the
Global Securities are credited to their account one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit
to them, CEDEL Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, CEDEL Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day,
assuming they cleared the overdraft when the Global Securities were credited to
their accounts. However, interest on the Global Securities would accrue from
the value date. Therefore, in many cases the investment income on the Global
Securities earned during that one-day period may substantially reduce or offset
the amount of such overdraft charges, although the result will depend on each
CEDEL Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for crediting Global
Securities to the respective European Depositary for the benefit of CEDEL
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two
DTC Participants.
Trading between CEDEL or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, CEDEL Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. In these cases
CEDEL or Euroclear will instruct the respective Depositary, as appropriate, to
credit the Global Securities to the DTC Participant's account against payment.
Payment will include interest accrued on the Global Securities from and
including the last coupon payment to and excluding the settlement date on the
basis of the actual number of days in such accrual period and a year assumed to
consist to 360 days. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. The payment will then be reflected in the account of CEDEL
Participant or Euroclear Participant the following day, and receipt of the cash
proceeds in the CEDEL Participant's or Euroclear Participant's account would be
back-valued to the value date (which would be 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.
I-2
<PAGE> 155
Finally, day traders that use CEDEL or Euroclear and that purchase
Global Securities from DTC Participants for delivery to CEDEL Participants or
Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the trade is reflected in their CEDEL or Euroclear accounts)
in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which would give the
Global Securities sufficient time to be reflected in their CEDEL or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the CEDEL Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
CEDEL or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons (as defined below), unless (i) each clearing system,
bank or other financial institution that holds customers' securities in the
ordinary course of its trade or business in the chain of intermediaries between
such beneficial owner and the U.S. entity required to withhold tax complies
with applicable certification requirements and (ii) such beneficial owner takes
one of the following steps to obtain an exemption or reduced tax rate:
Exemption for Non-U.S. Persons (Form W-8). Beneficial Owners of
Global Securities that are Non-U.S. Persons (as defined below) can obtain a
complete exemption from the withholding tax by filing a signed Form W-8
(Certificate of Foreign Status). If the information shown on Form W-8 changes,
a new Form W-8 must be filed within 30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation
or bank with a U.S. branch, for which the interest income is effectively
connected with its conduct of a trade or business in the United States, can
obtain an exemption from the withholding tax by filing Form 4224 (Exemption
from Withholding of Tax on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
Exemption or reduced rate for Non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
(depending on the treaty terms) by filing Form 1001 (Ownership, Exemption or
Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by Certificate Owners or their agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Owner of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds 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"
I-3
<PAGE> 156
means any person who is not a U.S. Person. This summary does not deal with all
aspects of U.S. Federal income tax withholding that may be relevant to foreign
holders of the Global Securities. Investors are advised to consult their own
tax advisors for specific tax advice concerning their holding and disposing of
the Global Securities.
I-4
<PAGE> 157
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
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PROSPECTUS SUPPLEMENT
Summary of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-15
The Portfolio of Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-18
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-34
The Depositor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-35
The Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-35
The Mortgage Loan Pools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-35
Prepayment and Yield Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-50
The Originators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-56
Formation of the Trust and Trust Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-56
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-56
Description of the Class A Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-57
The Insurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-66
Credit Enhancement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-69
The Pooling and Servicing Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-71
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-80
ERISA Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-81
Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-83
Legal Investment Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-83
Underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-83
Report of Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-84
Certain Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-84
Global Clearance, Settlement and Tax
Documentation Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annex I
Index to Location of Principal Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
Audited Financial Statements for the
Certificate Insurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
PROSPECTUS
Summary of Prospectus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Description of the Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
The Trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Credit Enhancement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Servicing of the Mortgage Loans and Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
The Depositor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Certain Legal Aspects of the Mortgage Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Legal Investment Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
ERISA Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Index to Location of Principal Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
</TABLE>
AMRESCO RESIDENTIAL SECURITIES
CORPORATION MORTGAGE LOAN TRUST
199__-__
----------------------
PROSPECTUS SUPPLEMENT
[UNDERWRITERS]
_______________, 1996
I-5
<PAGE> 158
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
<TABLE>
<CAPTION> Page
----
<S> <C>
Accrual Period S-3
Actuarial Loans S-38
Appraised Values S-34
Beneficial Owners S-8
Book-Entry Certificates S-48
Business Day S-3
Capitalized Interest Account S-8
Carry Forward Amount S-4
CEDE S-8
Cede S-8
CEDE Participants S-50
Certificate Account S-45
Citibank S-8
Class A Distribution Amount S-3
Clean-Up Call Date S-1
Closing Date S-1
Compensating Interest S-60
Cooperative S-50
Coupon Rates S-2
Current Interest S-4
Cut-Off Date S-1
D&P S-66
Daily Collections S-59
Definitive Certificate S-48
Deleted Mortgage Loan S-23
Depositor S-1
DTC S-8
DTC Participants S-49
ERISA S-66
Euroclear S-8
Euroclear Operator S-50
Euroclear Participants S-50
European Depositaries S-9
Excess Subordinated Amount S-47
Exemption S-66
File S-58
Final Certification S-58
Final Scheduled Payment Dates S-39
Financial Intermediary S-48
Fitch S-66
Funding Period S-7
Initial Certificate Principal Balance S-39
Initial Mortgage Loans S-1
Insurance Policy S-6
Insured Payment S-6
Liquidation Proceeds S-59
Loan Balance S-57
Loan Purchase Price S-23
Loan-to-Value Ratios S-36
Long Beach Loans S-15
Monthly Remittance Date S-5
Moody's S-9
Morgan S-9
Mortgage Loans S-33
Mortgaged Properties S-1
Mortgages S-1
Net Coupon Rate S-23
Net Liquidation Proceeds S-59
Notes S-1
Option One Guidelines S-19
Option One Loans S-19
Original Pre-Funded Amount S-2
Owners S-2
Participants S-48
Pass-Through Rate S-45
Payment Date S-3
Percentage Interest S-45
PHMC S-28
Plan S-66
Preference Amount S-5
Pre-Funded Amount S-7
Prepaid Installments S-60
Prepayments S-12
Preservation Expenses S-60
Principal and Interest Account S-59
Qualified Replacement Mortgage S-23
Qualifying Rate S-19
Rating Agencies S-9
Realized Loss S-47
Record Date S-3
Register S-45
Registrar S-45
Relevant Depositary S-48
Remittance Period S-5
REO Property S-60
Restricted Group S-67
Rules S-49
Seller S-1
Servicer S-1
Servicers S-1
Servicing Advance S-60
Servicing Fee Rate S-59
Specified Subordinated Amount S-46
Standard & Poor's S-9
Subordinate Certificates S-1
Subordinated Amount S-46
Subordination Deficit S-7
Subordination Increase Amount S-46
Subordination Reduction Amount S-47
Subsequent Cut-Off Date S-12
Subsequent Mortgage Loans S-2
Subsequent Transfer Agreement S-12
Subsequent Transfer Date S-7
Substitution Amount S-58
Terms and Conditions S-50
Trust S-43
Trust Estate S-43
Underwriters S-68
Weighted average life S-40
</TABLE>
<PAGE> 159
[THIS PAGE LEFT INTENTIONALLY BLANK]
<PAGE> 160
***************************************************************************
* *
* Information contained herein is subject to completion or amendment. A *
* registration statement relating to those securities has been filed *
* with Securities and Exchange Commission. These securities may not be *
* sold nor may offers to buy be accepted prior to the time the *
* registration statement becomes effective. This preliminary prospectus *
* shall not constitute an offer to sell or the solicitation of an offer *
* to buy nor shall there be any sale of these securities in any State *
* in which such offer, solicitation or sale would be unlawful prior to *
* registration or qualification under the securities laws of any such *
* State. *
* *
***************************************************************************
Preliminary Prospectus Dated June 24, 1997
- --------------------------------------------------------------------------------
MORTGAGE LOAN ASSET BACKED SECURITIES
(Issuable in Series)
AMRESCO RESIDENTIAL SECURITIES CORPORATION
(DEPOSITOR)
This Prospectus relates to Mortgage Loan Asset Backed Securities
("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 debt obligation of, or 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 of its
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 _____, 1997.
<PAGE> 161
AVAILABLE INFORMATION
A Registration Statement under the Securities Act of 1933, as amended
(the "1933 Act"), has been filed with the Securities and Exchange Commission
(the "Commission") with respect to the Securities. The Registration Statement
and amendments thereof and 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 Securities
offered hereby and thereby nor an offer of the Securities 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 the Securities and the related
Trust will be provided to the persons in whose names the Securities are
registered. See "Administration-Reports" herein. If specified in the related
Prospectus Supplement, the Securities may be issuable in book-entry form. In
such event, the Securities will be registered in the name of a Clearing Agency
(as defined herein) and, therefore, the Clearing Agency will be the registered
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 Securities Exchange Act of 1934 (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 Exchange Act subsequent to the date
of this Prospectus and prior to the termination of the offering of the
Securities of such Trust offered hereby shall be deemed to be incorporated by
reference into this Prospectus when delivered with respect to such Trust. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
Any person receiving a copy of this Prospectus may obtain, without
charge, upon written or oral request, a copy of any of the documents
incorporated by reference herein, except for the exhibits to such documents
(other than the documents expressly incorporated therein by reference).
Requests should be directed to AMRESCO Residential Securities Corporation, 700
N. Pearl Street, Suite 2400, Dallas, Texas 75201 (telephone number (214)
953-7700.
<PAGE> 162
TABLE OF CONTENTS
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SUMMARY OF PROSPECTUS . . . . . . . . . . . . . 1
RISK FACTORS . . . . . . . . . . . . . . . . . 7
DESCRIPTION OF THE SECURITIES . . . . . . . . . 10
General . . . . . . . . . . . . . . . . . 11
Classes of Securities . . . . . . . . . . 11
Distributions of Principal and Interest . 12
Book Entry Registration . . . . . . . . . 14
List of Owners of Securities . . . . . . . 14
THE TRUSTS . . . . . . . . . . . . . . . . . . 14
Mortgage Loans . . . . . . . . . . . . . . 15
Contracts . . . . . . . . . . . . . . . . 17
Mortgage-Backed Securities . . . . . . . . 17
Other Mortgage Securities . . . . . . . . 17
CREDIT ENHANCEMENT . . . . . . . . . . . . . . 17
SERVICING OF MORTGAGE LOANS AND CONTRACTS . . . 22
Payments on Mortgage Loans . . . . . . . . 22
Advances . . . . . . . . . . . . . . . . . 23
Collection and Other Servicing Procedures 23
Primary Mortgage Insurance . . . . . . . . 25
Standard Hazard Insurance . . . . . . . . 25
Title Insurance Policies . . . . . . . . . 26
Claims Under Primary Mortgage Insurance
Policies and Standard Hazard Insurance
Policies; Other Realization Upon
Defaulted Loan . . . . . . . . . . . . 26
Servicing Compensation and Payment of
Expenses . . . . . . . . . . . . . . 27
Master Servicer . . . . . . . . . . . . . . 27
ADMINISTRATION . . . . . . . . . . . . . . . . 27
Assignment of Mortgage Assets . . . . . . 28
Evidence as to Compliance . . . . . . . . 30
The Trustee . . . . . . . . . . . . . . . 30
Administration of the Security Account . . 30
Reports . . . . . . . . . . . . . . . . . 31
Forward Commitments; Pre-Funding . . . . . 32
Servicer Events of Default . . . . . . . . 32
Rights Upon Servicer Event of Default . . 33
Amendment . . . . . . . . . . . . . . . . 33
Termination . . . . . . . . . . . . . . . 33
USE OF PROCEEDS . . . . . . . . . . . . . . . . 34
THE DEPOSITOR . . . . . . . . . . . . . . . . . 34
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS . 34
General . . . . . . . . . . . . . . . . . 34
Foreclosure . . . . . . . . . . . . . . . 35
Soldiers' and Sailors' Civil Relief Act . 40
The Contracts . . . . . . . . . . . . . . 40
The Title I Program . . . . . . . . . . . 43
LEGAL INVESTMENT MATTERS . . . . . . . . . . . 43
ERISA CONSIDERATIONS . . . . . . . . . . . . . 44
CERTAIN FEDERAL INCOME TAX CONSEQUENCES . . . . 45
Federal Income Tax Consequences For REMIC
Securities . . . . . . . . . . . . . . 46
Taxation of Regular Securities . . . . . . 47
Taxation of Residual Securities . . . . . 52
Treatment of Certain Items of REMIC Income
and Expense . . . . . . . . . . . . . 54
Tax-Related Restrictions on Transfer of
Residual Securities . . . . . . . . . 55
Sale or Exchange of a Residual Security . 57
Taxes That May Be Imposed on the REMIC
Pool . . . . . . . . . . . . . . . . . 58
Liquidation of the REMIC Pool . . . . . . 58
Administrative Matters . . . . . . . . . . 59
Limitations on Deduction of Certain
Expenses . . . . . . . . . . . . . . . 59
Taxation of Certain Foreign Investors . . 60
Backup Withholding . . . . . . . . . . . . 60
Reporting Requirements . . . . . . . . . . 61
Federal Income Tax Consequences for
Securities as to Which No REMIC
Election Is Made . . . . . . . . . . . 61
Premium and Discount . . . . . . . . . . . 62
Stripped Securities . . . . . . . . . . . 64
Reporting Requirements and Backup
Withholding . . . . . . . . . . . . . 66
Taxation of Certain Foreign Investors . . 67
Debt Securities . . . . . . . . . . . . . 67
Taxation of Securities Classified as
Partnership Interests . . . . . . . . 68
PLAN OF DISTRIBUTION . . . . . . . . . . . . . 68
RATINGS . . . . . . . . . . . . . . . . . . . . 69
LEGAL MATTERS . . . . . . . . . . . . . . . . . 69
FINANCIAL INFORMATION . . . . . . . . . . . . . 69
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS. . A-1
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SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference
to the Prospectus Supplement relating to a particular series of Securities and
to the related Agreement (as defined herein) 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.
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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 secured by junior liens on the related mortgaged
properties, including Title I Loans and other types of home improvement retail
installment contracts; and
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(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 Mortgage 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 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
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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.
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.
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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 Mortgage Assets
of the related Trust or otherwise. See "Administration -- Termination" herein.
ADVANCES . . . . . . . . . . . . . The Servicer of the Mortgage Loans and Contracts will be obligated (but only as
specified in the related Prospectus Supplement) to advance delinquent
installments of principal and/or interest (less applicable servicing fees) on the
Mortgage Loans and Contracts in a Trust. Any such obligation to make advances may
be limited to amounts due to the Owners of Securities of the related series, to
amounts deemed to be recoverable from late payments or liquidation proceeds, to
specified periods or to any combination thereof, in each case as specified in the
related Prospectus Supplement. Any such advance will be recoverable under the
terms and conditions specified in the related Prospectus Supplement. See
"Servicing of Mortgage Loans and Contracts" herein.
CREDIT ENHANCEMENT . . . . . . . . If specified in the related Prospectus Supplement, a series of Securities, or
certain classes within such series, may have the benefit of one or more types of
credit enhancement ("Credit Enhancement"), including, but not limited to,
subordination, cross support, mortgage pool insurance, special hazard insurance,
financial guaranty insurance policies, a bankruptcy bond, reserve funds, other
insurance, guaranties and similar instruments and arrangements. The protection
against losses afforded by any such Credit Enhancement will be limited. If Owners
of Securities are materially dependent upon Credit Enhancement for timely
payments of interest and/or principal on their Securities, the related Prospectus
Supplement will include information, including financial information, concerning
the provider of such Credit Enhancement. See "Credit Enhancement" herein.
BOOK ENTRY REGISTRATION . . . . . . Securities of one or more classes of a series may be issued in book entry form
("Book Entry Securities") in the name of a clearing agency (a "Clearing Agency")
registered with the Securities and Exchange Commission, or its nominee. Transfers
and pledges of Book Entry Securities may be made only through entries on the
books of the Clearing Agency in the name of brokers, dealers, banks and other
organizations eligible to maintain accounts with the Clearing Agency ("Clearing
Agency Participants") or their nominees. Transfers and pledges by purchasers and
other beneficial owners of Book Entry Securities ("Beneficial Owners") other than
Clearing Agency Participants may be effected only through Clearing Agency
Participants. All references to the Owners of Securities shall mean Beneficial
Owners to the extent Beneficial Owners may exercise their rights through a
Clearing Agency. Except as otherwise specified in this Prospectus or a related
Prospectus Supplement, the term "Owners" shall be deemed to include Beneficial
Owners. See "Risk Factors -- Book Entry Registration" and "Description of the
Securities -- Book Entry Registration" herein.
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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.
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
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recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time. No person is obligated to maintain any rating on any
Security, and, accordingly, there can be no assurance that the ratings assigned
to any class of Securities upon initial issuance thereof will not be lowered or
withdrawn by a Rating Agency at any time thereafter. If a rating of any class of
Securities of a Series is revised or withdrawn, the liquidity of such class of
Securities may be adversely affected. In general, the ratings address credit risk
and do not represent any assessment of the likelihood or rate of principal
prepayments. See "Risk Factors" herein and "Ratings" in the related Prospectus
Supplement.
RISK FACTORS . . . . . . . . . . . Investment in the Securities will be subject to one or more risk factors,
including declines in the value of Mortgaged Properties, prepayment of Mortgage
Loans, higher risks of defaults on particular types of Mortgage Loans,
limitations on security for the Mortgage Loans, limitations on credit
enhancement, consumer credit laws affecting the Mortgage Assets, interest rates
on the Mortgage Assets resetting at different times or using different indices
than the Securities, availability of Mortgage Assets to satisfy Pre-Funding
Agreements and various other factors. See "Risk Factors" herein and in the
related Prospectus Supplement.
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RISK FACTORS
Prospective investors should consider, among other things, the
following risk factors in connection with the purchase of the Securities:
Declining Real Estate Market; Geographic Concentration. If the
residential real estate market in general or a regional or local area where
Mortgage Assets for a Trust are concentrated should experience an overall
decline in property values, a significant downturn in economic conditions or a
natural disaster, rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the mortgage lending industry.
See "The Trusts -- Mortgage Loans" herein.
Limited Obligations. The Securities will not represent an interest in
or obligation of the Depositor. The Securities of each series will not be
insured or guaranteed by any government agency or instrumentality, the
Depositor, any Servicer or the Seller.
Prepayment Considerations; Optional Termination. The prepayment
experience on Mortgage Loans or Contracts constituting or underlying the
Mortgage Assets will affect the average life of each class of Securities
relating to a Trust. Prepayments may be influenced by a variety of economic,
geographic, social and other factors, including changes in interest rate
levels. In general, if mortgage interest rates fall, the rate of prepayment
would be expected to increase. Conversely, if mortgage interest rates rise, the
rate of prepayment would be expected to decrease. Other factors affecting
prepayment of mortgage loans include changes in housing needs, job transfers,
unemployment and servicing decisions. See "Prepayment and Yield Considerations"
in the related Prospectus Supplement. In addition, investors in the Securities
should be aware that the Servicer, the Seller or, if specified in the related
Prospectus Supplement, the Owners of a Class of Securities or a credit enhancer
may at their respective options effect early retirement of a series of
Securities through the purchase of Mortgage Assets from the related Trust. See
"Administration--Termination" herein.
Risk of Higher Default Rates for Mortgage Loans with Balloon Payments.
A portion of the aggregate principal balance of the Mortgage Loans at any time
may be "balloon loans" that provide for the payment of the unamortized
principal balance of such Mortgage Loan in a single payment at maturity
("Balloon Loans"). Such Balloon Loans provide for equal monthly payments,
consisting of principal and interest, generally based on a 30-year amortization
schedule, and a single payment of the remaining balance of the Balloon Loan
generally 5, 7, 10 or 15 years after origination. Amortization of a Balloon
Loan based on a scheduled period that is longer than the term of the loan
results in a remaining principal balance at maturity that is substantially
larger than the regular scheduled payments. The Depositor does not have any
information regarding the default history or prepayment history of payments on
Balloon Loans. Because borrowers of Balloon Loans are required to make
substantial single payments upon maturity, it is possible that the default risk
associated with the Balloon Loans is greater than that associated with
fully-amortizing Mortgage Loans.
Security Interests and Other Aspects of the Contracts. Contracts may
be secured by a security interest in a Manufactured Home. Perfection of
security interests in the Manufactured Homes and enforcement of rights to
realize upon the value of the Manufactured Homes as collateral for the
Contracts are subject to a number of federal and state laws, including the
Uniform Commercial Code as adopted in each state and each state's certificate
of title statutes. The steps necessary to perfect the security interest in a
Manufactured Home will vary from state to state. Because of the expense and
administrative inconvenience involved, no party will be required to amend any
certificates of title to change the lienholder specified therein to the Trustee
and no party will be required to deliver any certificate of title to the
Trustee or note thereon the Trustee's interest. Consequently, in some states,
in the absence of such an amendment, the assignment to the Trustee of the
security interest in the Manufactured Home may not be effective or such
security interest may not be perfected and, in the absence of such notation or
delivery to the Trustee, the assignment of the security interest in the
Manufactured Home may not be effective against creditors of the previous owner
of the related Contract or a trustee in bankruptcy of such previous owner. In
addition, numerous federal and state consumer protection laws impose
requirements on lending under conditional sales contracts and installment loan
agreements such as the Contracts, and the failure by the lender or seller of
goods to comply with such requirements could give rise to liabilities of
assignees for amounts due under such agreements 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
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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.
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
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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
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
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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
Mortgage 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 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
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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 Mortgage Assets of the Trust that are allocable to (i) principal of
such class of Securities and (ii) interest on such Securities. If specified in
the Prospectus Supplement, one or more classes of a series of Securities may
evidence a beneficial ownership interest in, or a debt obligation payable from,
separate groups of assets included in the related Trust.
The Securities will have an aggregate original Security Principal
Balance equal to the aggregate unpaid principal balance of the Mortgage Assets
(plus, amounts held in a Pre-Funding Account, if any) as of the time and
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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 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 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
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(each, a "Record Date"). With respect to Securities other than Book Entry
Securities, distributions will be made by check or money order mailed to the
person entitled thereto at the address appearing in the Security Register or,
if specified in the Prospectus Supplement, in the case of Securities that are
of a certain minimum denomination as specified in the Prospectus Supplement,
upon written request by the Owner of a Security, by wire transfer or by such
other means as are agreed upon with the person entitled thereto; provided,
however, that the final distribution in retirement of the Securities (other
than Book Entry Securities) will be made only upon presentation and surrender
of the Securities at the office or agency of the Trustee specified in the
notice of such final distribution. With respect to Book Entry Securities, such
payments will be made as described below under "Book Entry Registration".
Distributions will be made out of, and only to the extent of, funds in
a separate account established and maintained for the benefit of the Securities
of the related series (the "Security Account" with respect to such series),
including any funds transferred from any related Reserve Fund. Amounts may be
invested in the Eligible Investments specified herein and in the Prospectus
Supplement, and all income or other gain from such investments will be
deposited in the related Security Account and may be available to make payments
on the Securities of the applicable series on the next succeeding Distribution
Date or pay other amounts owed by the Trust.
Distributions of Interest. Interest will accrue on the aggregate
Security Principal Balance (or, in the case of Securities entitled only to
distributions allocable to interest, the aggregate Notional Principal Balance
(as defined below)) of each class of Securities entitled to interest from the
date, at the applicable Security Interest Rate and for the periods (each, an
"Interest Accrual Period") specified in the Prospectus Supplement. The
aggregate Security Principal Balance of any class of Securities entitled to
distributions of principal will be the aggregate original Security Principal
Balance of such class of Securities, reduced by all distributions allocable to
principal, and, in the case of Compound Interest Securities, increased by all
interest accrued but not then distributable on such Compound Interest
Securities. With respect to a class of Securities entitled only to
distributions allocable to interest, such interest will accrue on a notional
principal balance (the "Notional Principal Balance") of such class, computed
solely for purposes of determining the amount of interest accrued and payable
on such class of Securities.
To the extent funds are available therefor, interest accrued during
each Interest Accrual Period on each class of Securities entitled to interest
(other than a class of Compound Interest Securities) will be distributable on
the Distribution Dates specified in the Prospectus Supplement until the
aggregate Security Principal Balance of the Securities of such class has been
distributed in full or, in the case of Securities entitled only to
distributions allocable to interest, until the aggregate Notional Principal
Balance of such Securities is reduced to zero or for the period of time
designated in the Prospectus Supplement. Distributions of interest on each
class of Compound Interest Securities will commence only after the occurrence
of the events specified in the Prospectus Supplement and, prior to such time,
the aggregate Security Principal Balance (or Notional Principal Balance) of
such class of Compound Interest Securities, will increase on each Distribution
Date by the amount of interest that accrued on such class of Compound Interest
Securities during the preceding Interest Accrual Period but that was not
required to be distributed to such class on such Distribution Date. Any such
class of Compound Interest Securities will thereafter accrue interest on its
outstanding Security Principal Balance (or Notional Principal Balance) as so
adjusted.
Distributions of Principal. The Prospectus Supplement will specify the
method by which the amount of principal to be distributed on the Securities on
each Distribution Date will be calculated and the manner in which such amount
will be allocated among the classes of Securities entitled to distributions of
principal.
One or more classes of Securities may be entitled to receive all or a
disproportionate percentage of the payments of principal which are received on
the related Mortgage Assets in advance of their scheduled due dates and are not
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
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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 Commission or its nominee. Transfers
and pledges of Book Entry Securities may be made only through entries on the
books of the Clearing Agency in the name of Clearing Agency Participants or
their nominees. Clearing Agency Participants may also be Beneficial Owners of
Book Entry Securities.
Purchasers and other Beneficial Owners may not hold Book Entry
Securities directly but may hold, transfer or pledge their ownership interest
in the Securities only through Clearing Agency Participants. Furthermore,
Beneficial Owners will receive all payments of principal and interest with
respect to the Securities and, if applicable, may request redemption of
Securities, only through the Clearing Agency and the Clearing Agency
Participants. Beneficial Owners will not be registered Owners of Securities or
be entitled to receive definitive certificates representing their ownership
interest in the Securities except under the limited circumstances, if any,
described in the related Prospectus Supplement. See "Risk Factors -- Book Entry
Registration" herein.
If Securities of a series are issued as Book Entry Securities, the
Clearing Agency will be required to make book entry transfers among Clearing
Agency Participants, to receive and transmit payments of principal and interest
with respect to the Securities of such series, and to receive and transmit
requests for redemption with respect to such Securities. Clearing Agency
Participants with whom Beneficial Owners have accounts with respect to such
Book Entry Securities will be similarly required to make book entry transfers
and receive and transmit payments and redemption requests on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial Owners will not
be registered Owners of Securities and will not possess physical certificates,
a method will be provided whereby Beneficial Owners may receive payments,
transfer their interests, submit redemption requests and receive the reports
provided herein.
LIST OF OWNERS OF SECURITIES
Upon written request of a specified number or percentage of interests
of Owners of Securities of record of a series of Securities for purposes of
communicating with other Owners of Securities with respect to their rights as
Owners of Securities, the Trustee will afford such Owners access during
business hours to the most recent list of Owners of Securities of that series
held by the 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
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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 Commission within 15 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 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
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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, 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
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principal and interest on the Mortgage Loans and, accordingly, the actual rates
of delinquencies, foreclosures and losses with respect to the Mortgage Loans.
CONTRACTS
Contracts included in the Trust with respect to a series of Securities
will consist of manufactured housing conditional sales contracts and
installment loan agreements or participation interests therein (collectively,
"Contracts"). The Contracts may be conventional manufactured housing contracts
or contracts insured by the FHA, including Title I Contracts, or partially
guaranteed by the VA. Each Contract is secured by a Manufactured Home. The
Prospectus Supplement will specify whether the Contracts will be fully
amortizing or have a balloon payment and whether they will bear interest at a
fixed or variable rate.
The related Prospectus Supplement may specify for the Contracts
contained in the related Contract Pool, among other things, the date of
origination of the Contracts; the annual percentage rates on the Contracts; the
loan-to-value ratios; the minimum and maximum outstanding principal balance as
of the Cut-Off Date and the average outstanding principal balance; the
outstanding principal balances of the Contracts included in the Contract Pool;
the original maturities of the Contracts; and the last maturity date of any
Contract.
MORTGAGE-BACKED SECURITIES
"Mortgage-Backed Securities" (or "MBS") may include (i) private (that
is, not guaranteed or insured by the United States or any agency or
instrumentality thereof) mortgage participations, mortgage pass-through
certificates or other mortgage-backed securities or (ii) certificates insured
or guaranteed by FNMA, FHLMC or GNMA.
The Prospectus Supplement for a series of Securities that evidence
interests in MBS will specify, to the extent available, (i) the aggregate
approximate initial and outstanding principal amount and type of the MBS to be
included in the Trust, (ii) the original and remaining term to stated maturity
of the MBS, if applicable, (iii) the pass-through or bond rate of the MBS or
the formula for determining such rates, (iv) the payment characteristics of the
MBS, (v) the MBS Issuer, MBS Servicer and MBS Trustee, as applicable, (vi) a
description of the credit support, if any, (vii) the circumstances under which
the stated underlying mortgage loans, or the MBS themselves may be purchased
prior to their maturity, (viii) the terms on which mortgage loans may be
substituted for those originally underlying the MBS, (ix) the servicing fees
payable under the MBS Agreement, (x) to the extent available to the Depositor,
information in respect of the underlying mortgage loans and (xi) the
characteristics of any cash flow agreements that relate to the MBS.
OTHER MORTGAGE SECURITIES
Other Mortgage Securities include other securities that directly or
indirectly represent an ownership interest in, or are secured by and payable
from, single-family mortgage loans on real property or mortgage-backed
securities, including residual interests in issuances of collateralized
mortgage obligations or mortgage pass-through certificates, as well as other
types of mortgage-related assets and securities that may be developed and
marketed from 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
Mortgage 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.
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Subordination. Distributions in respect of scheduled principal,
interest or any combination thereof otherwise payable to one or more classes of
Securities of a series (the "Subordinated Securities") may be paid to one or
more other classes of such series (the "Senior Securities") under the
circumstances and to the extent provided in the Prospectus Supplement. If
specified in the Prospectus Supplement, delays in receipt of scheduled payments
on the Mortgage Assets and losses on defaulted Mortgage Assets will be borne
first by the various classes of Subordinated Securities and thereafter by the
various classes of Senior Securities, in each case under the circumstances and
subject to the limitations specified in the Prospectus Supplement. The
aggregate distributions in respect of delinquent payments on the Mortgage
Assets over the lives of the Securities or at any time, the aggregate losses in
respect of defaulted Mortgage Assets which must be borne by the Subordinated
Securities by virtue of subordination and the amount of the distributions
otherwise distributable to the Subordinated Securities that will be
distributable to Owners of Senior Securities on any Distribution Date may be
limited as specified in the Prospectus Supplement. If aggregate distributions
in respect of delinquent payments on the Mortgage Assets or aggregate losses in
respect of such Mortgage Assets were to exceed the total amounts payable and
available for distribution to Owners of Subordinated Securities or, if
applicable, were to exceed the specified maximum amount, Owners of Senior
Securities could experience losses on the Securities.
In addition to or in lieu of the foregoing, all or any portion of
distributions otherwise payable to Subordinated Securities on any Distribution
Date may instead be deposited into one or more Reserve Funds (as defined below)
established by the Trustee. If so specified in the Prospectus Supplement, such
deposits may be made on each Distribution Date, on each Distribution Date for
specified periods, or on each Distribution Date until the balance in the
Reserve Fund has reached a specified amount and, following payments from the
Reserve Fund to Owners of Senior Securities or otherwise, thereafter to the
extent necessary to restore the balance in the Reserve Fund to required levels,
in each case as specified in the Prospectus Supplement. If so specified in the
Prospectus Supplement, amounts on deposit in the Reserve Fund may be released
to the Depositor or the Owners of any class of Securities at the times and
under the circumstances specified in the Prospectus Supplement.
If specified in the Prospectus Supplement, various classes of
Subordinate Securities and Subordinated Securities may themselves be
subordinate in their right to receive certain distributions to other classes of
Senior and Subordinated Securities, respectively, through a cross-support
mechanism or otherwise.
As between classes of Senior Securities and as between classes of
Subordinated Securities, distributions may be allocated among such classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in the Prospectus Supplement. As
between classes of Subordinated Securities, payments with respect to Senior
Securities on account of delinquencies or losses and payments to any Reserve
Fund will be allocated as specified in the Prospectus Supplement.
Financial Guaranty Insurance Policies. If so specified in the related
Prospectus Supplement, a financial guaranty insurance policy or surety bond
("Financial Guaranty Insurance Policy") may be obtained and maintained for each
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.
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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 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
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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.
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.
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Bankruptcy Bond. In the event of a bankruptcy of a borrower, the
bankruptcy court may establish the value of the property securing the related
Mortgage Loan at an amount less than the then outstanding principal balance of
such Mortgage Loan. The amount of the secured debt could be reduced to such
value and the holder of such Mortgage Loan thus would become an unsecured
creditor to the extent the outstanding principal balance of such Mortgage Loan
exceeds the value so assigned to the property by the bankruptcy court. In
addition, certain other modifications of the terms of a Mortgage Loan can
result from a bankruptcy proceeding, including the reduction in monthly
payments required to be made by the borrower. See "Certain Legal Aspects of the
Mortgage Assets" herein. If so provided in the related Prospectus Supplement,
the Depositor will obtain a bankruptcy bond or similar insurance contract (the
"bankruptcy bond") for proceedings with respect to borrowers under the
bankruptcy code. The bankruptcy bond will cover certain losses resulting from a
reduction by a bankruptcy court of scheduled payments of principal of and
interest on a Mortgage Loan or a reduction by such court of the principal
amount of a Mortgage Loan and will cover certain unpaid interest on the amount
of such a principal reduction from the date of the filing of a bankruptcy
petition.
The bankruptcy bond will provide coverage in the aggregate amount
specified in the related Prospectus Supplement. Such amount will be reduced by
payments made under such bankruptcy bond in respect of the related Mortgage
Loans and will not be restored.
If specified in the related Prospectus Supplement, other forms of
Credit Enhancement may be provided to cover such bankruptcy-related losses. Any
bankruptcy bond or other form of Credit Enhancement provided to cover
bankruptcy-related losses will be described in the related Prospectus
Supplement.
Reserve Funds. If specified in the Prospectus Supplement, cash, U.S.
Treasury securities, instruments evidencing ownership of principal or interest
payments thereon, letters of credit, surety bonds, demand notes, certificates
of deposit or a combination thereof in the aggregate amount specified in the
Prospectus Supplement will be deposited by the Depositor on the Delivery Date
in one or more accounts (each, a "Reserve Fund") established and maintained
with the Trustee. Such cash and the principal and interest payments on such
other investments will be used to enhance the likelihood of timely payment of
principal of, and interest on, or, if so specified in the Prospectus
Supplement, to provide additional protection against losses in respect of, the
assets in the related Trust, to pay the expenses of the Trust or for such other
purposes specified in the Prospectus Supplement. Whether or not the Depositor
has any obligation to make such a deposit, certain amounts to which the Owners
of Subordinated Securities, if any, would otherwise be entitled may instead be
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 (v) 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.
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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.
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 the 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
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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.
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
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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.
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).
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Where authorized by the Contract, the annual percentage rate may be increased,
upon assumption, to the then-prevailing market rate but will not be decreased.
Under each Agreement the Servicer will repossess or otherwise
comparably convert the ownership of properties securing such of the related
Contracts as come into and continue in default and as to which no satisfactory
arrangements can be made for collection of delinquent payments. In connection
with such repossession or other conversion, the Servicer will follow such
practices and procedures as it deems necessary or advisable and as shall be
normal and usual in its general servicing activities. The Servicer, however,
will not be required to expend its own funds in connection with any
repossession or towards the restoration of any property unless it determines
(i) that such restoration or repossession will increase the proceeds of
liquidation of the related Contract to the Trust after reimbursement to itself
for such expenses and (ii) that such expenses will be recoverable to it either
through Liquidation Proceeds or through Insurance Proceeds.
PRIMARY MORTGAGE INSURANCE
Mortgage Loans that the Depositor acquires will generally not have
primary mortgage insurance. If obtained, the primary mortgage insurance
policies will not insure against certain losses which may be sustained in the
event of a personal bankruptcy of the mortgagor under a Mortgage Loan.
STANDARD HAZARD INSURANCE
Mortgage Loans. The Servicer will be required to cause to be
maintained for each Mortgage Loan a standard hazard insurance policy. The
coverage of such policy is required to be in an amount not less than the
maximum insurable value of the improvements securing such Mortgage Loan from
time to time or the principal balance owing on such Mortgage Loan from time to
time, whichever is less. In all events, such coverage shall be in an amount
sufficient to ensure avoidance of the applicability of the co-insurance
provisions under the terms and conditions of the applicable policy. The
ability of each Servicer to assure that hazard insurance proceeds are
appropriately applied may be dependent on its 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 Mortgage 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 Mortgage 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
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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.
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
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Loan. Foreclosure proceedings will be conducted by the Servicer in accordance
with the Agreement. If the proceeds of any liquidation of the Mortgaged
Property securing the defaulted Mortgage Loan are less than the Principal
Balance of the defaulted Mortgage Loan plus interest accrued thereon, a loss
will be realized on such Mortgage Loan, to the extent the applicable Credit
Enhancement is not sufficient, in the amount of such difference plus the
aggregate of expenses which are incurred by the Servicer in connection with
such proceedings and are reimbursable under the Agreement. In such case there
will be a reduction in the value of the Mortgage Loans and Trust may be unable
to recover the full amount of principal and interest due thereon.
In addition, where a Mortgaged Property securing a defaulted Mortgage
Loan can be resold for an amount exceeding the principal balance of the related
Mortgage Loan together with accrued interest and expenses, it may be expected
that, where retention of any such amount is legally permissible, the Pool
Insurer will exercise its right under the related Mortgage Pool Insurance
Policy, if any, to purchase such Mortgaged Property and realize for itself any
excess proceeds. Any amounts remaining in the Security Account after such
foreclosure or liquidation and attributable to such Mortgage Loan will be
distributed to Owners of the Securities.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
As compensation for its servicing duties, each Servicer will be
entitled to a monthly servicing fee in the amount specified in the related
Prospectus Supplement. In addition to the primary compensation, Servicer may be
permitted to retain all assumption underwriting fees and late payment charges,
to the extent collected from Mortgagors.
As set forth above, each Servicer will be entitled to reimbursement
for certain expenses incurred by it in connection with the liquidation of
defaulted Mortgage Loans and Contracts and in connection with advancing
delinquent payments. No loss will be suffered on the Securities by reason of
such expenses to the extent claims for such expenses are paid directly under
any applicable Mortgage Pool Insurance Policy, a primary mortgage insurance
policy, the special hazard insurance policy or from other forms of Credit
Enhancement. In the event, however, that the defaulted Mortgage Loans are not
covered by a Mortgage Pool Insurance Policy, primary mortgage insurance
policies, the Special Hazard Insurance Policy or another form of Credit
Enhancement, or claims are either not 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
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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, if applicable, 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
promissory note, the original security agreement, the proprietary lease or
occupancy agreement, the recognition agreement, an executed financing agreement
and the relevant stock certificate and related blank stock powers. The
Depositor will file in the appropriate office an assignment of each Cooperative
Loan.
Each Seller generally will represent and warrant to the Depositor with
respect to the Mortgage Loans sold by it, among other things, that (i) the
information set forth in the schedule of Mortgage Loans attached thereto is
correct in all material respects, (ii) a lender's title insurance policy or
binder for each Mortgage Loan subject to the Agreement was issued on the date
of origination thereof and each such policy or binder assurance is valid and
remains in full force and effect or a legal opinion concerning title or title
search was obtained or conducted in connection with the origination of the
Mortgage Loan, (iii) at the Delivery Date, the Seller has good title to the
Mortgage Loans and the Mortgage Loans are free of offsets, defenses or
counterclaims; (iv) at the Delivery Date, each Mortgage is a valid 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 schedule
("Contract Loan Schedule") appearing as
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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, and if applicable, to the Indenture
Trustee, the original Contract and copies of documents and instruments related
to each Contract and the security interest in the Manufactured Home securing
each Contract. To give notice of the right, title and interest of the Trust,
and, if applicable, the Indenture Trustee, to the Contracts, the Depositor will
cause appropriate UCC-1 financing statements to be filed identifying the
secured party and identifying all Contracts as collateral. The Contracts will
not be stamped or otherwise marked to reflect their assignment by the
Depositor. Therefore, if a subsequent purchaser were able to take physical
possession of the Contracts without notice of such assignment, the interest of
the Trust, and, if applicable, the Indenture Trustee in the Contracts could be
defeated. See "Certain Legal Aspects of the Mortgage Assets" herein.
The Depositor or the related Seller, as the case may be, may provide
limited representations and warranties concerning the Contracts. Such
representations and warranties may include: (i) that the information contained
in the Contract Loan Schedule provides an accurate listing of the Contracts and
that the information respecting such Contracts set forth in such Contract Loan
Schedule is true and correct in all material respects at the date or dates
respecting which such information is furnished; (ii) that, immediately prior to
the conveyance of the Contracts, the Depositor had good title to and was sole
owner of each such Contract; and (iii) that there has been no other sale by it
of such Contract and that the Contract is not subject to any lien, charge,
security interest or other encumbrance.
Assignment of Mortgage-Backed Securities and Other Mortgage
Securities. With respect to each series, the Depositor will cause any
Mortgage-Backed Securities and Other Mortgage Securities included in the
related Trust to be 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, (i) 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 (ii) 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 (i) 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, (ii) repurchase such Defective
Mortgage
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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 (iii) 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 firm is of the opinion that such servicing has
been conducted in compliance with the Applicable Accounting Standards except
for (i) such exceptions as such firm shall believe to be immaterial and (ii)
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,
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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):
(a) all Mortgagor payments on account of principal,
including Principal Prepayments and, if specified in the related
Prospectus Supplement, prepayment penalties:
(b) all Mortgagor payments on account of interest,
adjusted to the Remittance Rate;
(c) all Liquidation Proceeds net of certain amounts
reimbursed to the Servicer or other person entitled thereto, as
described above;
(d) 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;
(e) all condemnation awards or settlements which are not
released to the Mortgagor in accordance with normal servicing
procedures;
(f) 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;
(g) 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;
(h) all amounts, if any, required to be deposited in the
Security Account from any Credit Enhancement for the related series;
and
(i) 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;
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(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).
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.
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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.
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
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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 Assets or Contracts. The
Depositor does not have, nor is it expected in the future to have, any
significant net worth.
The Depositor anticipates that it will acquire Mortgage Assets in the
open market or in privately negotiated transactions, which may be through or
from an affiliate. The Depositor will not receive any fees or other commissions
in connection with its acquisition of Mortgage Assets or its sale of such
Mortgage Assets to the Trust.
Neither the Depositor nor any of its affiliates will insure or
guarantee the Securities of any series.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS
The following discussion contains summaries of certain legal aspects
of mortgage loans and manufactured housing contracts which are general in
nature. Because such legal aspects are governed primarily by applicable state
law (which laws may differ substantially), the summaries do not purport to be
complete nor to reflect the laws of any particular state, nor to encompass the
laws of all states in which the security for the Mortgage Loans and Contracts
is situated. The summaries are qualified in their entirety be reference to the
applicable federal and state laws governing the Mortgage Loans and Contracts.
GENERAL
Mortgages. The Mortgage Loans will be secured either by deeds of trust
or mortgages. A mortgage creates a lien upon the real property encumbered by
the mortgage. It is not prior to liens for real estate taxes and assessments.
Priority between mortgages depends on their terms and generally on the order of
filing with a state or county office. There are two parties to a mortgage: the
mortgagor, who is the borrower and homeowner or the land trustee (as described
below), and the mortgagee, who is the lender. Under the mortgage instrument,
the mortgagor delivers to the mortgagee a note or bond and the mortgage.
Although a deed of trust is similar to a mortgage, a deed of trust formally has
three parties, the borrower-homeowner called the trustor (similar to a
mortgagor), a lender (similar to a mortgagee) called the beneficiary, and a
third-party grantee called the trustee. Under a deed of trust, the borrower
grants the property, irrevocably until the debt is paid, in trust and generally
with a power of sale, to the trustee to secure payment of the obligation. The
trustee's authority under a deed of trust and the mortgagee's authority under a
mortgage are governed by law, the express provisions of the deed of trust and,
in some cases, the directions of the beneficiary.
Cooperatives. Certain of the Mortgage Loans may be Cooperative Loans.
The private, non-profit, cooperative apartment corporation owns all the real
property that comprises the project, including the land, separate dwelling
units and all common areas. The cooperative is directly responsible for project
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. If there is a blanket mortgage on the
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cooperative apartment building and or underlying land, as is generally the
case, the cooperative, as project mortgagor, is also responsible for meeting
these mortgage obligations. A blanket mortgage is ordinarily incurred by the
cooperative in connection with the construction or purchase of the
cooperative's apartment building. The interest of the occupant under
proprietary leases or occupancy agreements to which that cooperative is a party
are generally subordinate to the interest of the holder of the blanket mortgage
in that building. If the cooperative is unable to meet the payment obligations
arising under its blanket mortgage, the mortgagee holding the blanket mortgage
could foreclose on that mortgage and terminate all subordinate proprietary
leases and occupancy agreements. In addition, the blanket mortgage on a
cooperative may provide financing in the form of a mortgage that does not fully
amortize with a significant portion of principal being due in one lump sum at
final maturity. The inability of the cooperative to refinance this mortgage and
its consequent inability to make such final payment could lead to foreclosure
by the mortgagee providing the financing. A foreclosure in either event by the
holder of the blanket mortgage could eliminate or significantly diminish the
value of any collateral held by the lender who financed the purchase by an
individual tenant-stockholder of cooperative shares or in the case of a Trust
including Cooperative Loans, the collateral securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership
of stock shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units. Generally, a tenant-stockholder of a cooperative must
make a monthly payment to the cooperative representing such
tenant-stockholder's pro rata share of the cooperative's payments for its
blanket mortgage, real property taxes, maintenance expenses and other capital
or ordinary expenses. An ownership interest in a cooperative and accompanying
occupancy rights is financed through 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.
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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.
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
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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.
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
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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
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
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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 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
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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.
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.
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Security Interests in the Manufactured Homes. The Manufactured Homes
securing the Contracts may be located in all 50 states. Security interests in
manufactured homes may be perfected either by notation of the secured party's
lien on the certificate of title or by delivery of the required documents and
payment of a fee to the state motor vehicle authority, depending on state law.
In some nontitle states, perfection pursuant to the provisions of the UCC is
required. The Depositor may effect such notation or delivery of the required
documents and fees, and obtain possession of the certificate of title, as
appropriate under the laws of the state in which any manufactured home securing
a manufactured housing conditional sales contract is registered. In the event
the Depositor fails, due to clerical errors, to effect such notation or
delivery, or files the security interest under the wrong law (for example,
under a motor vehicle title statute rather than under the UCC, in a few
states), the Trustee may not have a first priority security interest in the
Manufactured Home securing a Contract. As manufactured homes have become larger
and often have been attached to their sites without any apparent intention to
move them, courts in many states have held that manufactured homes, under
certain circumstances, may become subject to real estate title and recording
laws. As a result, a security interest in a manufactured home could be rendered
subordinate to the interests of other parties claiming an interest in the home
under applicable state real estate law. In order to perfect a security interest
in a manufactured home under real estate law, the holder of the security
interest must file either a "fixture filing" under the provisions of the UCC or
a real estate mortgage under the real estate laws of the state where the home
is located. These filings must be made in the real state records office of the
county where the home is located. So long as the borrower does not violate this
agreement, a security interest in the Manufactured Home will be governed by the
certificate of title laws or the UCC, and the notation of the security interest
on the certificate of title or the filing of a UCC financing statement will be
effective to maintain the priority of the security interest in the Manufactured
Home. If, however, a Manufactured Home is permanently attached to this site,
other parties could obtain an interest in the Manufactured Home which is prior
to the security interest transferred to the Trustee. With respect to a series
of Securities and as described in the related Prospectus Supplement, the
Depositor may be required to perfect a security interest in the Manufactured
Home under applicable real estate laws. If such real estate filings are not
required and if any of the foregoing events were to occur, the only recourse
would be to pursue the Trust's rights to require repurchase for breach of
warranties.
The Depositor will assign its security interest in the Manufactured
Homes. Neither the Depositor nor the Trustee or, if applicable, Indenture
Trustee will amend the certificates of title to identify a new secured party.
Accordingly, the Depositor or the Seller will continue to be named as the
secured party on the certificates of title relating to the Manufactured Homes.
In most states, such assignment is an effective conveyance of such security
interest without amendment of any lien noted on the related certificate of
title and the new secured party succeeds to the rights of the secured party.
However, in some states there exists a risk that, in the absence of an
amendment to the certificate of title, such assignment of the security interest
might not be held effective against creditors of the Depositor or the Seller.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien on the certificate
of title or delivery of the required documents and fees will be sufficient to
protect against the rights of subsequent purchasers of a Manufactured Home or
subsequent lenders who take a security interest in the Manufactured Home. If
there are any Manufactured Homes as to which the security interest is not
perfected, such security interest would be subordinate to, among others,
subsequent purchasers for value of Manufactured Homes and holders of perfected
security interests. There also exists a risk in not identifying a new secured
party on the certificate of title that, through fraud or negligence, the
security interest could be released.
Enforcement of Security Interests in Manufactured Homes. The Servicer,
to the extent required by the related Agreement, may take action to enforce the
security interest with respect to Contracts in default by repossession and
resale of the Manufactured Homes securing such Contracts in default. So long as
the Manufactured Home has not become subject to the real estate law, a creditor
can repossess a Manufactured Home securing a Contract by voluntary surrender,
by "self-help" repossession that is "peaceful" (i.e., without breach of the
peace) or in the absence of voluntary surrender and the ability to repossess
without breach of the peace, by 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
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the debtor may redeem at or before such resale. In the event of such
repossession and resale of a Manufactured Home, the Trustee would be entitled
to be paid out of the sale proceeds before such proceeds could be applied to
the payment of the claims of unsecured creditors or the holders of subsequently
perfected security interests or, thereafter, to the debtor.
If the owner of a Manufactured Home moves it to a state other than the
state in which such Manufactured Home initially is registered, under the laws
of most states the perfected security interest in the Manufactured Home would
continue for four months after such relocation and thereafter only if and after
the owner registers the Manufactured Home in such state. If the owner were to
relocate a Manufactured Home to another state and not re-register the
Manufactured Home in such state, and if steps are not taken to re-perfect the
security interest in such state, the security interest would cease to be
perfected. A majority of states generally requires surrender of a certificate
of title to re-register a Manufactured Home; accordingly, the Trustee or, if
applicable, the Indenture Trustee, must surrender possession if it holds the
certificate of title to such Manufactured Home or, in the case of Manufactured
Homes registered in states which provide for notation of lien, notice of
surrender would be given if the security interest in the Manufactured Home is
noted on the certificate of title. Accordingly, the there would be an
opportunity to re-perfect the security interest in the Manufactured Home in the
state of relocation. In states which do not require a certificate of title for
registration of a Manufactured Home, re-registration could defeat perfection.
In the ordinary course of servicing the manufactured housing conditional sales
contracts, the Servicer will be required to take steps to effect such
re-perfection upon receipt of notice of re-registration or information from the
obligor as to relocation. Similarly, when an obligor under a manufactured
housing conditional sales contract sells a Manufactured Home, possession of the
certificate of title must be surrendered or notice will be received as a result
of the lien noted thereon and accordingly there will be an opportunity to
require satisfaction of the related manufactured housing conditional sales
contract before release of the lien. Under each Agreement the Servicer is
obligated to take such steps, at the Servicer's expense, as are necessary to
maintain perfection of security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Depositor will represent in the Agreement that it has no knowledge of any such
liens with respect to any Manufactured Home securing payment on any Contract.
Nevertheless, such liens could arise at any time during the term of a Contract.
No notice will be given in the event such a lien arises.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the Manufactured Home securing such debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgment
Consumer Protection Laws. The so-called "Holder-in-Due-Course" rule of
the Federal Trade Commission is intended to defeat the ability of the
transferor of a consumer credit contract which is the seller of goods which
gave rise to the transaction (and certain related lenders and assignees) to
transfer such contract free of notice of claims by the debtor thereunder. The
effect of this rule is to subject the assignee of such a contract to all claims
and defenses which the debtor could assert against the seller of goods.
Liability under this rule is limited to amounts paid under a Contract; however,
the obligor also may be able to assert the rule to set off remaining amounts
due as a defense against a claim brought against such obligor. Numerous other
federal and state consumer protection laws impose requirements applicable to
the origination of and lending pursuant to the Contracts, including the
Truth-in-Lending Act, the Federal Trade Commission Act, the Fair Credit Billing
Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act, the Fair
Debt Collection Practices Act and the Uniform Consumer Credit Code. In the case
of some of these laws, the failure to comply with their provisions may affect
the enforceability of the related Contract
Transfers of Manufactured Homes; Enforceability of "Due-on-Sale"
Clauses. The Contracts, in general, prohibit the sale or transfer of the
related Manufactured Homes without consent and permit the acceleration of the
maturity of the Contracts upon any such sale or transfer for which consent has
not been granted. In certain cases, the transfer may be made by a delinquent
obligor in order to avoid a repossession proceeding with respect to a
Manufactured Home.
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In the case of a transfer of a Manufactured Home after which the
Servicer desires to accelerate the maturity of the related Contract, the
Servicer's ability to do so will depend on the enforceability under state law
of the "due-on-sale" clause. The Garn-St. Germain Act preempts, subject to
certain exceptions and conditions, state laws prohibiting enforcement of
"due-on-sale" clauses applicable to the Manufactured Homes. Consequently, in
some states the Servicer may be prohibited from enforcing a "due-on-sale"
clause in respect of certain Manufactured Homes.
THE TITLE I PROGRAM
Certain of the Mortgage Loans or Contracts contained in a Trust may be
loans insured under the FHA Title I credit insurance program created pursuant
to Sections 1 and 2(a) of the National Housing Act of 1934 (the "Title I
Program"). Under the Title I Program, the FHA is authorized and empowered to
insure qualified lending institutions against losses on eligible loans. The
Title I Program operates as a coinsurance program in which the FHA insures up
to 90% of certain losses incurred on an individual insured loan, including the
unpaid principal balance of the loan, but only to the extent of the insurance
coverage available in the lender's FHA insurance coverage reserve account. The
owner of the loan bears the uninsured loss on each loan.
The types of Title I loans, legal requirements, payment terms,
underwriting standards, eligibility requirements, insurance coverage and claims
proceeds related thereto shall be set forth in the related Prospectus
Supplement.
LEGAL INVESTMENT MATTERS
Unless otherwise set forth in the related Prospectus Supplement,
Securities of any series will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") so
long as they are rated by a Rating Agency in one of its two highest categories
and, as such, will be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including,
but not limited to, state-chartered savings banks, commercial banks, savings
and loan associations and insurance companies, as well as trustees and state
government employee retirement systems) created pursuant to or existing under
the laws of the United States or of any State (including the District of
Columbia and Puerto Rico) whose authorized investments are subject to State
regulation to the same extent that, under applicable law, obligations issued by
or guaranteed as to principal and interest by the United States or any agency
or instrumentality thereof constitute legal investments for such entities.
Under SMMEA, if a State enacted legislation prior to October 4, 1991,
specifically limiting the legal investment authority of any such entities with
respect to "mortgage related securities," the Securities will constitute legal
investments for entities subject to such legislation only to the extent
provided in such legislation. Certain States have enacted legislation which
overrides the preemption provisions of SMMEA.
SMMEA also amended the legal investment authority of federally
chartered depository institutions as follows: federal savings and loan
associations and federal savings bank may invest in, sell or otherwise deal
with mortgage- related securities without limitations as to the percentage of
their assets represented thereby; federal credit unions may invest in
mortgage-related securities, and national banks may purchase mortgage-related
securities for their own account without regard to the limitations generally
applicable to investment securities set forth in 12 U.S.C. 24 (Seventh),
subject in each case to such regulations as the applicable federal regulatory
authority may prescribe.
The Federal Financial Institution Examination Counsel has adopted the
"Supervisory Policy Statement on Securities Activities" (the "Policy
Statement"), applicable to all depository institutions, setting forth
guidelines for and significant restrictions on investments in "high-risk
mortgage securities." The Policy Statement has been adopted by the Federal
Reserve Board, the Office of the Comptroller of the Currency, the FDIC and the
OTS with an effective date of February 10, 1992, as revised April 15, 1994. The
Policy Statement generally indicates that a mortgage derivative product will be
deemed to be high risk if it exhibits greater price volatility than a standard
fixed rate thirty-year mortgage security. According to the Policy Statement,
prior to purchase, a depository institution will be required to determine
whether a mortgage derivative product that it is considering acquiring is
high-risk, and if so that the proposed acquisition would reduce the
institution's overall interest rate risk. Reliance on analysis and
documentation
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obtained from a securities dealer or other outside party without internal
analysis by the institution would be unacceptable. There can be no assurance as
to which classes of the Securities of any series will be treated as high-risk
under the Policy Statement. In addition, the National Credit Union
Administration has issued regulations governing federal credit union
investments which prohibit investment in certain specified types of securities,
which may include certain classes of Securities. Similar policy statement have
been issued by regulators having jurisdiction over other types of depository
institutions.
There may be other restrictions on the ability of certain investors
either to purchase certain classes of Securities or to purchase any class of
Securities representing more than a specified percentage of the investors'
assets. The Depositor will make no representations as to the proper
characterization of any class of Securities for legal investment or other
purposes, or as to the ability of particular investors to purchase any class of
Securities under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any class of Securities. Accordingly, all
investors whose investment activities are subject to legal investment laws and
regulations, regulatory capital requirements or review by regulatory
authorities should consult with their own legal advisors in determining whether
and to what extent the Securities of any class constitute a legal investment
under SMMEA or are subject to investment, capital or other restrictions, and
whether SMMEA has been overridden in any jurisdiction applicable to such
investor.
ERISA CONSIDERATIONS
ERISA imposes requirements on employee benefit plans (and on certain
other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds and
separate accounts in which such plans, accounts or arrangements are invested)
(collectively, "Plans") subject to ERISA and on persons who are fiduciaries
with respect to such Plans. Among other things, ERISA requires that the assets
of Plans be held in trust and that the trustee, or other duly authorized
fiduciary, have exclusive authority and discretion to manage and control the
assets of such Plans. ERISA also imposes certain duties on persons who are
fiduciaries of Plans. Under ERISA, any person who exercises any authority or
control respecting the management or disposition of the assets of a Plan is
considered to be a fiduciary of such Plan (subject to certain exceptions not
here relevant). In addition to the imposition of general fiduciary standards of
investment prudence and diversification, ERISA prohibits a broad range of
transactions involving Plan assets and persons ("Parties in Interest") having
certain specified relationships to a Plan and imposes additional prohibitions
where Parties in Interest are fiduciaries with respect to such Plan.
The United States Department of Labor (the "DOL") has issued
regulations concerning the definition of what constitutes the assets of a Plan.
(DOL Reg Section 2510.3-101). Under this regulation, the underlying assets and
properties of corporations, partnerships and certain other entities in which a
Plan makes an "equity" investment could be deemed for purposes of ERISA to be
assets of the investing Plan in certain circumstances. In such case, the
fiduciary making such an investment for the Plan could be deemed to have
delegated his or her asset management responsibility, and the underlying assets
and properties could be subject to ERISA reporting and disclosure. Certain
exceptions to the regulation may apply in the case of a Plan's investment in
the Securities, but the Depositor cannot predict in advance whether such
exceptions apply due to the factual nature of the conditions to be met.
Accordingly, because the Mortgage Loans and Contracts may be deemed Plan assets
of each Plan that purchases Securities, an investment in the Securities by a
Plan might give rise to a prohibited transaction under ERISA Sections 406 and
407 and be subject to an excise tax under Code Section 4975 unless a statutory
or administrative exemption applies.
DOL Prohibited Transaction Exemption 83-1 ("PTE 83-1") exempts from
ERISA's prohibited transaction rules certain transactions relating to the
operation of residential mortgage investment trusts and the purchase, sale and
holding of "mortgage pool pass-through certificates" in the initial issuance of
such certificates. PTE 83-1 permits, subject to certain conditions,
transactions which might otherwise be prohibited between Plans and Parties in
Interest with respect to those Plans involving the origination, maintenance and
termination of mortgage pools consisting of mortgage loans secured by first or
second mortgages or deeds of trust on single-family residential property, and
the acquisition and holding of certain mortgage pool pass-through certificates
representing an interest in such mortgage pools by PTE.
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PTE 83-1 sets forth three general conditions which must be satisfied
for any transaction to be eligible for exemption: (i) the maintenance of a
system of insurance or other protection for the pooled mortgage loans and
property securing such loans, and for indemnifying 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 based upon the opinion of Arter & Hadden, special
counsel to the Depositor, with respect to the 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, 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. The Prospectus Supplement for each series of Securities will
discuss any special tax consideration applicable to any class of Securities of
such series, and the discussion below is qualified by any such discussion in
the related Prospectus Supplement.
For purposes of this opinion, 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.
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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, special counsel to the Depositor, has advised
the Depositor that in their opinion, 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 and that, if a
Trust qualifies as a REMIC, the tax consequences to the Owners will be as
described below. 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.
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 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
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requirement will be met if at all times the aggregate adjusted basis of any
nonqualified assets (i.e., assets other than qualified mortgages and permitted
investments) is less than 1% of the aggregate adjusted basis of all the REMIC
Pool's assets.
If a REMIC Pool fails to comply with one or more of the requirements
of the Code for REMIC status during any taxable year, the REMIC Pool will not
be treated as a REMIC for such year and thereafter. In this event, the
classification of the REMIC Pool for federal income tax purposes is uncertain.
The REMIC Pool might be entitled to treatment as a grantor trust under the
rules described in "Federal Income Tax Consequences for Securities as to Which
No REMIC Election Is Made." In that case, no entity-level tax would be imposed
on the REMIC Pool. Alternatively, the Regular Securities may continue to be
treated as debt instruments for federal income tax purposes; but the REMIC Pool
could be treated as a taxable mortgage pool (a "TMP"). If the REMIC Pool is
treated as a TMP, any residual income of the REMIC Pool (income from the
Mortgage Assets less interest and original issue discount expense allocable to
the Regular Securities and any administrative expenses of the REMIC Pool) would
be subject to corporate income tax at the REMIC Pool level. On the other hand,
an entity with multiple classes of ownership interests may be treated as a
separate association taxable as a corporation under Treasury regulations, and
the Regular Securities may be treated as equity interests therein. The Code,
however, authorizes the Treasury Department to issue regulations that address
situations where failure to meet one or more of the requirements for REMIC
status occurs inadvertently and in good faith, and disqualification of the
REMIC Pool would occur absent regulatory relief. Investors should be aware,
however, that the Conference Committee Report to the Tax Reform Act of 1986
(the "1986 Act") indicates that the relief may be accompanied by sanctions,
such as the imposition of a corporate tax on all or a portion of the REMIC
Pool's income for the period of time in which the requirements for REMIC status
are not satisfied.
TAXATION OF REGULAR SECURITIES
General. Payments received by holders of Regular Securities generally
should be accorded the same tax treatment under the Code as payments received
on ordinary taxable corporate debt instruments. In general, interest, original
issue discount and market discount on a Regular Security will be treated as
ordinary income to a holder of the Regular Security (the "Regular
Securityholder") as they accrue, and principal payments on a Regular Security
will be treated as a return of capital to the extent of the Regular
Securityholder's basis in the Regular Security allocable thereto. Regular
Securityholders must use the accrual method of accounting with regard to
Regular Securities, regardless of the method of accounting otherwise used by
such Regular Securityholders.
Original Issue Discount. Regular Securities may be issued with
"original issue discount" within the meaning of Code Section 1273(a). Holders
of any class of Regular Securities having original issue discount generally
must include original issue discount in ordinary income for federal income tax
purposes as it accrues, in accordance with a constant interest method that
takes into account the compounding of interest, in advance of receipt of the
cash attributable to such income. While the Depositor anticipates that the
amount of original issue discount required to be included in a Regular
Securityholder's income in any taxable year will be computed as described
below, there can be no assurance that the rules described below will be applied
to the Regular Securities in the manner described.
Each Regular Security (except to the extent described below with
respect to a Regular Security on which distributions of principal are made in a
single installment or upon an earlier distribution by lot of a specified
principal 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
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unconditionally payable in cash or in property (other than debt instruments of
the issuer) at least annually at (i) a single fixed rate, (ii) one or more
qualified floating rates (as described below), (iii) a fixed rate followed by
one or more qualified floating rates, (iv) a single objective rate (as
described below) or (v) a fixed rate and an objective rate that is a qualified
inverse floating rate. The OID Regulations state that interest payments are
unconditionally payable only if a late payment or nonpayment is expected to be
penalized or reasonable remedies exist to compel payment. Certain debt
securities may provide for default remedies in the event of late payment or
nonpayment of interest. The interest on such debt securities will be
unconditionally payable and constitute qualified stated interest, not OID.
However, absent clarification of the OID Regulations, where debt securities do
not provide for default remedies, the interest payments will be included in the
debt security's stated redemption price at maturity and taxed as OID. Any
stated interest in excess of the qualified stated interest is included in the
stated redemption price at maturity. If the amount of original issue discount
is "de minimis" as described below, the amount of original issue discount is
treated as zero, and all stated interest is treated as qualified stated
interest. Distributions of interest on Regular Securities with respect to which
deferred interest will accrue may not constitute qualified stated interest, in
which case the stated redemption price at maturity of such Regular Securities
includes all distributions of interest as well as principal thereon. Moreover,
if the interval between the issue date and the first Distribution Date on a
Regular Security is longer than the interval between subsequent Distribution
Dates (and interest paid on the first Distribution Date is less than would have
been earned if the stated interest rate were applied to outstanding principal
during each day in such interval), the stated interest distributions on such
Regular Security technically do not constitute qualified stated interest. In
such case a special rule, applying solely for the purpose of determining
whether original issue discount is de minimis, provides that the interest
shortfall for the long first period (i.e., the interest that would have been
earned if interest had been paid on the first Distribution Date for each day
the Regular Security was outstanding) is treated as made at a fixed rate if the
value of the rate on which the payment is based is adjusted in a reasonable
manner to take into account the length of the interval. Regular Securityholders
should consult their own tax advisors to determine the issue price and stated
redemption price at maturity of a Regular Security.
Under a de minimis rule, original issue discount on a Regular Security
will be considered to be zero if such original issue discount is less than
0.25% of the stated redemption price at maturity of the Regular Security
multiplied by the weighted average maturity of the Regular Security. For this
purpose, the weighted maturity of the Regular Security is computed as the sum
of the amounts determined by multiplying the number of full years (i.e.,
rounding down partial years) from the issue date until each distribution in
reduction of stated redemption price at maturity is scheduled to be made by a
fraction, the numerator of which is the amount of each distribution included in
the stated redemption price at maturity of the Regular Security and the
denominator of which is the stated redemption price at maturity of the Regular
Security. Although currently unclear, it appears that the schedule of such
distributions should be determined in accordance with the assumed rate of
prepayment of the Mortgage Assets and the anticipated reinvestment rate, if
any, relating to the Regular Securities (the "Prepayment Assumption"). The
Prepayment Assumption with respect to a series of Regular Securities will be
set forth in the related Prospectus Supplement. The holder of a debt instrument
includes any de minimis original issue discount in income pro rata as stated
principal payments are received.
Of the total amount of original issue discount on a Regular Security,
the Regular Securityholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue 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
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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.
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
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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 and that is based on objective
financial or economic information; however, an objective rate does not include
a rate based on information that is in the control of the issuer or that is
unique to the circumstances of a related party. 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.
The application of the OID Regulations to variable rate debt
instruments is limited and may not apply to some Regular Securities having
variable rates. In that event, the provisions of regulations issued on June 11,
1996, applicable to instruments having contingent payments, may apply to those
Regular Securities. The application of these provisions to instruments such as
variable rate Regular Securities is subject to varying interpretations.
Prospective purchasers of variable rate Regular Securities are advised to
consult their tax advisors concerning the tax treatment of such Regular
Securities.
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
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the remaining original issue discount as of the end of such period. Such
purchaser also generally will be required to treat a portion of any gain on a
sale or exchange of the Regular Security as ordinary income to the extent of
the market discount accrued to the date of disposition under one of the
foregoing methods, less any accrued market discount previously reported as
ordinary income as partial distributions in reduction of the stated redemption
price at maturity were received. Such purchaser will be required to defer
deduction of a portion of the excess of the interest paid or accrued on
indebtedness incurred to purchase or carry a Regular Security over the interest
distributable thereon. The deferred portion of such interest expense in any
taxable year generally will not exceed the accrued market discount on the
Regular Security for such year. Any such deferred interest expense is, in
general, allowed as a deduction not later than the year in which the related
market discount income is recognized or the Regular Security is disposed of. As
an alternative to the inclusion of market discount in income on the foregoing
basis, the Regular Securityholder may elect to include market discount in
income currently as it accrues in all market discount instruments acquired by
such Regular Securityholder in that taxable year or thereafter, in which case
the interest deferral rule will not apply. In Revenue Procedure 92-67, the
Internal Revenue Service set forth procedures for taxpayers (1) electing under
Code Section 1278(b) to include market discount in income currently, (2)
electing under rules of Code Section 1276(b) to use a constant interest rate to
determine accrued market discount on a bond where the holder of the bond is
required to determine the amount of accrued market discount at a time prior to
the holder's disposition of the bond, and (3) requesting consent to revoke an
election under Code Section 1278(b).
By analogy to the OID Regulations, market discount with respect to a
Regular Security will be considered to be zero if such market discount is less
than 0.25% of the remaining stated redemption price at maturity of such Regular
Security multiplied by the weighted average maturity of the Regular Security
(determined as described above under "Original Issue Discount") remaining after
the date of purchase. Treasury regulations implementing the market discount
rules have not yet been issued, and therefore investors should consult their
own tax advisors regarding the application of these rules as well as the
advisability of making any of the elections with respect thereto.
Premium. A Regular Security purchased at a cost greater than its
remaining stated redemption price at maturity generally is considered to be
purchased at a premium. If the Regular Securityholder holds such Regular
Security as a "capital 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. On June
22, 1996, the IRS published proposed regulations (the "Proposed Premium
Regulations") covering the amortization of bond premiums. The Proposed Premium
Regualtions describe the yield method for amortizing premium and provided that
the Regular Security holder may offset the premium against corresponding
interest income only as that income is taken into account under the Regular
Securityholder's method of accounting. For instruments that may be called or
prepaid prior to maturity, a Regular Securityholder will be deemed to exercise
its option and an issuer will be deemed to exercise its redemption right in a
manner that maximizes the Regular Securityholder's yield. The Proposed Premium
Regulations are proposed to be effective for debt instruments acquired on or
after 60 days after final regulations are issued. A Regular Securityholder may
elect to amortize bond premium under the Proposed Premium Regulations for the
taxable year containing the effective date, with the election applying to all
the Regular Security holders' debt instruments held on the first day of the
taxable year. The Proposed Premium Regulations are subject to further
administrative actions before becoming effective, if at all, and may be
modified before their becoming effective. 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
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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.
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
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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.
However, in view of the possible acceleration of the income of Residual
Securityholders described above under "Taxation of REMIC Income," the period of
time over which such issue price is effectively amortized may be longer than
the economic life of the Residual Securities.
If a Residual Security has a negative value, it is not clear whether
its issue price would be considered to be zero or such negative amount for
purposes of determining the REMIC Pool's basis in its assets. The REMIC
Regulations do not address whether residual interests could have a negative
basis and a negative issue price. The Depositor does not intend to treat a
class of Residual Securities as having a value of less than zero for purposes
of determining the bases of the related REMIC Pool in its assets.
Further, to the extent that the initial adjusted basis of Residual
Securityholder (other than an original holder) in the Residual Security is
greater than the corresponding portion of the REMIC Pool's basis in the
Mortgage Assets, the Residual Securityholder will not recover a portion of such
basis until termination of the REMIC Pool unless Treasury regulations yet to be
issued provide for periodic adjustments to the REMIC income otherwise
reportable by such holder. The REMIC Regulations do not so provide. See
"Treatment of Certain Items of REMIC Income and Expense -- Market Discount"
below regarding the basis of Mortgage Assets to the REMIC Pool and "Sale or
Exchange of Residual Securities" below regarding possible treatment of a loss
upon termination of the REMIC Pool as a capital loss.
Mark to Market Rules
Prospective purchasers of a Residual Security should be aware that on
December 24, 1996, the Internal Revenue Service issued final regulations (the
"Mark to Market 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
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investment. The Mark to Market Regulations provide that for purposes of this
mark-to-market requirement, a Residual Security acquired after January 4, 1995,
is not treated as a security and thus may not be marked to market.
TREATMENT OF CERTAIN ITEMS OF REMIC INCOME AND EXPENSE
Original Issue Discount. Generally, the REMIC Pool's deductions for
original issue discount will be determined in the same manner as original issue
discount income on Regular Securities as described above under "Taxation of
Regular Securities -- Original Issue Discount" and "Variable Rate Regular
Securities," without regard to the de minimis rule described therein.
Market Discount. The REMIC Pool will have market discount income in
respect of Mortgage Assets if, in general, the basis of the REMIC Pool in such
Mortgage Assets is exceeded by their unpaid principal balances. The REMIC
Pool's basis in such Mortgage Assets is generally the fair market value of the
Mortgage Assets immediately after the transfer thereof to the REMIC Pool. The
REMIC Regulations provide that such basis is equal in the aggregate to the
issue prices of all regular and residual interests in the REMIC Pool. In
respect of Mortgage Assets that have market discount to which Code Section 1276
applies, the accrued portion of such market discount would be recognized
currently by the REMIC as an item of ordinary income. Market discount income
generally should accrue in the manner described above under "Taxation of
Regular Securities -- Market Discount." The rules of Code Section 1276
concerning market discount income will not, however, apply in the case of
Mortgage Assets originated on or prior to July 18, 1984, if any. With respect
to such Mortgage Assets market discount is generally includible in REMIC
taxable income or ordinary gross income pro rata as principal payments are
received. Under another interpretation of the Code and relevant legislative
history, market discount on such Mortgage Assets might be required to be
recognized currently by the REMIC, in the same manner that market discount
would be recognized with respect to Mortgage Assets originated after July 18,
1984. Under that method, a REMIC would tend to recognize market discount more
rapidly than it would otherwise. In either case, the deduction of a portion of
the interest expense on the Regular Securities allocable to such discount may
be deferred until such discount is included in income, and any gain on the sale
or exchange thereof will be treated as ordinary income to the extent of the
deferred interest deductible at that time.
Premium. Generally, if the basis of the REMIC Pool in the Mortgage
Assets exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired such Mortgage Assets at a premium equal to the
amount of such excess. As stated above, the REMIC Pool's basis in the Mortgage
Assets is the fair market value of the Mortgage Assets, based on the aggregate
of the issue prices of the regular and residual interests in the REMIC Pool
immediately after the transfer thereof to the REMIC Pool. In a manner analogous
to the discussion above under "Taxation of Regular Securities -- Premium," a
person that holds Mortgage Assets as a capital asset under Code Section 1221
may elect under Code Section 171 to amortize premium on Mortgage Assets
originated after September 27, 1985, under a constant yield method. Amortizable
bond premium will be treated as an offset to interest income on the Mortgage
Assets, rather than as a separate deduction item. Because substantially all the
mortgagors with respect to the Mortgage Assets are expected to be individuals,
Code Section 171 will not be available. Premium on Mortgage Assets may be
deductible in accordance with a reasonable method regularly employed by the
holder thereof. The allocation of such premium pro rata among principal
payments should be considered a reasonable method; however, the Internal
Revenue Service may argue that such premium should be allocated in a different
manner, such as allocating such premium entirely to the final payment of
principal.
Limitations on Offset or Exemption of REMIC Income; Excess Inclusions.
A portion of the income allocable to a Residual Security (referred to in the
Code as an "excess inclusion") for any calendar quarter, with an exception
discussed below for certain thrift institutions, will be subject to federal
income tax in all events. Thus, for example, an excess inclusion (i) cannot,
except as described below, be offset by any unrelated losses or loss carryovers
of a Residual Securityholder, (ii) will be treated as "unrelated business
taxable income" within the meaning of Code Section 512 if the Residual
Securityholder is a pension fund or any other organization that is subject to
tax only on its unrelated business taxable income and (iii) is not eligible for
any reduction in the rate of withholding tax in the case of a Residual
Securityholder that is a foreign investor, as further discussed in "Taxation of
Certain Foreign Investors -- Residual Securities" below. Members of an
affiliated group are treated as one corporation for purposes of applying the
limitation on offset of excess inclusion income. The Small Business Protection
Act of 1996 (the "1996 Act")
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eliminated a special rule that permitted thrift institutions to use net
operating losses and other allowable deductions to offset their excess
inclusion income from Residual Securities with significant value for taxable
years beginning after December 31, 1995 (subject to exceptions for certain
certificates held continuously since November 1, 1995). The 1996 Act also
provides new rules affecting the determination of alternative minimal taxable
income ("AMTI") of a Residual Securityholder. First, AMTI is calculated without
regard to the special rule that taxable income cannot be less than excess
inclusion income for the year. Second, AMTI cannot be less than excess
inclusion income for the year. Finally, any AMTI net operating loss deduction
is computed without regard to excess inclusion income . These new rules are
effective for tax years ending beginning after December 31, 1986, unless a
Residual Security holder elects to have the rules apply only to tax years after
August 20, 1996.
Except as discussed in the following paragraph, with respect to excess
inclusions from Residual Securities without "significant value," for any
Residual Securityholder, the excess inclusion for any calendar quarter is the
excess, if any, of (i) the income of such Residual Securityholder for that
calendar quarter from its Residual Security over (ii) the sum of the "daily
accruals" (as defined below) for all days during the calendar quarter on which
the Residual Securityholder holds such Residual Security. For this purpose, the
daily accruals with respect to a Residual Security are determined by allocating
to each day in the calendar quarter its ratable portion of the product of the
"adjusted issue price" (as defined below) of the Residual Security at the
beginning of the calendar quarter and 120 percent of the "Federal long-term
rate" in effect at the time the Residual Security is issued. For this purposes
the "adjusted issue price" of a Residual Security at the beginning of any
calendar quarter equals the issue price of the Residual Security (adjusted for
contributions), increased by the amount of daily accruals for all prior
quarters, and decreased (but not below zero) by the aggregate amount of
payments made on the Residual Security before the beginning of such quarter.
The Federal long-term rate is an average of current yields on Treasury
securities with a remaining term of greater than nine years, computed and
published monthly by the IRS.
The Code provides that to the extent provided in regulations, as an
exception to the general rule described above, the entire amount of income
accruing on a Residual Security will be treated as an excess inclusion if the
Residual Securities in the aggregate are considered not to have "significant
value." The Treasury Department has not yet provided regulations in this
respect and the REMIC Regulations did not adopt this rule. The exception from
the excess inclusion rules applicable to thrift institutions does not apply,
however, if the Residual Securities do not have significant value. Under the
REMIC Regulations, the Residual Securities will have significant value if: (i)
the aggregate of the issue prices of the Residual Securities is at least two
percent of the aggregate issue prices of all Regular Securities and Residual
Securities in the REMIC and (ii) the anticipated weighted average life of the
Residual Securities is at least 20 percent of the REMIC's anticipated weighted
average life based on the prepayment and reinvestment assumptions used in
pricing the transaction and any recognized or permitted clean up calls or any
required qualified liquidation. Although not entirely clear, the REMIC
Regulations indicate that the significant value determination is made only on
the Startup Day. The anticipated weighted average life of a Residual Security
with a principal balance and a market rate of interest is computed by
multiplying the amount of each expected principal payment by the number of
years (or portions thereof) from the Startup Day, adding these sums and
dividing by the total principal expected to be paid on such Residual Security
based on the relevant prepayment assumption and expected reinvestment income.
The anticipated weighted average life of a Residual Security with either no
specified principal balance or a principal balance and rights to interest
payments disproportionate to such principal balance, would be computed under
the formula described above but would include all payments expected on the
Residual Security instead of only the principal payments. The anticipated
weighted average life of a REMIC is a weighted average of the anticipated
weighted average lives of all classes of interest in the REMIC.
Under Treasury regulations to be promulgated, a portion of the
dividends paid by a REIT which owns a Residual Security are to be designated as
excess inclusions in an amount corresponding to the Residual Security's
allocable share of the excess inclusions. Similar rules apply in the case of
regulated investment companies, common trust funds and cooperatives. Thus,
investors in such entities which own a Residual Security will be subject to the
limitations on excess inclusions described above. The REMIC Regulations do not
provide guidance on this issue.
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TAX-RELATED RESTRICTIONS ON TRANSFER OF RESIDUAL SECURITIES
Disqualified Organizations. If legal title or beneficial interest in a
Residual Security is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Security for periods after the transfer and (ii) the highest marginal
federal corporate income tax rate. The REMIC Regulations provide that the
anticipated excess inclusion are based on actual prepayment experience to the
date of the transfer and projected payments based on the Prepayment Assumption.
The present value discount rate equals the applicable Federal rate under Code
Section 1274(d) that would apply to a debt instrument that was issued on the
date the Disqualified Organization acquired the Residual Security and whose
term ended on the close of the last quarter in which excess inclusion was
expected to accrue with respect to the Residual Security. Such a tax generally
would be imposed on the transferor of the Residual Security, except that where
such transfer is through an agent (including a broker, nominee, or other
middleman) for a Disqualified Organization, the tax would instead be imposed on
such agent. A transferor of a Residual Security would in no event, however, be
liable for such tax with respect to a transfer if the transferee furnishes to
the transferor an affidavit that the transferee is not a Disqualified
Organization and, as of the time of the transfer, the transferor does not have
actual knowledge that such affidavit is false. The tax also may be waived by
the Treasury Department if the Disqualified Organization promptly disposes of
the Residual Security and the transferor pays income tax at the highest
corporate rate on the excess inclusion for the period the Residual Security is
actually held by the Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Security during a taxable year and
a Disqualified Organization is the record holder of an equity interest in such
entity, then a tax is imposed on such entity equal to the product of (i) the
amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period such interest is held by such
Disqualified Organization and (ii) the highest marginal federal corporate
income tax rate. Such tax would be deductible from the ordinary gross income of
the Pass-Through Entity for the taxable year. The Pass-Through Entity would not
be liable for such tax if it has received an affidavit from such record holder
that (i) states under penalty of perjury that it is not a Disqualified
Organization or (ii) furnishes a social security number and states under
penalties of perjury that 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
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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 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.
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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 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
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property and (ii) gross income from foreclosure property other than qualifying
rents and other qualifying income for a real estate investment trust.
LIQUIDATION OF THE REMIC POOL
If a REMIC Pool and the Trustee adopt a plan of complete liquidation,
within the meaning of Code Section 860F(a)(4)(A)(i) and sell all the REMIC
Pool's assets (other than cash) within a 90-day period beginning on the date of
the adoption of the plan of liquidation, the REMIC Pool will recognize no gain
or loss on the sale of its assets, provided that the REMIC Pool credits or
distributes in liquidation all the sale proceeds plus its cash (other than
amounts retained to meet claims against the REMIC Pool) to holders of Regular
Securities and Residual Securityholders within the 90-day period.
ADMINISTRATIVE MATTERS
The REMIC Pool will be required to maintain its books on a calendar
year basis and to file federal income tax returns for federal income tax
purposes in a manner similar to a partnership. The form for such income tax
return is Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax
Return. The Trustee will be required to sign the REMIC Pool's returns. Treasury
regulations provide that, except where there is a single Residual
Securityholder for an entire taxable year, the REMIC Pool generally will be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination by the Internal Revenue Service of
any adjustments to, among other things, items of REMIC income, gain, loss,
deduction or credit in a unified administrative proceeding. The Depositor or
other designated Residual Securityholders will be obligated to act as "tax
matters person," as defined in applicable Treasury regulations, with respect to
the REMIC Pool. If the Code or applicable Treasury regulations do not permit
the Depositor to act as tax matters person in its capacity as agent of the
Residual Securityholders, the 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,
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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 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.
On April 22, 1996, the IRS issued proposed regualtions which, if
adopted in final form, could have an affect in the United States taxation of
foreign investors among Regular Securities or Residual. The proposed
regulations would apply to payments after December 31, 1997. Investors who are
Non-U.S. Persons should consult their tax advisors regarding the specific tax
consequences to them of owning Residual Securities.
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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 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
Arter & Hadden, special 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 discussed below.
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.
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 Debt Securities, as described below under "Debt Securities,"
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
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discussion below under "Recharacterization of Servicing Fees." 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.
Tax Status. Subject to the discussion below, Arter & Hadden, special
counsel to the Depositor, is of the opinion that:
(i). 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.
(ii). 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.
(iii). 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).
(iv). 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
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supporting treatment of an investment in a buy-down Mortgage Loan as entirely
secured by real property if the fair market value of the real property securing
the loan exceeds the principal amount of the loan at the time of issuance or
acquisition, as the case may be. There is no assurance that the treatment
described above is proper. Accordingly, Securityholders are urged to consult
their own tax advisors concerning the effects of such arrangements on the
characterization of such Securityholder's investment for federal income tax
purposes.
PREMIUM AND DISCOUNT
Securityholders are advised to consult with their tax advisors as to
the federal income tax treatment of premium and discount arising either upon
initial acquisition of Securities or thereafter.
Premium. The treatment of premium incurred upon the purchase of a
Security will be determined generally as described above under " -- Taxation of
Regular Securities -- Premium."
Original Issue Discount. The Internal Revenue Service has stated in
published rulings that, in circumstances similar to those described herein, the
original issue discount rules will be applicable to a Securityholder's interest
in those Mortgage Assets as to which the conditions for the application of
those sections are met. Rules regarding periodic inclusion of original issue
discount income are applicable to mortgages of corporations originated after
May 27, 1969, mortgages of noncorporate mortgagors (other than individuals)
originated after July l, 1982, and mortgages of individuals originated after
March 2, 1984. Such original issue discount could arise by the charging of
points by the originator of the mortgages in an amount greater than a statutory
de minimis exception, to the extent that the points are not currently
deductible under applicable Code provisions or are not for services provided by
the lender. It is generally not anticipated that adjustable rate Mortgage
Assets will be treated as issued with original issue discount. However, the
application of the OID Regulations to adjustable rate mortgage loans with
incentive interest rates or annual or lifetime interest rate caps may result in
original issue discount.
Original issue discount must generally be reported as ordinary gross
income as it accrues under a constant yield method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
Code Section 1272 provides, however, for a reduction in the amount of original
issue discount includible in the income of a holder of an obligation that
acquires the obligation after its initial issuance at a price greater than the
sum of the original issue price and the previously accrued original issue
discount, less prior payments of principal. Accordingly, if such Mortgage
Assets acquired by a Securityholder are purchased at a price equal to the then
unpaid principal amount of such Mortgage Assets, no original issue discount
attributable to the difference between the issue price and the original
principal amount of such Mortgage Assets (i.e., points) will be includible by
such holder.
Market Discount. Securityholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the Mortgage Assets will be determined and
will be reported as ordinary income generally in the manner described above
under " -- Taxation of Regular Securities -- Market Discount."
Recharacterization of Servicing Fees. If the servicing fees paid to
Servicers were deemed to exceed reasonable servicing compensation, the amount
of such excess would be nondeductible under Code Section 162 or 212. In this
regard, there are no authoritative guidelines for federal income tax purposes
as to either the maximum amount of servicing compensation that may be
considered reasonable in the context of this or similar transactions or
whether, in the case of the Securities, the reasonableness of servicing
compensation should be determined on a weighted average or loan-by-loan basis.
If a loan-by-loan basis is appropriate, the likelihood that such amount would
exceed reasonable servicing compensation as to some of the Mortgage Assets
would be increased. Recently issued Internal Revenue Service guidance indicates
that a servicing fee in excess of reasonable compensation ("excess servicing")
will cause the Mortgage Assets to be treated under the "stripped bond" rules.
Such guidance provides safe harbors for servicing deemed to be reasonable and
requires taxpayers to demonstrate that the value of servicing fees in excess of
such amounts is not greater than the value of the services provided.
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
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an obligation from the right to receive some or all of the principal payments
on the obligation would result in treatment of such Mortgage Assets as
"stripped coupons" and "stripped bonds." While Securityholders would still be
treated as owners of beneficial interests in a grantor trust for federal income
tax purposes, the corpus of such trust could be viewed as excluding the portion
of the Mortgage Assets the ownership of which is attributed to a servicer, or
as including such portion as a second class of equitable interest. Applicable
Treasury regulations treat such an arrangement as a fixed investment trust,
since the multiple classes of trust interests should be treated as merely
facilitating direct investments in the trust assets and the existence of
multiple classes of ownership interests is incidental to that purpose. In
general, such a recharacterization should not have any significant effect upon
the timing or amount of income reported by a Securityholder, except that the
income reported by a cash method holder may be slightly accelerated. See
"Stripped Securities" below for a further description of the federal income tax
treatment of stripped bonds and stripped coupons.
In the alternative, the amount, if any, by which the servicing fees
paid to the servicers are deemed to exceed reasonable compensation for
servicing could be treated as deferred payments of purchase price by the
Securityholders to purchase an undivided interest in the Mortgage Assets. In
such event, the present value of such additional payments might be included in
the Securityholder's basis in such undivided interests for purposes of
determining whether the Security was acquired at a discount, at par, or at a
premium. Under this alternative, Securityholders may also be entitled to a
deduction for unstated interest with respect to each deferred payment. The
Internal Revenue Service may take the position that the specific statutory
provisions of Code Section 1286 described above override the alternative
described in this paragraph. Securityholders are advised to consult their tax
advisors as to the proper treatment of the amounts paid to the servicers as set
forth herein as servicing compensation or under either of the alternatives set
forth above.
Sale or Exchange of Securities. Upon sale or exchange of a Security, a
Securityholder will recognize gain or loss equal to the difference between the
amount realized on the sale and its aggregate adjusted basis in the Mortgage
Assets and other assets represented by the Security. In general, the aggregate
adjusted basis will equal the Securityholder's cost for the Security, increased
by the amount of any income previously reported with respect to the Security
and decreased by the amount of any losses previously reported with respect to
the Security and the amount of any distributions received thereon. Except as
provided above with respect to market discount on any Mortgage Assets, and
except for certain financial institutions subject to the provisions of Code
Section 582(c), any such gain or loss would be capital gain or loss if the
Security was held as a capital asset.
STRIPPED SECURITIES
General. Pursuant to Code Section 1286, the separation of ownership of
the right to receive some of or all the principal payments on an obligation
from ownership of the right to receive some of or all the interest payments
results in the creation of "stripped bonds" with respect to principal payments
and "stripped coupons" with respect to interest payments. For purposes of this
discussion, Securities that are subject to those rules will be referred to as
"Stripped Securities." The Securities will be subject to those rules if (i) the
Depositor or any of its affiliates retains (for its own account or for purposes
of resale), in the form of fixed retained yield or otherwise, an ownership
interest in a portion of the payments on the Mortgage Assets, (ii) the
Depositor, any of its affiliates or a servicer is treated as having an
ownership interest in the Mortgage Assets to the extent it is paid (or retains)
servicing compensation in an amount greater than reasonable consideration for
servicing the Mortgage Assets (see "Standard Securities -- Recharacterization
of the Servicing Fees" above) and (iii) a class of Securities are issued in two
or more classes or subclasses representing the right to non pro rata
percentages of the interest and principal payments on the Mortgage Assets.
In general, a holder of a Stripped Security (a "Stripped
Securityholder") will be considered to own "stripped bonds" with respect to its
pro rata share of all or a portion of the principal payments on each Mortgage
Loan and/or "stripped coupons" with respect to its pro rata share of all or a
portion of the interest payments on each Mortgage Loan, including the Stripped
Security's allocable share of the servicing fees paid, to the extent that 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 "
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- -- Federal Income Tax Consequences for Securities as to Which No REMIC Election
is Made -- Standard Securities -- General," subject to the limitation described
therein.
Code Section 1286 treats a stripped bond or a stripped coupon
generally as a new obligation issued (i) on the date that the stripped interest
is purchased and (ii) at a price equal to its purchase price or, if more than
one stripped interest is purchased, the share of the purchase price allocable
to such stripped interest. Each stripped interest generally will have original
issue discount equal to the excess of its stated redemption price at maturity
(or, in the case of a stripped coupon, the amount payable on the due date of
such coupon) over its issue price. This treatment is based on the
interrelationship of Code Section 1286 and the regulations thereunder, Code
Sections 1272 through 1275, and the OID Regulations. While under Code Section
1286 computations with respect to Stripped Securities arguably should be made
in one of the ways described below, the OID Regulations state, in general, that
all debt instruments issued in connection with the same transaction must be
treated as a single debt instrument. The Trustee will make and report all
computations described below using this aggregate approach, unless substantial
legal authority requires otherwise.
Furthermore, the regulations under Code Section 1286 support the
treatment of a Stripped Security as a single debt instrument issued on the date
it is originated for purposes of calculating any original issue discount. The
preamble to such regulations state that such regulations are premised on the
assumption that an aggregation approach is appropriate in determining whether
original issue discount on a stripped bond or stripped coupon is de minimis. In
addition, under these regulations, a Stripped Security that represents a right
to payments of both interest and principal may be viewed either as issued with
original issue discount or market discount (as described below), at a de
minimis original issue discount, or presumably, at a premium. The preamble to
such regulations also provide that such regulations are premised on the
assumption that generally the interest component of such a Stripped Security
would be treated as stated interest under the original issue discount rules.
Further, the regulations provide that the purchaser of such a Stripped Security
may be required to account for any discount as market discount rather than
original issue discount if either (i) the initial discount with respect to the
Strip Security was treated as zero under the de minimis rule or (ii) no more
than 100 basis points in excess of reasonable servicing is stripped off the
related Mortgage Assets. Any such market discount would be reportable as
described above under "Federal Income Tax Consequences for REMIC Securities --
Taxation of Regular Securities -- Market Discount," without regard to the de
minimis rule therein.
Status of Stripped Securities. No specific legal authority exists as
to whether the character of the Stripped Securities, for federal income tax
purposes, will be the same as that of the Mortgage Assets. Stripped Securities
owned by applicable holders should be considered to represent "qualifying real
property loans" within the meaning or Code Section 593(d)(1), "real estate
assets" within the meaning of Code Section 856(c)(A), "obligations(s) . . .
principally secured by an interest in real property" within the meaning of Code
Section 860G(a)(3)(A), and "loans . . . secured by an interest in real
property" within the meaning of Code Section 7701(a)(19)(C)(v), and interest
(including original issue discount) income attributable to Stripped Securities
should be considered to represent "interest on obligations secured by mortgages
on real property" within the meaning or Code Section 856(c)(3)(B), provided
that in each case the Mortgage Assets and interest on such Mortgage Assets
qualify for such treatment. The application of such Code provisions to buy-down
Mortgage Assets is uncertain. See " -- Federal Income Tax Consequences for
Securities as to Which No REMIC Election is Made" and " -- Standard Securities
- -- Tax Status" above.
Original Issue Discount. Except as described above under " --
General," each Stripped Security will be considered to have been issued (i) on
the date that the stripped interest is purchased and (ii) at a price equal to
its purchase price or, if more than one stripped interest is purchased, the
share of the purchase price allocable to such stripped interest. Each stripped
interest generally will have original issue discount equal to the excess of its
stated redemption price at maturity (or, in the case of a stripped coupon, the
amount payable on the due date of such coupon) over its issue price. Original
issue discount with respect to a Stripped Security must be included in 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
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price of a Stripped Security will be the purchase price paid by each holder
thereof, and the stated redemption price at maturity will include the aggregate
amount of the payments to be made on the Stripped Security to such Stripped
Securityholder, presumably under the Prepayment Assumption, other than amounts
treated as qualified stated interest.
If the Mortgage Assets prepay at a rate either faster or slower than
that under the Prepayment Assumption, a Stripped Securityholder's recognition
of original issue discount will be either accelerated or decelerated and the
amount of such original issue discount will be either increased or decreased
depending on the relative interests in principal and interest on each Mortgage
Loan represented by such Stripped Securityholder's Stripped Security. While the
matter is not free from doubt, the holder of a Stripped Security should be
entitled in the year that it becomes certain (assuming no further prepayments)
that the holder will not recover a portion of its adjusted basis in such
Stripped Security to recognize an ordinary loss equal to such portion of
unrecoverable basis.
As an alternative to the method described above, the fact that some of
or all the interest payments with respect to the Stripped Securities will not
be made if the Mortgage Assets are prepaid could lead to the interpretation
that such interest payments are "contingent" within the meaning of the proposed
regulations issued under Code Section 1274 that address the treatment of
contingent payments. If the rules of those proposed regulations apply,
treatment of a Stripped Security under such rules depends on whether the
aggregate amount of principal payments, if any, to be made on the Stripped
Security is less than or greater than its issue price. If the aggregate
principal payments are greater than or equal to the issue price, the principal
payments would be treated as a separate installment obligation issued at a
price equal to the purchase price for the Stripped Security. In such case,
original issue discount would be calculated and accrued under the method
described above without consideration of the interest payments with respect to
the Stripped Security. Such payments of interest would be includible in the
Stripped Securityholder's gross income in the taxable year in which the amounts
become fixed. If the aggregate amount of principal payments to be made on the
Stripped Security is less than its issue price, each payment of principal would
be treated as a return of basis. Each payment of interest would be treated as
includible in gross income to the extent of the applicable Federal rate under
Code Section 1274(d), as applied to the adjusted basis of the Stripped
Security, while amounts received in excess of the applicable Federal rate, as
applied to the adjusted basis of the Stripped Security, would be characterized
as a return of basis until the total amount of interest payments treated as a
return of basis equaled 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
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returns. Such information will include the amount of original issue discount
accrued on Securities held by persons other than Securityholders exempted from
the reporting requirements. The amounts required to be reported by the Trustee
may not be equal to the proper amount of original issue discount required to be
reported as taxable income by a Securityholder, other than an original
Securityholder. The Trustee will also file such original issue discount
information with the Internal Revenue Service. If a Securityholder fails to
supply an accurate taxpayer identification number or if the Secretary of the
Treasury determines that a Securityholder has not reported all interest and
dividend income required to be shown on his federal income tax return, 31%
backup withholding may be required in respect of any reportable payments, as
described above under " -- Backup Withholding."
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a Security evidences ownership in Mortgage Assets
that are issued on or before July 18, 1984, interest or original issue discount
paid by the person required to withhold tax under Code Section 1441 or 1442,
which apply to nonresident aliens, foreign corporations, or other Non-U.S.
Persons generally will be subject to 30% United States withholding tax, or such
lower rate as may be provided for interest by an applicable tax treaty. Accrued
original issue discount or market discount recognized by the Securityholder on
the sale or exchange of such a Security also will be subject to federal income
tax at the same rate.
Treasury regulations provide that interest or original issue discount
paid by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Assets issued after July 18, 1984, will be
"portfolio interest" and will be treated in the manner, and such persons will
be subject to the same certification requirements described above under " --
Taxation of Certain Foreign Investors -- Regular Securities."
Securityholders should be aware that the IRS issued proposed
Regualtions on April 22, 1996, which, if adopted in final form, could affect
the United States taxation of foreign investors owning Securities. The proposed
regulations would apply to payments after December 31, 1997. Investors who are
Non-U.S. Persons should consult their own tax advisors regarding the specific
tax consequences to them of owning Securities.
DEBT SECURITIES
General. Certain Securities ("Debt Securities") 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. With respect to such Debt Securities, Arter & Hadden, special
counsel to the Depositor, is of the opinion that (unless otherwise limited in
the related Prospectus Supplement) the Debt Securities will be characterized as
debt issued by, and not equity in, the Trust for federal income tax purposes.
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
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in the stated redemption price at maturity of such Debt Security are received.
The amount of market discount on a Debt Security will be computed generally as
described under "Federal Income Tax Consequences for REMIC Certificates" and "
- -- Taxation of Regular Certificates -- Market Discount."
Premium. A Debt Security purchased at a cost greater than its
currently outstanding stated redemption price at maturity is considered to be
purchased at a premium. A holder of a Debt Security who holds a Debt Security
as a "capital asset" within the meaning of Code Section 1221 may elect under
Code Section 171 to amortize the premium under the constant interest method.
That election will apply to all premium obligations that the holder of a Debt
Security acquires on or after the first day of the taxable year for which the
election is made, unless the IRS permits the revocation of the election. In
addition, it appears that the same rules that apply to the accrual of market
discount on installment obligations are intended to apply in amortizing premium
on installment obligations such as the Debt Securities.The treatment of premium
incurred upon the purchase of a Debt Security will be determined generally as
described above under "Taxation of Regular Securities-Premium".
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%. However, Congress is
currently considering proposed tax legislation which would reduce the tax rate
on long-term capital gains.
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 which
will also cover any material federal income tax consequences applicable to the
Owners. With respect to such series of Partnership Interests, Arter & Hadden,
special counsel to the Depositor, is of the opinion 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.
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
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them may be deemed to be underwriting discounts and commissions under the
Securities Act of 1933, as amended. The Prospectus Supplement will describe any
such compensation paid by the Depositor.
It is anticipated that the underwriting agreement pertaining to the
sale of any series of Securities will provide that the obligations of the
Underwriters will be subject to certain conditions precedent, that the
Underwriters will be obligated to purchase all such Securities if any are
purchased and that the Depositor will indemnify the Underwriters against
certain civil liabilities, including liabilities under the Securities Act of
1933, as amended.
RATINGS
Each class of Securities of a Series will be rated at their initial
issuance in one of the four highest categories by at least one Rating Agency.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning Rating Agency. No person is obligated to maintain the rating on any
Security, and, accordingly, there can be no assurance that the ratings assigned
to a Security upon initial issuance will not be lowered or withdrawn by a
Rating Agency at any time thereafter. In general, ratings address credit risk
and do not represent any assessment of the likelihood or rate of principal
prepayments.
LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Securities will be passed upon for the Depositor by Arter & Hadden, Washington,
D.C. and by Keith Blackwell, General Counsel for the Depositor. Certain legal
matters relating to insolvency issues and certain federal income tax matters
concerning the Securities will be passed upon for the Depositor by Arter &
Hadden.
FINANCIAL INFORMATION
A Trust will be formed with respect to each series of Securities. No
Trust will have any assets or obligations prior to the issuance of the related
series of Securities. No Trust will engage in any activities other than those
described herein or in the Prospectus Supplement. Accordingly, no financial
statement with respect to any Trust is included in this Prospectus or will be
included in the Prospectus Supplement.
The Depositor has determined that its financial statements are not
material to the offering made hereby.
A Prospectus Supplement and the related Form 8-K (which will be
incorporated by reference to the Registration Statement) may contain financial
statements of the related Credit Enhancer, if any.
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APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
<S> <C>
1986 Act . . . . . . . . . . . . . . . . . . . . 47
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 . . . . . . . . . . . . . . . . 61
Certificates . . . . . . . . . . . . . . . . . . . 1
Clearing Agency . . . . . . . . . . . . . . . . . . 4
Clearing Agency Participants . . . . . . . . . . . 4
Code . . . . . . . . . . . . . . . . . . . . . . . 5
Companion Certificates . . . . . . . . . . . . . 12
Compound Interest Certificates . . . . . . . . . 12
Contract Loan Schedule . . . . . . . . . . . . . 28
Contracts . . . . . . . . . . . . . . . . . . . . 17
Cooperative Loans . . . . . . . . . . . . . . . . 15
Cooperatives . . . . . . . . . . . . . . . . . . . 1
Credit Enhancement . . . . . . . . . . . . . . . . 4
Custodial Account . . . . . . . . . . . . . . . . 22
Cut-Off Date . . . . . . . . . . . . . . . . . . 12
Debt Securities . . . . . . . . . . . . . . . . . 67
Defective Mortgage Loan . . . . . . . . . . . . . 29
Delivery Date . . . . . . . . . . . . . . . . . . 10
Deposit Date . . . . . . . . . . . . . . . . . . 29
Depositor . . . . . . . . . . . . . . . . . . . . . 1
Disqualified Organization . . . . . . . . . . . . 56
Distribution Date . . . . . . . . . . . . . . . . 12
DOL . . . . . . . . . . . . . . . . . . . . . . . 44
Eligible Investments . . . . . . . . . . . . . . 31
ERISA . . . . . . . . . . . . . . . . . . . . . . . 5
Events of Default . . . . . . . . . . . . . . . . 32
FDIC . . . . . . . . . . . . . . . . . . . . . . 22
FHA . . . . . . . . . . . . . . . . . . . . . . . . 2
Fitch . . . . . . . . . . . . . . . . . . . . . . . 5
Garn-St. Germain Act . . . . . . . . . . . . . . 39
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 . . . . . . . . . . . . . . . . . . . . . . 5
Mortgage Assets . . . . . . . . . . . . . . . . . . 1
Mortgage Loans . . . . . . . . . . . . . . . . . . 1
Mortgage Notes . . . . . . . . . . . . . . . . . 15
Mortgage Pool Insurance Policy . . . . . . . . . 19
Mortgage Rates . . . . . . . . . . . . . . . . . 16
Mortgaged Properties . . . . . . . . . . . . . . 15
Mortgages . . . . . . . . . . . . . . . . . . . . 15
Mortgage-Backed Securities . . . . . . . . . . . . 2
Mortgagors . . . . . . . . . . . . . . . . . . . 22
NCUA . . . . . . . . . . . . . . . . . . . . . . 22
Non-Priority Certificates . . . . . . . . . . . . 12
Non-U.S. Person . . . . . . . . . . . . . . . . . 60
Noneconomic Residual Interest . . . . . . . . . . 57
Nonrecoverable Advance . . . . . . . . . . . . . 23
Notional Principal Balance . . . . . . . . . . . 13
OID Regulations . . . . . . . . . . . . . . . . . 45
Original Value . . . . . . . . . . . . . . . . . 16
OTS . . . . . . . . . . . . . . . . . . . . . . . 39
Owners . . . . . . . . . . . . . . . . . . . . . 12
Partnership Interests . . . . . . . . . . . . . . 68
Pass-Through Entity . . . . . . . . . . . . . . . 56
Pass-Through Rate . . . . . . . . . . . . . . . . . 3
Plans . . . . . . . . . . . . . . . . . . . . . . 44
Pool Insurer . . . . . . . . . . . . . . . . . . 19
Prepayment Assumption . . . . . . . . . . . . . . 48
Pre-Funding Account . . . . . . . . . . . . . . . . 3
Pre-Funding Agreement . . . . . . . . . . . . . . . 3
Principal Balance . . . . . . . . . . . . . . . . 16
Principal Prepayments . . . . . . . . . . . . . . 13
Priority Certificates . . . . . . . . . . . . . . 12
PTE 83-1 . . . . . . . . . . . . . . . . . . . . 44
Rating Agency . . . . . . . . . . . . . . . . . . . 5
REIT . . . . . . . . . . . . . . . . . . . . . . 46
REMIC . . . . . . . . . . . . . . . . . . . . . . . 5
REMIC Certificates . . . . . . . . . . . . . . . 46
REMIC Pool . . . . . . . . . . . . . . . . . . . 46
REMIC Regulations . . . . . . . . . . . . . . . . 45
Record Date . . . . . . . . . . . . . . . . . . . 13
Regular Certificateholder . . . . . . . . . . . . 47
Regular Certificates . . . . . . . . . . . . . . 46
Relief Act . . . . . . . . . . . . . . . . . . . . 9
Remittance Date . . . . . . . . . . . . . . . . . 22
Remittance Rate . . . . . . . . . . . . . . . . . 22
Reserve Fund . . . . . . . . . . . . . . . . . . 21
Residual Certificateholders . . . . . . . . . . . 52
Residual Certificates . . . . . . . . . . . . . . 46
Retail Class Certificate . . . . . . . . . . . . 47
S&P . . . . . . . . . . . . . . . . . . . . . . . . 5
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 . . . . . . . . . . . . . 20
Standard Certificate . . . . . . . . . . . . . . 61
Stripped Certificateholder . . . . . . . . . . . 64
Stripped Certificates . . . . . . . . . . . . . . 64
Subordinated Certificates . . . . . . . . . . . . 18
Thrift Institution . . . . . . . . . . . . . . . 46
Title I Program . . . . . . . . . . . . . . . . . 43
TMP . . . . . . . . . . . . . . . . . . . . . . . 47
Trust . . . . . . . . . . . . . . . . . . . . . . . 1
Trustee . . . . . . . . . . . . . . . . . . . . . . 1
U.S. Person . . . . . . . . . . . . . . . . . . . 57
UCC . . . . . . . . . . . . . . . . . . . . . . . 37
Underwriters . . . . . . . . . . . . . . . . . . 68
VA . . . . . . . . . . . . . . . . . . . . . . . . 2
</TABLE>
A-1
<PAGE> 233
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PRELIMINARY PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 24, 1997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED ______________ __, 1997)
- --------------------------------------------------------------------------------
AMRESCO RESIDENTIAL SECURITIES CORPORATION MULTIFAMILY MORTGAGE LOAN TRUST
199__-__
$__________________ CLASS A-1 CERTIFICATES
$__________________ CLASS S-A INTEREST-ONLY CERTIFICATES
$___________ CLASS B CERTIFICATES
MULTIFAMILY MORTGAGE PASS-THROUGH CERTIFICATES
SERIES 199__-__
AMRESCO RESIDENTIAL SECURITIES CORPORATION
DEPOSITOR
__________
SERVICER
- --------------------------------------------------------------------------------
The AMRESCO Residential Securities Corporation Multifamily Mortgage
Pass-Through Certificates, Series 199__-__ (the "Certificates") will consist of
the Class A-1 senior certificates (the "Class A-1 Certificates"), the Class S-A
senior certificates (the "Class S-A Certificates" and, together with the Class
A-1 Certificates (the "Senior Certificates")), the Class B subordinate
certificates (the "Class B Certificates"), the Class C subordinate Certificates
(the "Class C Certificates") and the Class R residual certificates (the "Class
R Certificates"); (together with the Class B Certificates, and the Class C
Certificates, the "Subordinate Certificates"). Only the Senior Certificates
and Class B Certificates (collectively, the "Offered Certificates") are being
offered hereby.
As more fully described herein, interest distributions on the Offered
Certificates will be based on the Certificate Principal Balance of the related
Class or the aggregate principal balance of the Mortgage Loans or another
specified Class of Certificates (the "Notional Principal Balance") and the then
applicable Pass-Through Rate.
The Pass-Through Rate for the Class A-1 Certificates will be _____%
per annum, for the Class B Certificates will be ___% per annum and for the S-A
Certificates will be ___% per annum. The Class S-A Certificates are interest-
only Certificates. The yield to investors on the Class S-A Certificates will
be extremely sensitive to the rate and timing of principal payments (including
prepayments, repurchases, defaults and liquidations) on the Mortgage Loans,
which may vary over time. A rapid rate of such principal payments on the
Mortgage Loans could result in the failure of investors in the Class S-A
Certificates to recover their initial investments. FOR A DISCUSSION OF
SIGNIFICANT MATTERS AFFECTING INVESTMENT IN THE CERTIFICATES, SEE "RISK
FACTORS" BEGINNING ON PAGE S-10 HEREIN AND "YIELD PREPAYMENT AND MATURITY
CONSIDERATIONS" BEGINNING ON PAGE S-28 HEREIN AND"RISK FACTORS" BEGINNING ON
PAGE 6 IN THE RELATED PROSPECTUS.
(Cover continued on next page)
- --------------------------------------------------------------------------------
THE OFFERED CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY AND
DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF AMRESCO RESIDENTIAL CREDIT
CORPORATION, ANY ORIGINATORS OR ANY OF THEIR AFFILIATES. NEITHER THE
OFFERED CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED
OR GUARANTEED BY ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
[THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON
OR ENDORSED THE MERITS OF THIS OFFERING. ANY
REPRESENTATION TO THE CONTRARY
IS UNLAWFUL.]
- --------------------------------------------------------------------------------
The Offered Certificates will be purchased by the Underwriters from
the Depositor and will be offered by the Underwriters from time to time to the
public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale.
Proceeds to the Depositor from the sale of the Offered Certificates
will be approximately $____________, before deducting expenses payable by the
Depositor estimated to be approximately $_______ in the aggregate. See "Plan
of Distribution" in this Prospectus Supplement.
The Offered Certificates are offered subject to prior sale, when, as,
and if accepted by the Underwriters and subject to the approval of certain
legal matters. It is expected that delivery of the Senior Certificates in
book-entry form will be made on or about ____________, 199___ only through the
Same Day Funds Settlement System of The Depository Trust Company and that
delivery of the Class B Certificates will be made at the offices of
____________, on or about __, 199_ against payment therefor in immediately
available funds.
[UNDERWRITERS]
The date of this Prospectus Supplement is __________, 199__.
<PAGE> 234
(Cover continued from previous page)
The Certificates will evidence, in the aggregate, 100% of the
beneficial ownership interest in one of two trust funds established pursuant to
a Pooling and Servicing Agreement dated as of _____________, 199_ (the
"Agreement"), among the Depositor, in its capacity as sponsor of the Trust (the
"Depositor"), as seller (the "Seller"), ____________ as the servicer (the
"Servicer"), and __________, as trustee (the "Trustee"). One trust fund (the
"Trust Fund") will consist of the "regular interests" (and all the proceeds
thereof) in a separate trust fund (the "Mortgage Trust" and, together with the
Trust Fund, the "Trusts") that will consist primarily of a pool of mortgage
loans (the "Mortgage Loans") secured by first [and junior] liens on
[multi-family residential (including multi-family/retail mixed-use)/commercial]
properties located in ___ states (the "Mortgaged Properties"). Each of the
Mortgage Loans bear [fixed/adjustable] rates of interest and contain level pay
amortization schedules extending beyond such Mortgage Loans, scheduled maturity
date, with a "balloon" payment on the maturity date equal to the remaining
principal balance of such Mortgage Loans and any accrued and unpaid interest
thereon ending no later than the Final Scheduled Distribution Date.
The Class A-1 and Class S-A Certificates represent the senior
interests in the Trust Fund. As described herein, the rights of the holders of
the Class B Certificates and Class C Certificates to receive distributions from
the Trust Fund will be subordinate to the rights of the holders of the Class A
Certificates and the rights of the holders of the Class C Certificates will
also be subordinated to the rights of the holders of the Class B Certificates,
respectively, to receive distributions from the Trust Fund.
Principal of and interest on the Offered Certificates are payable on
the ___th day of each month or, if such day is not a business day, on the next
succeeding business day (each, a "Distribution Date"), commencing in
__________, 199__. See "Description of the Offered Certificates--Distributions
on the Certificates" herein.
The last scheduled Distribution Date for the Class A-1 Certificates is
_____________ ___, ____. It is expected that the actual last Distribution Date
for each Class of Certificates will occur significantly earlier than such
scheduled Distribution Dates. The yield to maturity on the Offered
Certificates will depend on, among other things, the price at which the
Certificates are acquired and the rate and timing of principal payments
(including prepayments, repurchases, defaults and liquidations) on the Mortgage
Loans, which rate may vary significantly over time. See "Yield, Prepayment and
Maturity Considerations" in this Prospectus Supplement.
It is a condition to the issuance of the Offered Certificates that the
Senior Certificates be rated "___" and "___," and the Class B Certificates be
rated "___" and "___," by Moody's Investor Service and Standard & Poor's.
As described herein, the Trustee will cause elections to be made to
treat the Mortgage Trust and Trust Fund as "real estate mortgage investment
conduits" ("REMICs" or, in the alternative, the "Lower Tier REMIC" and the
"Upper Tier REMIC," respectively) for federal income tax purposes. Each class
of the Offered Certificates will be designated as a "regular interest" in the
Upper Tier REMIC and the Class R Certificates and the Class RL Certificates
will be designated as the sole class of "residual interest" in the Upper Tier
REMIC and the Lower Tier REMIC, respectively. See "Certain Federal Income Tax
Considerations" herein and in the Prospectus.
Prior to their issuance there has been no market for the Offered
Certificates nor can there be any assurance that one will develop, or if it
does develop, that it will provide the Owners of the Offered Certificates with
liquidity or will continue for the life of the Offered Certificates. The
Underwriters intend, but are not obligated, to make a market in the Offered
Certificates.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE OFFERED
CERTIFICATES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
The Certificates offered by this Prospectus Supplement will be part of
a separate series of Certificates being offered by the Depositor pursuant to
its Prospectus dated ____________, 199__ of which this Prospectus Supplement is
a part and which accompanies this Prospectus Supplement. The Prospectus
contains important information regarding this offering which is not contained
herein, and prospective investors are urged to read the Prospectus and this
Prospectus Supplement in full.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement under the Securities Act of 1933,
as amended, with respect to the Certificates. This Prospectus Supplement and
the related Prospectus, which form a part of the Registration Statement, omit
certain information contained in such Registration Statement pursuant to the
Rules and Regulations of the Commission. The Registration Statement can be
inspected and copied at the Public Reference Room of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and the Commission's regional
offices at Seven World Trade Center, 13th Floor, New York, New York 10048, and
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 Website (http:\\www.sec.gov).
REPORTS TO CERTIFICATEHOLDERS
Monthly and annual reports concerning the Certificates and the Trust
will be sent by the Trustee to the Owners of Class A Certificates. So long as
any Class A Certificate is in book-entry form, such reports will be sent to
Cede & Co., as the nominee of DTC and as Owner of such Class A Certificates
pursuant to the Pooling and Servicing Agreement. DTC will supply such reports
to Owners of any such Class A Certificates in accordance with its procedures.
The Depositor will file or cause to be filed with the Commission such
periodic reports with respect to the Trust as are required under the Securities
Exchange Act of 1934 and the rules and regulations of the Commission
thereunder. It is the Depositor's intent to suspend the filing of such reports
as soon as such reports are no longer statutorily required.
<PAGE> 235
SUMMARY
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Reference is made to the Index of Principal Defined
Terms for the location in the Prospectus of the definitions of certain
capitalized terms.
ISSUER . . . . . . . . . . . AMRESCO Residential Securities Corporation
Multifamily Mortgage Loan Trust, 199__-_ (the
"Trust").
CERTIFICATES OFFERED . . . . The Class A-1 Certificates and the Class S-A
Certificates (collectively, the "Senior
Certificates") and the Class B Certificates
(collectively with the Senior Certificates,
the "Offered Certificates") evidence
undivided beneficial ownership interests in
the Trust Fund. The Class A-1 Certificates
have an original aggregate principal balance
(the "Original Class A-1 Principal Balance")
of $_________. The Class S-A Certificates
are interest-only Certificates and have no
principal balance. The Class S-A
Certificates will accrue interest on the
Notional Principal Balance, as described
herein. The Class B Certificates have an
original aggregate principal balance of
$________.
DEPOSITOR . . . . . . . . . . AMRESCO Residential Securities Corporation, a
Delaware corporation, having its principal
executive office at 700 North Pearl Street,
Suite 2400, LB 342, Dallas, Texas 75201 (the
"Depositor").
SERVICER . . . . . . . . . . _________________, a _________ corporation
(the "Servicer"). The Servicer's principal
executive offices are located at ________.
TRUSTEE . . . . . . . . . . . ____________________, a __________ banking
association, the ("Trustee"). The Trustee's
principal executive offices are located at
___________.
MASTER SERVICER . . . . . . . _____________________, a ________________
corporation (the "Master Servicer"). The
Master Servicer's principal executive offices
are located at ________________.
[Special Servicer . . . . . . ___________________ a ___________ corporation
(the "Special Servicer"). The Special
Servicer's principal executives offices are
located at ________________.]
CUT-OFF DATE . . . . . . . . _____________, 199___.
CLOSING DATE . . . . . . . . ________________, 199__.
DESCRIPTION OF THE
CERTIFICATES . . . . . . . . The AMRESCO Residential Securities
Corporation Multifamily Mortgage Pass-Through
Certificates, Series 199__-__ (the
"Certificates") will consist of the Offered
Certificates, the Class C Certificates, which
have an original aggregate principal balance
of $________, the Class R residual
certificates (the "Class R Certificates"),
which represent the residual interest in the
Trust Fund, the Class RL residual
certificates (the "Class RL Certificates")
which represent the residual interest in the
Mortgage Trust (the "Class R Certificates"
and the "Class RL Certificates" are referred
to collectively as the "Residual
Certificates"). The Class C Certificates and
the Residual Certificates are not offered
hereby, and may be offered for sale in
privately negotiated transactions. The
Certificates represent in the aggregate the
entire beneficial ownership interest in two
trust funds
S-1
<PAGE> 236
established pursuant to the Agreement. One
trust fund (the "Trust Fund") will consist of
all the "regular interests" (and all proceeds
thereof) in a separate trust fund (the
"Mortgage Trust" and, together with the Trust
Fund, the "Trusts") that will consist
primarily of a pool of loans (the "Mortgage
Loans") secured by [first] liens on
multi-family residential (including
family/retail mixed-use) properties located
in ___ states (the "Mortgaged Properties").
DENOMINATIONS . . . . . . . . The Class A-1 Certificates will be issued in
book-entry form in denominations of original
principal amounts of $_____ and integral
multiples of $_____ in excess thereof. The
Class S-A Certificates will be issued in
[book entry/fully registered, definitive
form] in percentage interests of ownership of
such class of not less than ___%. The Class
B Certificates will be issuable in fully
registered, certificated form in
denominations of $_______ and integral
multiples in excess thereof and one Class B
Certificate evidencing an additional amount
equal to the remainder of the Original
Certificate Principal Balance of such Class.
See "Description of the Offered Certificates
-- General" and "Description of the Offered
Certificates -- Book-Entry Registration of
the Senior Certificates" herein.
THE MORTGAGE LOANS . . . . . The Mortgage Loans will have a Cut-Off Date
aggregate principal balance outstanding,
after the deduction of payments of principal
due on such date, of approximately $ ______.
The Mortgage Loans were originated by
__________ in accordance with the Seller's
Underwriting Guidelines, as described herein.
See "The Mortgage Trust- Underwriting
Standards" herein. As of the date of
origination, the weighted average Mortgage
Rate of the Mortgage Loans (weighted by the
aggregate principal balance thereof) was
approximately ___%. All the Mortgage Loans
were originated on or after __________,
199__. As of the Cut-Off Date, the Mortgage
Loans had an average remaining term to
maturity (weighted by aggregate principal
balance thereof) of approximately _______.
As of their date of origination, the Mortgage
Loans had an average principal balance of
approximately $_________.
Each Mortgage Loan is secured by a mortgage
creating a [first/junior] lien on the related
Mortgaged Property. The Mortgaged Properties
will consist of a total of ___ multi-family
(including ___ multi-family/retail mixed-use)
apartment complexes. Each of the Mortgage
Loans bears interest at a [fixed/adjustable]
rate of interest and had an original term to
maturity of 3, 5 or 7 years, and all of the
Mortgage Loans require monthly payments of
principal based on a ___-year amortization
schedule. The Maturity Dates of the Mortgage
Loans will fall between ___________ and
__________, inclusive. None of the Mortgage
Loans are insured or guaranteed by any
governmental entity or private insurer. [All
of the Mortgage Loans are non-recourse
loans.] See "The Mortgage Trust -- Mortgage
Loan Characteristics" herein.
ORIGINATORS . . . . . . . . . Each of the Mortgage Loans to be acquired by
the Trust from the Depositor were acquired by
the Depositor from seller (the "Seller"),
which previously originated or acquired the
Mortgage Loans from the related originator
(each an "Originator").
CLASS A-1 PASS-THROUGH
RATE . . . . . . . . . . . ____% per annum.
CLASS S-A PASS-THROUGH
RATE . . . . . . . . . . . ___% per annum on the Notional Principal
Balance.
S-2
<PAGE> 237
CLASS B PASS-THROUGH
RATE . . . . . . . . . . . ___% per annum.
DISTRIBUTIONS ON THE
CERTIFICATES . . . . . . . Distributions of interest and principal, if
any, on the Class A-1, Class S-A Certificates
and the Class B Certificates will be made by
the Trustee on each Distribution Date (i.e.,
the __th day of each month or if such __th
day is not a business day, then the business
day next following such __th day), commencing
in ______ 199__, to the Owners of
Certificates of record as of the close of
business on the last business day of the
month preceding such Distribution Date (each,
a "Record Date").
AMOUNT OF DISTRIBUTIONS . . . On each Distribution Date, the Trustee will
apply the aggregate of amounts distributed
[in respect of the Lower Tier Interest] on
such Distribution Date in the following order
of priority:
(i) first, concurrently, to the Owners
of the Class A-1 Certificates, the Class A-1
Monthly Interest (as defined below); and to
the Owners of the Class S-A Certificates,
Class S-A Monthly Interest, any shortfall
being allocated among the Class A-1
Certificates and the Class S-A Certificates
in proportion to their respective amounts of
Class A-1 Monthly Interest and Class S-A
Monthly Interest;
(ii) second, to the Owners of the
Class A-1 Certificates, the Class A-1
Principal Distribution Amount (as defined
below) until the Class A-1 Principal Balance
has been reduced to zero;
(iii) third, to the Owners of the
Class B Certificates, the Class B Monthly
Interest;
(iv) fourth, to the Owners of the
Class A-1 Certificates, any Unpaid Delinquent
Maturity Amount (as defined below) until the
Class A-1 Principal Balance has been reduced
to zero;
(v) fifth, to the Owners of the Class
B Certificates, the Class B Principal
Distribution Amount until the Class B
Principal Balance has been reduced to zero;
(vi) sixth, to the Owners of the Class
C Certificates, the Class C Monthly Interest;
(vii) seventh, to the Owners of the
Class C Certificates, the Class C Principal
Distribution Amount until the Class C
Principal Balance has been reduced to zero;
and
(viii) eighth, to the Owners of the
Class R Certificates, all remaining Available
Funds, if any.
The "Class A-1 Principal Distribution
Amount," as to any Distribution Date, will
equal the sum of the items set forth below
and, if Available Funds should be less than
such sum, any partial distribution shall be
with respect to such items in the order of
priority set forth below:
S-3
<PAGE> 238
(i) the product of (x) the Class A
Percentage and (y-1) prior to the
Subordination Termination Date, the sum of
(A) the aggregate of the Unpaid Principal
Balance of all Mortgage Loans which ceased to
be Outstanding Mortgage Loans as of such
Distribution Date other than Mortgage Loans
that were subject to a Principal Prepayment
In Full prior to the end of the preceding
calendar month and (B) all scheduled
principal payments on the Mortgage Loans due
on the related Due Date; or (y-2) on and
after the Subordination Termination Date, the
sum of the amounts described in (y-1)(A) and
(y- 1)(B) above, but only to the extent such
amounts are actually received by the Trustee
prior to the Distribution Date;
(ii) all Principal Prepayments made on or
before the related Determination Date; and
(iii) any Unpaid Principal Shortfall
allocable to the Class A-1 Certificates.
The "Class B Principal Distribution Amount"
as to any Distribution Date, will equal the
sum of the items set forth below and, if
Available Funds should be less than such sum,
any partial distribution shall be with
respect to such items in the order of
priority set forth below:
(i) the product of (x) the Class B
Percentage and the sum of (A) the aggregate
of the Unpaid Principal Balance of all
Mortgage Loans which ceased to be Outstanding
Mortgage Loans as of such Distribution Date
other than Mortgage Loans that were subject
to a Principal Prepayment In Full prior to
the end of the preceding calendar month and
(B) all scheduled principal payments on the
Mortgage Loans due on the related Due Date;
(ii) after the Class A-1 Termination
Date, all Principal Prepayments made on or
before the related Determination Date; and
(iii) any Unpaid Principal Shortfall
allocable to the Class B Certificates.
[In addition, on each Distribution Date, the
Trustee will withdraw from the Prepayment
Premium Account (as defined herein) an amount
equal to the aggregate of all Prepayment
Premiums deposited therein during the
previous calendar month and will distribute
such amount (i) on each Distribution Date
prior to the Class A Termination Date, (a) if
prior to __________, to the Owners of Class A
Certificates, allocated ___% to the Class A-1
Certificates and ___% to the Class S-A
Certificates, and (b) if after __________,
solely to the Owners of Class A-1
Certificates, (ii) on the Class A-1
Termination Date, to the Owners of Class A
Certificates (in accordance with the
allocations described in subclauses (a) and
(b) (as the case may be) of clause (i) above,
only if the Class A-1 Termination Date is
prior to __________) and Class B Certificates
in proportion to the distributions of
principal made in respect of the Class A-1
and Class B Certificates, respectively, (iii)
on each Distribution Date thereafter, to the
Owners of Class B Certificates.]
Interest for the Class A and Class B
Certificates for any given Distribution Date
is equal to one month's interest accrued at
the applicable Pass-Through Rate, on the
Class A-1 or Class B Principal Balance, as
the case may be, immediately prior to such
Distribution Date. See "Description of the
Offered Certificates -- Amounts of
Distribution" herein.
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MONTHLY ADVANCES . . . . . . In the event that a monthly payment on a
Mortgage Loan has not been received by the
Servicer as of the close of business on the
Determination Date immediately preceding the
related Distribution Date, the Servicer will
be obligated to advance, for deposit in the
Certificate Account, the aggregate of
payments of principal (other than any Balloon
Payment) and interest on the Mortgage Loans
that were due on the related Due Date and
that is allocable to the Class A
Certificates, less the aggregate amount of
any such delinquent payments that the
Servicer has determined in its sole,
reasonable judgment would constitute a
nonrecoverable advance if made (a "Monthly
Advance"). The Servicer will be entitled to
be reimbursed from the Certificate Account
for all such Monthly Advances.
The obligation to make Monthly Advances with
respect to any Mortgage Loan shall continue
until the earliest to occur of (i) payment
thereof in full, (ii) liquidation of the
related Mortgaged Property and (iii) the
purchase or repurchase thereof from the
Mortgage Trust pursuant to any applicable
provision of the Agreement. If the rights
and obligations of the Servicer under the
Agreement are terminated upon the occurrence
of an event of default that remains uncured,
the [Trustee/Master Servicer] will be the
successor in all respects (with certain
exceptions relating to the repurchase of
Mortgage Loans under certain circumstances)
to the Servicer in its capacity as servicer
under the Agreement, including the obligation
to make all required Monthly Advances.
SUBORDINATION OF THE
SUBORDINATE CERTIFICATES . . The rights of the Owners of the Class B
Certificates and the Class C Certificates to
receive distributions with respect to the
Mortgage Loans will be subordinated to such
rights of the holders of the Class A
Certificates to the extent described below.
The subordination provided to the Class A
Certificates by the Class B Certificates and
the Class C Certificates is intended to
enhance the likelihood of timely receipt by
the Owners of the Class A Certificates of the
full amount of their scheduled monthly
payments and to afford such Owners protection
against losses resulting form Liquidated
Mortgage Loans.
The rights of the Owners of the Class C
Certificates to receive distributions with
respect to the Loans will be subordinated to
such rights of the Owners of the Class B
Certificates to the extent described below.
The subordination provided to the Class B
Certificates by the Class C Certificates is
intended to enhance the likelihood of timely
receipt by the Owners of the Class B
Certificates of the full amount of their
scheduled monthly payments and to afford such
Owners protection against losses resulting
form Liquidated Mortgage Loans.
The protection afforded to the Owners of
Class A Certificates by means of the
subordination of the Class B Certificates and
the Class C Certificates will be accomplished
by the preferential right of such Owners to
receive, prior to any distribution being made
on a Distribution Date in respect of the
Class B Certificates and the Class C
Certificates, the Class A-1 Monthly Interest
and the Class S-A Monthly Interest,
respectively, and to the Owners of the Class
A Certificates the Class A-1 Principal
Distribution Amount. The Class B
Certificates will, however, receive the Class
B Monthly Interest before the Owners of the
Class A Certificates receive any Unpaid
Delinquent Maturity Amount. There will be no
other form of Credit Enhancement available
for the benefit of the Offered Certificates.
See "Description of the Offered Certificates
-- Subordination of the Subordinate
Certificates" herein.
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ALLOCATION OF LOSSES . . . . Subject to the limitations described herein,
losses of principal and interest realized on
the Mortgage Loans ("Realized Losses") will
be allocated, first, to the Class R
Certificates and, then to the Class C
Certificates and, then to the Class B
Certificates, as described herein, prior to
allocation thereof to the Senior
Certificates. See "Description Of The
Offered Certificates -- Subordination of
Subordinate Certificates" herein.
SERVICING FEE . . . . . . . . With respect to each Distribution Date, the
Servicer shall be entitled to withhold from
deposit into the Certificate Account, with
respect to each Mortgage Loan (for which a
Monthly Payment was received) that was an
Outstanding Mortgage Loan as of such
Distribution Date, an amount equal to
one-twelfth of the product of (i) the rate
set forth in the Mortgage Loan Schedule (the
"Servicing Fee Rate") and (ii) the Unpaid
Principal Balance of such Mortgage Loan as of
such Distribution Date. The Servicer will be
entitled to retain additional servicing
compensation in the form of assumption fees,
late payment charges or extension and other
administrative charges to the extent
collected.
OPTIONAL TERMINATION . . . . At its option the Depositor may repurchase
all the Mortgage Loans at any time when the
Pool Principal Balance is less than 10% of
the Cut-Off Date Pool Principal Balance. The
payment of such purchase price will be
applied to the early retirement of the Class
A-1, Class S-A, Class B and Class C
Certificates. See "Description of the
Pooling and Servicing Agreement --
Termination; Retirement of the Certificates"
herein.
FINAL SCHEDULED DISTRIBUTION
DATE . . . . . . . . . . . Scheduled Payments on the Mortgage Loans will
be sufficient to distribute interest on the
Offered Certificates at the applicable
Pass-Through Rate and to reduce the principal
amount of the Offered Certificates to zero
not later than the "Final Scheduled
Distribution Date" set forth on the cover
page hereof, determined as described herein.
Because the rate of distributions of
principal on the Offered Certificates will
depend on the rate of payment (including
prepayments) of the principal of the Mortgage
Loans and on the timing of receipt of
Liquidation Proceeds and Insurance Proceeds
with respect to the Mortgage Loans, the
actual final Distribution Date for each Class
of the Offered Certificates may be earlier,
and could be substantially earlier, or may be
later, than the Final Scheduled Distribution
Date. See "Description Of The Offered
Certificates -- Final Scheduled Distribution
Date" and "Yield, Prepayment and Maturity
Considerations" herein.
NATURE OF CLASS S-A
CERTIFICATES . . . . . . . General Character as an Interest-Only
Security. The owners of the Class S-A
Certificates will be entitled to receive
monthly distributions equal to one-month's
interest at the Class S-A Pass-Through Rate
on the Notional Principal Balance then
outstanding. The Class S-A
Certificateholders will not be entitled to
receive any distributions of principal
collected on the Mortgage Loans. Because
they will not receive any distributions of
principal, the Class S-A Certificateholders
will be affected by prepayments, liquidations
and other dispositions of the Mortgage Loans
to a greater degree than will the Class A
Certificateholders. As an extreme
illustration, in the event that the entire
Mortgage Pool prepays in full during the
first month, then on the initial Distribution
Date the Owners of the Class A Certificates
will receive the full par value of their
Certificates while the Owners of the Class
S-A Certificates will suffer nearly a
complete loss (except for one month's
interest) on their investment.
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In general, liquidations due to losses,
repurchases by the Seller and other
dispositions of Mortgage Loans from the Trust
Fund will have the same effect on Class S-A
Certificateholders as do prepayments of
principal, liquidations due to losses,
repurchases by the Seller and other
dispositions of Mortgage Loans from the
Trust, and are collectively referred to as
"Prepayments."
Because the yield to the Class S-A
Certificateholders is sensitive to certain
constant rates of prepayment, it is advisable
for potential investors in the Class S-A
Certificates to consider carefully, and to
make their own evaluation of, the effect of
any particular assumption regarding the rates
and the timing of prepayments. In general,
when interest rates decline, prepayments in a
pool of receivables such as the Mortgage
Loans will increase as borrowers seek to
refinance at lower rates. This will have the
effect of reducing the future stream of
payments available to an owner of an
interest-only security based on such
receivables pool, thus adversely affecting
such investor's yield. Conversely, when
interest rates increase prepayments will tend
to decrease (since attractive refinancing
opportunities are not available) and the
future stream of payments available to such
an owner of an interest-only security may
increase, thus positively affecting such
investor's yield.
Accrual of "Original Issue Discount." The
Class S-A Certificates may be issued with
"original issue discount" within the meaning
of the Code. As a result, in certain rapid
prepayment environments the effect of the
rules governing the accrual of original issue
discount may require such Certificateholders
to accrue original issue discount at a rate
in excess of the rate at which distributions
are received by such Certificateholders. See
"Certain Federal Income Tax Consequences"
herein and in the Prospectus.
RATINGS . . . . . . . . . . . It is a condition to the issuance of the
Offered Certificates that the Class A-1 and
Class S-A Certificates each be rated no lower
than "AAA" and that the Class B Certificates
be rated no lower than "___" by Standard and
Poor's Ratings Group, a division of McGraw
Hill ("S&P") and Moody's Investors Service,
Inc. ("Moody's") (collectively, the "Rating
Agencies"). The Class C Certificates will
not be rated. A security rating is not a
recommendation to buy, sell or hold
securities and may be subject to revision or
withdrawal at any time by the assigning
rating agency. See "Ratings" herein.
Ratings of the Class S-A Certificates. The
Class S-A Certificates will, upon initial
issuance, receive ratings of "___" by ___ and
of "___" by __________. Ratings which are
assigned to securities such as the Class S-A
Certificates generally evaluate the ability
of the issuer (i.e., the Trust) to make
timely payments when such payments are due,
as required by such securities. As described
above, such amounts with respect to the Class
S-A Certificates consist only of interest.
In general, the ratings thus address credit
risk and not prepayment risk. See "Ratings"
herein.
The "r" symbol is appended to the rating by
Standard & Poor's of the Class S-A
Certificates because they are interest-only
Certificates that Standard & Poor's believes
may experience high volatility or high
variability in expected returns due to
non-credit risks created by the terms of such
Certificates. The absence of an "r" symbol
in the ratings of the other Class A
Certificates should not be taken as
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an indication that such Certificates will
experience no volatility or variability in
total returns. See "Ratings" herein.
CERTAIN FEDERAL INCOME
TAX CONSEQUENCES . . . . . The Trustee will cause elections to be made
to treat the Mortgage Trust (also referred to
herein as "Lower Tier REMIC") and the Trust
Fund as "real estate mortgage investment
conduits" (each, a "REMIC") for federal
income tax purposes. The Lower Tier A
Interest and the Lower Tier B Interest will
be the "regular interests" in the Lower Tier
REMIC and the Class RL Certificates will
constitute the sole class of "residual
interests" in the Lower Tier REMIC. The
Class A-1, Class S-A and Class B Certificates
will be "regular interests" in the Trust Fund
and the Class R Certificates will be the sole
class of "residual interests" in the Trust
Fund. See "Certain Federal Income Tax
Consequences" herein.
ERISA CONSIDERATIONS . . . . Any fiduciary of any employee benefit plan (a
"Plan") subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), who proposes to cause a Plan to
acquire any of the Offered Certificates
should consult with its own counsel with
respect to the applicability of ERISA and the
Internal Revenue Code of 1986, as amended
(the "Code"), to such investment.
Under current law the purchase and holding of
the Class B Certificates by or on behalf of
any Plan subject to the fiduciary
responsibility provisions of ERISA may result
in "prohibited transactions" within the
meaning of ERISA and the Code. [No transfer
of a Class B Certificate or any interest
therein may be made to any Plan or other
retirement arrangement, including individual
retirement accounts and annuities, Keogh
plans and collective investment and separate
accounts in which such plans, accounts or
arrangements are invested that is subject to
ERISA or the Code unless the prospective
transferee of the Class B Certificate
provides the Trustee with a representation
letter and an opinion of counsel, each in the
form required under the Agreement. See
"ERISA Considerations" herein and in the
Prospectus.]
RISK FACTORS . . . . . . . . Credit Considerations. For information with
regard to the Mortgage Loans and their
related risks, see "The Portfolio of Mortgage
Loans" herein.
Prepayment Considerations. For information
regarding the consequences of prepayments of
the Mortgage Loans, particularly Owners of
Class S-A Certificates, see "Prepayment and
Yield Considerations" herein.
Other. For a discussion of other risk
factors that should be considered by
prospective investors in the Offered
Certificates, see "Risk Factors" herein and
in the Prospectus.
LEGAL INVESTMENT
CONSIDERATIONS . . . . . . The Senior Certificates will [not] constitute
"mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act
of 1984 ("SMMEA") [for so long as they are
rated in one of the two highest rating
categories by one or more nationally
recognized statistical rating organizations.
As such, the Senior Certificates will be
legal investments for certain entities to the
extent provided in SMMEA, subject to state
laws overriding SMMEA. In addition,
institutions whose investment activities are
subject to review by federal or state
regulatory authorities may be or may become
subject to restrictions,
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which may be retroactively imposed by such
regulatory authorities, on the investment by
such institutions in certain forms of
mortgage related securities. Furthermore,
certain states have enacted legislation
overriding the legal investment provisions of
SMMEA.]
The Class B Certificates will not constitute
"mortgage related securities" for purposes of
SMMEA. As a result, the appropriate
characterization of the Class B Certificates
under various legal investment restrictions,
and thus the ability of investors subject to
these restrictions to purchase the Class B
Certificates, maybe subject to significant
interpretative uncertainties.
Prospective investors are advised to consult
their counsel as to qualification of the
Offered Certificates as legal investments
under any such laws, regulations, rules and
orders. See "Legal Investment Consideration"
herein and in the Prospectus.
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RISK FACTORS
Prospective investors in the Offered Certificates should consider the
following risk factors (as well as the risk factors set forth under "Risk
Factors" in the Prospectus) in connection with the purchase of the Offered
Certificates.
THE MORTGAGE LOANS
General. The Mortgage Loans were originated by the _____ between
_____ and _______, inclusive. The Mortgage Loans are all secured by
multi-family (or, in some cases, multi-family/retail mixed-use) apartment
buildings, each containing five or more residential units. Owners of
multi-family apartment buildings rely on monthly lease payments from tenants to
pay for maintenance and other operating expenses of the building, to fund
capital improvements and to service the related Mortgage Loan and any other
debt that may be secured by such property. Various factors, many of which are
beyond the control of the owner or operator of an apartment building, may
affect the economic viability of the building.
Adverse economic conditions, either local or national, may limit the
amount of rent that can be charged and may result in a reduction in timely
lease payments or a reduction in occupancy levels. Occupancy and rent levels
may also be affected by construction of additional housing units and local
politics, including rent stabilization or rent control laws and policies. In
addition, a low level of mortgage rates may encourage tenants to purchase
single-family housing.
Changes in payment patterns by tenants may result from a variety of
social, legal and economic factors. Economic factors including the rate of
inflation, unemployment levels and relative rents offered for various types of
housing may be reflected in changes in payment patterns, including increased
risks of defaults by tenants and higher vacancy rates. The Depositor is unable
to determine and has no basis to predict whether, or to what extent, economic,
legal or social factors will affect future rental or payment patterns.
Environmental Risks. Under the laws of certain states where Mortgaged
Properties are located, violation of applicable environmental laws may give may
rise to a "superlien" on the Mortgaged Property (i.e., a lien prior to the lien
of the related mortgage) to assure the payment of the costs of cleanup. In
addition, under the laws of several states and under the federal Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") a lender may
be liable, as an "owner" or "operator", for cleanup costs on mortgaged property
containing hazardous wastes if agents or employees of the lender have become
involved in the operations of the borrower, regardless of whether a previous
owner caused the environmental damage. If the lender actually takes possession
of the property, it may, more clearly, be liable for cleanup costs pursuant to
CERCLA. Under certain recent court decisions, even very little involvement by
the lender has led to liability for cleanup costs and efforts by the Federal
Environmental Protection Agency to clarify questions relating to lender
liability through rulemaking have been rejected. The Depositor will generally
require the preparation of environmental assessments; however, there can be no
assurance as to the ultimate level of protection, if any, afforded by any such
assessment. Although the lender can bring an action for contribution against
the owner who created the environmental hazard, any amounts awarded to the
lender under such an action may not be collectible if the owner is bankrupt or
otherwise judgment-proof. See "Risk Factors -- Environmental Risks" and
"Certain Legal Aspects of the Mortgage Loans--Environmental Risks" in the
Prospectus.
The Agreement provides that the Servicer may not, on behalf of the
Trustee, obtain title to (as a result of foreclosure or in lieu of foreclosure
or otherwise), or take possession of or other actions with respect to, a
Mortgaged Property unless the Servicer has previously determined, based on a
report prepared by a person who regularly conducts environmental audits, that
(i) the Mortgaged Property is in compliance with applicable environmental laws
or, if it is not, that it would be in the best economic interest of the holders
of the Certificates to take the actions necessary to bring the Mortgaged
Property into compliance with such laws and (ii) circumstances relating to the
use, management or disposal of certain hazardous materials either are not
present at the Mortgaged Property or should be addressed if to do so would be
in the best economic interest of the holders of the Certificates. See
"Description of the Pooling and Servicing Agreement -- Realization upon
Defaulted Mortgage Loans" herein.
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Environmental studies were commissioned by the Seller or its
correspondent originators prior to the origination of each Mortgage Loan. The
reports indicated that no material environmental conditions existed with
respect to any of the Mortgaged Properties. [Identified environmental
conditions which may result in liability to the issuer will be disclosed in a
separate risk factor.]
In addition, each Mortgagor has represented in the related Mortgage
that, the related Mortgaged Property was in compliance with all applicable
federal, state and local environmental laws and regulations on the date of
origination of the related Mortgage Loan.
Mortgagor Default. The Mortgage Loans are not insured or guaranteed
against Mortgagor default by any governmental entity or by any private mortgage
insurer.
The amount recoverable upon the occurrence of a default may be
affected by, among other things, a decline in real estate values or a change in
mortgage market interest rates. If the multifamily residential real estate
market should experience an overall decline in property values such that the
outstanding balances of the Mortgage Loans exceed the value of the related
Mortgaged Properties, the actual rates of delinquencies, foreclosures and
losses could be higher than those anticipated by investors.
The Agreement also contains limitations on the ability of the Servicer
to foreclose on a Mortgaged Property, to modify the terms of the related
Mortgage Loan as an alternative to foreclosure, and to rehabilitate a Mortgaged
Property acquired by the Mortgage Trust upon foreclosure. These limitations
may delay or otherwise adversely affect recoveries in respect of a defaulted
Mortgage Loan. See "Description of the Pooling and Servicing
Agreement--Realization Upon Defaulted Mortgage Loans".
Nonrecourse Mortgage Loans. All the Mortgage Loans are nonrecourse
loans, as to which, in the event of a Mortgagor default, recourse will be
available solely against the related Mortgaged Property, and not against any
other assets of the Mortgagor, to pay amounts due under the related Mortgage
Loan. In the case of a nonrecourse Mortgage Loan, a decrease in the value of
the related Mortgaged Property will directly reduce the amount of gross
liquidation proceeds that may be realized in respect thereof and, after the
deduction of liquidation expenses, applied to payment of such Mortgage Loan.
[In addition, the laws of some states prohibit obtaining a personal judgment
against a mortgagor for any deficiency in the net liquidation proceeds
following a foreclosure of a defaulted mortgage loan.]
Liquidation Risks. Even assuming that the Mortgaged Properties
provide adequate security for the Mortgage Loans, substantial delay could be
encountered in connection with the liquidation of defaulted Mortgage Loans and
corresponding delays in the receipt of related proceeds by Owners of the
Offered Certificates could occur. Further, liquidation expenses (such as legal
fees, real estate taxes, and maintenance and preservation expenses) will reduce
the proceeds payable to holders of the Offered Certificates and thereby reduce
the security for the Mortgage Loans. In the event any Mortgaged Properties
fail to provide adequate security for the related Mortgage Loans and the
protection provided by the subordination described herein is exhausted or
unavailable, holders of Offered Certificates could experience a loss on their
investment.
Other Risks of Multifamily Residential Lending. Multifamily
residential lending is generally viewed as exposing the lender to a greater
risk of loss than one-to-four-family residential lending. Multifamily
residential lending typically involves a larger loan to a single obligor than a
residential one- to four- family mortgage loan. Furthermore, the repayment of
loans secured by income producing properties is typically dependent upon the
successful operation of the related real estate project. If the net operating
income from the project is reduced (for example, if tenant leases are not
obtained or renewed), the obligor's ability to repay the loan may be impaired.
Multifamily residential real estate can be affected significantly by supply and
demand in the market for the type of property securing the loan and, therefore,
may be subject to adverse economic conditions. Market values may vary as a
result of economic events or governmental regulations outside the control of
the borrower or lender, such as the imposition of rent control or changes in
the laws which impact the future cash flow of the property. Market values may
also be influenced by the relative affordability of single-family housing in
the area in which the multifamily residential housing is located.
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The successful operation of a multifamily project is also dependent
upon the management of such project. The project manager, in conjunction with
the owner of the project, is responsible for responding to changes in the local
rental market, planning and implementing the rental market, planning and
implementing the rental structure, including establishing levels of rental
rates, and insuring that maintenance and capital improvements are carried out
in a timely fashion. Management errors may adversely affect the long-term
viability of a project. There can be no assurance that such errors by the
property manager will not ultimately cause a default on the related Mortgage
Loan. See "Security for the Certificates -- The Mortgage Loans" herein.
Mortgage Loan Concentration. The ______ largest Mortgage Loans, with
an aggregate Scheduled Principal Balance as of the Cut-Off Date of
approximately $__________, comprise approximately ___% of the aggregate
Scheduled Principal Balance of the Mortgage Loans on such date. The largest of
such Mortgage Loans has a Scheduled Principal Balance of approximately
$__________, or approximately ___% of the aggregate Scheduled Principal Balance
of the Mortgage Loans as of the Cut-Off Date. As a result of this relative
concentration of the Mortgage Loans, Losses, prepayments or modifications
(including an extension of the final Due Date) on any such Mortgage Loans are
likely to have a greater effect on the yield to Holders of the Offered
Certificates or the anticipated weighted average lives of the Offered
Certificates than if such concentration had not existed. In addition (i)
approximately ___% of the Mortgage Loans by aggregate Scheduled Principal
Balance are secured by Mortgaged Premises located in ________, (ii)
approximately __% by Mortgaged Premises located in _____, (iii) approximately
___% by Mortgaged Premises located in _____ and (iv) approximately ___% by
Mortgage Premises located in _________.
As a result of this relative geographic concentration of the Mortgage
Loans, the performance of the Offered Certificates may be more dependent upon
the economic conditions in the noted states.
The Mortgage Loans are all secured by Mortgaged Premises that are
either newly constructed or have been recently substantially rehabilitated. As
such, each Mortgaged Premises has limited operating history on which the
calculation of the Debt Service Coverage Ratio was based. There can be no
assurance that the future operating history will be consistent with the limited
recent operating history. To the extent future Net Operating Income is less
than the Net Operating Income used in underwriting a Mortgage Loan, the
likelihood of a default on such Mortgage Loan increases, which may result in a
Realized Loss.
Balloon Mortgage Loans and Extension Risk. Because all the Mortgage
Loans have amortization schedules extending significantly beyond their original
terms to maturity, substantial payments (that is "Balloon Payments") will be
due on the Mortgage Loans at their respective stated maturity dates. Such
loans involve a greater risk to lenders because a Mortgagor's ability to make a
Balloon Payment typically will depend upon its ability either to refinance such
Mortgage Loan or to sell the related Mortgaged Property. A mortgagor's ability
to accomplish either of these goals will be affected by the factors described
above under "The Mortgage Loans--General" and by other factors including the
level of available mortgage rates at the time of sale or refinancing, the
Mortgagor's equity in the Mortgaged Property, the financial condition of the
Mortgagor, the operating history and physical condition of the Mortgaged
Property, tax laws and prevailing general economic conditions. A high interest
rate environment may make it more difficult for the Mortgagor to accomplish a
refinancing or sale and may result in delinquencies or defaults which, in turn,
could cause delays in distributions to holders of Offered Certificates.
There is no assurance that the values of the Mortgaged Properties at
maturity of the Mortgage Loans will be equal to or will exceed their values at
the date of origination of the Mortgage Loans. Since the Mortgage Loans
require Balloon Payments at maturity, holders of Offered Certificates will be
assuming the risk that the Mortgage Loans may not be paid off when the Balloon
Payments are due.
In addition, if certain conditions are satisfied, such as the absence
of any deferred maintenance, the satisfaction of a minimum debt service
coverage ratio, the absence of delinquencies and the good faith effort to
secure refinancing, the Servicer may extend a Mortgagor's Balloon Payment due
date by as much as ____ months if the Mortgagor needs more time to refinance.
Such extension of the scheduled maturity date of the loan may cause the
weighted average lives of the Offered Certificates to be longer than if the
loan had been paid under its original terms. See "Yield, Maturity and
Prepayment Considerations" herein.
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CREDIT RISK OF SUBORDINATE CERTIFICATES
As described herein, the rights of the Subordinate Certificateholders
to receive payments of interest and principal will be subordinated to those of
the Holders of the Senior Certificates, and the rights of the Class C
Certificateholders to receive payments of interest and principal will be
subordinated to those of the Holders of the Class B Certificates.
Losses on the Mortgage Loans will first be charged to the Class C
Certificates. If as a consequence of such Losses the Class C Certificate
Principal Balance has been reduced to zero, any additional Losses will be
allocated first to reduce the principal balance of the Class B Certificates to
zero. Further, if as a consequence of such Losses the aggregate outstanding
principal balance of the Class B Certificates and Class C Certificates has been
reduced to zero, any additional Losses will reduce the outstanding principal
balance of the Class A-1 Certificates. See "Description of the Offered
Certificates -- Subordination of Subordinate Certificates" herein.
CERTAIN BANKRUPTCY ISSUES
Each Borrower is a limited partnership, which limited partnership is a
special purpose entity with limited liability and limited capitalization.
Under certain circumstances, the bankruptcy of a general partner of a limited
partnership may result in the dissolution of such limited partnership. The
dissolution of a limited partnership, the winding-up of its affairs and the
distribution of its assets could result in an acceleration of its payment
obligations under the related Mortgage Loan, reducing the yield to the
Certificateholders in the same manner as a principal prepayment.
In addition, in the event of the bankruptcy of the general partner of
a Borrower, a trustee in bankruptcy for such general partner, such general
partner as a debtor-in-possession, or a creditor of such general partner could
attempt to seek an order from a court consolidating the assets and liabilities
of the related Borrower with those of the general partner. [Counsel for each
Borrower has delivered an opinion in respect of each Borrower concluding that a
court applying state partnership law should not issue an order, in some cases
on the basis of a reasoned analysis and subject to certain facts, assumptions
and qualifications specified therein. However, notwithstanding such opinion,
if such consolidation were to be permitted, the respective Mortgage, for
example, would likely become property of the estate of such bankrupt general
partner. In such a case, not only would the Mortgaged Property be available to
satisfy the claims of creditors of such general partner, but an automatic stay
would apply to any attempt by the Servicer on behalf of the Trustee to exercise
remedies with respect to such Mortgage. However, such an occurrence should not
affect a properly perfected security interest in the Mortgaged Property or the
Trustee's status as the holder of such security interest.]
[Certain limited liability general partners are affiliated with two or
more Borrowers. The two largest groups of affiliated general partner of the
Borrowers each represent between ___% and ___% of the aggregate principal
balance of the Mortgage Loans. In the event that one of such general partners
or any of its affiliates becomes the subject of a bankruptcy proceeding, the
trustee in bankruptcy for such entity, such entity as debtor-in-possession or a
creditor of such entity, could attempt to seek an order from a court
consolidating the assets and liabilities of one or more of those affiliated
parties that are not part of the bankruptcy proceeding with the assets and
liabilities of such entity. If successful, the number of Borrowers potentially
affected by the concerns addressed in the preceding two paragraphs could be
increased significantly. See also "Certain Legal Aspects of The Mortgage
Loans" in the Prospectus.
[GEOGRAPHIC CONCENTRATION]
Commercial Lending. The Mortgage Loans are secured by commercial
properties. Commercial lending is generally viewed as exposing the lender to a
greater risk of loss than residential one-to-four-family lending. Commercial
lending typically involves larger loans to a single obligor than residential
lending.
Commercial property values are subject to volatility. The repayment
of loans secured by income producing properties is typically dependent upon the
successful operation of the related real estate project rather than upon the
liquidation value of the underlying real estate. If the cash flow from the
related project is reduced (for example, in
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the case of Shopping Center Properties, leases are not obtained or renewed or,
in the case of Hotel Properties, room rates decline or occupancy levels are
reduced), the obligor's ability to repay the loan may be impaired. Real estate
projects can be affected significantly by supply and demand in the market for
the type of property securing the loan and, therefore, may be subject to
adverse economic conditions.
The liquidation value of commercial properties may be adversely
affected by risks generally incident to interests in real property, including:
changes or continued weakness in general or local economic conditions and/or
specific industry segments; declines in real estate values; declines in rental,
room or occupancy rates; increases in interest rates, real estate and personal
property tax rates and other operating expenses (including energy costs); the
availability of refinancing; changes in governmental rules, regulations and
fiscal policies, including rent control ordinances and environmental
legislation; and other factors beyond the control of the borrower or the
lender.
The successful operation of a real estate project is also dependent on
the performance of the property manager of such project. The property manager
is responsible for responding to changes in the local market, planning and
implementing the rental structure, including establishing levels of rent
payments or room rates, and advising the borrowers so that maintenance and
capital improvements can be carried out in a timely fashion. Each of the
Mortgaged Properties will be managed by an affiliate of the respective
borrower.
One Action Considerations. Several states have laws that prohibit
more than one "judicial action" to enforce a mortgage obligation, and some
courts have construed the term "judicial action" broadly. Accordingly, the
Pooling & Servicing Agreement will require the Servicer to obtain advice of
counsel prior to enforcing any of the lender's rights under any of the lender's
rights under nay of the Mortgage Loans that include properties where the rule
can be applicable. In addition, the Servicer may be required to foreclose
first on properties located in states where such "one action" rule apply (and
where non-judicial foreclosure is permitted) before foreclosing on properties
located in states where judicial foreclosure is the only permitted method of
foreclosure. See "Certain Legal Aspects of Mortgage Loan -- Foreclosure" in
the Prospectus.
[Group Leases]
[Zoning]
Limited Liquidity. There is currently no secondary market for the
Offered Certificates. While the Underwriter has advised that it currently
intends to make a secondary market in the Offered Certificates, it is under no
obligation to do so. Accordingly, there can be no assurance that a secondary
market for the Offered Certificates will develop. Moreover, if a secondary
market does develop, there can be no assurance that it will provide holders of
Offered Certificates with liquidity of investment or that it will continue for
the life of the Offered Certificates. The Offered Certificates will not be
listed on any securities exchange.
Other Financing. Certain of the Mortgage Loans permit the borrower to
incur additional indebtedness, including subordinated indebtedness secured by
the related Mortgaged Properties, if certain financial tests are met and such
financing will not result in the downgrading of the ratings then assigned to
any class Certificates. The existence of additional indebtedness could
adversely affect the financial viability of the related borrowers.
[Costs of Compliance with Americans with Disabilities Act]
THE MORTGAGE TRUST
GENERAL
The mortgage assets in the Mortgage Trust will consist primarily of
Mortgage Loans with a Cut-Off Date aggregate principal balance outstanding,
after the deduction of payments of principal due on such date, of approximately
$_______. Each Mortgage Loan is secured by a mortgage creating a
[first/junior] lien on the related Mortgaged Property. The Mortgaged
Properties consist of a total of ___ multifamily (including ___
multifamily/retail mixed-use) apartment complexes. The Mortgage Loans had an
original term to maturity of ____, ____ or ____ years,
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but all the Mortgage Loans require monthly payments of principal based on a ___
or ___ year amortization schedule. Thus, Balloon Payments will be due on each
Mortgage Loan at its stated maturity date. The Maturity Dates of the Mortgage
Loans will fall between ________ and _________ inclusive. None of the Mortgage
Loans are insured or guaranteed by any governmental entity or private insurer.
All the Mortgage Loans are non-recourse loans. The Mortgage Loans to be
included in the Mortgage Trust will be acquired by the Trust from Depositor,
which will have acquired the Mortgage Loans from the Seller. [All the Mortgage
Loans were underwritten in accordance with the Seller's Underwriting standards,
as described under "Underwriting Standards" below.]
[The Mortgage Loans permit voluntary prepayment prior to maturity only
upon the payment by the Mortgagor of a prepayment penalty based on a [yield
maintenance formula/predetermined schedule reducing over time]. See "Certain
Yield, Prepayment and Maturity Considerations" herein.]
THE MORTGAGED PROPERTIES
The Mortgaged Properties consist of __ multifamily (including ____
multifamily/retail mixed-use) apartment complexes comprising a total of
approximately ___ rental units. The mortgage amount, name of Mortgagor,
property type and property address for each Mortgaged Property are set forth in
the schedule (the "Mortgage Loan Schedule") attached hereto as Exhibit A.
The Mortgage Loan Schedule also sets forth the appraised values for
each of the Mortgaged Properties and the resultant loan-to-value ratios based
on the principal balance of the Mortgage Loans attributable to each such
Mortgaged Property as of the Cut-Off Date.
The original loan-to-value ratio of a Mortgage Loan is the ratio of
the original principal balance of such Mortgage Loan (assuming disbursement of
all funds required or conditionally required to be disbursed thereunder) to the
appraised value of the related Mortgaged Property. The Mortgage Loans had a
weighted average original loan-to-value ratio of approximately _____%, with a
range from _____% of _____%.
DELINQUENCIES
Owned and Managed Servicing Portfolio. The following tables set forth
information relating to the delinquency, loan loss and foreclosure experience
of the Servicer for its servicing portfolio of fixed rate multifamily mortgage
loans for , 199 , , 199 and for each of the three prior
years.
DELINQUENCY AND FORECLOSURE EXPERIENCE OF THE
SERVICER'S OWNED AND MANAGED SERVICING PORTFOLIO OF MULTIFAMILY MORTGAGE LOANS
<TABLE>
<CAPTION>
As of [ ] Year End [ ],
--------------- -------------------
199 199 199 199 198
---- ---- ---- ---- ----
Number Dollar Number Dollar Number Dollar Number Dollar Number Dollar
of Amount of Amount of Amount of Amount of Amount
Loans (000) Loans (000) Loans (000) Loans (000) Loans (000)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio . . . . . . .
Delinquent Loans(1) . .
31-60 (2) . . . . . .
61-90 . . . . . . . .
91 days or more . . .
Total . . . .
Total Delinquency
Percentage . . . . .
REO Properties (3) . .
</TABLE>
- --------------------
(1) The period of delinquency is based on the number of days payments are
contractually past due and includes all loans in foreclosure.
(2) Generally all Mortgage Loans 31 to 60 days or more delinquent are in
foreclosure.
(3) REO Properties (i.e., "real estate owned" properties--properties
relating to mortgages foreclosed or for which deeds in lieu of
foreclosure have been accepted and held by the Servicer pending
disposition).
S-15
<PAGE> 250
LOAN LOSS EXPERIENCE OF THE
SERVICER'S OWNED AND MANAGED SERVICING PORTFOLIO OF MULTIFAMILY MORTGAGE LOANS
<TABLE>
<CAPTION>
[ ] Months
Ending
[ ], Year End [ ],
------------- ----------------------
199 199 199 199 198
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Average Portfolio Balance
(1) . . . . . . . . . . . .
Net Losses (2)(3) . . . . .
As a percentage of Average
Portfolio Balance . . . .
</TABLE>
- --------------------
(1) Average Portfolio Balance equals the average of the portfolio balance
of the current period and the portfolio balance of the prior period.
(2) "Net Losses" means actual net profits realized with respect to the
disposition of REO property less net losses incurred with respect to
the liquidation or charge-off of mortgage loans. Net Losses are
presented only if a net loss has occurred or, as $0 if net profit has
occurred.
(3) Annualized for , 199 information.
MORTGAGE LOAN CHARACTERISTICS
The Mortgage Loans had the following characteristics:
The weighted average Mortgage Rate of the Mortgage Loans was
approximately per annum at origination. _____ of the Mortgage Loans have
Mortgage Rates of ___ per annum (the lowest such rate). The highest Mortgage
Rate of the other Mortgage Loans is ____ per annum.
The weighted average remaining term to maturity of the Mortgage Loans
was approximately four years and two months as of the Cut-Off Date. All of the
Mortgage Loans were originated on or after _______ and before _________. All
of the Mortgage Loans had original terms to maturity of five, seven or ten
years. The Mortgage Loans had principal balances ranging from $______ to
$________ at origination and from $_____ to $______ as of the Cut-Off Date.
The average principal balance of the Mortgage Loans was $______ at origination
and approximately $ ______ as of the Cut-Off Date.
The original amortization of all the Mortgage Loans was either 20 or
either 30 years, with a weighted average remaining amortization term of ____.
The debt service coverage ratios of the Mortgage Loans at origination
ranged from ___% to ___% (after the enhancements described in the next
sentence), with a weighted average of ___. Mortgage Loans with debt service
coverage ratios ranging from ___ to ___ (prior to any enhancement) have posted
letters of credit or cash reserve deposits in amounts sufficient to raise such
ratios to a range of ___ to ___.
The Mortgaged Properties contain between ___ and ___ units, the
average being ___. The Mortgage Loan balance per unit at origination was ___
on average, with a range from $ ____ to _______.
The Mortgage Loan Schedule sets forth a description of certain other
characteristics of the Mortgage Loans as of the dates of origination of the
Mortgage Loans or as of the Cut-Off Date, as indicated.
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<PAGE> 251
DISTRIBUTION OF LTV'S
<TABLE>
<CAPTION>
% OF AGGREGATE
AGGREGATE UNPAID
NUMBER OF UNPAID PRINCIPAL
RANGE OF LTV'S MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- -------------- -------------- ----------------- -------
<S> <C> <C> <C>
Total
</TABLE>
The LTV's shown above were calculated based upon the appraised values
of the Mortgaged Properties at the time of origination (the "Appraised
Values"). No assurance can be given that such appraised values of the
Mortgaged Properties have remained or will remain at their levels on the dates
of origination of the related Mortgage Loans. If property values decline such
that the outstanding balances of the Mortgage Loans, [together with the
outstanding balances of any Senior Mortgage Loans,] become equal to or greater
than the value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those heretofore experienced by
the Servicer, as set forth above under "The Portfolio of Mortgage Loans," and
by the mortgage lending industry in general.
DISTRIBUTION OF MORTGAGE RATES
<TABLE>
<CAPTION>
% OF AGGREGATE
AGGREGATE UNPAID
RANGE OF NUMBER OF UNPAID PRINCIPAL
MORTGAGE RATES MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- -------------- -------------- ----------------- -------
<S> <C> <C> <C>
Total
</TABLE>
S-17
<PAGE> 252
DISTRIBUTION OF REMAINING TERMS TO MATURITY
<TABLE>
<CAPTION>
% OF AGGREGATE
AGGREGATE UNPAID
NUMBER OF UNPAID PRINCIPAL
RANGE OF MONTHS MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- --------------- -------------- ----------------- -------
<S> <C> <C> <C>
</TABLE>
DISTRIBUTION OF PRINCIPAL BALANCES
<TABLE>
<CAPTION>
% OF AGGREGATE
AGGREGATE UNPAID
RANGE OF NUMBER OF UNPAID PRINCIPAL
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ------------------ -------------- ----------------- -------
<S> <C> <C> <C>
Total
</TABLE>
DEBT SERVICE COVERAGE RATIOS
<TABLE>
<CAPTION>
% OF AGGREGATE
AGGREGATE UNPAID
RANGE OF DEBT SERVICE NUMBER OF UNPAID PRINCIPAL
COVERAGE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
- ---------------- -------------- ----------------- -------
<S> <C> <C> <C>
Total
</TABLE>
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<PAGE> 253
GEOGRAPHIC DISTRIBUTION
<TABLE>
<CAPTION>
% of Aggregate
Aggregate Unpaid
Number of Unpaid Principal
State Mortgage Loans Principal Balance Balance
- ----- -------------- ----------------- -------
<S> <C> <C> <C>
Total
</TABLE>
[If the Mortgage Assets securing the Certificates of a Series include
a multifamily Mortgage Loan or Mortgage- Backed Security or a group of Mortgage
Loans or Mortgage-Backed Securities of a single obligor or affiliated obligors
representing: (a) 20% or more of the principal amount of such Certificates,
the financial statements of such obligor(s) will be included in accordance with
Rule 3-14(a) of Regulation S-X; and (b) 10% or more but less than 20% of the
principal amount of such Certificates, information, including financial
information, sufficient for investors to assess the credit quality of the
obligor(s) will be included.
If the Mortgage Assets securing the Certificates of a Series include a
concentration of properties within regions, counties, or other subdivisions of
a state whose adverse economic conditions are greater than those of the state
as a whole, address such concentration in the prospectus supplement.
If the Mortgage Assets securing the Certificates of a Series include a
concentration of multifamily residential properties with brief or financially
troubled operating histories, such concentration will be discussed in the
prospectus supplement.]
UNDERWRITING STANDARDS
[The Seller originates multifamily mortgage loans through a network of
approved correspondents; each correspondent is responsible for applying the
Seller's standard loan underwriting guidelines and forwarding loan applications
to ___________________ only when guideline requirements concerning the borrower
and property are met. ___________________ verifies all data gathered by the
correspondent to ensure that guidelines are being applied in a consistent
manner.
The Seller's underwriting guidelines (which were in effect at the time
of origination of the Mortgage Loans and were applied with respect to each of
them) are presented in detail in the ___________________ Approved Correspondent
Manual. In addition to listing the various documents that must be submitted to
___________________ by the correspondent, the guidelines focus on four major
components of the underwriting process:
1. Net Operating Income/Debt Service Coverage: ___________________
requires that each property's net operating income exceed its debt service by a
factor of not less than _____. Net operating income is equal to gross income
(calculated using a current rent roll) less: (i) a vacancy factor of not less
than, generally, __%--or greater if the actual vacancy is greater or if the
appraisal (see below) uses a larger factor; and (ii) operating expenses,
including ___% management fee and a replacement reserve (____% of adjusted
gross income).
2. Appraisal/Loan-to-Value: ___________________ requires an appraisal
performed by an appraiser with a designation of the Society of Real Estate
Appraisers ("SREA"), Senior Real Property Appraiser ("SRPA") or Member of
Appraisal Institute ("MAI"); the appraiser must be independent and approved by
___________________. The appraisal must use the three traditional approaches
to value and establish a current value for the property such that the
loan-to-value ratio does not exceed ____%. The appraisal must also contain the
following: location maps for the subject and for the comparables, photographs
of the subject and comparables, area and neighborhood analysis, market
analysis, site description and information on current zoning and tax
assessments.
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<PAGE> 254
3. Property Condition: The correspondent must inspect each property
to ensure that it is in acceptable physical condition. The inspection focuses
on: ongoing maintenance programs, common area upkeep, laundry facility
condition, mechanical systems and grounds maintenance.
4. Borrower Credit: ___________________ requires that a credit
investigation be completed for all prospective borrowers; the file must include
a credit report not more than 60 days old, three years of Federal income tax
returns and current financial statements.
Other important aspects of the Seller's underwriting guidelines
include: (i) a requirement for a complete Phase I environmental report for each
property, (ii) a general prohibition against subordinate financing and (iii) a
review of the property's occupancy history.]
[Describe any bulk acquisitions of Mortgage Loans not underwritten in
connection with the Seller's program.]
PREPAYMENT PROVISIONS
The principal balance of any Mortgage Loan may be prepaid in whole or
in part upon the payment by the Mortgagor of: (a) interest accrued and unpaid
on the outstanding principal balance of the related note (the "Mortgage Note);
(b) all other sums due under the Mortgage Note and the Mortgage Loan; and (c) a
prepayment consideration [describe yield maintenance or prepayment charges].
In addition, if following the occurrence of any Event of Default (as
hereinafter defined) the Mortgagor shall tender payment of an amount sufficient
to satisfy the remaining sums due on the Mortgage Loan in whole or in part
prior to a foreclosure sale of the Mortgaged Property, such tender shall be
deemed to be a voluntary prepayment of the principal balance of the Mortgage
Notes and the Mortgagor shall, in addition to all sums due on the Mortgage
Loan, be required to pay the prepayment consideration.
DEFAULT PROVISIONS
Each of the Mortgage Loans provides for certain events of default by
the Mortgagor ("Events of Default"). Upon the occurrence of any Event of
Default the remaining sums under the Mortgage Loan shall immediately become due
and payable and the Mortgagor will pay, from the date of such Event of Default,
interest on the unpaid principal balance of the Mortgage Note at the rate of
interest (the "Default Rate") equal to the greater of (i) __ above the
applicable interest rate on the Mortgage Note, or (ii) __% above the prime rate
charged on corporate loans or large U.S. money center banks and (b) the
mortgagee shall have the right to exercise any and all rights and remedies
available at law and in equity. If the Default Rate as calculated above is
greater than the maximum rate permitted by applicable law, then the Default
Rate shall then be deemed to equal to the maximum rate permitted by such
applicable law.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS
All the Mortgage Loans contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related Mortgaged Property with
the criteria for granting consent set forth in the related Mortgage Loan
documents and due-on-sale clauses entitling the mortgagee to accelerate payment
of a Mortgage upon any sale or other transfer of the related Mortgaged Property
without the consent of the Mortgagor. Furthermore, the Mortgage Loans contain
certain restrictions regarding further encumbrances on the Mortgaged
Properties, requiring the consent of the mortgagee to the creation of any other
lien or encumbrance on such Mortgaged Property and entitling the mortgagee to
accelerate payment of a Mortgage upon the imposition of any such additional
lien or encumbrance on such Mortgaged Property.
The Servicer, on behalf of the Owners of the Certificates, will be
required to exercise any right the Trustee may have as mortgagee of record of
any such Mortgage Loan to withhold its consent to any transfer or further
encumbrance in accordance with the general servicing standards described in the
Agreement.
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<PAGE> 255
HAZARD, LIABILITY AND OTHER INSURANCE
Each Mortgage requires the Mortgagor to keep the Mortgaged Property
insured against loss or damage by fire, flood and such other hazards, risks and
matters, including, without limitation, business interruption and/or rental
loss, public habituating and boiler damage and liability, as the mortgagee may
from time to time require in amounts required by the mortgagee, and shall pay
the premiums for such insurance as they become due and payable. All policies
of insurance (the "Policies") shall be issued by an insurer acceptable to the
mortgagee and be rated [A:V] by Best's Key Rating Guide and shall contain the
standard New York mortgagee non-contribution clause naming the mortgagee as the
person to which all payments made by such insurance company shall be paid. The
Mortgagor will assign and deliver the Policies to the mortgagee. Not later
than thirty (30) days prior to the expiration date of each of the Policies, the
Mortgagor will deliver evidence satisfactory to the mortgagee of the renewal of
each of the Policies.
The Servicer will be obligated to cause to be maintained for each
Mortgage Loan fire insurance with extended coverage (and, if applicable,
federal flood insurance) in an amount at least equal to the lesser of the
current principal balance of such Mortgage Loan and the replacement cost of the
improvements which are part of such property or, in lieu thereof, to maintain a
blanket policy insuring against hazard losses on the Mortgaged Properties, with
a deductible clause not in excess of a customary amount.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the mortgage pool and
the Mortgaged Properties is based upon the mortgage pool as constituted at the
close of business on the Cut-Off Date, as adjusted for the scheduled principal
payments due on or before such date. Prior to the issuance of the Offered
Certificates, Mortgage Loans may be removed from the mortgage pool as a result
of incomplete documentation or non-compliance with representations and
warranties set forth in the Agreement, if the Depositor deems such removal
necessary or appropriate. A limited number of other mortgage loans may be
included in the mortgage pool prior to the issuance of the Offered
Certificates.
A current report on Form 8-K will be available to purchasers of the
Offered Certificates and will be filed and incorporated by reference to the
Registration Statement together with the Agreement with the Securities and
Exchange Commission within fifteen days after the initial issuance of the
Offered Certificates. In the event Mortgage Loans are removed from or added to
the mortgage pool as set forth in the preceding paragraph, such removal or
addition will be noted in the current report on Form 8-K.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware on November 9,
1995 and is affiliated with the Seller. The Depositor maintains its principal
executive offices at 700 North Pearl Street, Suite 2400, LB 342, Dallas, Texas
75201. Neither the Depositor, the Seller nor any of their affiliates will
insure or guarantee distributions on the Certificates.
THE SELLER
[To be provided]
THE SERVICER
[To be provided]
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<PAGE> 256
MASTER SERVICER
[To be provided]
SPECIAL SERVICER
[To be provided]
DESCRIPTION OF THE OFFERED CERTIFICATES
GENERAL
The Class A-1 will be available in minimum denominations of
$___________ and integral multiples of $1,000 in excess thereof, except that
one Certificate of each class may be issued in any amount. The Class S-A
Certificates will not have a stated principal balance. The Class S-A
Certificates will be issuable in minimum Percentage Interests of ___% and
integral multiples of ___% in excess thereof. The Senior Certificates will be
issued, maintained and transferred on the book-entry records of DTC and its
Participants as described below. The Class B Certificates will be issuable in
fully registered, certificated form in denominations of $__________ and
integral multiples in excess thereof and one Class B Certificate evidencing an
additional amount equal to the remainder of the Original Certificate Principal
Balance of such Class.
[Until Definitive Senior Certificates are issued, interest in such
Classes will be transferred on the book- entry records of DTC and its
Participants. The Class B Certificates may be transferred or exchanged,
subject to certain restrictions on the transfer of such Certificates to Plans
(see "ERISA Considerations" herein), at the offices of __________________
located at _________________________________, without the payment of any
service charges, other than any tax or other governmental charge payable in
connection therewith. ________________ will initially serve as registrar (in
such capacity, the "Certificate Registrar") for purposes of recording and
otherwise providing for the registration of the Offered Certificates and of
transfers and exchanges of the Class B and, if issued, the Definitive Senior
Certificates.
Distributions on the Certificates
Distributions on the Certificates will be made on the ___ day of each
calendar month, or if such day is not a business day, the next succeeding
business day (each, a "Payment Date") commencing in __________ __, 199__, to
holders of record of the Certificates (the "Owners") as of the last day of the
calendar month immediately preceding the calendar month in which such Payment
Date occurs, whether or not such day is a business day (each, a "Record Date")
in an amount equal to the product of such Owner's Percentage Interest and the
amount distributed in respect of such Certificateholder's Class of such
Certificates on such Payment Date. The "Percentage Interest" represented by
any Offered Certificate will be equal to the percentage obtained by dividing
the Original Certificate Principal Balance of such Offered Certificate by the
Original Certificate Principal Balance of all Certificates of the same Class.
Book Entry Registration of the Senior Certificates
Each Class of the Senior Certificates will be represented by a single
certificate registered in the name of the nominee of The Depository Trust
Company (the "Clearing Agency"), [except that one Certificate of each Class of
the Class A Certificates may be issued in an amount of less than $1,000 and
held in fully registered definitive form directly by the applicable investor].
The Clearing Agency will maintain book entry records of ownership, transfers
and pledges of such Certificates only in the names of its participants and
indirect participants (the "Clearing Agency Participants"), which include
securities brokers and dealers, banks and trust companies and clearing
corporations and may include certain other organizations. Prior to Book Entry
Termination (as defined below), Beneficial Owners who are not Clearing Agency
Participants may transfer and pledge their interests in the Offered
Certificates, and exercise any other rights and remedies of Certificateholders,
only through Clearing Agency Participants or other entities that
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<PAGE> 257
maintain relationships with Clearing Agency Participants. The Clearing Agency
may charge its customary fee to Clearing Agency Participants in connection with
any such transfers and pledges. In addition, prior to Book Entry Termination,
distributions on the Offered Certificates will be made to Beneficial Owners
only through the Clearing Agency and its Clearing Agency Participants.
Consequently, Beneficial Owners may experience some delay in the receipt of
their payments. See "Risk Factors--Book Entry Registration" and "Description
of the Certificates -- Book Entry Registration" in the Prospectus.
The Senior Certificates will be issued in definitive, registered form
to Beneficial Owners or their nominees, and thereupon such Beneficial Owners
will become Certificateholders if, and only if, one of the following events
shall occur (any such event being referred to as "Book Entry Termination"): (i)
the Clearing Agency or the Depositor advises the Trustee in writing that the
Clearing Agency is no longer willing or able properly to discharge its
responsibilities as a clearing corporation with respect to the Senior
Certificates and the Depositor and the Trustee are unable to engage a qualified
successor to serve as the Clearing Agency, or (ii) the Clearing Agency, at the
direction of Beneficial Owners representing a majority of the outstanding
principal amount of the Senior Certificates, advise the Trustee in writing that
the continuation of a book entry system is no longer in the best interests of
Beneficial Owners, or (iii) the Depositor, at its option, advises the Trustee
that it elects to terminate the book entry system. Upon Book Entry
Termination, Beneficial Owners will become registered Certificateholders and
will deal directly with the Trustee with respect to transfers, notices and
payments.
The Clearing Agency has advised the Depositor and the Trustee that,
prior to Book Entry Termination, the Clearing Agency will take any action
permitted to be taken by a Certificateholder under the Agreement only at the
direction of one or more Clearing Agency Participants to whom the Senior
Certificates are credited in an account maintained by the Clearing Agency. The
Clearing Agency has advised that it will take such action with respect to any
principal amount of the Senior Certificates only at the direction of and on
behalf of Clearing Agency Participants with respect to those principal amounts
of such Senior Certificates.
Issuance of the Senior Certificates in book entry form rather than as
physical Certificates may adversely affect the liquidity of such Senior
Certificates in the secondary market and the ability of Senior
Certificateholders to pledge them. In addition, because distributions on the
Senior Certificates will be made by the Trustee to the Clearing Agency and the
Clearing Agency will credit such distributions to the accounts of its
Participants, which will further credit them to the accounts of indirect
participants of the Senior Certificateholders such beneficial owners of the
Senior Certificates may experience delays in the receipt of such distributions.
AMOUNTS OF DISTRIBUTION
On each Distribution Date, the Trustee will apply the aggregate of
amounts distributed in respect of the Lower Tier Interests on such Distribution
Date in the following order of priority:
(i) concurrently to the Owners of the Class A-1 Certificates,
Class A-1 Monthly Interest (as defined below) and to the Owners of the
Class S-A Certificates, Class S-A Monthly Interest, any shortfall
being allocated among the Class A-1 Certificates and the Class S-A
Certificates in proportion to their respective amounts of Class A-1
Monthly Interest and Class S-A Monthly Interest;
(ii) to the Owners of the Class A-1 Certificates, the Class A
Principal Distribution Amount until the Class A-1 Principal Balance
has been reduced to zero;
(iii) to the Owners of the Class B Certificates, the Class B
Monthly Interest;
(iv) to the Owners of the Class A-1 Certificates, any Unpaid
Delinquent Maturity Amount (as defined below) until the Class A-1
Principal Balance has been reduced to zero;
(v) to the Owners of the Class B Certificates, the Class B
Principal Distribution Amount until the Class B Principal Balance has
been reduced to zero; and
(vi) sixth, to the Owners of the Class C Certificates, the
Class C Monthly Interest;
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(vii) seventh, to the Owners of the Class C Certificates, the
Class C Principal Distribution Amount until the Class C Principal
Balance has been reduced to zero; and
(viii) eighth, to the Owners of the Class R Certificates, all
remaining Available Funds, if any.
In addition, on each Distribution Date, the Trustee shall withdraw
from the Prepayment Premium Account (as defined herein) an amount equal to the
aggregate of all Prepayment Premiums deposited therein during the previous
calendar month and shall distribute such amount (i) on each Distribution Date
prior to the Class A-1 Termination Date, (A) if such Distribution Date is prior
to ________________, to the Owners of Class A Certificates, allocated ___% to
the Class A-1 Certificates and __% to the Class S-A Certificates, and (B) if
such Distribution Date is after ________, solely to the Owners of Class A-1
Certificates, (ii) on the Class A-1 Termination Date, to the Holders of Class
A-1 Certificates and the Class S-A Certificates (in accordance with the
allocations described in subclauses (a) and (b) (as the case may be) of clause
(i) above) and the Owners of [Class B] Certificates in proportion to the
distributions of principal made in respect of the Class A-1 and Class B
Certificates, respectively, on the Class A-1 Termination Date, to the Owners of
Class [B Certificates].
"Monthly Interest" for the Class A-1, Class B and Class C Certificates
for any given Distribution Date is equal to one month's interest accrued at the
applicable Pass-Through Rate on the Certificate Principal Balance immediately
prior to such Distribution Date. Monthly Interest for the Class S-A
Certificates for any given Distribution Date is equal to the sum of (i) one
month's interest accrued at the Class S-A Pass-Through Rate on the Notional
Principal Balance immediately prior to such Distribution Date and (ii) any
Unpaid Class S-A Interest Shortfall (as defined herein).
The "Class Principal Balance" as to any Class of certificates other
than the Class S-A Certificates and the Residual Certificates, and as to any
Distribution Date, is the sum of (i) the applicable initial Class Principal
Balance thereof and (ii) the aggregate of all Interest Shortfalls for such
Class for previous Distribution Date, less all amounts distributed as principal
of such Class on previous Distribution Dates. The Class S-A Certificates and
the Residual Certificates have no Class Principal Balance.
An "Outstanding Mortgage Loan" is, as to any Distribution Date, a
Mortgage Loan which was not the subject of prepayment in full prior to the end
of the preceding calendar month, which did not become a Liquidated Mortgage
Loan prior to the end of such preceding calendar month, which was not
repurchased by the Seller as a Defective Mortgage Loan on or prior to such
Distribution Date or which was not paid in full through the receipt of a
Balloon Payment on or before the related Determination Date.
The "Unpaid Principal Balance" is, as to any Mortgage Loan as of any
Distribution Date, the Cut-Off Date Principal Balance thereof, less (i) all
unscheduled payments by or on behalf of the Mortgagor allocable to principal
which were received prior to the end of the preceding calendar month; (ii) any
Balloon Payment or portion thereof received on or before the Determination Date
next preceding such Distribution Date; (iii) any Insurance Proceeds (other than
Liquidation Proceeds) applied in reduction of the principal balance of such
Mortgage Loan prior to the end of such preceding calendar month; (iv) the
principal component of any Monthly Payment which was due on the related Due
Date and received on or before the related Determination Date or, if delinquent
on such Determination Date, was included in a Monthly Advance made by the
Servicer in respect of such Distribution Date; (v) the aggregate of all REO
Principal Amortization Amounts prior to the end of such preceding calendar
month; and (vi) all amounts deemed to have been distributed to Holders of Class
A-1 Certificates on previous Distribution Dates with respect to such Mortgage
Loans pursuant to the definition of Unpaid Delinquent Maturity Amount.
The "Unpaid Delinquent Maturity Amount" is, with respect to any
Distribution Date, the aggregate of the Unpaid Principal Balances of all
Outstanding Mortgage Loans which had Maturity Dates on or before the preceding
Due Date and were delinquent as of the close of business on the related
Determination Date. For purposes of clause (vi) of the definition of "Unpaid
Principal Balance" any amounts distributed to Class A-1 Certificateholders on
account of an Unpaid Delinquent Maturity Amount will be allocated to particular
delinquent Outstanding Mortgage Loans in the chronological order of their
Maturity Dates, beginning with all such Outstanding Mortgage Loans with
Maturity Dates in the twenty-third preceding calendar month with any excess
over the Unpaid Principal Balances of such
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Outstanding Mortgage Loans being applied to all such Outstanding Mortgage Loans
with Maturity Dates in the __________ preceding calendar month and so forth.
An "Unpaid Principal Shortfall" is, as to any Distribution Date, the
amount, if any, by which the aggregate of the Principal Shortfalls for prior
Distribution Dates is in excess of the aggregate of the amounts distributed on
prior Distribution Dates pursuant to clause (iv) of the definition of Formula
Distribution Amount.
A Mortgage Loan becomes a "Liquidated Mortgage Loan" when the Servicer
determines that all amounts which it expects to recover from or on account of
such Mortgage Loan have been recovered.
MONTHLY ADVANCES
In the event that a monthly payment on a Mortgage Loan has not been
received by the Servicer as of the close of business on the Determination Date
immediately preceding the related Distribution Date, the Servicer will be
obligated to advance, for deposit in the Certificate Account, the aggregate of
payments of principal (other than any Balloon Payment) and interest at the Loan
Rate (less the Servicing Fee Rate) on the Mortgage Loans that were due on the
related Due Date, less the aggregate amount of any such delinquent payments
that the Servicer has determined would constitute a nonrecoverable advance if
made (a "Monthly Advance"). If the Servicer determines that it is not
obligated to make the entire Monthly Advance because all or a lesser portion of
such Monthly Advance would not be recoverable from Insurance Proceeds,
Liquidation Proceeds or otherwise, the Servicer will deliver to the Trustee for
the benefit of the Certificateholders an officer's certificate setting forth
the reasons for the Servicer's determination. The Servicer will be entitled to
be reimbursed from the Certificate Account for all such Monthly Advances.
The obligation to make Monthly Advances with respect to any Mortgage
Loan shall continue until the earliest to occur of (i) payment thereof in full,
(ii) liquidation of the related Mortgaged Property and (iii) the purchase or
repurchase thereof from the Mortgage Trust pursuant to any applicable provision
of the Agreement.
If the rights and obligations of the Servicer under the Agreement are
terminated upon the occurrence of an event of default that remains uncured, the
Trustee will be the successor in all respects (with certain exceptions relating
to the repurchase of Mortgage Loans under certain circumstances) to the
Servicer in its capacity as servicer under the Agreement, including the
obligation to make all required Monthly Advances.
SUBORDINATION OF THE SUBORDINATED CERTIFICATES
The rights of the Owners of the Subordinate Certificates to receive
distributions with respect to the Mortgage Loans will be subordinated to such
rights of the Owners of the Senior Certificates, in the case of the Class B
Certificates, and to the Owners of the Offered Certificates in the case of the
Class C Certificates. The subordination provided to the Senior Certificates by
the Class B Certificates and to the Class B Certificates by the Class C
Certificates is intended to enhance the likelihood of timely receipt by the
Owners of the respective Class of Certificates of the full amount of their
scheduled monthly payments and to afford such Owners protection against losses
resulting from Liquidated Mortgage Loans.
The protection afforded to the Owners of Senior Certificates by means
of the subordination of the Subordinate Certificates will be accomplished by
the preferential rights of such Owners to receive, prior to any distribution
being made on a Distribution Date in respect of the Subordinate Certificates,
the Class A-1 Monthly Interest and the Class S-A Monthly Interest,
respectively, and to the Class A-1 Certificateholders, the Class A Principal
Distribution Amount. The Class B Certificates will, however, receive the Class
B Monthly Interest before the Class A-1 Certificateholders receive any Unpaid
Delinquent Maturity Amount. The Class B Certificates will be entitled to the
Class B Principal Distribution Amount only after such time as the Class A-1
Principal Balance has been reduced to zero through payment to the Class A-1
Certificateholders of the Formula Principal Distribution Amount and then any
Unpaid Delinquent Maturity Amount.
Loss realized on the Mortgage Loans will not be allocated to the
Owners of the Class A-1 Certificates until the principal balances of the Class
C Certificates and then the Class B Certificates have both been reduced to
zero. Any losses allocated to the Class A-1 Certificates will be allocated pro
rata to all Owners of the Class A-1
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Certificates. Any losses allocated to the Class B Certificates will be
allocated pro rata to all Owners of the Class B Certificates.
REPORTS TO HOLDERS OF THE CERTIFICATES
The Trustee is required to prepare and mail to the Servicer, to each
Owner of a Class A-1, Class S-A and Class B Certificate a statement (a "Monthly
Report") setting forth:
(i) the Available Funds for such Distribution Date,
including, stated separately, any Monthly Advance component thereof;
(ii) the aggregate of all Principal Prepayments received
during the previous calendar month together with, stated separately,
the aggregate of all REO Principal Amortization Amounts for such
preceding calendar month;
(iii) all previously undistributed Balloon Payments or
portions thereof received on or before the preceding Determination
Date;
(iv) the aggregate Unpaid Principal Balances of all Mortgage
Loans and Foreclosed Mortgage Loans which became Liquidated Mortgage
Loans during the previous calendar month;
(v) the aggregate Unpaid Principal Balances of all Mortgage
Loans which are required to be purchased by the Seller prior to the
related Distribution Date pursuant to the Agreement;
(vi) the amount of all Prepayment Premiums received during
the previous calendar month;
(vii) the Formula Principal Distribution Amount for such
Distribution Date;
(viii) the Class A-1 Monthly Interest for such Distribution
Date;
(ix) the Class S-A Monthly Interest for such Distribution
Date;
(x) the Class B Monthly Interest for such Distribution Date;
(xi) the Class C Monthly Interest for such Distribution Date;
(xii) the Unpaid Delinquent Maturity Amount for such
Distribution Date;
(xiii) the Class A-1 Distribution Amount (exclusive of any
distribution from the Prepayment Premium Account) for such
Distribution Date;
(xiv) the Class B Distribution Amount for such Distribution
Date;
(xv) the Class S-A Distribution Amount for such Distribution
Date;
(xvi) the Class C Distribution Amount for such Distribution
Date;
(xvii) any Interest Shortfall for the Class A-1 or Class B
Certificates, dated separately;
(xviii) any Unpaid Class S-A Interest Shortfall immediately
following such Distribution Date together with the amount of any Class
S-A Interest Shortfall for such Distribution Date;
(xix) the Class A-1 Principal Balance immediately following
such Distribution Date;
(xx) the Class B Principal Balance immediately following such
Distribution Date;
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(xxi) the Class C Principal Balance immediately following
such Distribution Date;
(xxii) any Unpaid Principal Shortfall for such Distribution
Date and any remaining Unpaid Principal Shortfall after giving effect
to such distribution;
(xxiii) the amount and allocation of any distribution from
the Prepayment Premium Account on such Distribution Date; and
(xxiv) the Pool Principal Balance for the following
Distribution Date;
(xxv) the number, percentage and aggregate unpaid principal
balances of Mortgage Loans delinquent (a) 30 to 59 days and (b) 60
days or more (including Foreclosed Mortgage Loans), respectively, as
of the end of the preceding calendar month (separately stating the
aggregate unpaid principal balances of Foreclosed Mortgage Loans);
(xxvi) with respect to any Mortgage Loan included in (xxv)
above, the number of each such Mortgage Loan as set forth in the
Agreement and the Unpaid Principal Balance of each such Mortgage Loan;
(xxvii) the number and aggregate principal balances of any
REO Properties;
(xxviii) with respect to each Mortgage Loan that has become
an REO Property included in (xxvii) above, the number of such Mortgage
Loan as set forth in the Agreement and the Unpaid Principal Balance of
each such REO Property;
(xxix) with respect to each Mortgage Loan that became a
Liquidated Mortgage Loan during the prior calendar month, the number
of such Mortgage Loan, as set forth in Exhibit [G] to the Agreement,
the Net Liquidation Proceeds with respect to each such Mortgage Loan
and the Unpaid Principal Balance of each such Mortgage Loan; and
(xxx) such other information as is required by the Code and
regulations thereunder to be made available to Owners of the Class
A-1, Class S-A, Class B Certificates and Class C Certificates.
The Trustee shall be under no duty to recalculate or verify the
information (set forth above in subclauses (i) through (vi) and (xxiv) through
(xxiii)) provided to it by the Servicer in each Servicing Certificate and shall
be protected in relying upon such information in connection with the
calculation of all amounts and preparation of all reports and statements
required to be prepared by it pursuant to this Agreement. The Servicer shall
indemnify the Trustee for any loss, expense or cost incurred by it as a result
of any such reliance which is caused by the Servicer's gross negligence,
willful misconduct or bad faith.
In the case of information furnished pursuant to subclauses (viii),
(x), (xiii), (xiv), (xii), (xxv) and (xxvi) above, the amounts shall be
expressed as a dollar amount per Class A-1 Certificate and Class B Certificate,
as applicable, with a $1,000 denomination. In the case of the information
furnished pursuant to subclauses (ix), (xv) and (xix) above, the amount shall
be expressed as a dollar amount per Class S-A Certificate with a 100 Percentage
Interest. Any such statement furnished to an Owner of a Class A-1 Certificate,
Class S-A Certificate or Class B Certificate may, if requested by the Trustee,
omit information pertinent only to Certificates of Classes not held by such
Owner.
Within 90 days after the end of each calendar year, the Trustee shall
prepare and mail to each Person who at any time during the calendar year was
the Owner of a Class A-1 Certificate, Class S-A Certificate, Class B
Certificate or Class C Certificate, a statement containing the information set
forth in the subclauses mentioned in the preceding paragraph, as applicable,
aggregated for such calendar year or, in the case of each Person who was an
Owner of a Certificate for a portion of such calendar year, setting forth such
information for each month thereof for the portion of the year during which
such Person was an Owner of a Certificate of such Class. Such obligation of
the Trustee shall be deemed to have been satisfied to the extend that
substantially comparable information shall be provided by the Trustee pursuant
to any requirements of the Code.
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YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The yield to maturity on the Offered Certificates will be affected by
the rate of principal payments on the Mortgage Loans including, for this
purpose, prepayments, which may include amounts received by virtue of
repurchase, condemnation, insurance or foreclosure. The rate of principal
payments on the Offered Certificates will correspond to the rate of principal
payments (including prepayments) on the Mortgage Loans. Principal prepayments
may be influenced by a variety of economic, geographic, demographic, social,
tax, legal and other factors. In general, if prevailing interest rates fall
significantly below the interest rates on the Mortgage Loans, the Mortgage
Loans are likely to be subject to higher prepayments than if prevailing rates
remain at or above the interest rates on such Mortgage Loans. Conversely, if
prevailing interest rates rise above the interest rates on such Mortgage Loans,
the rate of prepayment would be expected to decrease. Other factors affecting
prepayment of the Mortgage Loans include the availability of mortgage
financing, changes in tax laws (including depreciation benefits), changes in
Mortgagors' net equity in the Mortgaged Properties, servicing decisions and
prevailing general economic conditions. The Mortgage Loans may be prepaid at
any time subject to the payment of a prepayment penalty. See "The Mortgage
Trust--Prepayment Provisions" herein.
The effective yield to holders of the Offered Certificates will differ
from the yield otherwise produced by the applicable Pass-Through Rate and
purchase prices of such Offered Certificates because principal and interest
distributions will not be payable to such holders until at least the ___th day
of the month following the month of accrual (without any additional
distribution of interest or earnings thereon in respect of such delay).
If the purchaser of an Offered Certificate offered at a discount from
its initial principal amount calculates its anticipated yield to maturity based
on an assumed rate of payment of principal that is faster than that actually
experienced on the Mortgage Loans, the actual yield to maturity will be lower
than that so calculated. Conversely, if the purchaser of an Offered
Certificate offered at a premium calculates its anticipated yield to maturity
based on an assumed rate of payment of principal that is slower than that
actually experienced on the Mortgage Loans, the actual yield to maturity will
be lower than that so calculated.
The timing of changes in the rate of prepayments on the Mortgage Loans
may affect an investor's actual yield to maturity, even if the average rate of
principal payments is consistent with an investor's expectation. In general,
the earlier a prepayment of principal of the Mortgage Loans, the greater the
effect on an investor's yield to maturity. The effect on an investor's yield
of principal payments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the
issuance of the Offered Certificates may not be offset by a subsequent like
decrease (or increase) in the rate of principal payments. An investor must
make an independent decision as to the appropriate prepayment scenario to be
used in deciding whether to purchase the Offered Certificates.
Voluntary prepayments of a Mortgage Loan can be made only upon the
payment by the Mortgagor of a prepayment penalty based on a [yield maintenance
formula/predetermined schedule]. See "The Mortgage Trust--Prepayment
Provision" for a description of such formula. The payment of such prepayment
penalties by Mortgagors should have the effect of reducing the risk of rapid
rates of voluntary prepayments. If, however, such penalties were to be
uncollectible for any reason, investors would have to bear the risk that
prepayments on the Mortgage Loans, and therefore of principal payments on the
Offered Certificates, could coincide with periods of low prevailing interest
rates. In that event, the effective interest rates on securities in which an
investor might choose to reinvest amounts received as principal payments on
such investor's Certificate might be lower than the applicable Pass-Through
Rate.
Conversely, slow rates of prepayments on the Mortgage Loans, and
therefore of principal payments on the Offered Certificates, may coincide with
periods of high prevailing interest rates. During such periods, the amount of
principal payments available to an investor for reinvestment at such high
prevailing interest rates may be relatively low.
Many of the Mortgage Loans contain "due-on-sale" provisions, and the
Agreement obligates the Servicer, with certain exceptions, to enforce such
"due-on-sale" provisions.
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Because amounts distributable to Owners of the Class S-A Certificates
consist of interest payable on the Mortgage Loans, the yield to maturity of the
Class S-A Certificates will be sensitive to the repurchase and default
experience of the Mortgage Loans, and prospective investors should fully
consider the associated risks, including the risk that such investors may not
fully recover their initial investment. In particular, investors in the Class
S-A Certificates should be aware that the Mortgage Loans may be required to be
repurchased in the event of certain breaches of representations and warranties
relating to certain events. [Other calamity calls] [With respect to voluntary
prepayments, however, Class S-A Certificateholders will be allocated a
percentage of the prepayment penalties discussed above. See also "Description
of the Certificates--Amounts of Distribution."]
WEIGHTED AVERAGE LIFE OF THE CLASS A-1 AND CLASS B CERTIFICATES
The following information is given solely to illustrate the effect of
prepayments of the Mortgage Loans on the weighted average lives of the Class
A-1 and Class B Certificates under the stated assumptions and is not a
prediction of the prepayment rate that might actually be experienced by the
Mortgage Loans.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal
of such security will be repaid to the investor. The weighted average life of
the Class A-1 and Class B Certificates will be influenced by the rate at which
principal payments on the Mortgage Loans are paid, which may be in the form of
scheduled amortization or prepayments (for this purpose, the term "prepayment"
includes prepayments, condemnation, insurance and liquidations due to default).
Prepayments on mortgage loans are commonly measured relative to a prepayment
standard or model. In the model used in this Prospectus Supplement, the
"constant prepayment rate" ("CPR") represents an assumed annualized rate of
prepayment relative to the then outstanding principal balance of a pool of new
mortgage loans.
Based on the foregoing assumptions, the tables below indicate the
weighted average life of the Class A-1 and Class B Certificates, assuming that
the Mortgage Loans prepay according to the following CPR prepayment scenarios:
[CPR PREPAYMENT SCENARIOS
<TABLE>
<CAPTION>
Scenario I Scenario II Scenario III Scenario IV Scenario V
---------- ----------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
</TABLE>
Neither the CPR nor any other prepayment model or assumption purports
to be an historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Loans included in the Trust. Variations in the actual prepayment
experience and the balance of the Mortgage Loans that prepay may increase or
decrease each weighted average life shown in the following tables. Such
variations may occur even if the average prepayment experience of all such
Mortgage Loans equals any of the specified percentages of the CPR.]
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<PAGE> 264
WEIGHTED AVERAGE LIVES
CLASS A-1
<TABLE>
<CAPTION>
Weighted
CPR Average Life Earliest Retirement
Prepayment (years) Date(1)
---------- ------- -------
<S> <C> <C> <C>
</TABLE>
CLASS B
<TABLE>
<CAPTION>
Weighted
CPR Average Life Earliest Retirement
Prepayment (years) Date(1)
---------- ------- -------
<S> <C> <C> <C>
</TABLE>
- --------------------
(1) Assuming early termination or the Mortgage Loan Groups when the
aggregate Loan Balances decline to a level equal to 10% of the
aggregate principal balance of the Mortgage Loans as of the Cut-Off
Date.
There is no assurance that prepayments will occur, or, if they do
occur, that they will occur at any constant percentage of CPR or in accordance
with any of the aforementioned scenarios.
PAYMENT DELAY FEATURE OF CLASS A-1 AND CLASS B CERTIFICATES
The effective yield to the Owners of the Class A-1 and Class B
Certificates will be lower than the yield otherwise produced by the respective
Pass-Through Rate and the purchase price of such Certificates because principal
and interest distributions will not be payable to such Certificateholders until
at least the twenty-fifth day of the month following the month of accrual
(without any additional distributions of interest or earnings thereon in
respect of such delay).
YIELD SENSITIVITY OF THE CLASS S-A CERTIFICATES
Because amounts distributable to Class S-A Certificateholders consist
entirely of interest, the yield to maturity of the Class S-A Certificates will
be extremely sensitive to the repurchase, prepayment and default experience of
the Mortgage Loans, and prospective investors should fully consider the
associated risks, including the risk that such investors may not fully recover
their initial investment. In particular, investors in the Class S-A
Certificates should be aware that Depositor may cause a termination of the
Trust when the aggregate outstanding principal balance of the Mortgage Loans
has declined to ___% or less of the aggregate principal balance of the Mortgage
Loans as of the Cut- Off Date.
The following table indicates certain relationships between the
assumed purchase price and the yield to maturity on the Class S-A Certificates,
stated on a corporate bond equivalent basis. Such table also indicates such
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<PAGE> 265
relationships on the assumption that (a) the Trust is not terminated
by the Depositor pursuant to its __% a "clean-up call", and (b) the
Trust is so terminated.
SENSITIVITY OF THE CLASS S-A CERTIFICATES TO PREPAYMENTS
<TABLE>
<CAPTION>
Pre-Tax Yield to Maturity
-------------------------
Prepayment 0% 22 47 50 55
Scenario CPR CPR CPR CPR CPR
-------- --- --- --- --- ---
<S> <C> <C> <C> <C> <C>
I
II
III
IV
V
</TABLE>
On the basis of approximately __% CPR, and a purchase price of ____%,
no termination of the Trust by the Depositor pursuant to its __% "clean-up
call" and the other assumptions described above, the pre-tax yield to maturity
of the Class S-A Certificates would be approximately __%. If the actual
prepayment rate were to exceed approximately __% CPR based on such assumptions,
an investor in the Class S-A Certificates as to which such percentage of CPR
was exceeded would not fully recover the initial purchase price thereof.
On the basis of approximately ___% CPR, a purchase price of _______%,
termination of the Trust by the Depositor pursuant to its ___% "clean-up call"
and the other assumptions described above, the pre-tax yield to maturity of the
Class S-A Certificates would be approximately ___%. If the actual prepayment
rate were to exceed approximately ___% CPR, on such assumptions, an investor in
the Class S-A Certificates as to which such percentage of CPR was exceeded
would not fully recover the initial purchase price thereof.
It is highly unlikely that the Mortgage Loans will prepay at a
constant rate until maturity or that all of the Mortgage Loans will prepay at
the same rate. In fact, Mortgage Loans are expected to prepay at different
rates.
The yields set forth in the preceding tables were calculated by
determining the monthly discount rates which, when applied to the assumed
stream of cash flow to be paid on the Class S-A Certificates, would cause the
discounted present value of such assumed cash flows to equal the assumed
purchase price of such Class S-A Certificates and by converting such monthly
rates to corporate bond equivalent rates. Such calculations do not take into
account variations that may occur in the interest rates at which investors may
be able to reinvest funds received by them as distributions on the Class S-A
Certificates and consequently do not purport to reflect the return on any
investment in the Class S-A Certificates when such reinvestment rates are
considered.
The Mortgage Loans will not necessarily have the characteristics
assumed above, and there can be no assurance the (i) the Mortgage Loans will
prepay at any of the rates shown in the table or at any other particular rate
or will prepay proportionately, (ii) the pre-tax yield on the Class S-A
Certificates will correspond to any of the pre-tax yields shown above or (iii)
the aggregate purchase price of the Class S-A Certificates will be equal to the
purchase price assumed.
Scheduled Final Distribution Date. The Scheduled Final Distribution
Date for the Class S-A Certificates is ___________ __, 200_.
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DESCRIPTION OF THE POOLING AND SERVICING AGREEMENT
The Certificates will issued pursuant to the Pooling and Servicing
Agreement to be dated as of the Closing Date (the "Agreement"). The following
summaries describe certain provisions of the Agreement which are not otherwise
described elsewhere in this Prospectus Supplement. The summaries do not
purport to be complete and are subject to and qualified in their entirety by
reference to, the provisions of the Agreement. Wherever particular defined
terms used in the Agreement are referred to in this Prospectus Supplement, such
defined terms are hereby incorporated herein by reference.
The Mortgage Trust will consist of, to the extent provided in the
Agreement, (i) the Mortgage Loans that from time to time are subject to the
Agreement, and the Additional Collateral (as defined below), (ii) such assets
as shall from time to time be identified as deposited in the Certificate
Account or Prepayment Premium Account, in accordance with the Agreement, (iii)
property which secured a Mortgage Loan and which has been acquired by
foreclosure or deed-in- lieu of foreclosure.
ASSIGNMENT OF THE MORTGAGE LOANS
At the time of the initial issuance of the Certificates, the Depositor
will assign all its right, title and interest in and to the Mortgage Trust
(including the Mortgage Loans, [letters of credit with respect to certain
Mortgage Loans] and a collateral deposit account with respect to a certain
Mortgage Loan (such letters of credit and collateral deposit account are
referred to hereafter as the "Additional Collateral") to the Trustee, including
all principal and interest received by the Depositor on or with respect to the
Mortgage Loans after the Cut-Off Date (other than payments of interest and
principal due on the Mortgage Loans on or before the Cut-Off Date), together
with all its right, title and interest in and to the proceeds of any related
insurance policies. The Trustee, concurrently with such assignment, will
declare that it holds and will hold such rights and interest for the exclusive
use and benefit of the present and future Owners of the Certificates, other
than the Class RL Certificates. Each Mortgage Loan will be identified in the
Mortgage Loan Schedule to the Agreement. The Mortgage Loan Schedule includes
information as to the Cut-Off Date principal balance of each Mortgage Loan, the
Loan Rate, the stated maturity date of the Mortgage Loan and the name of the
Mortgagor and address of the Mortgaged Property.
The Depositor is obligated to deliver and assign to the Trustee at the
Closing Date, the Mortgage Notes, the Mortgages and certain other documents in
respect of the Mortgage Loans (collectively, the "Mortgage Files") and the
Additional Collateral. By the Closing Date, the Trustee will review the
Mortgage Files (or copies thereof) in accordance with the Agreement and if any
document required to be included in any Mortgage File is found to be defective
in any material respect and such defect is not corrected or cured by the
Closing Date, the affected Mortgage Loan will not be included in the Mortgage
Trust.
If (i) a document constituting a part of any Mortgage File is
defective, (ii) an Assignment of Mortgage is not recorded as required or (iii)
any representation, warranty or covenant to a Mortgage Loan as made by the
Seller to the Depositor in connection with the sale of the Mortgage Loans to
the Depositor is breached, thereby materially and adversely affecting the
interests of the Owners of the Certificates in such Mortgage Loan (any such
Mortgage Loan being a "Defective Mortgage Loan"), the Seller will be required
to repurchase the related Mortgage Loan (including any property acquired in
respect thereof and any insurance policy or insurance proceeds with respect
thereto) from the Trustee at a price equal to the Unpaid Principal Balance of
the Mortgage Loan as of the Distribution Date upon which the proceeds of the
repurchase would be distributed to Certificateholders, together with accrued
and unpaid interest at the Mortgage Loan's Loan Rate (less the Servicing Fee
Rate) for the calendar month preceding the date of repurchase (the "Purchase
Price"). Upon receipt by the Trustee of written notification of any such
repurchase, the Trustee will execute and deliver an instrument of transfer or
assignment necessary to vest in the legal and beneficial ownership of such
Mortgage Loan (including any property acquired in respect thereof or proceeds
of any insurance policy with respect thereto). The obligation of the Seller to
repurchase any such Mortgage Loan shall be the sole remedy available to the
Owners of the Certificates or the Trustee, on behalf of the Owners, against the
Seller under the Agreement.
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Notwithstanding the foregoing, in the case of any repurchase of a
Mortgage Loan that would result in the realization of a gain by the Mortgage
Trust or Trust Fund, the Seller will not be required to repurchase such
Mortgage Loan unless the Trustee has received an opinion of counsel to the
effect that such repurchase will not be subject to tax as a result of being
deemed a "prohibited transaction" under Section 860F(a)(2) of the Code and a
certificate from the Seller to the effect that such repurchase will not give
rise to net income taxable under Section 860F(a)(1) of the Code. The Seller
will use its reasonable best efforts to obtain such opinion and deliver such
certificate. In the absence of such opinion or certificate, the Seller will
not be required to so repurchase any Mortgage Loan unless there is an actual or
imminent default with respect thereto or unless such breach adversely affects
the enforceability of such Mortgage Loan.
COLLECTION AND OTHER SERVICING PROCEDURES
The Servicer is required to service the Mortgage Loans, subject to the
terms of the Mortgage Loans themselves, pursuant to the Agreement and the
requirements of applicable law, in the same manner in which it services
mortgage loans for its own portfolio that are comparable to the Mortgage Loans,
giving due consideration to customary and usual standards of practice of
prudent institutional multifamily mortgage lenders and loan services utilized
with respect to comparable mortgage loans (the "Servicing Standard"). The
Servicer will make reasonable efforts to collect all payments called for under
the Mortgage Loans and will, consistent with the Agreement, follow such
collection procedures as are customary to the servicing of mortgage loans in
its servicing portfolio which are comparable to the Mortgage Loans. Consistent
with the above, the Servicer may, in its discretion, waive any late payment
charge in respect of a late Mortgage Loan payment or any other administrative
fee.
The Servicer may extend the Maturity Date of any Mortgage Loan without
the consent of the Trustee or the Owners of the Certificates, subject to the
following conditions: (i) a determination must be made that a Balloon Payment
default is imminent and that the extension of the Maturity date is reasonably
likely to produce a greater recovery than liquidation of the related Mortgage
Loan; (ii) any such extension will be for a period of not greater than [36]
months; and (iii) prior to granting such extension, the Servicer must
determine: (a) that no deferred maintenance exists; (b) the ratio of the net
income from the operation of the Mortgaged Property to debt service on the
Mortgage Loan is not less than ______ to _______; (c) no Mortgage Loan payment
due during the preceding 12 months had been more than 30 days delinquent; and
(d) the related mortgagor has made a reasonable effort to obtain new financing
in an amount sufficient to enable payment of the Balloon Payment.
The Servicer will not permit the placement of a subsequent senior
mortgage on any Mortgaged Property.
In any case in which a Mortgaged Property has been or is about to be
conveyed by the Mortgagor, the Servicer may not permit an assumption of the
related Mortgage Loan. If the Servicer, however, is prevented from enforcing
any such clause or any such clause, by its terms, is not operable, the Servicer
is authorized to take or enter into an assumption and modification agreement
with the person to whom such Mortgaged Property has been or is about to be
conveyed, pursuant to which such person becomes liable under the Mortgage Note
and the Mortgagor remains liable thereon or, if the Servicer finds it
appropriate, is released from liability thereon. In respect of transfers or
proposed transfers not covered by the above guideline, the Servicer will
exercise its right to accelerate the maturity of the related Mortgage Loan and
require that the principal balance thereof be paid in full. Any fee collected
by the Servicer for entering into any such agreement will be retained by the
Servicer as additional servicing compensation.
In addition, if Mortgage Loans contain due-on-encumbrance clauses or
require the consent of the holder of the Mortgage Loan to the creation of any
subordinate lien or encumbrance on the Mortgaged Property, the Servicer, on
behalf of the Trustee, will exercise any right it may have to accelerate the
payment of such Mortgage Loans upon, or to withhold its consent to, the
creation of such liens or encumbrances.
[The Servicer is not required to establish any escrow account into
which it will deposit escrow payments from Mortgagors under the Mortgages for
the payment of taxes, insurance premiums, assessments or similar items.]
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PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO CERTIFICATE ACCOUNT AND PREPAYMENT
PREMIUM ACCOUNT
The Trustee will establish and maintain in the name of the Trustee a
separate account (the "Certificate Account") for the benefit of the Owners of
the Certificates. The Certificate Account will be required to be an Eligible
Account (described below). The Servicer shall be required to remit to the
Trustee for deposit into the Certificate Account, daily, within one Business
Day of receipt thereof:
(i) all payments of interest on the Mortgage Loans (net of
the related Monthly Servicing Fee with respect to each such Mortgage
Loan which was an Outstanding Mortgage Loan as of the preceding
Distribution Date);
(ii) all payments of principal received in respect of the
Mortgage Loans;
(iii) the aggregate of all purchase prices paid by the Seller
for the purchase of any Defective Mortgage Loan:
(iv) all cash ("Liquidation Proceeds") received in connection
with the liquidation of a Liquidated Mortgage Loan net of expenses
("Liquidation Expenses") of the Servicer in connection with such
liquidation (such net liquidation proceeds being referred to herein as
"Net Liquidation Proceeds");
(v) the aggregate of any insurance proceeds received in
respect of a Mortgaged Property (net of amounts covering the related
reasonable expenses of the Servicer) that are not Liquidation Proceeds
and are applied to principal or interest on the related Mortgage Loan;
(vi) any amounts required to be deposited pursuant to the
Agreement in connection with any property ("REO Property") acquired by
the Mortgage Trust through foreclosure or deed in lieu of foreclosure;
(vii) any amounts required to be deposited pursuant to the
Agreement in connection with the application of co-insurance clauses,
flood damage to REO Properties and blanket policy deductibles; and
(viii) all advances made by the Servicer with respect to
payments of principal (other than Balloon Payments) and interest on
the Mortgage Loans that were due on the related Due Date and not
received as of the close of business on the Determination Date
preceding the related Distribution Date, less the aggregate amount of
any such delinquent payments that would constitute a Monthly Advance.
Payments and collections that do not constitute Available Funds (e.g.,
assumption fees, late fees or other administrative charges) will not be
deposited in the Certificate Account and will be retained by [the Servicer as
additional servicing compensation]. The Servicer may, from time to time,
direct the Trustee to make withdrawals from the Certificate Account referred to
above, to make reimbursement of certain expenses to the Servicer.
The Trustee will establish and maintain, on behalf of the
Certificateholders, a trust account (the "Prepayment Premium Account") in which
shall be deposited any premium or yield maintenance payment by a Mortgagor with
respect to a related Mortgage Loan in connection with a Principal Prepayment (a
"Prepayment Premium"). The Servicer shall remit to the Trustee for deposit
into the Prepayment Premium Account, daily, within one Business Day of receipt
thereof from subservicers, all Prepayment Premiums received by it.
Any funds on deposit in the Certificate Account and Prepayment Premium
Account may be invested in Permitted Investments. Permitted Investments are
specified in the Agreement as including certain federal government obligations
and other highly rated obligations. Any net investment income from such
Permitted Investments will be for the benefit of [the Servicer as part of its
servicing compensation].
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HAZARD INSURANCE
The Servicer is required to cause to be maintained for each Mortgaged
Property a fire insurance policy with extended perils coverage which contains a
standard mortgagee's clause in an amount at least equal to the lesser of (a)
the replacement cost of the improvements on such Mortgaged Property or (b) the
current principal balance of such Mortgage Loan. As set forth above, all
amounts collected by the Servicer under any hazard policy (except for amounts
to be applied to the restoration or repair of the Mortgaged Property or
released to the borrower in accordance with the Servicer's normal servicing
procedures or the terms of the Mortgage Loan), to the extent they constitute
Net Liquidation Proceeds or insurance proceeds, will ultimately be deposited in
the Certificate Account. The ability of the Servicer to assure that hazard
insurance proceeds are appropriately applied may be dependent on its being
named as an additional insured under any hazard insurance policy, or upon the
extend to which information in this regard is furnished to the Servicer by a
borrower. The Agreement provides that the Servicer may satisfy its obligation
to cause hazard policies to be maintained by maintaining a blanket policy
issued by an insurer acceptable to the Rating Agency and fire insurance with
extended perils coverage on the Mortgage Loans. If such blanket policy
contains a deductible clause, the Servicer is obligated to deposit in the
Certificate Account the sums which would have been deposited therein but for
such clause.
If the properties securing the Mortgage Loans have appreciated in
value and if the amount of hazard insurance maintained on the improvements
securing the Mortgage Loans were to decline as the principal balances owing
thereon decreased, hazard insurance proceeds could be insufficient to restore
fully the damaged property in the event of a partial loss. See "Description of
the Offered Certificates -- Subordination of the Subordinate Certificates"
above for a description of the protection afforded to holders of the Class A
Certificates and, to a lesser extent, the Class B Certificates against losses
occasioned by hazards which are otherwise uninsured against (including losses
caused by the application of the co-insurance clause described in the preceding
paragraph).
If the protection afforded the Owners of the Class B Certificates by
the subordination of the Class C Certificates is exhausted, and if a borrower
defaults on his obligations to make payments on a Mortgage Loan, the Owners of
the Class B Certificates will bear all risk of loss resulting from hazard
losses not covered by hazard insurance. Once the Class Principal Balance is
reduced to zero, all such remaining losses will be by the Owners of the Class A
Certificates.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Servicer will foreclose upon or otherwise comparably convert the
ownership of Mortgaged Properties securing such of the Mortgage Loans as come
into default when, in accordance with applicable servicing procedures under the
Agreement, no satisfactory arrangements can be made for the collection of
delinquent payments and the Servicer determines that such action is in the best
economic interest of the Certificateholders. In connection with such
foreclosure or other conversion, the Servicer will follow such practices as it
deems necessary or advisable and as are in keeping with the Servicer's
multifamily mortgage loan servicing activities and with the Servicing Standard,
provided the Servicer will not expend its own funds in connection foreclosure
or other conversion, correction of a default on a senior mortgage or
restoration of any property unless such foreclosure, correction or restoration
is determined to be in the best economic interest of the Trust. Any Mortgaged
Property so acquired by the Mortgage Trust is required to be disposed of in
accordance with applicable federal income tax law and regulations and
consistent with the status of the Trust Fund and the Mortgage Trust as REMICs,
which regulations currently require that such disposition occur within two
years of the acquisition. The Agreement will provide that the Servicer, acting
on behalf of the Trust, may not acquire title to a Mortgaged Property or take
over its operation unless the Servicer has previously determined, based on a
report prepared by an independent person who regularly conducts environmental
audits, that the Mortgaged Property is in compliance with applicable
environmental laws or that it would be in the best economic interest of the
Trusts to take the actions necessary to comply with such laws. [Special
Servicer requirements.]
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal servicing compensation (the "Servicing Fee") to be paid
to the Servicer in respect of its servicing activities relating to the
Certificates will be paid to it with respect to each Distribution Date by
withholding from funds to be deposited into the Certificate Account out of
collections on the Mortgage Loans in an amount equal
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to, as to each Mortgage Loan, one-twelfth of the product of (i) the rate set
forth in the Mortgage Loan Schedule (the "Servicing Fee Rate") and (ii) the
Unpaid Principal Balance of such Mortgage Loan as of such Distribution Date.
All assumption fees, late payment charges and extension and other
administrative charges, to the extent collected from borrowers, will be
[retained by the Servicer]. The amounts of late charges are limited by state
law and range from __% to __% of the late monthly payment. [Assumption fees
range from __% to __% of the outstanding amount of the Mortgage Loan.]
The Servicer will pay certain ongoing expenses associated with the
Trust and incurred by it in connection with its responsibilities under the
Agreement, including, without limitation, payment of the fees and disbursements
of the Trustee, any custodian appointed by the Trustee and any paying agent.
In addition, as indicated in the preceding section, the Servicer will be
entitled to reimbursement for certain expenses incurred by it in connection
with defaulted Mortgage Loans and in connection with the restoration of
Mortgaged Properties, such right of reimbursement being prior to the rights of
Certificateholders to receive any related insurance proceeds or Liquidation
Proceeds.
EVIDENCE AS TO COMPLIANCE
On or before __________ in each year, beginning with __________,
199__, the Servicer at its expense is required to cause a firm of independent
public accountants to furnish a statement to the Trustee to the effect that
such firm has examined, for the preceding calendar year, certain documents and
records related to the servicing of mortgage loans under pooling and servicing
agreements (including the Agreement) substantially similar to the Agreement and
such examination, which as been conducted substantially in compliance with the
Uniform Single Audit Program for Mortgage Bankers, has disclosed no items of
noncompliance with the provisions of the Agreement which, in the opinion of the
firm, are material, except for such items as will be referred to in the report.
The Agreement will also provide for delivery (on or before __________
in each year, commencing with __________, 199__) to the Trustee of an annual
statement signed by an officer of the Servicer to the effect that the Servicer
has fulfilled its material obligations under the Agreement throughout the
preceding year.
CERTAIN MATTERS REGARDING THE SERVICER
The Agreement will provide that the Servicer may not resign from its
obligations and duties thereunder unless (i) its duties thereunder are no
longer permissible under applicable law or (ii) the Servicer no longer wishes
to be Servicer and has proposed a successor Servicer that (a) is reasonably
acceptable to the Trustee (b) whose appointment will not result in a reduction
of the rating assigned to the Offered Certificates or the Class C Certificates
and (c) is approved in writing by Owners of Percentages Interest aggregating
not less than 50% of each Class of Certificate then Outstanding.
The Agreement will also provide that neither the Servicer, nor any
director, officer, employee or agent of the Servicer will be under any
liability to the Trust Fund or the Owners of the Certificates for any action
taken or for refraining from the taking of any action in good faith pursuant to
the Agreement, or for errors in judgment; provided, however, that neither the
Servicer nor any such person will be protected against any liability which
would otherwise be imposed by reason of misfeasance, bad faith or negligence in
the performance of duties or by reason of reckless disregard of obligations and
duties thereunder. The Agreement will further provide that the Servicer and
any director, officer, employee or agent of the Servicer is entitled to
indemnification by the Trust Fund and will be held harmless against any loss,
liability or expense incurred in connection with any legal action relating to
the Agreement or the Owners of the Certificates, other than any loss, liability
or expense related to any specific Mortgage Loan or Mortgage Loans (except any
such loss, liability or expense otherwise reimbursable pursuant to the
Agreement) and any loss, liability or expense incurred by reason of reckless
disregard of obligations and duties thereunder. In addition, the Agreement
will provide that the Servicer will not be under any obligation to appear in,
prosecute or defend any legal action which is not incidental to its duties
under the Agreement and which in its opinion may involve it in any expense or
liability. The Servicer may, however, in its discretion undertake any such
action which it may deem necessary or desirable with respect to the Agreement
and the rights and duties of the parties thereto and the interests of the
Owners of the Certificates thereunder. In such event, the legal expenses and
costs of such action and any liability resulting therefrom will be expenses,
costs and liabilities of the Trust Fund and the Servicer will be entitled to be
reimbursed therefor from time to time on one or more Distribution Dates, only
out of the Available Funds for such Distribution
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Date that remain after the distributions to the Certificateholders for such
Distribution Date have been made. The Servicer's right to such indemnity or
reimbursement will survive any resignation or termination of the Servicer (and
will survive any termination of the Agreement if the Servicer is still serving
as the servicer at such termination) with respect to any losses, expenses,
costs or liabilities arising prior to such resignation or termination (or
arising from events that occurred prior to such resignation or termination).
Any such claims by or on behalf of the Certificateholders or the Trust Fund
will be made only against the Servicer, who will be liable with respect to its
own acts and omissions as well as the acts and omissions of its directors,
officers, employees and agents.
Any corporation into which the Servicer may be merged or consolidated,
or any corporation resulting from any merger, conversion or consolidation to
which the Servicer will be a party, or any corporation succeeding to the
business of the Servicer, which executes an agreement of assumption to perform
every obligation of the Servicer under the Agreement, will be the successor of
the Servicer thereunder, without the execution or filing of any other paper or
any further act on the part of any of the parties thereto, anything therein to
the contrary notwithstanding.
EVENTS OF DEFAULT
Events of Default under the Agreement will consist of (i) a failure by
the Servicer to deposit in the Certificate Account any deposit required to be
made under the Agreement, which failure continues unremedied for five business
days after the giving of written notice of such failure to the Servicer by the
Trustee, or to the Servicer and the Trustee by holders of the Certificates of
any class evidencing, as to such Class, Percentage Interests aggregating not
less than 25%; (ii) any failure by the Servicer duly to observe or perform in
any material respect any of its other covenants or agreements in the Agreement
which materially affects the Certificateholders and continues, unremedied for
60 days after the giving of written notice of such failure to the Servicer by
the Trustee, or to the Servicer and the Trustee by holders of the Certificates
of any class evidencing, as to such Class, Percentage Interests aggregating not
less than 25%; and (iii) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings regarding the
Servicer and certain actions by the Servicer indicating its insolvency or
inability to pay its obligations.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default remains unremedied by the Servicer, the
Depositor or the Trustee may, or at the written direction of the Owners of
Certificates evidencing not less than 51% of the Ownership Interests in the
Trust Fund (for the purposes of this percentage, the Class B, Class R and Class
RL Certificateholders shall be deemed to hold 0% of the Ownership Interests in
the Trust Fund) shall, terminate all the rights and obligations of the Servicer
under the Agreement in and to the Mortgage Loans, whereupon the Trustee will
succeed to all the responsibilities, duties and liabilities of the Servicer
under the Agreement and will be entitled to similar compensation arrangements;
provided, however, that the Trustee may waive any default by the Servicer in
the performance of its obligations under the Agreement and its consequences,
except that a default in the making of any required distribution on any of the
Certificates may only be waived with the consent of the Owners of Certificates
of each Class affected thereby, voting as a Class, evidencing, as to each such
Class, Percentage Interests aggregating not less than 66%]. Upon any such
waiver of a past default, such default shall cease to exist, and any Event of
Default arising therefrom shall be deemed to have been remedied for every
purpose of the Agreement. No such waiver shall extend to any subsequent or
other default or impair any right contingent thereon except to the extent
expressly so waived.
In the event that the Trustee would be obligated to succeed the
Servicer but is unwilling or unable so to act, it may appoint, or petition a
court of competent jurisdiction for the appointment of, any established housing
and home finance institution that is then servicing a multi-family mortgage
loan portfolio and with a net worth of at least $__________ to act as successor
to the Servicer under the Agreement. Pending such appointment, the Trustee is
obligated to act in such capacity, unless the Trustee is prohibited by law from
so acting. The Trustee and such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
to the initial Servicer under the Agreement.
No Certificateholder will have any right under the Agreement to
institute any proceeding with respect to the Agreement unless such holder
previously has given to the Trustee written notice of default and unless
holders of Certificates of any Class evidencing, as to such Class, Percentage
Interests aggregating not less than 25% have made
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written request upon the Trustee to institute such proceeding in its own name
as Trustee thereunder and have offered to the Trustee reasonable indemnity and
the Trustee for 60 days after the receipt of such request and after the
indemnity has neglected or refused to institute any such proceeding. The
Trustee will be under no obligation to exercise any of the trusts or powers
vested in it by the Agreement or to make any investigation of matters arising
thereunder or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the Owners of the
Certificates covered by the Agreement, unless such Owners of the Certificates
have offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred therein or thereby.
AMENDMENT
The Agreement may be amended from time to time by the Servicer, the
Depositor, the Seller and the Trustee without the consent of any of the Owners
of the Certificates (a) to cure any error or any ambiguity or to correct or
supplement any provisions therein which may be inconsistent with any other
provisions therein, (b) to add to the duties or obligations of the Servicer
thereunder, (c) to maintain or improve the rating of the Class A Certificates
or the Class B Certificates then given by a Rating Agency (it being understood
that after obtaining the initial ratings of the Class A and Class B
Certificates, none of the Depositor, the Servicer or the Trustee is obligated
to maintain or improve such ratings), or (d) to add any other provisions with
respect to matters or questions arising under the Agreement; provided, however,
that such action will not, as evidenced by an Opinion of Counsel, adversely
affect in any material respect the interests of any Owner of a Certificate.
The Agreement may also be amended from time to time by the Servicer, the
Depositor, and the Trustee, with the consent of the Owners of Certificates of
each Class affected thereby evidencing, as to such Class, Percentage Interests
aggregating not less than 51% for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of the Agreement or
of modifying in any manner the rights of Owners of the Certificates; provided,
however, that no such amendment will (a) reduce in any manner the amount of, or
delay the timing of, collections of payments on Mortgage Loans or distributions
which are required to be made on any Certificate without the consent of the
Owner of such Certificate or (b) reduce the aforesaid percentage required to
consent to any such amendment, without the consent of the Owners of all
Certificates then outstanding. The Agreement may also be amended from time to
time, without the consent of the Owners of the Certificates, with regard to
certain REMIC matters.
TERMINATION; RETIREMENT OF THE CERTIFICATES
The obligations created by the Agreement will terminate upon the
payment to Owners of the Certificates of all amounts held in the Certificate
Account or by the Servicer and required to be paid to them pursuant to the
Agreement following the earlier of (i) the final payment or other liquidation
of the last Mortgage Loan subject thereto or the disposition of all property
acquired upon foreclosure of any such Mortgage Loan and (ii) the repurchase by
the Servicer from the Mortgage Trust of all remaining Mortgage Loans and all
property acquired in respect of such Mortgage Loans, as described below. In no
event, however, will the trust created by the Agreement continue beyond the
expiration of 21 years from the death of the last to survive of certain persons
described in the Agreement. Written notice of termination of the Agreement
will be given to each Certificateholder, and the final distribution will be
made only upon surrender and cancellation of the Certificates at an office or
agency appointed by the Trustee which will be specified in the notice of
termination.
At its option, the Depositor may repurchase from the Mortgage Trust
all remaining Mortgage Loans held by the Mortgage Trust at a price equal to the
greater of (a) the sum of (x) 100% of the Unpaid Principal Balance of each
Mortgage Loan (other than any Foreclosed Mortgage Loan represented by REO
Property whose fair market value is included pursuant to clause (y) below) as
of the Distribution Date upon which the proceeds of any repurchase are to be
distributed and (y) the fair market value of all Foreclosed Mortgage Loans
represented by REO Property. The right of the Depositor to make any such
purchase is conditioned upon the Pool Principal Balance being less than 10% of
the Cut- Off Date Pool Principal Balance. The termination of the Trusts is
required to be effected in a manner consistent with applicable federal income
tax regulations and their status as REMIC's.
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THE TRUSTEE
____________________, a __________ banking association organized under
the laws of the United States, is the Trustee. Its Corporate Trust Office is
located at _________________________. The Depositor may also remove the
Trustee under certain circumstances, including, among others, failure of the
Trustee to continue to satisfy the eligibility requirements described in the
Agreement or adjudication of the Trustee as bankrupt or insolvent. Upon
becoming aware of such circumstances, the Depositor will be obligated to
appoint a successor Trustee. The Trustee may resign from its duties as Trustee
under the Agreement. Any resignation or removal of the Trustee and appointment
of a successor Trustee will not become effective until acceptance of the
appointment by the successor Trustee.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of certain of the material
anticipated federal income tax consequences of the purchase, ownership and
disposition of the Offered Certificates is to be considered only in connection
with "Certain Federal Income Tax Consequences" in the Prospectus. The
discussion herein and in the Prospectus is based upon laws, regulations,
rulings and decisions now in effect, all of which are subject to change. The
discussion below and in the Prospectus does not purport to deal with all
federal tax consequences applicable to all categories of investors, some of
which may be subject to special rules. Investors should consult their own tax
advisors in determining the federal, state, local and any other tax
consequences to them of the purchase, ownership and disposition of the Offered
Certificates.
REMIC ELECTIONS
The Trustee will cause an election to be made to treat the Trust as a
"real estate mortgage investment conduit" ("REMIC") for federal income tax
purposes. Arter & Hadden, special tax counsel, will deliver its opinion to the
Depositor that for federal income tax purposes, assuming (i) the REMIC election
is made and (ii) compliance with the Agreement, the Trust will be treated as a
REMIC, each Class of Offered Certificates will be treated as "regular
interests" in the REMIC and the Class R Certificates will be treated as the
sole class of "residual interests" in the REMIC. For federal income tax
purposes, regular interests in a REMIC are treated as debt instruments issued
by the REMIC on the date on which those interests are created, and not as
ownership interests in the REMIC or its assets. Owners of Offered Certificates
that otherwise report income under a cash method of accounting will be required
to report income with respect to such Offered Certificates under an accrual
method. The Offered Certificates may be issued with "original issue discount"
for federal income tax purposes. The prepayment assumption to be used in
determining whether any Class of Offered Certificates is issued with original
issue discount and the rate of accrual of original issue discount is ___%. No
representation is made that any of the Mortgage Loans will prepay at this rate
or any other rate. See "Certain Federal Income Tax
Consequences--REMICS--Taxation of Holders of REMIC Regular Securities--Original
Issue Discount" in the Prospectus.
Although not free from doubt, it is anticipated that the Class S-A
Certificates will be treated as issued with original issue discount in an
amount equal to the excess of all payments thereon over their issue price
(including accrued interest), and the Trustee intends to report income in
respect of such Class of Certificates in this manner. Under this method, any
"negative" amounts of original issue discount attributable to rapid prepayments
would not be deductible currently, but would be offset against future positive
accruals of original issue discount, if any. Finally, a Class S-A
Certificateholder may be entitled to a loss deduction to the extent it becomes
certain that such holder will not recover a portion of its remaining basis in
the Class S-A Certificate, assuming no further prepayments.
ERISA CONSIDERATIONS
Any Plan fiduciary which proposes to cause a Plan to acquire any of
the Offered Certificates should consult with its counsel with respect to the
potential consequences under the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and the Code, of the Plan's acquisition and
ownership of such Certificates.
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GENERAL
ERISA imposes certain restrictions on employee benefit plans subject
to ERISA ("Plans") and on persons who are parties in interest or disqualified
persons ("parties in interest") with respect to such Plans. Certain employee
benefit plans, such as governmental plans and church plans (if no election has
been made under section 410(d) of the Code), are not subject to the
restrictions of ERISA, and assets of such plans may be invested in the Class
A-1 and Class B Certificates without regard to the ERISA considerations
described below, subject to other applicable federal and state law. However,
any such governmental or church plan which is qualified under Section 401(a) of
the Code and exempt from taxation under Section 501(a) of the Code is subject
to the prohibited transaction rules set forth in Section 503 of the Code.
Investments by Plans are subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
PROHIBITED TRANSACTIONS
General. Section 406 of ERISA prohibits parties in interest with
respect to a Plan from engaging in certain transactions involving a Plan and
its assets unless a statutory or administrative exemption applies to the
transaction. Section 4975 of the Code (or, in some cases, Section 502(i) of
ERISA) imposes certain excise taxes on parties in interest which engage in
non-exempt prohibited transactions.
The United States Department of Labor ("DOL") has issued a final
regulation (29 C.F.R. Section 2510.3-101) containing rules for determining what
constitutes the assets of a Plan. This regulation provides that, as a general
rule, the underlying assets and properties of corporations, partnerships,
trusts and certain other entities in which a Plan makes an "equity investment"
will be deemed for purposes of ERISA to be assets of the Plan unless certain
exceptions apply. One such exception provides that if less than 25% of the
value of the Certificates outstanding is held by Plans, the assets of the
Trusts would not be deemed to include assets of Plans that are
Certificateholders. However, there can be no assurance that the 25% exception
described in the regulations would be satisfied with respect to the Trusts.
Under the terms of the regulation, the Trusts may be deemed to hold
plan assets by reason of a Plan's investment in a Certificate; such plan assets
would include an undivided interest in the Mortgage Loans and any other assets
held by the Trusts. In such an event, the Depositor, the Servicer, the Trustee
and other persons, in providing services with respect to the Mortgage Loans,
may be parties in interest, subject to the fiduciary responsibility provisions
of Title I of ERISA, including the prohibited transaction provisions of Section
406 of ERISA (and of Section 4975 of the Code), with respect to transactions
involving the Mortgage Loans unless such transactions are subject to a
statutory or administrative exemption.
[Availability of Administrative Exemption for Class A-1 and Class S-A
Certificates. The U.S. Department of Labor has granted to
___________________________ an administrative exemption (Prohibited Transaction
Exemption _______, ________________________________________ from certain of the
prohibited transaction rules of ERISA with respect to the initial purchase, the
holding and the subsequent resale by Plans of certificates representing
interests in asset-backed pass-through trusts that consist of certain
receivables, loans and other obligations that meet the conditions and
requirements of PTE ______. The receivables covered by the exemption include
mortgage loans such as the Mortgage Loans. The exemption will apply to the
acquisition, holding and resale of the Class A-1 and Class S-A Certificates by
a Plan, provided that certain conditions (certain of which are described below)
are met.
Among the conditions which must be satisfied for PTE ______ to apply
to the Class A-1 and Class S-A Certificates are the following:
(1) The acquisition of the Class A-1 and Class S-A Certificates by a
Plan is on terms (including the price for the Class A-1 and Class S-A
Certificates) that are at least as favorable to the Plan as they would be in an
arm's-length transaction with an unrelated party;
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<PAGE> 275
(2) The rights and interests evidenced by the Class A-1 and Class S-A
Certificates acquired by the Plan are not subordinated to the rights and
interests evidenced by other certificates of the Trust Fund;
(3) The Class A-1 and Class S-A Certificates acquired by the Plan
have received a rating at the time of such acquisition that is in one of the
three highest generic rating categories from any of S&P, Moody's, Duff & Phelps
Credit Rating Co. or Fitch Investors Service, Inc.;
(4) The Trustee is not an affiliate of any member of the Restricted
Group (as defined below);
(5) The sum of all payments made in connection with the resale of the
Class A-1 and Class S-A Certificates represents not more than reasonable
compensation for reselling the Class A-1 and Class S-A Certificates. The sum
of all payments made to and retained by the Depositor pursuant to the sale of
the Mortgage Loans to the Mortgage Trust represents not more than the fair
market value of such Mortgage Loans. The sum of all payments made to and
retained by the Servicer represents not more than reasonable compensation for
the Servicer's services under the Agreement and reimbursement of the Servicer's
reasonable expenses in connection therewith; and
(6) The Plan investing in the Class A-1 and Class S-A Certificates is
an "accredited investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the 1933 Act.
Moreover, PTE _______ would provide relief from certain
self-dealing/conflict of interest prohibited transactions only if, among other
requirements, (i) in the case of the acquisition of Class A-1 and Class S-A
Certificates in connection with the initial issuance, at least fifty percent
(50%) of the Class A-1 and Class S-A Certificates are acquired by persons
independent of the Restricted Group (as defined below), (ii) the Plan's
investment in Class A-1 or Class S-A Certificates does not exceed twenty-five
percent (25%) of all of the Class A-1 and Class S-A Certificates outstanding at
the time of the acquisition and (iii) immediately after acquisition, no more
than twenty-five percent (25%) of the assets of the Plan are invested in
certificates representing an interest in one or more trusts containing assets
sold or serviced by the same entity. PTE ____ does not apply to Plans sponsored
by the Servicer, the Depositor, the Trustee, any obligor with respect to
Mortgage Loans included in the Mortgage Trust constituting more than five
percent of the aggregate unamortized principal balance of the assets in the
Mortgage Trust, or any affiliate of such parties (the "Restricted Group")
____ believes that the exemption will apply to the acquisition and
holding of the Class A-1 and Class S-A Certificates by Plans and that all
conditions of the exemption other than those within the control of the
investors have been met. [In addition, as of the date hereof, there is no
single obligor with respect to Mortgage Loans included in the Mortgage Trust
that constitutes more than five percent of the aggregate unamortized principal
balance of the assets of the Mortgage Trust.]
Under current law the purchase and holding of the Class B Certificates
by or on behalf of any Plan subject to the fiduciary responsibility provisions
of ERISA may result in "prohibited transactions" within the meaning of ERISA
and the Code. [No transfer of a Class B Certificate or any interest therein
may be made to any Plan or other retirement arrangement, including individual
retirement accounts and annuities, Keogh plans and collective investment and
separate accounts in which such plans, accounts or arrangements are invested
that is subject to ERISA or the Code unless the prospective transferee of the
Class B Certificate provides the Trustee with a representation letter and an
opinion of counsel, each in the form required under the Agreement. See "ERISA
Considerations" herein and in the Prospectus.]
Review By Plan Fiduciaries. Due to the complexity of these rules and
the penalties imposed upon persons involved in prohibited transactions, it is
especially important that any Plan fiduciary who proposes to cause a Plan to
purchase Class A-1 or Class S-A Certificates should consult with its own
counsel with respect to the potential consequences under ERISA and the Code of
the Plan's acquisition and ownership of Class A-1 or Class S-A Certificates.
Assets of a Plan or individual retirement account should not be invested in the
Class A-1 and Class S-A Certificates unless it is clear that the assets of the
Trusts will not be plan assets or unless it is clear that the PTE ______ or a
prohibited transaction class exemption will apply and exempt all potential
prohibited transactions.
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<PAGE> 276
LEGAL INVESTMENT CONSIDERATIONS
[As long as the Class A Certificates are rated in one of the two
highest rating categories by at least one nationally recognized statistical
rating organization, the Class A Certificates will constitute "mortgage related
securities" within the meaning of SMMEA and as such will be legal investments
for persons, trusts, corporations, partnerships, associations, business trusts
and business entities (including depository institutions, life insurance
companies and pension funds) created pursuant to or existing under the laws of
the United States or of any State whose authorized investments are subject to
state regulation to the same extent that, under applicable law, obligations
issued by or guaranteed as to principal and interest by the United States or
any agency or instrumentality thereof constitute legal investments for such
entities. Under SMMEA, however, if a State enacted legislation on or prior to
October 3, 1991 specifically limiting the legal investment authority of any
such entities with respect to "mortgage related securities," such securities
will constitute legal investments for entities subject to such legislation only
to the extent provided therein. Certain States have enacted legislation which
overrides the preemption provisions of SMMEA.
SMMEA has amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and
loan associations and federal savings banks may invest in, sell or otherwise
deal with "mortgage related securities" without limitation as to the percentage
of their assets represented thereby, federal credit unions may invest in such
securities, and national banks may purchase such securities for their own
account without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. 24 (seventh), subject in each case to such
regulations as the applicable federal regulatory authority may prescribe.]
The [Class B] Certificates will not be "mortgage securities" for
purposes of SMMEA. As a result, the appropriate characterization of the [Class
B] Certificates under various legal investment restrictions, and thus the
ability of investors subject to these restrictions to purchase the [Class B]
Certificates, is subject to significant interpretive uncertainties.
The Depositor makes no representation as to the ability of particular
investors to purchase the Offered Certificates under applicable legal
investment or restrictions. All institutions whose investment activities are
subject to legal investments and regulations, regulatory requirements or review
by regulatory authorities should consult with their own advisors in determining
whether and to what extent the Offered Certificates constitute legal
investments for or are subject to investment, capital or other restrictions.
RATINGS
It is a condition to the issuance of the Offered Certificates that the
Class A-1 and Class S-A Certificates each be rated no lower than "AAA" by S&P
and "Aaa" by Moody's and that the Class B Certificates be rated no lower than
"____" by _____. A security rating is not a recommendation to buy, sell or
hold securities and may be subject to revision or withdrawal at any time by the
assigning rating agency. Each security rating should be evaluated
independently of any other security rating.
The ratings assigned by the Rating Agencies to mortgage pass-through
certificates address the likelihood of the receipt by certificateholders of all
distributions to which such certificateholders are entitled. The ratings
assigned to mortgage pass-through certificates do not constitute a statement
regarding the frequency or extent of principal prepayments. The ratings do not
address the possibility that certificateholders might receive a lower than
anticipated yield on their investment.
Ratings which are assigned to securities such as the Class S-A
Certificates generally evaluate the ability of the seller (i.e., the Trust) and
any guarantor (i.e., the Certificate Insurer) to make payments, as required by
such securities. The amounts distributable on the Class S-A Certificates
consist only of interest. In general, the ratings address credit risk and not
prepayment risk. If all of the Home Equity Loans were to prepay in the initial
month, with the result that investors in the Class S-A Certificates receive
only a single month's interest and thus suffer a nearly complete loss of their
investment, all amounts "due" to such Owners will nevertheless have been paid,
and such result is consistent with the "AAAr/Aaa" ratings received on the Class
S-A Certificates.
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<PAGE> 277
The "r" symbol is appended to the rating by Standard & Poor's of the
Class S-A Certificates because they are interest-only Certificates that
Standard & Poor's believes may experience high volatility or high variability
in expected returns due to non-credit risks created by the terms of such
Certificates. The absence of an "r" symbol in the rating of the other Classes
of Class A Certificates should not be taken as an indication that such
Certificates will experience no volatility or variability in total return.
UNDERWRITING
Under the terms and subject to the conditions set forth in the
Underwriting Agreement for the sale of the Offered Certificates, the Depositor
has agreed to cause the Trust to sell and ___________________ (the
"Underwriters") have agreed to purchase the Offered Certificates.
In the Underwriting Agreement, the Underwriters have agreed, subject
to the terms and conditions set forth therein, to purchase, the entire
principal amount of each Class of Offered Certificates.
The Underwriters have advised the Depositor that they propose to offer
the Offered Certificates for sale from time to time in one or more registered
transactions or otherwise, at market prices prevailing at the time of sale, at
prices related to such market prices or at negotiated prices. The Underwriters
may effect such transactions by selling such Certificates to or through
dealers, and such dealers may receive compensation in the form of underwriting
discounts, concessions or commissions from the Underwriters or purchasers of
the Offered Certificates for whom they may act as agent. Any dealers that
participate with the Underwriters in the distribution of the Offered
Certificates purchased by the Underwriters may be deemed to be underwriters,
and any discounts or commissions received by them or the Underwriters and any
profit on the resale of Offered Certificates by them or the Underwriters may be
deemed to be underwriting discounts or commissions under the Securities Act.
The Seller has agreed to indemnify the Underwriters against certain
liabilities including liabilities under the Securities Act of 1933.
The Depositor has been advised by the Underwriters that the
Underwriters presently intends to make a market in each Class of Offered
Certificates, as permitted by applicable laws and regulations. The
Underwriters are not obligated, however, to make a market in either Class of
Offered Certificates and such market-making may be discontinued at any time at
the sole discretion of the Underwriters. Accordingly, no assurance can be
given as to the liquidity of, or trading markets for, the Offered Certificates.
LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Depositor by
______________________________________ and by L. Keith Blackwell, General
Counsel to the Depositor. Certain legal matters relating to insolvency issues
and certain federal income tax matters concerning the Certificates will be
passed upon for the Depositor by ___________. Certain legal matters relating
to the validity of the Certificates will be passed upon for the Underwriter by
________________________.
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<PAGE> 278
EXHIBIT A
MORTGAGE LOAN SCHEDULE
A-1
<PAGE> 279
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
<S> <C>
accredited investor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-41
Additional Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-32
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-32
Appraised Values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-17
Balloon Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-12
Book Entry Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-23
CERCLA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-10
Certificate Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-34
Certificate Registrar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-22
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Class A-1 Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Class A-1 Pass-Through Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
Class B Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Class B Pass-Through Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
Class B Principal Distribution Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4
Class C Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Class Principal Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-24
Class R Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Class RL Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Class S-A Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Class S-A Pass-Through Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
Class A-1 Principal Distribution Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
Clearing Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-22
Clearing Agency Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-22
Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
CPR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-29
Cut-Off Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Default Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-20
Defective Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-32
Depositor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
DOL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-40
equity investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-40
ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-20
Final Scheduled Distribution Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6
Liquidated Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-25
Liquidation Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-34
Liquidation Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-34
Lower Tier REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
MAI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-19
Master Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Monthly Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
Monthly Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-24
Monthly Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-26
Moody's . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7
Mortgage Files . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-32
Mortgage Loan Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-15
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
Mortgage Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-20
mortgage related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
Mortgage Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
Mortgaged Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
Net Liquidation Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-34
Net Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-16
Notional Principal Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Offered Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Original Class A-1 Principal Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Originator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
Outstanding Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-24
Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-22
parties in interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-40
Payment Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-22
Percentage Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-22
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-40
Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-21
Prepayment Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-34
Prepayment Premium Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-34
Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7
Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-32
Rating Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7
Realized Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
REO Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-34
Residual Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Restricted Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-41
S&P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7
Scheduled Final Distribution Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-31
Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
Senior Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Servicing Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-35
Servicing Fee Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6
Servicing Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-33
SMMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
Special Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
SREA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-19
SRPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-19
superlien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-10
The Mortgage Trust-Underwriting Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
Underwriter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-43
Unpaid Delinquent Maturity Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-24
Unpaid Principal Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-24
Weighted average life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-29
accredited investor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-42
Additional Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-33
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-33
Appraised Values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-17
Balloon Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-12
Book Entry Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-23
CERCLA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-10
Certificate Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-35
Certificate Registrar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-23
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Class A-1 Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Class A-1 Pass-Through Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
Class B Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Class B Pass-Through Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
Class B Principal Distribution Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4
Class C Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Class Principal Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-25
Class R Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Class RL Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Class S-A Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Class S-A Pass-Through Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
Class A-1 Principal Distribution Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4
Clearing Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-23
Clearing Agency Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-23
Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
CPR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-30
Cut-Off Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Default Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-21
Defective Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-33
Depositor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
DOL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-41
equity investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-41
ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-21
Final Scheduled Distribution Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6
Liquidated Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-25
Liquidation Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-35
Liquidation Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-35
Lower Tier REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
MAI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-20
Master Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Monthly Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
Monthly Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-25
Monthly Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-26
Moody's . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7
Mortgage Files . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-33
Mortgage Loan Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-15
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
Mortgage Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-20
mortgage related securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-9
Mortgage Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
Mortgaged Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
Net Liquidation Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-35
Net Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-16
Notional Principal Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Offered Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Original Class A-1 Principal Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Originator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
Outstanding Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-25
Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-23
parties in interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-41
Payment Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-23
Percentage Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-23
Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-41
Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-21
Prepayment Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-35
Prepayment Premium Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-35
Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7
Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-33
Rating Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7
Realized Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
REO Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-35
Residual Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Restricted Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-42
S&P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7
Scheduled Final Distribution Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-32
Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
Senior Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Servicing Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-37
Servicing Fee Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6
Servicing Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-34
SMMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-9
Special Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
SREA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-20
SRPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-20
superlien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-10
The Mortgage Trust-Underwriting Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
Underwriter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-44
Unpaid Delinquent Maturity Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-25
Unpaid Principal Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-25
Weighted average life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-30
</TABLE>
<PAGE> 280
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
REPORTS TO CERTIFICATEHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-10
THE MORTGAGE TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-14
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-21
THE DEPOSITOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-21
THE SELLER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-21
THE SERVICER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-21
MASTER SERVICER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-22
SPECIAL SERVICER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-22
DESCRIPTION OF THE OFFERED CERTIFICATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-22
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-28
DESCRIPTION OF THE POOLING AND SERVICING AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-32
CERTAIN FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-39
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-39
LEGAL INVESTMENT CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-42
RATINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-42
UNDERWRITING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-43
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-43
</TABLE>
APPENDIX A INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
EXHIBIT A MORTGAGE LOAN SCHEDULE
<PAGE> 281
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* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. *
* A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY *
* NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PRELIMINARY *
* PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION *
* OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN *
* ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL *
* PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF *
* ANY SUCH STATE. *
* *
***************************************************************************
Preliminary Prospectus Dated June 24, 1997
MORTGAGE PASS-THROUGH CERTIFICATES
(Issuable in Series)
AMRESCO RESIDENTIAL SECURITIES CORPORATION
(DEPOSITOR)
This Prospectus relates to Mortgage Pass-Through Certificates to be
issued from time to time in one or more series (and one or more classes within
a series), certain classes of which may be offered on terms determined at the
time of sale and described in this Prospectus and the related Prospectus
Supplement. Each Certificate will be issued by a separate trust (each, a
"Trust") and will evidence a beneficial ownership interest in a Trust. The
assets of a Trust will include one or more of the following: (i) multifamily
or commercial mortgage loans and/or installment contracts for the sale of
multifamily or commercial properties; (ii) multifamily or commercial
mortgage-backed securities representing an interest in, or that are secured by
pledges of, multifamily or commercial loans; and (iii) reinvestment income,
reserve funds, cash accounts, insurance policies, guaranties, letters of credit
or other assets as described in the related Prospectus Supplement.
One or more classes of Certificates of a series may be (i) entitled to
receive distributions allocable to principal, principal prepayments, interest
or any combination thereof prior to one or more other classes of Certificates
of such series or after the occurrence of certain events and (ii) subordinated
in the right to receive such distributions to one or more senior classes of
Certificates of such series, in each case as specified in the related
Prospectus Supplement. Interest on each class of Certificates entitled to
distributions allocable to interest will accrue at a fixed rate or at a rate
that is subject to change from time to time as specified in the related
Prospectus Supplement. The Depositor or its affiliates may retain or hold for
sale from time to time one or more classes of a series of Certificates.
Distributions on the Certificates will be made at the intervals and on
the dates specified in the related Prospectus Supplement from the assets of the
related Trust and any other assets pledged for the benefit of the Certificates.
An affiliate of the Depositor may make or obtain for the benefit of the
Certificates limited representations and warranties with respect to mortgage
assets assigned to the Trust. Neither the Depositor or any affiliate will have
any other obligation with respect to the Certificates.
The yield on each class of Certificates of a series will be affected by
the rate of payment of principal (including prepayments) on mortgage assets in
the related Trust. Each series of Certificates will be subject to early
termination under the circumstances described herein and in the related
Prospectus Supplement.
It is a condition to the issuance of the Certificates that the
Certificates be rated in not less than the fourth highest rating category by a
nationally recognized rating organization.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 HEREIN AND BEGINNING ON PAGE S-10
IN THE RELATED PROSPECTUS SUPPLEMENT FOR A DISCUSSION OF SIGNIFICANT RISK
FACTORS.
See "ERISA Considerations" herein and in the related Prospectus
Supplement for a discussion of restrictions on the acquisition of Certificates
by "plan fiduciaries."
If specified in a Prospectus Supplement, an election may be made to
treat the Trust for the related series or specified portions thereof as a "real
estate mortgage investment conduit" ("REMIC") for federal income tax purposes.
See "Certain Federal Income Tax Consequences" herein and in the related
Prospectus Supplement.
AN INVESTOR SHOULD CAREFULLY REVIEW THE INFORMATION IN THE RELATED
PROSPECTUS SUPPLEMENT CONCERNING THE RISKS ASSOCIATED WITH THE DIFFERENT TYPES
AND CLASSES OF CERTIFICATES.
THE ASSETS OF A TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE RELATED
CERTIFICATES. THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION
OF THE DEPOSITOR, ANY SERVICER, ANY ORIGINATOR OR ANY OF THEIR AFFILIATES,
EXCEPT AS SET FORTH HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT. NEITHER
THE CERTIFICATES NOR THE UNDERLYING MORTGAGE ASSETS WILL BE GUARANTEED OR
INSURED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE DEPOSITOR, ANY
SERVICER, ANY ORIGINATOR OR ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH IN THE
RELATED PROSPECTUS SUPPLEMENT.
THESE CERTIFICATES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR ANY RELATED
PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Offers of the Certificates may be made through one or more different
methods, including offerings through underwriters, as more fully described
under "Plan of Distribution" herein and in the related Prospectus Supplement.
There will have been no public market for any series of Certificates
prior to the offering thereof. There can be no assurance that a secondary
market will develop for the Certificates of any series or, if it does develop,
that such market will continue.
RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE. THIS PROSPECTUS MAY NOT BE
USED TO CONSUMMATE SALES OF CERTIFICATES UNLESS ACCOMPANIED BY A PROSPECTUS
SUPPLEMENT.
THE DATE OF THIS PROSPECTUS IS _____________, 1997
<PAGE> 282
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SUMMARY OF PROSPECTUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
DESCRIPTION OF THE CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . 9
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Classes of Certificates . . . . . . . . . . . . . . . . . . . . . . . 10
Distributions of Principal and Interest . . . . . . . . . . . . . . . 11
Book Entry Registration . . . . . . . . . . . . . . . . . . . . . . . 12
List of Owners of Certificates . . . . . . . . . . . . . . . . . . . 13
THE TRUSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Mortgage-Backed Securities . . . . . . . . . . . . . . . . . . . . . 16
CREDIT ENHANCEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SERVICING OF THE MORTGAGE LOANS . . . . . . . . . . . . . . . . . . . . . . . 18
Payments on Mortgage Loans . . . . . . . . . . . . . . . . . . . . . 19
Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Collection and Other Servicing Procedures . . . . . . . . . . . . . . 20
Standard Hazard Insurance . . . . . . . . . . . . . . . . . . . . . . 20
Title Insurance Policies . . . . . . . . . . . . . . . . . . . . . . 21
Claims Under Standard Hazard Insurance Policies; Other
Realization Upon Defaulted Loans . . . . . . . . . . . . . . . 21
Servicing Compensation and Payment of Expenses . . . . . . . . . . . 21
POOLING AND ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . 22
Assignment of Mortgage Assets . . . . . . . . . . . . . . . . . . . . 22
Evidence as to Compliance . . . . . . . . . . . . . . . . . . . . . . 24
The Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Administration of the Certificate Account . . . . . . . . . . . . . . 24
Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Forward Commitments; Pre-Funding . . . . . . . . . . . . . . . . . . 26
Servicer Events of Default . . . . . . . . . . . . . . . . . . . . . 26
Rights Upon Servicer Event of Default . . . . . . . . . . . . . . . . 26
Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
THE DEPOSITOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS . . . . . . . . . . . . . . . . 28
The Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . 28
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Leases and Rents . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Installment Contracts . . . . . . . . . . . . . . . . . . . . . . . . 32
Subordinate Financing . . . . . . . . . . . . . . . . . . . . . . . . 33
LEGAL INVESTMENT MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . 33
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
CERTAIN FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . 35
Federal Income Tax Consequences For REMIC Certificates . . . . . . . 36
Taxation of Regular Certificates . . . . . . . . . . . . . . . . . . 37
Taxation of Residual Certificates . . . . . . . . . . . . . . . . . . 42
Treatment of Certain Items of REMIC Income and Expense . . . . . . . 44
Tax-Related Restrictions on Transfer of Residual Certificates . . . . 46
Sale or Exchange of a Residual Certificate . . . . . . . . . . . . . 48
Taxes That May Be Imposed on the REMIC Pool . . . . . . . . . . . . . 48
Liquidation of the REMIC Pool . . . . . . . . . . . . . . . . . . . . 49
Administrative Matters . . . . . . . . . . . . . . . . . . . . . . . 49
Limitations on Deduction of Certain Expenses . . . . . . . . . . . . 50
Taxation of Certain Foreign Investors . . . . . . . . . . . . . . . . 50
Backup Withholding . . . . . . . . . . . . . . . . . . . . . . . . . 51
Reporting Requirements . . . . . . . . . . . . . . . . . . . . . . . 51
Federal Income Tax Consequences for Certificates as to Which No
REMIC Election Is Made . . . . . . . . . . . . . . . . . . . . 52
Premium and Discount . . . . . . . . . . . . . . . . . . . . . . . . 53
Stripped Certificates . . . . . . . . . . . . . . . . . . . . . . . . 55
Reporting Requirements and Backup Withholding . . . . . . . . . . . . 57
Taxation of Certain Foreign Investors . . . . . . . . . . . . . . . . 57
Certificateholders should be aware that the IRS issued
proposed regulations on April 22, 1996, which, if adopted
in final form, could affect the United States taxation of
foreign investors owning Certificates. The proposed
regulations would apply to payments after December 31,
1997. Investors who are Non-U.S. Persons should consult
their own tax advisors regarding the specific tax
consequences to them of owning Certificates.
TAXATION OF SECURITIES CLASSIFIED AS PARTNERSHIP INTERESTS . . 58
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
RATINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS . . . . . . . . . . . . . . . A-1
</TABLE>
<PAGE> 283
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 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. See "Pooling and 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 Securities Corporation, 700
N. Pearl Street, Suite 2400, Dallas, Texas 75201 (telephone number (214) 953-
7700).
<PAGE> 284
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the Prospectus Supplement relating to a particular series of Certificates and
to the related Agreement which will be prepared in connection with each series
of Certificates. Unless otherwise specified, capitalized terms used and not
defined in this Summary of Prospectus have the meanings given to them in this
Prospectus and in the related Prospectus Supplement.
TITLE OF SECURITIES . . . . . . Mortgage Pass-Through Certificates, issuable
in series, in fully registered form or in
book entry only form, in authorized
denominations, as described in the
Prospectus Supplement (the "Certificates").
Each Certificate will represent a beneficial
ownership interest in a trust (a "Trust")
created by the Depositor from time to time
pursuant to a pooling and administration
agreement (each, an "Agreement").
THE DEPOSITOR . . . . . . . . . AMRESCO Residential Securities Corporation
(the "Depositor") is a Delaware corporation.
The Depositor's principal executive offices
are located at 700 N. Pearl Street, Suite
2400, Dallas, Texas 75201; telephone number
(214) 953-7700. See "The Depositor" herein.
The Depositor or its affiliates may retain
or hold for sale from time to time one or
more classes of a series of Certificates.
THE SERVICER . . . . . . . . . The entity or entities named as the Servicer
in the Prospectus Supplement (each, a
"Servicer"), will act as administrator, and
may act as a servicer, with respect to the
Mortgage Loans included in the related
Trust. The Servicer may be an affiliate of
the Depositor and may be the related seller
of Mortgage Assets to the Depositor (each, a
"Seller").
THE TRUSTEE . . . . . . . . . . The trustee (the "Trustee") for each series
of Certificates will be specified in the
related Prospectus Supplement.
TRUST ASSETS . . . . . . . . . The assets of a Trust will primarily be made
up of mortgage-related assets (the "Mortgage
Assets") consisting of one or more of the
following types of assets:
A. The Mortgage Loans . . . . . "Mortgage Loans" may include fixed rate or
adjustable rate (i) conventional multifamily
mortgage loans ("Conventional Multifamily
Loans") or mortgages insured by the Federal
Housing Authority (the "FHA") ("FHA-Insured
Multifamily Loans" and together with the
Conventional Multifamily Loans, "Multifamily
Loans"), in each case secured by rental
apartment buildings or projects containing
five or more residential units on mortgage
loans on apartment buildings owned by
Cooperatives (each, a "Multifamily
Property"), (ii) commercial loans secured by
office buildings, shopping centers, retail
stores, hotels or motels, nursing homes,
hospitals or other health-care related
facilities, mobile home parks, warehouse
facilities, mini-warehouse facilities or
self-storage facilities, industrial plants,
mixed use or other types of income-producing
properties or unimproved land (each, a
"Commercial Property"; a Multifamily
Property or a Commercial Property is a
"Mortgaged Property") and/or (iii)
installment contracts ("Installment
Contracts") for the sale of Multifamily
Properties or Commercial Properties.
1
<PAGE> 285
A Mortgage Loan may provide for accrual of
interest thereon at an interest rate (a
"Mortgage Loan Rate") that is fixed over
time, or that adjusts from time to time, or
that may be converted at the borrower's
election from an adjustable to a fixed
Mortgage Loan Rate, or from a fixed to an
adjustable Mortgage Loan Rate. Adjustable
rate Mortgage Loans ("Adjustable Rate
Mortgage Loans") may permit or require
periodic changes in their interest rates
("Adjustable Mortgage Loan Rates") and in
their monthly payments. Mortgage Loans may
provide for no amortization of the principal
amount prior to maturity or for a specified
period after origination, with the entire
unpaid principal balance to be paid in a
lump sum at maturity, or may provide for
full amortization of principal. The
Mortgage Loans may provide for negative
amortization. The Mortgage Loans may
provide for a prohibition on prepayment or
require payment of a premium or a yield
maintenance penalty in connection with a
prepayment. See "The Trust -- Mortgage
Loans" herein.
B. Mortgage-
Backed Securities . . . . . "Mortgage-Backed Securities" or "MBS" may
include (i) private (that is, not guaranteed
or insured by the United States or any
agency or instrumentality thereof) mortgage
participations, mortgage pass-through
certificates or other mortgage-backed
securities or (ii) certificates insured or
guaranteed by Federal Home Loan Mortgage
Corporation ("FHLMC"), Federal National
Mortgage Association ("FNMA"), Government
National Mortgage Association ("GNMA") or
the Federal Agricultural Mortgage
Corporation ("FAMC"). See "The Trust
-- Mortgage-Backed Securities" herein.
Trust Assets may also include reinvestment
income, reserve funds, cash accounts,
insurance policies, guaranties, letters of
credit or other assets as described in the
related Prospectus Supplement.
THE CERTIFICATES . . . . . . . The Certificates of any series may be issued
in one or more classes, as specified in the
Prospectus Supplement. One or more classes
of Certificates of each series (i) may be
entitled to receive distributions allocable
only to principal, only to interest or to
any combination thereof; (ii) may be
entitled to receive distributions only of
prepayments of principal throughout the
lives of the Certificates or during
specified periods; (iii) may be subordinated
in the right to receive distributions of
scheduled payments of principal, prepayments
of principal, interest or any combination
thereof to one or more other classes of
Certificates of such series throughout the
lives of the Certificates or during
specified periods; (iv) may be entitled to
receive such distributions only after the
occurrence of events specified in the
Prospectus Supplement; (v) may be entitled
to receive distributions in accordance with
a schedule or formula or on the basis of
collections from designated portions of the
assets in the related Trust; (vi) as to
Certificates entitled to distributions
allocable to interest, may be entitled to
receive interest at a fixed rate or a rate
that is subject to change from time to time;
(vii) may accrue interest, with such accrued
interest added to the principal amount of
the Certificates, and no payments being made
thereon until certain other classes of the
series have been paid in full; and (viii) as
to Certificates entitled to distributions
allocable to interest, may be entitled to
distributions
2
<PAGE> 286
allocable to interest only after the
occurrence of events specified in the
Prospectus Supplement and may accrue
interest until such events occur, in each
case as specified in the Prospectus
Supplement. The timing and amounts of such
distributions may vary among classes, over
time, or otherwise as specified in the
related Prospectus Supplement.
DISTRIBUTIONS ON
THE CERTIFICATES . . . . . . The related Prospectus Supplement will
specify (i) whether distributions on the
Certificates entitled thereto will be made
monthly, quarterly, semi-annually or at
other intervals and dates out of the
payments received in respect of the Mortgage
Assets included in the related Trust and
other assets, if any, pledged for the
benefit of the related Owners of
Certificates, (ii) the amount allocable to
payments of principal and interest on any
Distribution Date and (iii) whether all
distributions will be made pro rata to
Owners of Certificates of the class entitled
thereto.
The aggregate original principal balance of
the Certificates will equal the aggregate
distributions allocable to principal that
such Certificates will be entitled to
receive; the Certificates will have an
aggregate original principal balance equal
to the aggregate unpaid principal balance of
the related Mortgage as of the first day of
the month of creation of the Trust; and the
Certificates will bear interest in the
aggregate at a rate (the "Pass-Through
Rate") equal to the interest rate borne by
the related Mortgage net of servicing fees
and any other specified amounts.
FORWARD COMMITMENTS;
PRE-FUNDING . . . . . . . . A Trust may enter into an agreement (each, a
"Pre-Funding Agreement") with the Depositor
whereby the Depositor will agree to transfer
additional Mortgage Assets to such Trust
following the date on which such Trust is
established and the related Certificates are
issued. Any Pre-Funding Agreement will
require that any Mortgage Assets so
transferred conform to the requirements
specified in such Pre-Funding Agreement. If
a Pre-Funding Agreement is to be utilized,
the related Trustee will be required to
deposit in a segregated account (each, a
"Pre-Funding Account") all or a portion of
the proceeds received by the Trustee in
connection with the sale of one or more
classes of Certificates of the related
series; subsequently, the additional
Mortgage Assets will be transferred to the
related Trust in exchange for money released
to the Depositor from the related Pre-
Funding Account. Each Pre-Funding Agreement
will set a specified period during which any
such transfers must occur. The related
Agreement will require that, if all moneys
originally deposited to such Pre-Funding
Account are not used by the end of such
specified period, then any remaining moneys
will be applied as a mandatory prepayment of
a class or classes of Certificates as
specified in the related Prospectus
Supplement. The specified period for the
acquisition by a Trust of additional
Mortgage Assets will generally not exceed
three months from the date such Trust is
established.
OPTIONAL TERMINATION . . . . . The Servicer, the Seller, the Depositor, or,
if specified in the related Prospectus
Supplement, the Owners of a related class of
Certificates or a credit enhancer may at
their respective options effect early
retirement of a series of Certificates
through the purchase of the Mortgage Assets
in the related Trust. See "Pooling and
Administration -- Termination" herein.
3
<PAGE> 287
MANDATORY TERMINATION . . . . . The Trustee, the Servicer or certain other
entities specified in the related Prospectus
Supplement may be required to effect early
retirement of a series of Certificates by
soliciting competitive bids for the purchase
of the assets of the related Trust or
otherwise. See "Pooling and Administration
-- Termination" herein.
ADVANCES . . . . . . . . . . . The Servicer will be obligated (but only to
the extent set forth in the related
Prospectus Supplement) to advance delinquent
installments of principal and interest (less
applicable servicing fees) on the Mortgage
Loans in a Trust. Any such obligation to
make advances may be limited to amounts due
to the Owners of Certificates of the related
series, to amounts deemed to be recoverable
from late payments or liquidation proceeds,
to specified periods or any combination
thereof, in each case as specified in the
related Prospectus Supplement. Any such
advance will be recoverable as specified in
the related Prospectus Supplement. See
"Servicing of Mortgage Loans -- Advances"
herein.
CREDIT ENHANCEMENT . . . . . . A series of Certificates, or certain classes
within such series, may have the benefit of
one or more types of credit enhancement
("Credit Enhancement") including but not
limited to subordination, cross support,
reserve funds, certificate insurance,
guaranties and similar instruments and
arrangements. The protection against losses
afforded by any such Credit Enhancement will
be limited. See "Credit Enhancement"
herein.
BOOK ENTRY REGISTRATION . . . . Certificates of one or more classes of a
series may be issued in book entry form
("Book Entry Certificates") in the name of a
clearing agency (a "Clearing Agency")
registered with the Securities and Exchange
Commission, or its nominee. Transfers and
pledges of Book Entry Certificates may be
made only through entries on the books of
the Clearing Agency in the name of brokers,
dealers, banks and other organizations
eligible to maintain accounts with the
Clearing Agency ("Clearing Agency
Participants") or their nominees. Transfers
and pledges by purchasers and other
beneficial owners of Book Entry Certificates
("Beneficial Owners") other than Clearing
Agency Participants may be effected only
through Clearing Agency Participants.
Beneficial Owners will receive payments of
principal and interest, and, if applicable,
may tender Certificates for redemption to
the Trustee, only through the Clearing
Agency and Clearing Agency Participants.
All references to "Owners" shall mean
Beneficial Owners to the extent Beneficial
Owners may exercise their rights through a
Clearing Agency. See "Risk Factors -- Book
Entry Registration" and "Description of the
Certificates -- Book Entry Registration"
herein.
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES . . . . . . . . Federal income tax consequences will depend
on, among other factors, whether one or more
elections are made to treat a Trust or
specified portions thereof as a "real estate
mortgage investment conduit" ("REMIC") under
the Internal Revenue Code of 1986, as
amended (the "Code"), or, if no REMIC
election is made, whether the Certificates
are considered to be Standard Certificates,
Stripped Certificates or Partnership
Interests. The related Prospectus
Supplement for each series of Certificates
will specify which type of tax treatment
will apply to the related Certificates. See
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"Certain Federal Income Tax Consequences"
herein and in the related Prospectus
Supplement.
ERISA CONSIDERATIONS . . . . . A fiduciary of any employee benefit plan
subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"),
or the Code should carefully review with its
own legal advisors whether the purchase or
holding of Certificates could give rise to a
transaction prohibited or otherwise
impermissible under ERISA or the Code.
Certain classes of Certificates may not be
transferred unless the Trustee and the
Depositor are furnished with a letter of
representation or an opinion of counsel to
the effect that such transfer will not
result in a violation of the prohibited
transaction provisions of ERISA or the Code
and will not subject the Trustee, the
Depositor or the Servicer to additional
obligations. See "Description of the
Certificates -- General" and "ERISA
Considerations" herein and in the related
Prospectus Supplement.
LEGAL INVESTMENT MATTERS . . . Certificates may constitute "mortgage
related securities" under the Secondary
Mortgage Market Enhancement Act of 1984
("SMMEA") so long as they are rated in one
of the two highest rating categories by the
Rating Agency or Agencies identified in the
related Prospectus Supplement and, as such,
would be "legal investments" for certain
types of institutional investors to the
extent provided in SMMEA, subject to state
laws overriding SMMEA. Institutions whose
investment activities are subject to review
by federal or state regulatory authorities
should consult with their counsel or the
applicable authorities to determine whether
an investment in such Certificates complies
with applicable guidelines, policy
statements or restrictions. See "Legal
Investment Matters" herein.
USE OF PROCEEDS . . . . . . . . Substantially all the net proceeds from the
sale of a series of Certificates will be
applied to the simultaneous purchase of the
Mortgage Assets included in the related
Trust (or to reimburse the amounts
previously used to effect such purchase),
the costs of carrying the Mortgage Assets
until sale of the Certificates and to pay
other expenses. See "Use of Proceeds"
herein.
RATING . . . . . . . . . . . . Each class of Certificates offered by a
Prospectus Supplement will be rated in one
of the four highest rating categories of a
nationally recognized statistical rating
agency; provided, however, that one or more
classes of Subordinated Certificates and
Residual Certificates, which will not be so
offered, need not be so rated.
RISK FACTORS . . . . . . . . . Investment in the Certificates will be
subject to one or more risk factors,
including declines in the value of Mortgaged
Properties, prepayment of Mortgage Assets,
higher risks of defaults on particular types
of Mortgage Loans, limitations on security
for the Mortgage Loans, limitations on
Credit Enhancement and various other
factors. See "Risk Factors" herein and in
the related Prospectus Supplement.
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RISK FACTORS
Prospective investors should consider, among other things, the following
risk factors in connection with the purchase of the Certificates:
General. Mortgage Loans made on the security of a multifamily or
commercial property may entail risks of delinquency and foreclosure, and risks
of loss in the event thereof, that are greater than similar risks associated
with loans made on the security of a single-family property. The ability of a
borrower to repay a loan secured by an income-producing property typically is
dependent primarily upon the successful operation of such property rather than
upon the existence of independent income or assets of the borrower; thus, the
value of an income-producing property is directly related to the net operating
income derived from such property. If the residential or commercial real
estate market in general or a regional or local area where Mortgage Assets are
concentrated should experience an overall decline in property values or a
significant downturn in economic conditions, rates of delinquencies,
foreclosures and losses on Mortgage Loans could be higher than those now
generally experienced in the mortgage lending industry.
A number of the Mortgage Loans may be secured by liens on owner-occupied
Mortgaged Properties or on Mortgaged Properties leased to a single tenant.
Accordingly, a decline in the financial condition of the borrower or single
tenant, as applicable, may have a disproportionately greater effect on the net
operating income from such Mortgaged Properties than would be the case with
respect to Mortgaged Properties with multiple tenants. Furthermore, the value
of any Mortgaged Property may be adversely affected by risks generally incident
to interests in real property, including changes in general or local economic
conditions and/or specific industry segments; declines in real estate values;
declines in rental or occupancy rates; increases in interest rates, real estate
tax rates and other operating expenses; changes in governmental rules,
regulations and fiscal policies, including environmental legislation; acts of
God; and other factors. See "The Trusts--Mortgage Loans" herein.
In addition, additional risk may be presented by the type and use of a
particular Mortgaged Property. For instance, Mortgaged Properties that operate
as hospitals and nursing homes may present special risks to lenders due to the
significant governmental regulation of the ownership, operation, maintenance
and financing of health care institutions. Hotel and motel properties are
often operated pursuant to franchise, management or operating agreements which
may be terminable by the franchisor or operator. Moreover, the transferability
of a hotel's operating, liquor and other licenses upon a transfer of the hotel,
whether through purchase or foreclosure, is subject to local law requirements.
Multifamily Loans may be affected by excessive building resulting in an
oversupply of rental housing stock or a decrease in employment reducing the
demand for rental units in the area, by federal, state or local regulations and
controls affecting rents, prices of goods, fuel and energy consumption and
prices, water and environmental restrictions affecting new construction, by
increasing labor and materials costs, and by the relative attractiveness to
tenants of the multifamily rental projects securing the Multifamily Loans.
Repayment of a Multifamily Loan secured by an apartment building owned by a
cooperative will depend primarily on the receipt of payments from the tenant
stockholders of the cooperative and its ability to refinance the loan at
maturity.
It is anticipated that some or all of the Mortgage Loans will be
nonrecourse loans or loans for which recourse may be restricted or
unenforceable. As to those Mortgage Loans, recourse in the event of borrower
default will be limited to the specific real property and other assets, if any,
that were pledged to secure the Mortgage Loan. However, even with respect to
those Mortgage Loans that provide for recourse against the borrower and its
assets generally, there can be no assurance that enforcement of such recourse
provisions will be practicable, or that the assets of the borrower will be
sufficient to permit a recovery in respect of a defaulted Mortgage Loan in
excess of the liquidation value of the related Mortgaged Property.
Further, the concentration of default, foreclosure and loss risks in
individual Mortgage Loans will generally be greater than for pools of single-
family loans because Mortgage Loans will generally consist of a smaller number
of higher balance loans than would a pool of single-family loans of comparable
aggregate unpaid principal balance.
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Limited Obligations. The Certificates will not represent an interest in
or obligation of the Depositor. The Certificates of each series will not be
insured or guaranteed by any government agency or instrumentality, the
Depositor, the Servicer or the Seller.
Prepayment Considerations. The prepayment experience on the Mortgage
Loans and the mortgage loans underlying the Mortgage-Backed Securities (the
"Underlying Mortgage Loans") will affect the average life of each class of
related Certificates. Prepayments may be influenced by restrictions on
prepayment for specified periods or requirements for payment of prepayment
premiums which are contained in the Mortgage Loans and the Underlying Mortgage
Loans as well as by a variety of other factors, including the difference
between the interest rates on the Mortgage Loans or the Underlying Mortgage
Loans (giving consideration to the cost of refinancing) and prevailing mortgage
rates. In general, if mortgage interest rates fall below the interest rates on
the Mortgage Loans or the Underlying Mortgage Loans, the rate of prepayment
would be expected to increase. Conversely, if mortgage interest rates rise
above the interest rates on the Mortgage Loans or the Underlying Mortgage
Loans, the rate of prepayment would be expected to decrease. See "Certain
Prepayment and Yield Considerations" in the related Prospectus Supplement.
Risk of Higher Default Rates for Mortgage Loans with Balloon Payments.
A portion of the aggregate principal balance of the Mortgage Loans at any time
may be "balloon loans" that do not fully amortize (or may not amortize at all)
over their terms to maturity and, thus, provide for the payment of the
unamortized principal balance of such Mortgage Loan in a single payment at
maturity ("Balloon Loans"). Amortization of a Balloon Loan based on a
scheduled period that is longer than the term of the loan results in a
remaining principal balance at maturity that is substantially larger than the
regular scheduled payments. Mortgage Loans of this type involve a greater
degree of risk than self-amortizing loans because the ability of a borrower to
make a balloon payment typically will depend upon its ability either to fully
refinance the loan or to sell the related Mortgaged Property at a price
sufficient to permit the borrower to make the balloon payment. The ability of
a borrower to accomplish either of these goals will be affected by a number of
factors, including the value of the related Mortgaged Property, the level of
available mortgage rates at the time of sale or refinancing, the borrower's
equity in the related Mortgaged Property, the financial condition and operating
history of the borrower and the related Mortgaged Property, tax laws, rent
control laws (with respect to certain residential properties), Medicaid and
Medicare reimbursement rates (with respect to hospitals and nursing homes),
prevailing general economic conditions and the availability of credit for loans
secured by commercial or multifamily, as the case may be, real properties
generally.
Limited Liquidity. There will be no market for the Certificates of any
series prior to the issuance thereof, and there can be no assurance that a
secondary market will develop or, if it does develop, that it will provide
liquidity of investment or will continue for the life of the Certificates of
such series. The market value of the Certificates will fluctuate with changes
in prevailing rates of interest. Consequently, the sale of Certificates in any
market that may develop may be at a discount from the Certificates' par value
or purchase price. Owners of Certificates have no right to request redemption
of Certificates, and the Certificates are subject to redemption only under the
limited circumstances described in each such Prospectus Supplement
Limited Assets. Owners of Certificates of each series must rely upon
distributions on the related Mortgage Assets, together with the other specific
assets pledged for the benefit of such series (which assets may be subject to
release from such pledge prior to payment in full of the Certificates), for the
payment of principal of, and interest on, that series of Certificates. If the
assets comprising the Trust are insufficient to make payments on such
Certificates, no other assets of the Depositor will be available for payment of
the deficiency. Because payments of principal will be applied to classes of
outstanding Certificates of a series in the priority specified in the related
Prospectus Supplement, a deficiency may have a disproportionately greater
effect on the Certificates of classes having lower priority in payment. In
addition, due to the priority of payments and the allocation of losses,
defaults experienced on the assets comprising a Trust may have a
disproportionate effect on a specified class or classes within such series.
Mortgage Type. Mortgage Loans made to partnerships, corporations or
other entities may entail risks of loss from delinquency and foreclosure that
are greater than those of Mortgage Loans made to individuals. The mortgagor's
sophistication and form of organization may increase the likelihood of
protracted litigation or bankruptcy in default situations.
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Limitations, Reduction and Substitution of Credit Enhancement. Credit
Enhancement may be provided in one or more of the forms described in the
related Prospectus Supplement, including, but not limited to, prioritization as
to payments of one or more classes of such series, one or more Reserve Funds,
as defined herein, insurance, guaranties and similar instruments and
agreements, or any combination thereof. Regardless of the Credit Enhancement
provided, the amount of coverage will be limited in amount and in most cases
will be subject to periodic reduction in accordance with a schedule or formula.
Furthermore, such Credit Enhancement may provide only very limited coverage as
to certain types of losses and may provide no coverage as to certain other
types of losses. The Trustee may be permitted to reduce, terminate or
substitute all or a portion of the Credit Enhancement for any series of
Certificates, if the applicable rating agencies indicate that the then-current
rating thereof will not be adversely affected.
Original Issue Discount. All the Compound Interest Certificates (as
defined herein) will be, and certain of the other Certificates may be, issued
with original issue discount for federal income tax purposes. An Owner of a
Certificate issued with original issue discount will be required to include
original issue discount in ordinary gross income for federal income tax
purposes as it accrues, in advance of receipt of the cash attributable to such
income. Accrued but unpaid interest on the Compound Interest Certificates
generally will be treated as original issue discount for this purpose. For
this purpose, however, many issues relevant to the determination of the amount
and manner of reporting original issue discount for prepayable securities, such
as the Certificates, are not adequately addressed under the current tax rules.
See "Certain Federal Income Tax Consequences -- Federal Income Tax Consequences
for REMIC Certificates," "-- Taxation of Regular Certificates", "-- Variable
Rate Regular Certificates" and "Certain Federal Income Tax Consequences --
Federal Income Tax Consequences for Certificates as to Which No REMIC Election
Is Made -- Standard Certificates," "-- Premium and Discount," and "-- Stripped
Certificates" herein.
Book Entry Registration. Because transfers and pledges of Book Entry
Certificates may be effected only through book entries at a Clearing Agency
through Clearing Agency Participants, the liquidity of the secondary market for
Book Entry Certificates may be reduced to the extent that some investors are
unwilling to hold Certificates in book entry form in the name of Clearing
Agency Participants and the ability to pledge Book Entry Certificates may be
limited due to lack of a physical certificate. Beneficial Owners of Book Entry
Certificates may, in certain cases, experience delay in the receipt of payments
of principal and interest because such payments will be forwarded by the
Trustee to the Clearing Agency who will then forward payment to the Clearing
Agency Participants who will thereafter forward payment to Beneficial Owners.
In the event of the insolvency of the Clearing Agency or of a Clearing Agency
Participant in whose name Certificates are recorded, the ability of Beneficial
Owners to obtain timely payment and (if the limits of applicable insurance
coverage by the Securities Investor Protection Corporation are exceeded, or if
such coverage is otherwise unavailable) ultimate payment of principal and
interest on Book Entry Certificates may be impaired.
Certain Matters Relating to Insolvency. The sellers of the Mortgage
Assets to the Depositor and the Depositor intend that the transfers of such
Mortgage Assets to the Depositor, and in turn to the applicable Trust,
constitute sales rather than pledges to secure indebtedness of the seller for
insolvency purposes. If, however, a seller of Mortgage Assets were to become a
debtor under the federal bankruptcy code, it is possible that a creditor,
trustee-in-bankruptcy or receiver of such seller may argue that the sale
thereof by such seller is a pledge rather than a sale. This position, if
argued or accepted by a court, could result in a delay in or reduction of
distributions on the related Certificates.
Leases and Rents. The Mortgage Loans typically will be secured by an
assignment of leases and rents pursuant to which the borrower assigns to the
lender its right, title and interest as landlord under the leases of the
related Mortgaged Property, and the income derived therefrom, as further
security for the related Mortgage Loan, while retaining a license to collect
rents for so long as there is no default. If the borrower defaults, the
license terminates and the lender is entitled to collect rents. Some state
laws may require that the lender take possession of the Mortgaged Property and
obtain a judicial appointment of a receiver before becoming entitled to collect
the rents. In addition, if bankruptcy or similar proceedings are commenced by
or in respect of the borrower, the lender's ability to collect the rents may be
adversely affected. See "Certain Legal Aspects of Mortgage Assets -- Leases
and Rents".
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DESCRIPTION OF THE CERTIFICATES
Each Trust will be created pursuant to a separate Agreement entered into
among the Depositor, the Trustee and the Servicer. The provisions of each
Agreement will vary depending upon the nature of the Certificates to be issued
thereunder and the nature of the related Trust. Certificates which represent
beneficial interests in the Trust will be issued pursuant to the Agreement.
The following summaries and the summaries set forth under "Pooling and
Administration" describe certain provisions relating to each series of
Certificates. THE PROSPECTUS SUPPLEMENT FOR A SERIES OF CERTIFICATES WILL
DESCRIBE THE SPECIFIC PROVISIONS RELATING TO SUCH SERIES. Such summaries do
not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all the provisions of the Agreement for each series
of Certificates. The Depositor will provide Owners of Certificates, without
charge, on written request a copy of the Agreement for the related series.
Requests should be addressed to AMRESCO Residential Securities Corporation, 700
N. Pearl Street, Suite 2400, Dallas, Texas 75201. The Agreement relating to a
series of Certificates will be filed with the Securities and Exchange
Commission within 15 days after the date of issuance of such series of
Certificates (the "Delivery Date").
The Certificates of a series will be entitled to payment only from the
assets of the Trust and any other assets pledged for the benefit of the
Certificates and will not be entitled to payments in respect of the assets
included in any other trust fund established by the Depositor. The
Certificates will not represent obligations of the Depositor, any Servicer or
any affiliate thereof and will not be guaranteed by any governmental agency.
See "The Trust" herein.
The Mortgage Assets relating to a series of Certificates, other than
GNMA Certificates, will not be insured or guaranteed by any governmental entity
and, to the extent that delinquent payments on or losses in respect of
defaulted Mortgage Assets are not advanced or paid from any applicable Credit
Enhancement, such delinquencies may result in delays in the distribution of
payments on, or losses allocated to, one or more classes of Certificates of
such series.
GENERAL
The Certificates of each series will be issued either in book entry form
or in fully registered form. The minimum original denomination of each class
of Certificates will be specified in the related Prospectus Supplement. The
original "Certificate Principal Balance" of each Certificate will equal the
aggregate distributions allocable to principal to which such Certificate is
entitled and distributions allocable to interest on each Certificate that is
not entitled to distributions allocable to principal will be calculated based
on the "Notional Principal Balance" of such Certificate. The Notional
Principal Balance of a Certificate will not evidence an interest in or
entitlement to distributions allocable to principal but will be used solely for
convenience in expressing the calculation of interest and for certain other
purposes.
Except as described below under "Book Entry Registration" with respect
to Book Entry Certificates, the Certificate of each series will be transferable
and exchangeable on a "Certificate Register" to be maintained at the corporate
trust office of the Trustee or such other office or agency maintained for such
purposes by the Trustee. The Trustee will be appointed initially as the
"Certificate Registrar" and no service change will be made for any registration
of transfer or exchange of Certificates, but payment of a sum sufficient to
cover any tax or other governmental charge may be required.
Under current law the purchase and holding of certain classes of
Certificates may result in "prohibited transactions" within the meaning of
ERISA and the Code. See "ERISA Considerations" herein. Transfer of
Certificates of such a class will not be registered unless the transferee (i)
executes a representation letter stating that it is not, and is not purchasing
on behalf of, any such plan, account or arrangement, or (ii) provides an
opinion of counsel satisfactory to the Trustee and the Depositor that the
purchase of Certificates of such a class by or on behalf 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
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election is to be made. Alternatively, the Agreement for a series may provide
that a REMIC election may be made at the discretion of the Depositor or the
Servicer and may only be made if certain conditions are satisfied. See
"Certain Federal Income Tax Considerations" herein. As to any such series, the
terms and provisions applicable to the making of a REMIC election, as well as
any material federal income tax consequences to Owners of Certificates not
otherwise described herein, will be set forth in the related Prospectus
Supplement. If such an election is made with respect to a series, one of the
classes will be designated as evidencing the "residual interests" in the
related REMIC, as defined in the Code. All other classes of Certificates in
such a series will constitute "regular interests" in the related REMIC, as
defined in the Code. As to each series with respect to which a REMIC election
is to be made, the Servicer, the Trustee, an Owner of Residual Certificates, as
defined herein, or another person as specified in the related Prospectus
Supplement will be obligated to take all actions required in order to comply
with applicable laws and regulations and will be obligated to pay any
prohibited transaction taxes. The person so specified will be entitled to
reimbursement for any such payment.
CLASSES OF CERTIFICATES
Each series of Certificates will be issued in one or more classes which
will evidence the beneficial ownership in, or the debt obligation payable from,
any distributions in respect of the assets of the Trust that are allocable to
(i) principal of such class of Certificates and (ii) interest on such
Certificates. One or more classes of a series of Certificates may evidence
beneficial ownership interests in, or the debt obligation payable from,
separate groups of assets included in the related Trust.
The Certificates will have an aggregate original Certificate Principal
Balance equal to the aggregate unpaid principal balance of the Mortgage Assets
as of the time and day prior to creation of the Trust specified in the related
Prospectus Supplement (the "Cut-Off Date") after deducting payments of
principal due before the Cut-Off Date and will bear interest at rates which, on
a weighted basis, will be equal to the Pass-Through Rate which will equal the
weighted average rate of interest borne by the related Mortgage Assets, net of
the aggregate servicing fees, amounts allocated to the residual interests and
any other amounts (including fees payable to the Administrator) as are
specified in the Prospectus Supplement. The original Certificate Principal
Balance (or Notional Principal Balance) of the Certificates of a series and the
interest rate on the classes of such Certificates will be determined in the
manner specified in the Prospectus Supplement.
Each class of Certificates that is entitled to distributions allocable
to interest will bear interest at a fixed rate or a rate that is subject to
change from time to time (a) in accordance with schedule, (b) by reference to
an index, or (c) otherwise (each, a "Certificate Interest Rate"), in each case
as specified in the Prospectus Supplement. One or more classes of Certificates
may provide for interest that accrues but is not currently payable ("Compound
Interest Certificates"). With respect to any class of Compound Interest
Certificates, if specified in the Prospectus Supplement, any interest that has
accrued but is not paid on a given Distribution Date will be added to the
aggregate Certificate Principal Balance of such class of Certificates on that
Distribution Date.
A series of Certificates may include one or more classes entitled only
to distributions (i) allocable to interest, (ii) allocable to principal (and
allocable as between scheduled payments of principal and Principal Prepayments,
as defined below) or (iii) allocable to both principal (and allocable as
between scheduled payments of principal and Principal Prepayments) and
interest. A series of Certificates may consist of one or more classes as to
which distributions will be allocated (i) on the basis of collections from
designated portions of the assets of the Trust, (ii) in accordance with a
schedule or formula, (iii) in relation to the occurrence of events, or (iv)
otherwise. The timing and amounts of such distributions may vary among
classes, over time or otherwise.
A series of Certificates may include one or more Classes of Scheduled
Amortization Certificates and Companion Certificates. "Scheduled Amortization
Certificates" are Certificates with respect to which payments of principal are
to be made in specified amounts on specified Distribution Dates, to the extent
of funds available on such Distribution Date. "Companion Certificates" are
Certificates which receive payments of all or a portion of any funds available
on a given Distribution Date which are in excess of amounts required to be
applied to payments on Scheduled Amortization Certificates on such Distribution
Date. Because of the manner of application of payments of principal to
Companion Certificates, the weighted average lives of Companion Certificates of
a series may be expected to be
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more sensitive to the actual rate of prepayments on the Mortgage Assets in the
related Trust than will the Scheduled Amortization Certificates of such series.
One or more series of Certificates may constitute series of "Special
Allocation Certificates", which may include Senior Certificates, Subordinated
Certificates, Priority Certificates and Non-Priority Certificates, as defined
herein. As specified in the related Prospectus Supplement for a series of
Special Allocation Certificates, the timing and/or priority of payments of
principal and/or interest may favor one or more classes of Certificates over
one or more other classes of Certificates. Such timing and/or priority may be
modified or reordered upon the occurrence of one or more specified events.
Losses on Trust assets for such series may be disproportionately borne by one
or more classes of such series, and the proceeds and distributions from such
assets may be applied to the payment in full of one or more classes within such
series before the balance, if any, of such proceeds are applied to one or more
other classes within such series. For example, Special Allocation Certificates
in a series may be comprised of one or more classes of Senior Certificates
having a priority in right to distributions of principal and interest over one
or more classes of Subordinated Certificates as a form of Credit Enhancement.
See "Credit Enhancement -- Subordination" herein. Typically, the Subordinated
Certificates will carry a rating by the rating agencies lower than that of the
Senior Certificates. In addition, one or more classes of Certificates
("Priority Certificates") may be entitled to a priority of distributions of
principal or interest from assets in the Trust over another class of
Certificates ("Non-Priority Certificates"), but only after the exhaustion of
other Credit Enhancement applicable to such series. The Priority Certificates
and Non-Priority Certificates nonetheless may be within the same rating
category.
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
General. Distributions of principal and interest will be made, to the
extent of funds available therefor, on the dates specified in the Prospectus
Supplement (each, a "Distribution Date") to the persons in whose names the
Certificates are registered (the "Owner") at the close of business on the dates
specified in the Prospectus Supplement (each, a "Record Date"). With respect
to Certificates other than Book Entry Certificates, distributions will be made
by check or money order mailed to the person entitled thereto at the address
appearing in the Certificate Register or, if specified in the Prospectus
Supplement, in the case of Certificates that are of a certain minimum
denomination as specified in the Prospectus Supplement, upon written request by
the Owner of a Certificate, by wire transfer or by such other means as are
agreed upon with the person entitled thereto; provided, however, that the final
distribution in retirement of the Certificates (other than Book Entry
Certificates) will be made only upon presentation and surrender of the
Certificates at the office or agency of the Trustee specified in the notice of
such final distribution. With respect to Book Entry Certificates, such
payments will be made as described below under "Book Entry Registration".
Distributions will be made out of, and only to the extent of, funds in a
separate account established and maintained for the benefit of the Certificates
of the related series (the "Certificate Account" with respect to such series),
including any funds transferred from any related Reserve Fund. Amounts may be
invested in the Eligible Investments, and all income or other gain from such
investments will be deposited in the related Certificate Account and will be
available to make payments on the Certificates of the applicable series on the
next succeeding Distribution Date.
Distributions of Interest. Interest will accrue on the aggregate
Certificate Principal Balance (or, in the case of Certificates entitled only to
distributions allocable to interest, the aggregate Notional Principal Balance
of each class of Certificates entitled to interest from the date, at the
applicable Certificate Interest Rate and for the periods (each, an "Interest
Accrual Period") specified in the Prospectus Supplement. The aggregate
"Certificate Principal Balance" of any class of Certificates entitled to
distributions of principal will be the aggregate original Certificate Principal
Balance of such class of Certificates specified in the Prospectus Supplement,
reduced by all distributions allocable to principal, and, in the case of
Compound Interest Certificates, increased by all interest accrued but not then
distributable on such Compound Interest Certificates. With respect to a class
of Certificates entitled only to distributions allocable to interest, such
interest will accrue on the Notional Principal Balance of such class, computed
solely for purposes of determining the amount of interest accrued and payable
on such class of Certificates.
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To the extent funds are available therefor, interest accrued during each
Interest Accrual Period on each class of Certificates entitled to interest
(other than a class of Compound Interest Certificates) will be distributable on
the Distribution Dates specified in the Prospectus Supplement until the
aggregate Certificate Principal Balance of the Certificates of such class has
been distributed in full or, in the case of Certificates entitled only to
distributions allocable to interest, until the aggregate Notional Principal
Balance of such Certificates is reduced to zero or for the period of time
designated in the Prospectus Supplement. Distributions of interest on each
class of Compound Interest Certificates will commence only after the occurrence
of the events specified in the Prospectus Supplement and, prior to such time,
the aggregate Certificate Principal Balance (or Notional Principal Balance) of
such class of Compound Interest Certificates, will increase on each
Distribution Date by the amount of interest that accrued on such class of
Compound Interest Certificates during the preceding Interest Accrual Period but
that was not required to be distributed to such class on such Distribution
Date. Any such class of Compound Interest Certificates will thereafter accrue
interest on its outstanding Certificate Principal Balance (or Notional
Principal Balance) as so adjusted.
Distributions of Principal. The Prospectus Supplement will specify the
method by which the amount of principal to be distributed on the Certificates
on each Distribution Date will be calculated and the manner in which such
amount will be allocated among the classes of Certificates entitled to
distributions of principal.
One or more classes of Senior Certificates may be entitled to receive
all or a disproportionate percentage of the payments of principal which are
received on the related Mortgage Assets in advance of their scheduled due dates
and are not accompanied by amounts representing scheduled interest due after
the month of such payments ("Principal Prepayments"). Any such allocation may
have the effect of accelerating the amortization of such Certificates relative
to the interests evidenced by the other Certificates.
Unscheduled Distributions. The Certificates of a series may be subject
to receipt of distributions before the next scheduled Distribution Date under
the circumstances and in the manner described below and in the related
Prospectus Supplement. If applicable, such unscheduled distributions on the
Certificates of a series on the date and in the amount specified in the related
Prospectus Supplement if, due to substantial payments of principal (including
Principal Prepayments) on the related Mortgage Assets, low rates then available
for reinvestment of such payments or both, it is determined, based on specified
assumptions, that the amount anticipated to be on deposit in the Certificate
Account for such series on the next related Distribution Date, together with,
if applicable, any amounts available to be withdrawn from any related Reserve
Fund or from any other Credit Enhancement provided for such series, may be
insufficient to make required distributions on the Certificates on such
Distribution Date. The amount of any such unscheduled distribution that is
allocable to principal will not exceed the amount that would otherwise have
been required to be distributed as principal on the Certificates on the next
Distribution Date and will include interest at the applicable Certificate
Interest Rate (if any) on the amount of the unscheduled distribution allocable
to principal for the period and to the date specified in the Prospectus
Supplement.
All distributions allocable to principal in any unscheduled distribution
will be made in the same priority and manner as distributions of principal on
the Certificates would have been made on the next Distribution Date, and, with
respect to Certificates of the same class, unscheduled distributions of
principal will be made on a pro rata basis. Notice of any unscheduled
distribution will be given by the Trustee prior to the date of such
distribution.
BOOK ENTRY REGISTRATION
Certificates may be issued as Book Entry Certificates held in the name
of a Clearing Agency registered with the Securities and Exchange Commission or
its nominee. Transfers and pledges of Book Entry Certificates may be made only
through entries on the books of the Clearing Agency in the name of Clearing
Agency Participants or their nominees. Clearing Agency Participants may also
be Beneficial Owners of Book Entry Certificates.
Purchasers and other Beneficial Owners may not hold Book Entry
Certificates directly but may hold, transfer or pledge their ownership interest
in the Certificates only through Clearing Agency Participants. Furthermore,
Beneficial Owners will receive all payments of principal and interest with
respect to the Certificates and, if applicable, may request redemption of
Certificates, only through the Clearing Agency and the Clearing Agency
Participants. Beneficial Owners will not be registered Owners of Certificates
or be entitled to receive definitive certificates
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representing their ownership interest in the Certificates except under the
limited circumstances, if any, described in the related Prospectus Supplement.
See "Risk Factors -- Book Entry Registration" herein.
If Certificates of a series are issued as Book Entry Certificates, the
Clearing Agency will be required to make book entry transfers among Clearing
Agency Participants, to receive and transmit payments of principal and interest
with respect to the Certificates of such series, and to receive and transmit
requests for redemption with respect to such Certificates. Clearing Agency
Participants with whom Beneficial Owners have accounts with respect to such
Book Entry Certificates will be similarly required to make book entry transfers
and receive and transmit payments and redemption requests on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial Owners will not
be registered Owners of Certificates and will not possess physical
certificates, a method will be provided whereby Beneficial Owners may receive
payments, transfer their interests, and submit redemption requests.
LIST OF OWNERS OF CERTIFICATES
Upon written request of three or more Owners of Certificates of record
of a series of Certificates for purposes of communicating with other Owners
with respect to their rights as Owners of Certificates, the Trustee will afford
such Owners access during business hours to the most recent list of Owners of
Certificates of that series held by the Trustee. With respect to Book Entry
Certificates, the only named Owner on the Certificate Register will be the
Clearing Agency.
The Agreement will not provide for the holding of any annual or other
meetings of Owners.
THE TRUSTS
The Trust Estate for a series of Certificates will consist of: (i) the
Mortgage Assets (subject, if specified in the Prospectus Supplement, to certain
exclusions); (ii) all payments (subject, if specified in the Prospectus
Supplement, to certain exclusions) received on and after the related Cut-Off
Date in respect of such Mortgage Assets, which may be adjusted, to the extent
specified in the related Prospectus Supplement, in the case of interest
payments on Mortgage Assets, to the Pass-Through Rate; (iii) if specified in
the Prospectus Supplement, reinvestment income on such payments; (iv) with
respect to a Trust that includes Mortgage Loans, all property acquired by
foreclosure or deed in lieu of foreclosure with respect to any such Mortgage
Loan; (v) certain rights of the Trustee, the Depositor and the Servicer under
any policies required to be maintained in respect of the related Mortgage
Assets; and (vi) if so specified in the Prospectus Supplement, one or more
forms of Credit Enhancement.
The Certificates of each series will be entitled to payment only from
the assets of the related Trust and any other assets pledged therefor and will
not be entitled to payments in respect of the assets of any other trust fund
established by the Depositor.
Mortgage Assets may be acquired by the Depositor from affiliated or
unaffiliated Originators. The following is a brief description of the Mortgage
Assets expected to be included in the Trusts. If specific information
respecting the Mortgage Assets is not known at the time the related series of
Certificates initially are offered, more general information of the nature
described below will be provided in the related Prospectus Supplement, and
specific information will be set forth in a report on Form 8-K to be filed with
the Securities and Exchange Commission within fifteen days after the initial
issuance of such Certificates. A copy of the Agreement with respect to each
series of Certificates will be attached to the Form 8-K and will be available
for inspection at the corporate trust office of the Trustee specified in the
related Prospectus Supplement. A schedule of the Mortgage Assets relating to
each series of Certificates will be attached to the related Agreement delivered
to the Trustee upon delivery of such Certificates.
MORTGAGE LOANS
Mortgage Loans will consist of (i) Multifamily Loans consisting of
either Conventional Multifamily Loans or FHA-Insured Multifamily Loans secured
by mortgages or deeds of trust or other similar security instruments creating a
lien on rental apartment buildings or projects containing five or more units,
including, but not limited to, high-rise, mid-rise and garden apartments or
secured by apartment buildings owned by cooperative housing
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corporations or (ii) Commercial Loans secured by mortgages, deeds of trust or
similar security instruments that create liens against office buildings, retail
stores, hotels or motels, nursing homes, hospitals or other health care-related
facilities, mobile home parks, warehouse facilities, mini-warehouse facilities,
self-storage facilities, industrial plants, mixed use or other types of income-
producing properties or unimproved land. The Multifamily Properties may
include mixed commercial and residential structures. Unless otherwise
specified in the related Prospectus Supplement, each Mortgage Loan will create
a first priority mortgage lien on a Mortgaged Property. A Mortgage Loan may
create a lien on a borrower's leasehold estate in a property; however, unless
otherwise specified in the related Prospectus Supplement, the term of any such
leasehold will exceed the term of the Mortgage Loan by at least two years. The
Depositor expects that Mortgage Loans will have been originated by mortgagees
in the ordinary course of their real estate lending activities. Each Mortgage
Loan will bear interest at an annual fixed rate or adjustable rate of interest
specified in the Prospectus Supplement.
The related Prospectus Supplement may specify for each Mortgage Loan:
the date of origination; the interest rate, or, in the case of Adjustable
Mortgage Loans, the initial Adjustable Mortgage Rate, the index or formula, if
any, used to determine the Adjustable Mortgage Rate, the margin or margins, if
any, to be added to or subtracted from the Index to calculate the Mortgage Loan
Rate, the maximum and minimum percentage adjustment, if any, for the life of
the Mortgage Loan and on any annual basis, and the frequency of adjustment; the
number of Mortgage Loans in the pool of Mortgage Loans (the "Mortgage Loan
Pool"); the original loan amount or range of original loan amounts; the
original loan-to-value ratio; the original and remaining term; and the balloon,
principal amortization or interest-only terms, if any. The related Prospectus
Supplement may also specify the number and type of units or total rentable
square feet contained in each Mortgaged Property, the loan amount per unit or
per square foot of rentable space, the percentage of units or total rentable
square feet occupied as of the Cut-Off Date, the appraised value of each
Mortgaged Property and whether each property is subject to local rent control
ordinances and whether the Mortgage Loan financed the acquisition or
rehabilitation of the underlying property or refinanced prior indebtedness.
Unless otherwise specified in the related Prospectus Supplement, all of
the Mortgage Loans will have had original terms to maturity of not more than 40
years and will provide for scheduled payments of principal, interest or both,
to be made on specified dates ("Due Dates") that occur monthly, quarterly or
semi-annually. A Mortgage Loan (i) may provide for accrual of interest thereon
at an interest rate (a "Mortgage Loan Rate") that is fixed over its term of
that adjusts from time to time, or that may be converted at the borrower's
election from an adjustable to a fixed Mortgage Loan Rate, or from a fixed to
an adjustable Mortgage Loan Rate, (ii) may provide for level payments to
maturity or for payments that adjust from time to time to accommodate changes
in the Mortgage Loan Rate or to reflect the occurrence of certain events, and
may permit negative amortization, (iii) may be fully amortizing over its term
to maturity, or may provide for little or no amortization over its term and
thus require a balloon payment on its stated maturity date, and (iv) may
contain a prohibition on prepayment (the period of such prohibition, a "Lock-
out Period" and its date of expiration, a "Lock-out Expiration Date") or
require payment of a premium or a yield maintenance penalty (a "Prepayment
Premium") in connection with a prepayment, in each case as described in the
related Prospectus Supplement. A Mortgage Loan may also contain a provision
that entitles the lender to a share of profits realized from the operation or
disposition of the Mortgaged Property (an "Equity Participation"), as described
in the related Prospectus Supplement. If holders of any class or classes of
Offered Certificates of a series will be entitled to all or a portion of an
Equity Participation, the related Prospectus Supplement will describe the
Equity Participation and the method or methods by which distributions in
respect thereof will be made to such holders.
Certain of the Multifamily Loans may be secured by apartment buildings
owned by a private, non-profit cooperative corporation ("Cooperative"). The
Cooperative is owned by tenant-stockholders who, through ownership of stock,
shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
apartments or units. Generally, a tenant-stockholder of a Cooperative must
make a monthly payment to the Cooperative representing such tenant-
stockholder's pro rata share of the cooperative's payments for its mortgage
loan, real property taxes, maintenance expenses and other capital or ordinary
expenses. Such payments to the Cooperative are in addition to any payments of
principal and interest the tenant-stockholder must make on any loans of the
tenant-stockholder secured by its shares in the Cooperative. The Cooperative
will be directly responsible for building management and, in most cases,
payment of real estate taxes and hazard and liability insurance. The
Cooperative's ability to meet debt service obligations on the Multifamily
Loans, as well as all other operating expenses, will be dependent in large part
on the receipt of maintenance payments from
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the tenant-stockholders, as well as any rental income from units or commercial
assessments on the tenant-stockholders. The Cooperative's ability to pay the
principal amount of the Multifamily Loan at maturity depends primarily on its
ability to pay the principal amount of the Multifamily Loan. The Depositor,
the Seller and the Administrator will have no obligation to provide refinancing
for the Multifamily Loans.
Lenders typically look to the Debt Service Coverage Ratio of a loan
secured by income-producing property as an important measure of the risk of
default on such loan. Unless otherwise defined in the related Prospectus
Supplement, the "Debt Service Coverage Ratio" of a Mortgage Loan at any given
time is the ratio of (i) the Net Operating Income of the related Mortgaged
Property for a twelve-month period to (ii) the annualized scheduled payments on
the Mortgage Loan and on any other loan that is secured by a lien on the
Mortgaged Property prior to the lien of the related Mortgage. Unless otherwise
defined in the related Prospectus Supplement. "Net Operating Income" means,
for any given period, the total operating revenues derived from a Mortgaged
Property during such period, minus the total operating expenses incurred in
respect of such Mortgaged Property during such period other than (i) non-cash
items such as depreciation and amortization, (ii) capital expenditures and
(iii) debt service on loans (including the related Mortgage Loan) secured by
liens on the Mortgaged Property. The Net Operating Income of a Mortgaged
Property will fluctuate over time and may or may not be sufficient to cover
debt service on the related Mortgage Loan at any given time. As the primary
source of the operating revenues of a non-owner occupied income-producing
property, rental income (and maintenance payments from tenant-stockholders of a
Cooperative) may be affected by the condition of the applicable real estate
market and/or area economy. In addition, properties typically leased, occupied
or used on a short-term basis, such as certain health care-related facilities,
hotels and motels, and mini-warehouse and self-storage facilities, tend to be
affected more rapidly by changes in market or business conditions than do
properties typically leased for longer periods, such as warehouses, retail
stores, office buildings and industrial plants. Commercial Properties may be
owner-occupied or leased to a single tenant. Thus, the Net Operating Income of
such a Mortgaged Property may depend substantially on the financial condition
of the borrower or the single tenant, and Mortgage Loans secured by liens on
such properties may pose greater risks than loans secured by liens on
Multifamily Properties or on multi-tenant Commercial Properties.
Increases in operating expenses due to the general economic climate or
economic conditions in a locality or industry segment, such as increases in
interest rates, real estate tax rates, energy costs, labor costs and other
operating expenses and/or to changes in governmental rules, regulations and
fiscal policies, may also affect the risk of default on a Mortgage Loan. As
may be further described in the related Prospectus Supplement, in some cases
leases of Mortgaged Properties may provide that the lessee, rather than the
borrower/landlord, is responsible for payment of operating expenses ("Net
Leases"). However, the existence of such "net of expense" provisions will
result in stable Net Operating Income to the borrower/landlord only to the
extent that the lessee is able to absorb operating expense increases while
continuing to make rent payments.
Lenders also look to the Loan-to-Value Ratio of a mortgage loan as a
measure of risk of loss if a property must be liquidated following a default.
Unless otherwise defined in the related Prospectus Supplement, the "Loan-to-
Value Ratio" of a Mortgage Loan at any given time is the ratio (expressed as a
percentage) of (i) the then outstanding principal balance of the Mortgage Loan
and the outstanding principal balance of any loan secured by a lien on the
related Mortgaged Property prior to the lien of the related Mortgage, to (ii)
the Value of such Mortgaged Property. The "Value" of a Mortgaged Property, is
generally its fair market value determined in an appraisal obtained by the
originator at the origination of such loan. The lower the Loan-to-Value Ratio,
the greater the percentage of the borrower's equity in a Mortgaged Property,
and thus the greater the cushion provided to the lender against loss on
liquidation following a default.
Loan-to-Value Ratios will not necessarily constitute an accurate measure
of the risk of liquidation loss in a pool of Mortgage Loans. For example, the
value of a Mortgaged Property as of the date of initial issuance of the related
series of Certificates may be less than the Value determined at loan
origination, and will likely continue to fluctuate from time to time based upon
changes in economic conditions and the real estate market. Moreover, even when
current, an appraisal is not necessarily a reliable estimate of Value.
Appraised values of income-producing properties are generally based on the
market comparison method (recent sale value of comparable properties at the
date of the appraisal), the cost replacement method (the cost of replacing the
property at such date), the income capitalization method (a projection of value
based upon the property's projected net cash flow), or upon a selection
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from or interpolation of the values derived from such methods. Each of these
appraisal methods can present analytical difficulties. It is often difficult
to find truly comparable properties that have recently been sold; the
replacement of a property may have little to do with its current market value;
and income capitalization is inherently based on inexact projections of income
and expense and the selection of an appropriate capitalization rate. Where
more than one of these appraisal methods are used and provide significantly
different results, an accurate determination of Value and, correspondingly, a
reliable analysis of default and loss risks, is even more difficult.
MORTGAGE-BACKED SECURITIES
Mortgage-Backed Securities ("MBS") may include (i) private (that is, not
guaranteed or insured by the United States or any agency or instrumentality
thereof) mortgage participations, mortgage pass-through certificates or other
mortgage-backed securities or (ii) certificates insured or guaranteed by FHLMC,
FNMA, GNMA or FAMC.
Any MBS will have been issued pursuant to a participation and servicing
agreement, a pooling and servicing agreement, an indenture or similar agreement
(an "MBS Agreement"). A seller (the "MBS Issuer") and/or servicer (the "MBS
Servicer") of the underlying mortgage loans will have entered into the MBS
Agreement with a trustee or a custodian under the MBS Agreement (the "MBS
Trustee"), if any, or with the original purchaser or purchasers of the MBS.
The MBS may have been issued in one or more classes with characteristics
similar to the classes of Certificates described herein. Distributions in
respect of the MBS will be made by the MBS Servicer or the MBS Trustee on the
dates specified in the related Prospectus Supplement. The MBS Issuer or the
MBS Servicer or another person specified in the related Prospectus Supplement
may have the right or obligation to repurchase or substitute assets underlying
the MBS after a certain date or under other circumstances specified in the
related Prospectus Supplement.
Reserve funds, subordination, cross-support or other credit enhancement
similar to that described for the Certificates under "Credit Enhancement" may
have been provided with respect to the MBS. The type, characteristics and
amount of such credit enhancement, if any, will be a function of the
characteristics of the underlying mortgage loans and other factors and
generally will have been established on the basis of the requirements of any
rating agency that may have assigned a rating to the MBS, or by the initial
purchasers of the MBS.
The Prospectus Supplement for a series of Certificates that evidence
interests in MBS will specify, to the extent available, (i) the aggregate
approximately initial and outstanding principal amount and type of the MBS to
be included in the Trust, (ii) the original and remaining term to stated
maturity of the MBS, if applicable, (iii) the pass-through or bond rate of the
MBS or the formula for determining such rates, (iv) the payment characteristics
of the MBS, (v) the MBS Issuer, MBS Servicer and MBS Trustee, as applicable,
(vi) a description of the credit support, if any, (vii) the circumstances under
which the stated underlying mortgage loans or the MBS themselves may be
purchased prior to their maturity, (viii) the terms on which mortgage loans may
be substituted for those originally underlying the MBS, (ix) the servicing fees
payable under the MBS Agreement, (x) to the extent available to the Depositor,
information in respect of the underlying mortgage loans, and (xi) the
characteristics of any cash flow agreements that relate to the MBS.
CREDIT ENHANCEMENT
General. Various forms of Credit Enhancement may be provided with
respect to one or more classes of a series of Certificates or with respect to
the assets in the related Trust. Credit Enhancement may be in the form of the
subordination of one or more classes of the Certificates of such series to
other classes, the establishment of one or more Reserve Funds, the use of a
cross-support feature, FHA insurance on the underlying Mortgage Loans, another
form of Credit Enhancement described in the related Prospectus Supplement, or
any combination of the foregoing. Credit Enhancement may not provide
protection against all risks of loss and may not guarantee repayment of the
entire principal balance of the Certificates and interest thereon.
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Subordination. Distributions in respect of scheduled principal,
interest or any combination thereof otherwise payable to one or more classes of
Certificates of a series (the "Subordinated Certificates") may be paid to one
or more other classes of such series (the "Senior Certificates") under the
circumstances and to the extent provided in the Prospectus Supplement. For
example, delays in receipt of scheduled payments on the Mortgage Assets and
losses on defaulted Mortgage Assets may be borne first by the various classes
of Subordinated Certificates and thereafter by the various classes of Senior
Certificates. The aggregate distributions in respect of delinquent payments on
the Mortgage Assets over the lives of the Certificates or at any time, the
aggregate losses in respect of defaulted Mortgage Assets which must be borne by
the Subordinated Certificates by virtue of subordination and the amount of the
distributions otherwise distributable to the Subordinated Certificates that
will be distributable to Senior Certificates on any Distribution Date may be
limited as specified in the Prospectus Supplement. If aggregate distributions
in respect of delinquent payments on the Mortgage Assets or aggregate losses in
respect of such Mortgage Assets were to exceed the total amounts payable and
available for distribution to Owners of Subordinated Certificates or, if
applicable, were to exceed the specified maximum amount, Owners of Senior
Certificates could experience losses on the Certificates.
In addition to or in lieu of the foregoing, all or any portion of
distributions otherwise payable to Subordinated Certificates on any
Distribution Date may instead be required to be deposited into one or more
Reserve Fund (as defined below). Such deposits may be made on each
Distribution Date, on each Distribution Date for specified periods, or on each
Distribution Date until the balance in the Reserve Fund has reached a specified
amount and, following payments from the Reserve Fund to Senior Certificates or
otherwise, to the extent necessary to restore the balance in the Reserve Fund
to required levels, and amounts on deposit in the Reserve Fund may be released
to the Depositor or any class of Certificates in each case as specified in the
Prospectus Supplement.
If specified in the Prospectus Supplement, various classes of Senior
Certificates and Subordinated Certificates may themselves be subordinate in
their right to receive certain distributions to other classes of Senior and
Subordinated Certificates, respectively, through a cross-support mechanism or
otherwise.
As between classes of Senior Certificates and as between classes of
Subordinated Certificates, distributions may be allocated among such classes
(i) in the order of their scheduled final distribution dates, (ii) in
accordance with a schedule or formula, (iii) in relation to the occurrence of
events, or (iv) otherwise, in each case as specified in the Prospectus
Supplement. As between classes of Senior Certificates, payments to Senior
Certificates on account of delinquencies or losses and payments to any Reserve
Fund will be allocated as specified in the Prospectus Supplement.
Cross-Support. The beneficial ownership of separate groups of assets
included in the Trust for a series may be evidenced by separate classes of
related series of Certificates. In such case, Credit Enhancement may be
provided by a cross-support feature which may require that distributions be
made with respect to Certificates evidencing beneficial ownership of one or
more asset groups prior to distributions to Subordinated Certificates
evidencing a beneficial ownership interest in other asset groups within the
same Trust. The Prospectus Supplement for a series which includes a cross-
support feature will describe the manner and conditions for applying such
cross-support feature.
If specified in the Prospectus Supplement, the coverage provided by one
or more forms of Credit Enhancement may apply concurrently to two or more
separate Trusts for a separate series of Certificates. If applicable, the
Prospectus Supplement will identify the Trusts to which such credit support
relates and the manner of determining the amount of the coverage provided
thereby and of the application of such coverage to the identified Trusts.
FHA Insurance on the Multifamily Loans. There are two primary FHA
insurance programs that are available for Multifamily Loans. Sections 221(d)
(3) and (d) (4) of the National Housing Act (the "Housing Act") allow the
Department of Housing and Urban Development ("HUD") to insure mortgage loans
that are secured by newly constructed and substantially rehabilitated
multifamily rental projects. Generally the term of such a mortgage loan can be
up to 40 years and the ratio of loan amount to property replacement cost (as
calculated by FHA) can be up to 90%.
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Section 223(f) of the Housing Act allows HUD to insure mortgage loans
made for the purchase or refinancing of existing apartment projects which are
at least three years old. Under Section 223(f), the loan proceeds cannot be
used for substantial rehabilitation work, but repairs may be made for up to, in
general, the greater of 15% of the value of the project or a dollar amount per
apartment unit established from time to time by HUD. In general, the loan term
may not exceed 35 years and a loan to value ratio of no more than 85% for the
purchase of a project and 70% for the refinancing of a project is required.
FHA insurance is generally payable in cash or at the option of the
mortgagee in debentures. Such insurance does not cover 100% of the mortgage
loan but is instead subject to certain deductions and certain losses of
interest from the date of the default.
Reserve Funds. If specified in the Prospectus Supplement, cash, U.S.
Treasury securities, instruments evidencing ownership of principal or interest
payments thereon, letters of credit, surety bonds, demand notes, certificates
of deposit or a combination thereof in the aggregate amount specified in the
Prospectus Supplement will be deposited by the Depositor on the Delivery Date
in one or more accounts (each, a "Reserve Fund") established and maintained
with the Trustee. Such cash and the principal and interest payments on such
other investments will be used to enhance the likelihood of timely payment of
principal of, and interest on, or, if so specified in the Prospectus
Supplement, to provide additional protection against losses in respect of, the
assets in the related Trust, to pay the expenses of the Trust or for other
purposes specified in the Prospectus Supplement. Certain amounts to which the
Owners of Subordinated Certificates, if any, would otherwise be entitled may
instead be required to be deposited into a Reserve Fund from time to time and
in the amounts as specified in the Prospectus Supplement. Any cash in any
Reserve Fund and the proceeds of any other instrument upon maturity will be
invested in Eligible Investments. If a letter of credit is deposited with the
Trustee, such letter of credit will be irrevocable. Any instrument deposited
in a Reserve Fund will name the Trustee, as a beneficiary and will be issued by
an entity acceptable to each rating agency that rates the Certificates.
Additional information with respect to such instruments deposited in the
Reserve Funds may be set forth in the Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will
be available for withdrawal from the Reserve Fund for distribution with respect
to the Certificates for the purposes, in the manner and at the times specified
in the Prospectus Supplement.
Other Insurance, Guaranties and Similar Instruments or Agreements. If
specified in the Prospectus Supplement, the related Trust may also include
insurance, guaranties, surety bonds, letters of credit, guaranteed investment
contracts or similar arrangements for the purpose of (i) maintaining timely
payments or providing additional protection against losses on the assets
included in such Trust, (ii) paying administrative expenses, (iii) establishing
a minimum reinvestment rate on the payments made in respect of such assets or
principal payment rate on such assets, (iv) guaranteeing timely payment of
principal and interest under the Certificates, or for such other purpose as is
specified in such Prospectus Supplement. Such arrangements may include
agreements under which Owners of Certificates are entitled to receive amounts
deposited in various accounts held by the Trustee upon the terms specified in
the Prospectus Supplement. Such arrangements may be in lieu of any obligation
of the Servicer to advance delinquent installments in respect of the Mortgage
Loans. See "Servicing of the Mortgage Loans" herein.
SERVICING OF THE MORTGAGE LOANS
With respect to each series of Certificates, the related Mortgage Loans
will be serviced either (i) by the Servicer as sole servicer, (ii) by the
Servicer as administrator or master servicer, (iii) by another institution as
sole servicer or (iv) by another institution as administrator or master
servicer. If an institution other than the Servicer acts as sole servicer or
as master servicer for a series, the Servicer may have no servicing obligations
with respect to such series.
The Prospectus Supplement for each series will specify whether the
Servicer or another institution will act as sole servicer or master servicer
for such series. If the Servicer acts as master servicer or administrator for
a series, all references to a Servicer herein and under the headings "Servicing
of the Mortgage Loans" and "Pooling and Administration" herein should be read
to refer to the direct Servicer of such series. If an institution other than
the
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Servicer acts as sole Servicer for a series, or acts as master servicer for
such series, all references to the Servicer herein and under the headings
"Servicing of the Mortgage Loans" and "Pooling and Administration" herein
should be read to refer to such institution as sole or master servicer, as
appropriate.
The related Prospectus Supplement will specify whether each Servicer is
a FNMA- or FHLMC-approved servicer of conventional mortgage loans. In
addition, the Depositor will require adequate servicing experience, where
appropriate, and financial stability, generally including a net worth
requirement (to be specified in the Agreement), as well as satisfaction of
certain other criteria.
Each Servicer will be required to perform the customary functions of a
mortgage loan servicer, including collection of payments from borrowers (the
"Mortgagors") and remittance of such collections to the Trustee, maintenance of
applicable standard hazard insurance and primary mortgage insurance policies,
attempting to cure delinquencies, supervising foreclosures, management of
Mortgaged Properties under certain circumstances, maintaining accounting
records relating to the Mortgage Loans and, if specified in the related
Prospectus Supplement, maintenance of escrow or impoundment accounts of
Mortgagors for payment of taxes, insurance, and other items required to be paid
by the Mortgagor pursuant to the Mortgage Loan. Each Servicer will also be
obligated to make advances in respect of delinquent installments on Mortgage
Loans as applicable, as described more fully under "-- Payments on Mortgage
Loans" and "-- Advances" herein and in respect of certain taxes and insurance
premiums not paid on a timely basis by Mortgagors.
Each Servicer will be entitled to a monthly servicing fee as specified
in the related Prospectus Supplement. Each Servicer will also generally be
entitled to collect and retain, as part of its servicing compensation, late
payment charges and assumption underwriting fees. Each Servicer will be
reimbursed from proceeds of one or more of the insurance policies described
herein ("Insurance Proceeds") or from proceeds received in connection with the
liquidation of defaulted Mortgage Loans ("Liquidation Proceeds"). See "--
Servicing Compensation and Payment of Expenses" herein.
Each Servicer will be required to service each Mortgage Loan pursuant to
the terms of the Agreement for the entire term of such Mortgage Loan unless the
Agreement is earlier terminated. Upon termination, a replacement for the
Servicer will be appointed.
PAYMENTS ON MORTGAGE LOANS
Each Servicer will establish and maintain a separate account (each, a
"Custodial Account"). Subject to the following paragraph, each Custodial
Account must be an account the deposits in which are fully insured by either
the Federal Deposit Insurance Corporation ("FDIC") or the National Credit Union
Administration ("NCUA") or are, to the extent such deposits are in excess of
the coverage provided by such insurance, continuously secured by certain
obligations issued or guaranteed by the United States of America. If at any
time the amount on deposit in such Custodial Account shall exceed the amount so
insured or secured, the applicable Servicer must remit to the Trustee the
amount on deposit in such Custodial Account which exceeds the amount so insured
or secured, less any amount such Servicer may retain for its own account
pursuant to its Agreement.
Notwithstanding the foregoing, the deposits in a Servicer's Custodial
Account will not be required to be fully insured or secured as described above,
and such Servicer will not be required to remit amounts on deposit therein in
excess of the amount so insured or secured, so long as such Servicer meets
certain requirements established by the rating agencies requested to rate the
Certificates.
Each Servicer is required to deposit into its Custodial Account on a
daily basis all amounts in respect of each Multifamily Loan received by such
Servicer, with interest adjusted to a rate (the "Remittance Rate") equal to the
related Mortgage Rate less the Servicer's servicing fee rate. On the 18th day
of each month, or such other day specified in the related Prospectus Supplement
(the "Remittance Date"), each Servicer of the Mortgage Loans will remit to the
Trustee all funds held in its Custodial Account with respect to each Mortgage
Loan; provided, however, that Principal Prepayments may be remitted on the
Remittance Date in the month following the month of such prepayment. Each
Servicer will be required pursuant to the terms of the related Servicing
Agreement and as specified
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in the related Prospectus Supplement, to remit with each Principal Prepayment
interest thereon at the Remittance Rate through the last day of the month in
which such Principal Prepayment is made. Each Servicer is also required to
advance its own funds as described below.
ADVANCES
With respect to a delinquent Mortgage Loan, the related Servicer will be
obligated (but only to the extent set forth in the related Prospectus
Supplement) to advance its own funds or funds from its Custodial Account equal
to the aggregate amount of payments of principal and interest (adjusted to the
applicable Remittance Rate) which were due on a due date and which are
delinquent as of the close of business on the business day preceding the
Remittance Date ("Monthly Advance"). Generally such advances will be required
to be made by the Servicer unless the Servicer determines that such advances
ultimately would not be reimbursable under any applicable insurance policy,
from the proceeds of liquidation of the related Mortgaged Property, or from any
other source (any amount not so reimbursable being referred to herein as a
"Nonrecoverable Advance"). Such advance obligation will continue through the
month following the month of final liquidation of such Mortgage Loan. Any
Servicer funds thus advanced will be reimbursable to such Servicer out of
recoveries on the Multifamily Loans with respect to which such amounts were
advanced. The Servicers will also be obligated to make advances with respect
to certain taxes and insurance premiums not paid by Mortgagors on a timely
basis. Funds so advanced are reimbursable to the Servicers out of recoveries
on the related Mortgage Loans. Each Servicer's right of reimbursement for any
advance will be prior to the rights of the Trust to receive any related
Insurance Proceeds or Liquidation Proceeds.
COLLECTION AND OTHER SERVICING PROCEDURES
Each Servicer will service the Mortgage Loans pursuant to guidelines
established in the related Agreement.
Mortgage Loans. The Servicer will be responsible for making reasonable
efforts to collect all payments called for under the Mortgage Loans. The
Servicer will be obligated to follow such normal practices and procedures as it
deems necessary or advisable to realize upon a defaulted Mortgage Loan. In
this regard, the Servicer may (directly or through a local assignee) sell the
property at a foreclosure. The amount of the ultimate net recovery (including
the proceeds of any Credit Enhancement), after reimbursement to the Servicer of
its expenses incurred in connection with the liquidation of any such defaulted
Mortgage Loan and prior unreimbursed advances of principal and interest with
respect thereto will be deposited in the Certificate Account when realized and
will be distributed to Owners of Certificates on the next Distribution Date
following the month of receipt.
The Servicer will expend its own funds to restore property securing a
Mortgage Loan which has sustained uninsured damage only if it determines that
such restoration will increase the proceeds to the Trust of liquidation of the
Mortgage Loan after the reimbursement to the Servicer of its expenses.
If specified in the related Prospectus Supplement, the Servicer will
maintain with one or more depository institutions one or more accounts into
which it will deposit all payments of taxes, insurance premiums, assessments or
comparable items received for the account of the Mortgagors. Withdrawals from
such account or accounts may be made only to effect payment of taxes, insurance
premiums, assessments or comparable items, to reimburse the Servicer out of
related collections for any cost incurred in paying taxes, insurance premiums
and assessments or otherwise preserving or protecting the value of the
Mortgages, to refund to Mortgagors any amounts determined to be overages and to
pay interest to mortgagors on balances in such account or accounts to the
extent required by law.
So long as it acts as servicer of the Mortgage Loans, the Servicer will
be required to maintain certain insurance covering errors and omissions in the
performance of its obligations as servicer and certain fidelity bond coverage
ensuring against losses through wrongdoing of its officers, employees and
agents.
STANDARD HAZARD INSURANCE
The Servicer will be required to cause to be maintained, for each
Mortgage Loan, a standard hazard insurance policy with extended coverage in an
amount which is at least equal to the lesser of the original principal
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balance of the Mortgage Loan or the replacement cost of the related Mortgaged
Property. Where any part of any improvement to the related Mortgage Property
is located in an area identified by the Flood Emergency Management Agency as
having special flood hazards and flood insurance has been made available, the
Servicer is required to cause to be maintained with a generally acceptable
insurance carrier a flood insurance policy meeting the requirements of the
current guidelines of the Federal Insurance Administration, providing coverage
in an amount not less than (i) the original principal balance of the Mortgage
Loan, (ii) the insurable value of the related Mortgage Property, or (iii) the
maximum amount of insurance available under the Flood Disaster Protection Act
of 1973, as amended, whichever is less. Each Agreement may provide that the
related Servicer may satisfy its obligation to cause hazard insurance to be
maintained by maintaining a blanket policy insuring against hazard loss on the
Mortgage Loans serviced by such Servicer.
Additional insurance coverage for specific properties in a Mortgage Loan
Pool included in the Trust for a series of Certificates will be described in
the related Prospectus Supplement.
TITLE INSURANCE POLICIES
The Agreement will require that the lien on each Mortgaged Property is
insured by a valid title insurance policy and that such title insurance policy
contain no coverage exceptions, except those permitted pursuant to the
guidelines heretofore established by Seller and amended from time to time.
CLAIMS UNDER STANDARD HAZARD INSURANCE POLICIES; OTHER REALIZATION UPON
DEFAULTED LOANS
Each Servicer will present claims to the hazard insurer under any
related standard hazard insurance policy. All collections under any related
standard hazard insurance policy (less any proceeds to be applied to the
restoration or repair of the related Mortgaged Property) will be remitted to
the Trustee.
If any Mortgaged Property securing a defaulted Multifamily Loan is
damaged and proceeds, if any, from the related standard hazard insurance policy
are insufficient to restore the damaged property, each Servicer will be
required to expend its own finds to restore the damaged property. In the event
that a Servicer fails to make a required expenditure, another party, such as a
Master Servicer or Trustee, may be required to make such expenditure as
specified in the related Prospectus Supplement. In either case, the Servicer
will be required to make such expenditures only to the extent it determines
such expenditures are recoverable from Insurance Proceeds or Liquidation
Proceeds.
Foreclosure proceedings will be conducted by the Servicer with the
concurrence of the Depositor. If the proceeds of any liquidation of the
Mortgaged Property securing the defaulted Mortgage Loan are less than the
Principal Balance of the defaulted Mortgage Loan plus interest accrued thereon,
a loss will be realized on such Mortgage Loan, to the extent the applicable
Credit Enhancement is not sufficient, in the amount of such difference plus the
aggregate of expenses which are incurred by the Servicer in connection with
such proceedings and which are reimbursable under the Agreement. In such case
there will be a reduction in the value of the Mortgage Loans and the Trust may
be unable to recover the full amount of principal and interest due thereon.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
As compensation for its servicing duties, each Servicer will be entitled
to a monthly servicing fee in the amount specified in the related Prospectus
Supplement. In addition to the primary compensation, each Servicer will retain
all late payment charges, to the extent collected from Mortgagors.
As set forth above, each Servicer will be entitled to reimbursement for
certain expenses incurred by it in connection with the liquidation of defaulted
Mortgage Loans and in connection with advancing delinquent payments. No loss
will be suffered on the Certificates by reason of such expenses to the extent
claims for such expenses are paid directly under any form of Credit
Enhancement. In the event, however, that the defaulted Mortgage Loans are not
covered by any form of Credit Enhancement, or claims are either not made or
paid under such policies or Credit Enhancement, or if coverage thereunder has
ceased, such a loss will occur to the extent that the proceeds from the
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liquidation of a defaulted Mortgage Loan, after reimbursement of the Servicer's
expenses, are less than the Principal Balance of such defaulted Mortgage Loan.
POOLING AND ADMINISTRATION
The following summaries describe certain provisions of the Agreement.
The summaries do not purport to be complete and are subject to, and qualified
in their entirety by reference to, the provisions of the Agreement. Where
particular provisions or terms used in the Agreement are referred to, such
provisions or terms are as specified in the Agreement. In addition, certain of
the following summaries only apply to an Agreement relating to series of
Certificates for which the related Trust includes Mortgage Loans. Provisions
of the Agreement relating to series of Certificates for which the related Trust
includes other types of Mortgage Assets will be summarized and described in the
related Prospectus Supplement.
ASSIGNMENT OF MORTGAGE ASSETS
Assignment of the Mortgage Loans. The Depositor will cause the Mortgage
Loans constituting the Mortgage Loan Pool to be assigned to the Trustee,
together with principal and interest due on or with respect to the Mortgage
Loans on and after the Cut-Off Date specified in the related Prospectus
Supplement. The Trustee will, concurrently with such assignment, authenticate
and deliver the Certificates. Each Mortgage Loan will be identified in a
schedule appearing as an exhibit to the Agreement (the "Mortgage Loan
Schedule"). The Mortgage Loan Schedule may specify, with respect to each
Mortgage Loan: the original principal amount of the adjusted principal balance
as of the close of business of the Cut-Off Date; the Mortgage Loan Rate; the
current scheduled monthly payment of principal, if any, and interest; the
amortization schedule, including the term and any balloon payment requirement;
the maturity of the Mortgage Loan; if the Mortgage Loan is an Adjustable
Mortgage Loan, the initial Adjustable Mortgage Loan Rate, the maximum and
minimum permitted Adjustable Mortgage Loan Rate, if any, the Adjustable
Mortgage Loan Rate as of the Cut-Off Date, and the original and current margin
over the index, if any.
In addition, the Depositor will, as to each Mortgage Loan, deliver or
cause to be delivered to the Trustee, the mortgage note endorsed without
recourse, the mortgage or deed of trust with evidence of recording indicated
thereon and an assignment of the instrument to the Trust in recordable form
(but not yet recorded).
Each seller of Mortgage Loans generally will represent, with respect to
the Mortgage Loans sold by it, among other things, that (i) immediately prior
to the transfer and assignment of the Mortgage Loans, the seller had good title
to, and was the sole owner of, each Mortgage Loan and there has been no other
sale or assignment thereof, (ii) as of the date of such transfer, the Mortgage
Loans are subject to no offsets, defenses or counterclaims, (iii) each Mortgage
Loan at the time it was made complied in all material respects with applicable
state and federal laws, including usury, and disclosure laws, (iv) a lender's
policy of title insurance was issued on the date of the origination of each
Mortgage Loan and each such policy is valid and remains in full force and
effect, (v) as of the date of such transfer, each mortgage note subject to the
agreement is a valid first lien on the related Mortgaged Property (subject only
to (a) the lien of current real property taxes and assessments, (b) covenants,
conditions and restrictions, rights of way, easements and other matters of
public record as of the date of recording of such instrument of indebtedness,
such exceptions appearing of record and either being acceptable to mortgage
lending institutions generally or specifically reflected in the appraisal made
in connection with the origination of the related Mortgage Loan and (c) other
matters to which like properties are commonly subject which do not materially
interfere with the benefits of the security intended to be provided by the
instrument of indebtedness) and such property is free of material damage and is
in good repair, (vi) as of the date of such transfer, no Mortgage Loan is more
than 31 days delinquent in payment and there are no delinquent tax or
assessment liens against the related apartment project, and (vii) with respect
to each Mortgage Loan, if the Mortgaged Property is located in an area
identified by the Secretary of HUD as having special flood hazards and subject
in certain circumstances to the availability of flood insurance under the
National Flood Insurance Act of 1968, as amended, such Mortgaged Property is
covered by flood insurance if applicable regulations at the time such Mortgage
Loan was originated required that such flood insurance coverage be obtained.
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All the representations and warranties of an originator in respect of a
Mortgage Loan will have been made as of the date on which such originator sold
the Mortgage Loan to the Depositor or its affiliate; the date as of which such
representations and warranties were made may be a date prior to the date of the
initial issuance of the related series of Certificates. A substantial period
of time may have elapsed between the date as of which the representations and
warranties were made and the later date of initial issuance of the related
series of Certificates. Because the representations and warranties referred to
in the preceding paragraph are expected to be the only representations and
warranties that will be made by an originator, the originator's repurchase
obligations described below will not arise if, during the period commencing on
a date of sale of a Mortgage Loan by the originator to the Depositor or its
affiliate, the relevant event occurs that would have given rise to such an
obligation had the event occurred prior to the sale of the affected Mortgage
Loan. Nothing, however, has come to the Depositor's attention that would cause
it to believe that the representations and warranties referred to in the
preceding paragraph will not be accurate and complete in all material respects
in respect of Mortgage Loans as of the date of initial issuance of the related
series of Certificates.
Assignment of Mortgage-Backed Securities. With respect to each series,
the Depositor will cause any Mortgage-Backed Securities included in the related
Trust to be registered in the name of the Trustee. The Trustee (or its
custodian) will have possession of any certificated Mortgage-Backed Securities.
Unless otherwise specified in the related Prospectus Supplement, the Trustee
will not be in possession of or be assignee of record of any underlying assets
for a Mortgage-Backed Security. Each Mortgage-Backed Security will be
identified in a schedule appearing as an exhibit to the related Agreement which
may specify certain information with respect to such security, including, as
applicable, the original principal amount, outstanding principal balance as of
the Cut-Off Date, annual pass-through rate or interest rate and maturity date
and certain other pertinent information for each such security. The Depositor
will represent and warrant to the Trustee, among other things, the information
contained in such schedule is true and correct and that immediately prior to
the transfer of the related securities to the Trustee, the Depositor had good
title to, and was the sole owner of, each such security.
Repurchase or Substitution of Mortgage Loans. The Trustee will review
the documents delivered to it with respect to the Mortgage Loans included in
the related Trust. If any document is not delivered or is found to be
defective in any material respect and the Seller cannot deliver such document
or cure such defect within 90 days after notice thereof (which the Trustee will
undertake to give within 45 days of the delivery of such documents), and if any
other party obligated to deliver such document or cure such defect has not done
so and has not substituted or repurchased the affected Mortgage Loan, then the
Seller will, not later than the first date designated for the deposit of
payments into the Certificate Account (a "Deposit Date") which is more than ten
days after such 90-day period, (a) if so provided in the Prospectus Supplement
remove the affected Mortgage Loan from the Trust and substitute one or more
other Mortgage Loans therefor or (b) to repurchase the Mortgage Loan from the
Trustee for a price equal to 100% of its Principal Balance plus one month's
interest thereon at the applicable Remittance Rate. This repurchase and, if
applicable, substitution obligation constitutes the sole remedy available to
the Trustee against the Seller for a material defect in a document relating to
a Mortgage Loan.
The Seller will agree to either (a) cure any breach of any
representation or warranty that materially and adversely affects the interests
of the Trust in a Mortgage Loan (each, a "Defective Mortgage Loan") within 90
days of its discovery by the Seller or its receipt of notice thereof from the
Trustee, (b) repurchase such Defective Mortgage Loan not later than the first
Deposit Date which is more than ten days after such 90-day period for a price
equal to 100% of its Principal Balance plus one month's interest thereon at the
applicable Remittance Rate, or (c) if so specified in the Prospectus
Supplement, to remove the affected Mortgage Loan from the Trust and substitute
one or more other mortgage loans or contracts therefor. Such purchase price
will be deposited in the Certificate Account on such Deposit Date. This
repurchase and, if applicable, substitution obligation will constitute the sole
remedies available to the Trustee for any such breach.
If a REMIC election is to be made with respect to all or a portion of a
Trust, there may be federal income tax limitations on the right to substitute
Multifamily Loans.
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EVIDENCE AS TO COMPLIANCE
The Agreement will provide that on or before a specified date in each
year, beginning the first such date that is at least a specified number of
months after the Cut-Off Date, a firm of independent public accountants will
furnish a statement to the Trustee to the effect that, based on an examination
of certain specified documents and records relating to the servicing of the
Servicer's mortgage loan portfolio conducted substantially in compliance with
the audit program for mortgages serviced for FNMA or FHLMC, the United States
Department of Housing and Urban Development Mortgage Audit Standards or the
Uniform Single Audit Program for Mortgage Bankers (the "Applicable Accounting
Standards"), such firm is of the opinion that such servicing has been conducted
in compliance with the Applicable Accounting Standards except for (a) such
exceptions as such firm shall believe to be immaterial and (b) such other
exceptions as shall be set forth in such statement.
THE TRUSTEE
Any commercial bank or trust company serving as Trustee may have normal
banking relationships with the Depositor. In addition, the Servicer and the
Trustee acting jointly will have the power and the responsibility for
appointing co-trustees or separate trustees of all or any part of the Trust
relating to a particular series of Certificates. In the event of such
appointment, all rights, powers, duties and obligations conferred or imposed
upon the Trustee by the Agreement shall be conferred or imposed upon the
Trustee and such separate trustee or co-trustee jointly, or, in any
jurisdiction in which the Trustee shall be incompetent or unqualified to
perform certain acts, singly upon such separate trustee or co-trustee who shall
exercise and perform such rights, powers, duties and obligations solely at the
direction of the Trustee.
The Trustee will make no representations as to the validity or
sufficiency of the Agreement, the Certificates or of any Mortgage Loan or
Mortgage-Backed Securities or related document, and will not be accountable for
the use or application by the Depositor of any funds paid to the Depositor in
respect of the Certificates or the related assets, or amounts deposited in the
Certificate Account or deposited into the Distribution Account. If no Event of
Default, as defined herein, has occurred, the Trustee will be required to
perform only those duties specifically required of it under the Agreement.
However, upon receipt of the various certificates, reports or other instruments
required to be furnished to it, the Trustee will be required to examine them to
determine whether they conform to the requirements of the Agreement.
The Trustee may resign at any time, and the Depositor may remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Agreement, if the Trustee becomes insolvent or in such other instances, if any,
as are set forth in the Agreement. Following any resignation or removal of the
Trustee, the Servicer will be obligated to appoint a successor Trustee. Any
resignation or removal of the Trustee and appointment of a successor Trustee
does not become effective until acceptance of the appointment by the successor
Trustee.
ADMINISTRATION OF THE CERTIFICATE ACCOUNT
The Agreement will require that the Certificate Account be either (i)
maintained with a depository institution the debt obligations of which (or, in
the case of a depository institution which is a part of a holding company
structure, the debt obligations of the holding company of which) have a rating
acceptable to each rating agency that rated the Certificates, or (ii) an
account or accounts the deposits in which are fully insured by either the Bank
Insurance Fund (the "BIF") or the Savings Association Insurance Fund ("SAIF")
of the FDIC. The collateral eligible to secure amounts in the Certificate
Account is limited to United States government securities and other investments
acceptable to each rating agency that was requested to rate such series of
Certificates, and may include one or more Certificates of a series ("Eligible
Investments"). If so specified in the related Prospectus Supplement, a
Certificate Account may be maintained as an interest bearing account, or the
funds held therein maybe invested pending each succeeding Remittance Date in
Eligible Investments. If so specified in the related Prospectus Supplement,
the Servicer or its designee will be entitled to receive any such interest or
other income earned on funds in the Certificate Account as additional
compensation. The Servicer will deposit in the Certificate Account from
amounts previously deposited by it into the Servicer's Custodial Account on the
related Remittance Date the following payments and collections
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received or made by it on and after the Cut-Off Date (including scheduled
payments of principal and interest due on and after the Cut-Off Date but
received before the Cut-Off Date):
(i) all Mortgagor payments on account of principal, including
Principal Prepayments and, if specified in the related Prospectus
Supplement, prepayment penalties:
(ii) all Mortgagor payments on account of interest, adjusted to
the Remittance Rate;
(iii) all Liquidation Proceeds net of certain amounts reimbursed
to the Servicers, as described above;
(iv) all Insurance Proceeds, other than proceeds to be applied
to the restoration or repair of the related property or released to the
Mortgagor and net of certain amounts reimbursed to the Servicers, as
described above;
(v) all condemnation awards or settlements which are not
released to the Mortgagor in accordance with normal servicing
procedures;
(vi) any advances made as described under "Servicing of the
Mortgage Loans -- Advances" and certain other amounts required under the
Agreement to be deposited in the Certificate Account;
(vii) all proceeds of any Mortgage Loan or property acquired in
respect thereof repurchased by the Servicer, the Seller or otherwise as
described above or under "Termination" below;
(viii) all amounts, if any, required to be deposited in the
Certificate Account from any Credit Enhancement for the related series;
and
(ix) all other amounts required to be deposited in the
Certificate Account pursuant to the related Agreement.
REPORTS
Concurrently with each distribution on the Certificates, a statement
generally setting forth, to the extent applicable to any series, among other
things:
(i) the aggregate amount of such distribution allocable to
principal, separately identifying the amount allocable to each class;
(ii) the amount of such distribution allocable to interest,
separately identifying the amount allocable to each class;
(iii) the aggregate Certificate Principal Balance of each class
of the Certificates after giving effect to distributions on such
Distribution Date;
(iv) the aggregate Certificate Principal Balance of any class
of Compound Interest Certificates after giving effect to any increase in
such Principal Balance that results from the accrual of interest that is
not yet distributable thereon;
(v) if applicable, the amount otherwise distributable to
Owners of any class of Certificates that was distributed to Owners of
other classes of Certificates;
(vi) if any class of Certificates has priority in the right to
receive Principal Prepayments, the amount of Principal Prepayments in
respect of the related Mortgage Assets;
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(vii) the aggregate principal balance and number of Mortgage
Loans which were delinquent as to a total of two installments of
principal and interest; and
(viii) the aggregate principal balances of Mortgage Loans which
(a) were delinquent 30-59 days, 60-89 days, and 90 days or more, and (b)
were in foreclosure.
Customary information deemed necessary for Owners to prepare their tax
returns will be furnished annually.
FORWARD COMMITMENTS; PRE-FUNDING
The Trustee of a Trust may enter into a Pre-Funding Agreement for the
transfer of additional Mortgage Loans to such Trust following the date on which
such Trust is established and the related Certificates are issued. The Trustee
of a Trust may enter into Pre-Funding Agreements to permit the acquisition of
additional Mortgage Loans that could not be delivered by the Depositor or have
not formally completed the origination process, in each case prior to the
Delivery Date. Any Pre-Funding Agreement will require that any Mortgage Loans
so transferred to a Trust conform to the requirements specified in such Pre-
Funding Agreement. If a Pre-Funding Agreement is to be utilized, the related
Trustee will be required to deposit in the Pre-Funding Account all or a portion
of the proceeds received by the Trustee in connection with the sale of one or
more classes of Certificates of the related series; the additional Mortgage
Loans will be transferred to the related Trust in exchange for money released
from the related Pre-Funding Account. Each Pre-Funding Agreement will set a
specified period during which any such transfers must occur. The Pre-Funding
Agreement or the related Pooling and Servicing Agreement will require that, if
all moneys originally deposited to such Pre-Funding Account are not so used by
the end of such specified period, then any remaining moneys will be applied as
a mandatory prepayment of the related class or classes of Certificates as
specified in the related Prospectus Supplement. The specified period for the
acquisition by a Trust of additional Mortgage Loans is not expected to exceed
three months from the date such Trust is established.
SERVICER EVENTS OF DEFAULT
"Events of Default" under the Agreement will consist of (i) any failure
by the Servicer to duly observe or perform in any material respect any other of
its covenants or agreements in the Agreement materially affecting the rights of
Owners which continues unremedied for 60 days after the giving of written
notice of such failure to the Depositor by the Trustee or to the Servicer and
the Trustee by the Owners of Certificates evidencing interests aggregating not
less than 25% of the affected class of Certificates; and (ii) certain events of
insolvency, readjustment of debt, marshaling of assets and liabilities or
similar proceedings and certain actions by the Depositor indicating its
insolvency, reorganization or inability to pay its obligations.
If specified in the Prospectus Supplement, the Agreement will permit the
Trustee to sell the Mortgage Loans or Mortgage-Backed Securities and the other
assets of the Trust in the event that payments in respect thereto are
insufficient to make payments required in the Agreement. The assets of the
Trust will be sold only under the circumstances and in the manner specified in
the Prospectus Supplement.
RIGHTS UPON SERVICER EVENT OF DEFAULT
As long as an Event of Default under the Agreement remains unremedied by
the Servicer, the Trustee, or, to the extent provided in the Prospectus
Supplement, a provider of Credit Enhancement and Owners of Certificates may
terminate all the rights and obligations of the Servicer under the Agreement,
whereupon the Trustee, or a new Servicer appointed pursuant to the Agreement,
will succeed to all the responsibilities, duties and liabilities of the
Servicer under the Agreement and will be entitled to similar compensation
arrangements. The Servicer shall be entitled to payment of certain amounts
payable to it under the Agreement, notwithstanding the termination of its
activities as servicer. Following such termination, the Depositor shall
appoint any established housing finance institution satisfying the
qualification standards established in the Agreement to act as successor to the
Servicer under the Agreement. If no such successor shall have been appointed
within 30 days following such termination, then either the Depositor or the
Trustee may petition a court of competent jurisdiction for the appointment of a
successor Servicer. Pending the appointment of a successor Servicer, the
Trustee shall act as Administrator. The Trustee, the
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Depositor and such successor may agree upon the servicing compensation to be
paid, which in no event may be greater than the compensation to the Servicer
under such Agreement.
The Owners of Certificates will not have any right under the Agreement
to institute any proceeding with respect to the Agreement, unless they
previously have given to the Trustee written notice of default and unless the
Owners of the percentage of Certificates specified in the Prospectus Supplement
have made written request to the Trustee to institute such proceeding in its
own name as Trustee thereunder and have offered to the Trustee reasonable
indemnity and the Trustee for 60 days has neglected or refused to institute any
such proceedings. However, the Trustee is under no obligation to exercise any
of the trusts or powers vested in it by the Agreement or to make any
investigation of matters arising thereunder or to institute, conduct or defend
any litigation thereunder or in relation thereto at the request, order or
direction of any of the Owners, unless such Owners have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities
which may be incurred therein or thereby.
AMENDMENT
The Agreement may be amended by the Depositor, the Servicer and the
Trustee, without the consent of the Owners of the Certificates, to cure any
ambiguity, to correct or supplement any provision therein which may be
defective or inconsistent with any other provision therein, to take any action
necessary to maintain REMIC status of any Trust as to which a REMIC election
has been made or to add any other provisions with respect to matters or
questions arising under the Agreement which are not materially inconsistent
with the provisions of the Agreement; provided that such action will not, as
evidenced by an opinion of counsel satisfactory to the Trustee, adversely
affect in any material respect the interests of any Owners of Certificates of
that series. The Agreement may also be amended by the Depositor, the Servicer
and the Trustee with the consent of the Owners of the Certificates evidencing
interests aggregating not less than 66% of the aggregate Certificate Principal
Balance of the Certificates of the applicable series for the purpose of adding
any provisions to or changing in any manner or eliminating any of the
provisions of such Agreement or of modifying in any manner the rights of the
Owners of the Certificates of that series; provided, however, that no such
amendment may (i) reduce in any manner the amount of, or delay the timing of,
collections of payments received on the related Mortgage Assets or
distributions which are required to be made on any Certificate without the
consent of the Owners of such Certificate, (ii) adversely affect in any
material respect the interests of the Owners of any class of Certificates in
any manner other than as described in (i), without the consent of the Owners of
Certificates of such class evidencing not less than 66% of the interests of
such class or (iii) reduce the aforesaid percentage of Certificates of any
class required to consent to any such amendment, without the consent of the
Owners of all Certificates of such class then outstanding,
TERMINATION
The obligations of the Depositor, the Servicer, and the Trustee created
by the Agreement will terminate upon the payment as required by the Agreement
of all amounts held by the Servicer or in the Certificate Account and required
to be paid to them pursuant to the Agreement after the later of (i) the
maturity or other liquidation of the last Mortgage Asset subject thereto or the
disposition of all property acquired upon foreclosure of any such Mortgage Loan
or (ii) the repurchase by the Depositor from the Trust of all the outstanding
Certificates or all remaining assets in the Trust. The Agreement will
establish the repurchase price for the assets in the Trust and the allocation
of such purchase price among the classes of Certificates. The exercise of such
right will effect early retirement of the Certificates of that series, but the
Depositor's right so to repurchase will be subject to the conditions described
in the related Prospectus Supplement. If a REMIC election is to be made with
respect to all or a portion of a Trust, there may be additional conditions to
the termination of such Trust which will be described in the related Prospectus
Supplement. In no event, however, will the trust created by the Agreement
continue beyond the expiration of 21 years from the death of the survivor of
certain persons named in the Agreement. The Trustee will give written notice
of termination of the Agreement to each Owner and the final distribution will
be made only upon surrender and cancellation of the Certificates at an office
or agency of the Trustee specified in such notice of termination.
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USE OF PROCEEDS
Substantially all the net proceeds to be received from the sale of each
series of Certificates will be applied to the simultaneous purchase of the
Mortgage Assets related to such series (or to reimburse the amounts previously
used to effect such a purchase), the costs of carrying such Mortgage Assets
until sale of the Certificates and to pay other expenses.
THE DEPOSITOR
The Depositor will have no obligations or responsibilities with respect
to any Mortgage Loan. The Depositor does not have, nor is it expected in the
future to have, any significant net worth.
As specified in the related Prospectus Supplement, the Servicer with
respect to any series of Certificates evidencing interests in Mortgage Loans
may be an affiliate of the Depositor. The Depositor anticipates that it will
acquire Mortgage Assets in the open market or in privately negotiated
transactions, which may be through or from an affiliate.
Neither the Depositor nor any of its affiliates will insure or guarantee
the Certificates of any series.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS
The following discussion contains summaries of certain legal aspects of
multifamily mortgage loans which are general in nature. Because such legal
aspects are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Mortgage Loans is situated. The summaries are qualified
in their entirety be reference to the applicable federal and state laws
governing the Mortgage Loans.
THE MORTGAGE LOANS
GENERAL
The Mortgage Loans will be secured either by mortgages, deeds of trust
or deeds to secure debt, depending upon the prevailing practice in the state in
which the Mortgaged Property is located. A mortgage creates a lien upon the
real property encumbered by the mortgage. It is not prior to the lien for real
estate taxes and assessments. Priority between mortgages depends on their
terms and generally on the order of filing with a state or county office.
There are two parties to a mortgage: the mortgagor, who is the borrower and
homeowner or the land trustee (as described below), and the mortgagee, who is
the lender. Under the mortgage instrument, the mortgagor delivers to the
mortgagee a note or bond and the mortgage. Although a deed of trust is similar
to a mortgage, a deed of trust formally has three parties, the borrower-
homeowner called the trustor (similar to a mortgagor), a lender (similar to a
mortgagee) called the beneficiary, and a third-party grantee called the
trustee. Under a deed of trust, the borrower grants the property, irrevocably
until the debt is paid, in trust and generally with a power of sale, to the
trustee to secure payment of the obligation. The trustee's authority under a
deed of trust and the mortgagee's authority under a mortgage are governed by
law, the express provisions of the deed of trust or mortgage and, in some
cases, the directions of the beneficiary.
LEASES AND RENTS
Mortgages that encumber income-producing property often contain an
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease
and the income derived therefrom, while (unless rents are to be paid directly
to the lender) retaining a revocable license to collect the rents for so long
as there is no default. If the borrower defaults, the license terminates and
the
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lender is entitled to collect the rents. Local law may require that the lender
take possession of the property and/or obtain a court-appointed receiver before
becoming entitled to collect the rents.
In most states, hotel and motel room rates are considered accounts
receivable under the Uniform Commercial Code ("UCC"); in cases where hotels or
motels constitute loan security, the rates are generally pledged by the
borrower as additional security for the loan. In general, the lender must file
financing statements in order to perfect its security interest in the rates and
must file continuation statements, generally every five years, to maintain
perfection of such security interest. Even if the lender's security interest
in room rates is perfected under the UCC, it will generally be required to
commence a foreclosure action or otherwise take possession of the property in
order to collect the room rates following a default.
FORECLOSURE
Foreclosure of a deed of trust is generally accomplished by a non-
judicial trustee's sale under a specific provision in the deed of trust that
authorizes the trustee to sell the property to a third party upon any default
by the borrower under the terms of the note or deed of trust. In some states,
the trustee must record a notice of default and send a copy to the borrower-
trustor and any person who has recorded a request for a copy of a notice of
default and notice of sale. In addition, the trustee must provide notice in
some states to any other individual having an interest in the real property,
including any junior lienholders. The borrower, or any other person having a
junior encumbrance on the real estate, may, during a reinstatement period, cure
the default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation. Generally, state law controls the amount
of foreclosure expenses and costs, including attorney's fees' which may be
recovered by a lender. If the deed of trust is not reinstated, a notice of
sale must be posted in a public place and, in most states, published for a
specific period of time in one or more newspapers. In addition, some state
laws require that a copy of the notice of sale be posted on the property and
sent to all parties having an interest in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action.
The action is initiated by the service of legal pleadings upon all parties
having an interest in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties defendant. Judicial foreclosure proceedings are often not protested by
any of the parties defendant. However, when the mortgagee's right to foreclose
is contested, the legal proceedings necessary to resolve the issue can be time
consuming. After the completion of judicial foreclosure, the court generally
issues a judgment of foreclosure and appoints a referee or other court officer
to conduct the sale of the property.
In case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty a potential buyer at the sale would
have in determining the exact status of title and because the physical
condition of the property may have deteriorated during foreclosure proceedings,
it is uncommon in most jurisdictions for a third party to purchase the property
at the foreclosure sale. Rather it is common for the lender to purchase the
property from the trustee or referee for an amount equal to the principal
amount of the mortgage or deed of trust, accrued and unpaid interest and
expenses of foreclosure. Thereafter, the lender will assume the burdens of
ownership, including paying real estate taxes, obtaining casualty insurance and
making such repairs at its own expense as are necessary to render the property
suitable for sale. The lender will commonly obtain the services of a real
estate broker and pay the broker's commission in connection with the sale of
the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property.
Any loss may be reduced by the receipt of any mortgage insurance proceeds.
A sale conducted in accordance with the terms of the power of sale
contained in a mortgage or deed of trust is generally presumed to be conducted
regularly and fairly, and a conveyance of the real property by the trustee
confers, in most states, legal title to the real property to the purchaser,
free of all junior mortgages or deeds of trust and free of all other liens and
claims subordinate to the mortgage or deed of trust under which the sale is
made (with the exception of certain governmental liens). The purchaser's title
is, however, subject to all senior liens, encumbrances and mortgages and may be
subject to mechanic's and materialman's liens in some states.
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The proceeds received by the sheriff or trustee from the sale are
applied pursuant to the terms of the deed of trust, which may require
application first to the costs, fees and expenses of sale and then in
satisfaction of the indebtedness secured by the mortgage or deed of trust under
which the sale was conducted. In some states, any surplus money remaining may
be available to satisfy claims of the holders of junior mortgages or deeds of
trust and other junior liens and claims in order of their priority, whether or
not the mortgagor or trustee is in default, while in some states, any surplus
money remaining may be payable directly to the mortgagor or trustor. Any
balance remaining is generally payable to the mortgagor or trustor.
Right of Redemption. In some states, after sale pursuant to a deed of
trust or foreclosure of a mortgage, the borrower and foreclosed junior lienors
are given a statutory period in which to redeem the property following
foreclosure. The right of redemption should be distinguished from the equity
of redemption, which is a non statutory right that must be exercised before
foreclosure. In some states, redemption may occur only upon payment of the
entire principal balance of the loan, accrued interest and expenses of
foreclosure. In other states, redemption may be authorized if the former
borrower pays only a portion of the sums due. The effect of a statutory right
of redemption is to diminish the ability of the lender to sell the foreclosed
property. The rights of redemption would defeat the title of any purchaser
from the lender subsequent to foreclosure or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to retain the property and pay the expenses of ownership until the
redemption period has run.
ln addition, numerous other statutory provisions, including the federal
bankruptcy laws and state laws affording relief to debtors, may interfere with
or affect the ability of the secured mortgage lender to realize upon
collateral. For example, with respect to federal bankruptcy law, a court with
federal bankruptcy jurisdiction may permit a debtor through a Chapter 11
rehabilitative plan to cure a monetary default in respect of a mortgage loan by
paying arrearages within a reasonable time period and reinstating the original
mortgage loan payment schedule even though the lender accelerated the mortgage
loan and final judgment of foreclosure had been entered in state court
(provided no sale of the residence had yet occurred) prior to the filing of the
debtor's petition. Some courts with federal bankruptcy jurisdiction have
approved plans, based on the particular fact of the reorganization case, that
effected the curing of a mortgage loan default by paying arrearages over a
number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that such modifications may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule and reducing the lender's security interest to the value of
the residence, thus leaving the lender a general unsecured creditor for the
difference between the value of the residence and the outstanding balance of
the loan.
The Internal Revenue Code of 1986, as amended, provides priority to
certain tax liens over the lien of the mortgage.
Enforceability of Certain Provisions. Certain of the Mortgage Loans
will contain due-on-sale classes. These clauses permit the lender to
accelerate the maturity of a loan if the borrower sells, transfers, or conveys
the property. The enforceability of these clauses was the subject of
legislation or litigation in many states, and in some cases the enforceability
of these clauses was limited or denied. However, the Garn-St. Germain
Depository Institutions Act of 1982 (the "Garn-St. Germain Act") preempts state
constitutional, statutory and case law prohibiting the enforcement of due-on-
sale clauses and permits lenders to enforce these clauses in accordance with
their terms, subject to certain limited exceptions. The Garn-St. Germain Act
does "encourage" lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
The Garn-St. Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the Garn-St. Germain Act (including federal
savings and loan associations and federal savings banks) may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property
may have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St. Germain Act by the
Federal Home Loan Bank Board as succeeded by the Office of Thrift Supervision
("OTS"), also prohibit the imposition of a prepayment penalty upon the
acceleration of a loan pursuant to a due-on-sale clause. Any inability of the
Depositor to enforce due-on-sale
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clauses may affect the average life of the Multifamily Loans and the number of
Multifamily Loans that may be outstanding until maturity.
Upon foreclosure, courts have imposed general equitable principles.
These equitable principles are generally designed to relieve the borrower from
the legal effect of his defaults under the loan documents. Examples of
judicial remedies that have been fashioned include requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right
of the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower falling to adequately maintain the property or
the borrower executing a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or
not federal or state constitutional provisions reflecting due process concerns
for adequate notice require that borrowers under deeds of trust or mortgages
receive notices in addition to the statutorily-prescribed minimum. For the
most part, these cases have upheld the notice provisions as being reasonable or
have fund that the sale by a trustee under a deed of trust, or under a mortgage
having a power of sale, does not involve sufficient state action to afford
constitutional protections to the borrower.
The standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states,
there are or may be specific limitations upon late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if
the loan is prepaid. Under the Agreement, late charges (to the extent
permitted by law and not waived by the Servicer) will be retained by the
Servicer as additional servicing compensation.
Adjustable Rate Loans. The laws of certain states may provide that
mortgage notes relating to adjustable rate loans are not negotiable instruments
under the Uniform Commercial Code. In such event, the Trustee will not be
deemed to be a "holder in due course," within the meaning of the Uniform
Commercial Code and may take such a mortgage note subject to certain
restrictions on its ability to foreclose and to certain contractual defenses
available to a mortgagor.
Environmental Risks. Real property pledged as security to a lender may
be subject to unforeseen environmental risks. Under the laws of certain
states, contamination of a property may give rise to a lien on the property to
assure the payment of costs of clean-up. In several states such a lien has
priority over the lien of an existing mortgage against such property. In
addition, under the laws of some states and under the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), a
lender may be liable, as an "owner" or "operator," for costs of addressing
releases or threatened releases of hazardous substances that require remedy at
a property, if agents or employees of the lender have become sufficiently
involved in the operations of a borrower, regardless of whether or not the
environmental damage or threat was caused by a prior owner. A lender also
risks such liability on foreclosure of the Mortgaged Premises. Excluded from
CERCLA's definition of "owner" or "operator," however, is a person "who without
participating in the management of the facility, holds indicia of ownership
primarily to protect his security interest." On April 29, 1992, the United
States Environmental Protection Agency ("EPA") issued a final rule intended to
protect lenders from liability under CERCLA. This rule was in response to a
1990 decision of the United States Court of Appeals for the Eleventh Circuit,
United States v. Fleet Factors Corp., which narrowly construed the security
interest exemption under CERCLA to hold lenders liable if they had the capacity
to influence their borrower's management of hazardous waste. While the scope
of permissible activities in which a lender may engage to protect its security
interest is still uncertain and the rule will not protect a lender against
liability under other laws or theories, EPA's rule provides conditions under
which a lender may demonstrate that it holds indicia of ownership primarily to
protect its security interest and does not participate in the management of the
facility. If a lender is or becomes liable, it can bring an action for
contribution against the owner or operator who created the environmental
hazard, but that person or entity may be bankrupt or otherwise judgment proof.
Such clean-up costs may be substantial. It is possible that such costs could
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become a liability of the Trust Estate and occasion a loss in certain
circumstances described above if such remedial costs were incurred.
The Agreement provides that the Servicer may not acquire title to any
Mortgaged Property or take over its operation unless (i) directed, in writing,
by the Trustee to do so and (ii) the Servicer has previously determined, based
upon a report prepared by a person who regularly conducts environmental audits,
that such Mortgaged Property is in compliance with applicable environmental
laws and regulations or that such acquisition would not be more detrimental
than beneficial to the value of the Mortgaged Property and the interest therein
of the Trust. Title to any Mortgaged Property may not be foreclosed upon in
the name of the Trustee without the Trustee's prior written consent.
Leasehold Risks. Mortgage Loans may be secured by a mortgage on the
borrower's leasehold interest in a ground lease. Leasehold mortgage loans are
subject to certain risks not associated with mortgage loans secured by a lien
on the fee estate of the borrower. The most significant of these risks is that
if the borrower's leasehold were to be terminated upon a lease default or the
lessee's bankruptcy, the leasehold mortgagee would lose its security. This
risk may be lessened or substantially eliminated if the ground lease requires
the lessor to give the leasehold mortgagee notices of lessee defaults and an
opportunity to cure them, permits the leasehold estate to be assigned to and by
the leasehold mortgagee or the purchaser at a foreclosure sale, grants the
leasehold mortgagee the right to a new lease if the lessee's lease is
terminated in a bankruptcy proceeding and contains certain other protective
provisions typically included in a "mortgageable" ground lease.
Under the Bankruptcy Code, a landlord in bankruptcy may "reject" an
unexpired lease. If it does, the Bankruptcy Code permits the lessee to either
treat the least as terminated (an election that "mortgageable" ground leases
would prohibit) or "remain in possession of the leasehold." 11 U.S.C. Section
365(g). The legislative history of this provision indicates that Congress
intended that lessees that elected to remain "possession of the leasehold" were
entitled to retain all of their leasehold rights under the reject lease, and
there is case law that construes the Bankruptcy Code consistent with that
intent. See e.g. Chestnut Ridge Plaza Associates, L.P. v. Fox Grocery Co. (In
re Chestnut Ridge Plaza Associates, L.P.). 156 B.R. 477 (Bankr. W.D. Pa. 1993).
However, some recent bankruptcy court decisions have held that a lessee's
rights under a lease rejected by a landlord in bankruptcy are limited to the
lessee's own physical possession of the leased premises under the terms of the
lease, and that the rejected lease does not otherwise continue. Thus, in In re
Carlton Restaurant, Inc. 151 B.R. 353 (Bankr. E.D. Pa. 1993) the court held
that a landlord's rejection of a lease in bankruptcy "excuses [it] from
accepting performance by a party other than a lessee who remains in
possession."
Although none of the cases that have taken a restrictive view of the
rights of a lessee under a rejected lease involved a leasehold mortgage, whose
security might have been impaired as a result of the court's holding, the
holding that a landlord that rejects a lease in bankruptcy need not honor the
right to assign that lease or to recognize a sublease casts doubt upon the
ability of a leasehold mortgagee to realize upon its security in the case of
the bankruptcy of the ground lessor. Representatives of the real estate
lending industry, which has lent billions of dollars on the security of ground
leases, have strongly criticized these cases. As a result, Congress is
considering legislation that would, if passed, clarify the Bankruptcy Code to
effectively overrule them. However, unless and until such legislation is
passed or the cases are overruled, some uncertainty will remain and ground
lessee/borrowers may find it difficult to refinance their mortgages.
INSTALLMENT CONTRACTS
The Mortgage Loans may also consist of Installment Contracts. Under an
Installment Contract the seller (hereinafter referred to in this Section as the
"lender") retains legal title to the property and enters into an agreement with
the purchaser (hereinafter referred to in this Section as the "borrower") for
the payment of the purchase price, plus interest, over the term of such
contract. Only after full performance by the borrower of the contract is the
lender obligated to convey title to the real estate to the purchaser. As with
mortgage or deed of trust financing, during the effective period of the
Installment Contract, the borrower is generally responsible for maintaining the
property in good condition and for paying real estate taxes, assessments and
hazard insurance premiums associated with the property.
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The method of enforcing the rights of the lender under an Installment
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to its terms. The terms of Installment Contracts
generally provide that upon a default by the borrower, the borrower loses his
or her right to occupy the property, the entire indebtedness is accelerated,
and the buyer's equitable interest in the property is forfeited. The lender in
such a situation does not have to foreclose in order to obtain title to the
property, although in some cases a quiet title action is in order if the
borrower has filed the Installment Contract in local land records and an
ejectment action may be necessary to recover possession. In a few states,
particularly in cases of borrower default during the early years of an
Installment Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Installment Contracts from the harsh consequences of
forfeiture. Under such statutes, a judicial or nonjudicial foreclosure may be
required, the lender may be required to give notice of default and the borrower
may be granted some grace period during which the contract may be reinstated
upon full payment of the default amount and the borrower may have a post-
foreclosure statutory redemption right. In other states, courts in equity may
permit a borrower with significant investment in the property under an
Installment Contract for the sale of real estate to share in the proceeds of
sale of the property after the indebtedness is repaid or may otherwise refuse
to enforce the forfeiture clause. Nevertheless, generally speaking, the
lender's procedures for obtaining possession and clear title under an
Installment Contract for the real estate in a given state are simpler and less
time-consuming and costly than are the procedure for foreclosing and obtaining
clear title to a mortgaged property.
SUBORDINATE FINANCING
Certain of the Mortgage Loans may not restrict the ability of the
borrower to use the Mortgaged Property as security for one or more additional
loans. Where a borrower encumbers a Mortgaged Property with one or more junior
liens, the senior lender is subjected to additional risk. First, the borrower
may have difficulty servicing and repaying multiple loans. Moreover, if the
subordinate financing permits recourse to the borrower (as is frequently the
case) and the senior loan does not, a borrower may have more incentive to repay
sums due on the subordinate loan. Second, acts of the senior lender that
prejudice the junior lender or impair the junior lender's security may create a
superior equity in favor of the junior lender. For example, if the borrower
and the senior lender agree to an increase in the principal amount of or the
interest rate payable on the senior loan, the senior lender may lose its
priority to the extent any existing junior lender is harmed or the borrower is
additionally burdened. Third, if the borrower defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions
taken by junior lenders can impair the security available to the senior lender
and can interfere with or delay the taking of action by the senior lender.
Moreover the bankruptcy of a junior lender may operate to stay foreclosure or
similar proceedings by the senior lender.
LEGAL INVESTMENT MATTERS
The Certificates may constitute "mortgage related securities" for
purposes of SMMEA, so long as they are rated in one of the two highest rating
categories by the Rating Agency or Agencies identified in the related
Prospectus Supplement and, as such, would be legal investments for persons,
trusts, corporations, partnerships, associations, business trusts and business
entities (including but not limited to state-chartered savings banks,
commercial banks, saving and loan associations and insurance companies, as well
as trustees and state government employee retirement systems) created pursuant
to or existing under the laws of the United States or any State (including the
District of Columbia and Puerto Rico) whose authorized investments are subject
to State regulation to the same extent that, under applicable law, obligations
issued by or guaranteed as to principal and interest by the United States or
any agency or instrumentality thereof constitute legal investments for such
entities. Under SMMEA, in all States which enacted legislation prior to
October 4, 1991 specifically limiting the legal investment authority of any of
such entities with respect to "mortgage related securities," the Certificates
will constitute legal investments for entities subject to such legislation only
to the extent provided in such legislation SMMEA provides, however, that in no
event will the enactment of any such legislation affect the validity of any
contractual commitment to purchase, bold or invest in any securities or require
the sale or over disposition of any securities, so long as such contractual
commitment was made or such securities were acquired prior to the enactment of
such legislation. Alaska, Arkansas, Colorado, Connecticut, Delaware, Florida,
Georgia, Illinois, Kansas, Louisiana, Maryland, Michigan, Missouri, Nebraska,
New Hampshire,
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New York, North Carolina, Ohio, South Dakota, Utah, Virginia and West Virginia
each enacted legislation overriding the exemption afforded by SMMEA prior to
the October 4, 1991 deadline.
Institutions whose investment activities are subject to legal investment
laws or regulations or review by certain regulatory authorities may be subject
to restrictions on investment in certain classes of the Certificates. Any
financial institution which is subject to the jurisdiction of the Comptroller
of the Currency, the Board of Governors of the Federal Reserve System, the
FDIC, the OTS, the NCUA or other federal or state agencies with similar
authority should review any applicable rules, guidelines and regulations prior
to purchasing the certificates. The Federal Financial Institutions Examination
Council, for example, has issued a Supervisory Policy Statement on Securities
Activities effective February 10, 1992 (the "Policy Statement"). The Policy
Statement has been adopted by the Comptroller of the Currency, the Federal
Reserve Board, the FDIC and the OTS with respect to the depository institutions
that they regulate. The Policy Statement prohibits depository institutions
from investing in certain "high-risk mortgage securities" except under limited
circumstances, and sets forth certain investment practices deemed to be
unsuitable for regulated institutions. The NCUA issued final regulations
effective December 2, 1991 that restrict and in some instances prohibit the
investment by federal credit unions in certain types of mortgage related
securities.
The foregoing does not take into consideration the applicability of
statutes, rules, reunions, orders, felines or agreements generally governing
investments made by a particular investor, including, but not limited to
"prudent investor" provisions, percentage-of-assets limits and provisions which
may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying."
Notwithstanding SMMEA, there may be other restrictions on the ability of
certain investors, including depository institutions, either to purchase
Certificates or to purchase Certificates representing more than a specified
percentage of the investors' assets.
Investors should consult their own legal advisors in determining whether
and to what extent the Certificates constitute legal investments for such
investors.
ERISA CONSIDERATIONS
ERISA imposes requirements on employee benefit plans (and on certain
other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and collective investment funds and
separate accounts in which such plans, accounts or arrangements are invested)
(collectively, "Plans") subject to ERISA and on persons who are fiduciaries
with respect to such Plans. Among other things, ERISA requires that the assets
of Plans be held in trust and that the trustee, or other duly authorized
fiduciary, have exclusive authority and discretion to manage and control the
assets of such Plan. ERISA also imposes certain duties on persons who are
fiduciaries of Plans. Under ERISA, any person who exercises any authority or
control respecting the management or disposition of the assets of a Plan is
considered to be a fiduciary of such Plan (subject to certain exceptions not
here relevant). In addition to the imposition of general fiduciary standards
of investment prudence and diversification, ERISA prohibits a broad range of
transactions involving Plan assets and persons ("Parties in Interest") having
certain specified relationships to a Plan and imposes additional prohibitions
where Parties in Interest are fiduciaries with respect to such Plan.
The United States Department of Labor (the "DOL") has issued regulations
concerning the definition of what constitutes the assets of a Plan. (DOL Reg
Section 2510.3-101). Under this regulation, the underlying assets and
properties of corporations, partnerships and certain other entities in which a
Plan makes an "equity" investment could be deemed for purposes of ERISA to be
assets of the investing Plan in certain circumstances. In such cases, the
fiduciary making such an investment for the Plan could be deemed to have
delegated his or her asset management responsibility, and the underlying assets
and properties could be subject to ERISA reporting and disclosure. Certain
exceptions to the regulation may apply in the case of a Plan's investment in
the Certificates, but the Depositor cannot predict in advance whether such
exceptions apply due to the factual nature of the conditions to be met.
Accordingly, because the Multifamily Loans or Multifamily Mortgage-Backed
Securities may be deemed Plan assets of each Plan that purchases Certificates,
an investment in the Certificates by a Plan might give rise to a prohibited
transaction under
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ERISA Sections 406 and 407 and be subject to an excise tax under Code Section
4975 unless a statutory or administrative exemption applies.
DOL Prohibited Transaction Exemption 83-1 ("PTE 83-1") exempts from
ERISA's prohibited transaction rules certain transactions relating to the
operation of residential mortgage investment trusts and the purchase, sale and
holding of "mortgage pool pass-through certificates" in the initial issuance of
such certificates. PTE 83-1 permits, subject to certain conditions,
transactions which might otherwise be prohibited between Plans and Parties in
Interest with respect to those Plans involving the origination, maintenance and
termination of mortgage pools consisting of mortgage loans secured by first or
second mortgages or deeds of trust on single-family residential property, and
the acquisition and holding of certain mortgage pool pass- through certificates
representing an interest in such mortgage pools by PTE.
PTE 83-1 sets forth three general conditions which must be satisfied for
any transaction to be eligible for exemption: (i) the maintenance of a system
of insurance or other protection for the pooled mortgage loans and property
securing such loans, and for indemnifying owners against reductions in pass-
through payments due to property damage or defaults in loan payments in an
amount not less than the greater of one percent of the aggregate principal
balance of all covered pooled mortgage loans or the principal balance of the
largest covered pooled mortgage loan, (ii) the existence of a pool trustee who
is not an affiliate of the Depositor, and (iii) a limitation on the amount of
the payments retained by the pool sponsor, together with other funds inuring to
its benefit, to not more than adequate consideration for selling the mortgage
loans plus reasonable compensation for services provided by the pool sponsor.
Although the Trustee for any series of Certificates will be unaffiliated
with the Depositor, there can be no assurance that the system of insurance or
subordination will meet the general or specific conditions referred to above.
In addition, the nature of a Trust's assets or the characteristics of one or
more classes of the related series of Certificates may not be included within
the scope of PTE 83-1 or any other class exemption under ERISA. The Prospectus
Supplement will provide additional information with respect to the application
of ERISA and the Code to the related Certificates.
Several underwriters of mortgage-backed securities have applied for and
obtained ERISA prohibited transactions exemptions which are in some respects
broader than PTE 83-1. Such exemptions can only apply to mortgage-backed
securities which, among other conditions, are sold in an offering with respect
to which such underwriter serves as the sole or a managing underwriter, or as a
selling or placement agent. Several other underwriters have applied for
similar exemptions. If such an exemption might be applicable to a series of
Certificates, the related Prospectus Supplement will refer to such possibility.
Each Plan fiduciary who is responsible for making the investment
decisions whether to purchase or commit to purchase and to hold Certificates
must make its own determination as to whether the general and the specific
conditions of PTE 83-1 have been satisfied or as to the availability of any
other prohibited transaction exemptions Each Plan fiduciary should also
determine whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the Certificates is appropriate for the
Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
Any Plan proposing to invest in Certificates should consult with its
counsel to confirm that such investment will not result in a prohibited
transaction and will satisfy the other requirements of ERISA and the Code.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is based upon the opinion of Arter & Hadden, special
counsel to the Depositor, with respect to the material federal income tax
consequences of the purchase, ownership and disposition of Certificates. 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, as well as final regulations
concerning
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REMICs (the "REMIC Regulations") promulgated on December 23, 1992, and final
regulations under Sections 1271 through 1273 and 1275 of the Code concerning
debt instruments promulgated on January 27, 1994 (the "OID Regulations"). The
Depositor intends to rely on the OID Regulations for all Certificates offered
pursuant to this Prospectus; however, investors should be aware that the OID
Regulations do not adequately address certain issues relevant to prepayable
securities, such as the Certificates. Investors should consult their own tax
advisors in determining the federal, state, local and any other tax
consequences to them of the purchase, ownership and disposition of
Certificates. The Prospectus Supplement for each series of Certificates will
discuss any special tax consideration applicable to any class of Certificates
of such series, and the discussion below is qualified by any such discussion in
the related Prospectus Supplement.
For purposes of this opinion, where the applicable Prospectus Supplement
provides for a fixed retained yield with respect to the Mortgage Assets
underlying a series of Certificates, references to the Mortgage Assets will be
deemed to refer to that portion of the Mortgage Assets held by the Trust which
does not include the fixed retained yield.
FEDERAL INCOME TAX CONSEQUENCES FOR REMIC CERTIFICATES
General. With respect to a particular series of Certificates, an
election may be made to treat the Trust or one or more trusts or segregated
pools of assets therein as one or more REMICs within the meaning of Code
Section 860D. A Trust or a portion or portions thereof as to which one or more
REMIC elections will be made will be referred to as a "REMIC Pool." For
purposes of this discussion, Certificates of a series as to which one or more
REMIC elections are made are referred to as "REMIC Certificates" and will
consist of one or more classes of "Regular Certificates" and one class of
"Residual Certificates" in the case of each REMIC Pool. Qualification as a
REMIC requires ongoing compliance with certain conditions. With respect to
each series of REMIC Certificates, Arter & Hadden, special counsel to the
Depositor, has advised the Depositor that, in their opinion, 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 and that if a Trust qualifies as a REMIC, the tax consequences to the
Owners will be as described below. In such case, the Regular Certificates will
be considered to be "regular interests" in the REMIC Pool and generally will be
treated for federal income tax purposes as if they were newly originated debt
instruments, and the Residual Certificates will be considered to be "residual
interests" in the REMIC Pool. The Prospectus Supplement for each series of
Certificates will indicate 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.
Status of REMIC Certificates. REMIC Certificates held by a mutual
savings bank or a domestic building and loan association (a "Thrift
Institution") will constitute "qualifying real property loans" within the
meaning of Code Section 593(d)(1) in the same proportion that the assets of the
REMIC Pool would be so treated. REMIC Certificates held by a domestic building
and loan association will constitute "a regular or residual interest in a
REMIC" within the meaning of Code Section 7701(a) (19)(C) (xi) in the same
proportion that the assets of the REMIC Pool would be treated as "loans secured
by an interest in real property" within the meaning of Code Section
7701(a)(19)(C)(v) or as other assets described in Code Section 7701(a)(19)(C).
REMIC Certificates held by a real estate investment trust (a "REIT") will
constitute "real estate assets" within the meaning of Code Section
856(c)(5)(A), and interest on the REMIC Certificates will be considered
"interest on obligations secured by mortgages on real property or on interests
in real property" within the meaning of Code Section 856(c)(3)(B) in the same
proportion that, for both purposes, the assets of the REMIC Pool would be so
treated. If at all times 95% or more of the assets of the REMIC Pool
constitute qualifying assets for Thrift Institutions and REITs, the REMIC
Certificates will be treated entirely as qualifying assets for such entities.
Moreover, the REMIC Regulations provide that, for purposes of Code Sections
593(d)(1) and 856(c)(5)(A), payments of principal and interest on the Mortgage
Assets that are reinvested pending distribution to holders of REMIC
Certificates, constitute qualifying assets for such entities. Where two REMIC
Pools are part of a tiered structure they will be treated as one REMIC for
purposes of the tests described above respecting asset ownership of more or
less than 95%. Notwithstanding the foregoing, however, REMIC income received
by a REIT owning a residual interest in a REMIC Pool could be treated in part
as non-qualifying REIT income if the REMIC Pool holds Mortgage Assets with
respect to which income is contingent on mortgagor profits or property
appreciation.
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In addition, if the assets of the REMIC include buy-down Mortgage Assets, it is
possible that the percentage of such assets constituting "qualifying real
property loans" or "loans secured by an interest in real property" for purposes
of Code Sections 593(d)(1) and 7701(a)(19)(C)(v), respectively, may be required
to be reduced by the amount of the related buy-down funds. REMIC Certificates
held by a regulated investment company will not constitute "government
securities" within the meaning of Code Section 851(b)(4)(A)(i). REMIC
Certificates held by certain financial institutions will constitute an
"evidence of indebtedness" within the meaning of Code Section 582(c)(i). REMIC
Certificates representing interests in obligations secured by manufactured
housing treated as single family residences under Code Section 25(e)(10) will
be considered interests in "qualified mortgages" as defined in Code Section
860E(a)(3).
Qualification as a REMIC. In order for the REMIC Pool to qualify as a
REMIC, there must be ongoing compliance on the part of the REMIC Pool with the
requirements set forth in the Code. The REMIC Pool must fulfill an asset test,
which requires that no more than a de minimis amount of the assets of the REMIC
Pool, as of the close of the third calendar month beginning after the Delivery
Date (which for purposes of this discussion is the date of issuance of the
REMIC Certificates) and at all times thereafter, may consist of assets other
than "qualified mortgages" and "permitted investments." The REMIC Regulations
provide a "safe harbor" pursuant to which the de minimis requirement will be
met if at all times the aggregate adjusted basis of any nonqualified assets
(i.e., assets other than qualified mortgages and permitted investments) is less
than 1% of the aggregate adjusted basis of all the REMIC Pool's assets.
If a REMIC Pool fails to comply with one or more of the requirements of
the Code for REMIC status during any taxable year, the REMIC Pool will not be
treated as a REMIC for such year and thereafter. In this event, the
classification of the REMIC Pool for federal income tax purposes is uncertain.
The REMIC Pool might be entitled to treatment as a grantor trust under the
rules described in "Federal Income Tax Consequences for Certificates as to
Which No REMIC Election Is Made." In that case, no entity-level tax would be
imposed on the REMIC Pool. Alternatively, the Regular Certificates may
continue to be treated as debt instruments for federal income tax purposes; but
the REMIC Pool could be treated as a taxable mortgage pool (a "TMP"). If the
REMIC Pool is treated as a TMP, any residual income of the REMIC Pool (income
from the Mortgage Assets less interest and original issue discount expense
allocable to the Regular Certificates and any administrative expenses of the
REMIC Pool) would be subject to corporate income tax at the REMIC Pool level.
On the other hand, an entity with multiple classes of ownership interests may
be treated as a separate association taxable as a corporation under Treasury
regulations, and the Regular Certificates may be treated as equity interests
therein. The Code, however, authorizes the Treasury Department to issue
regulations that address situations where failure to meet one or more of the
requirements for REMIC status occurs inadvertently and in good faith, and
disqualification of the REMIC Pool would occur absent regulatory relief.
Investors should be aware, however, that the Conference Committee Report to the
Tax Reform Act of 1986 (the "1986 Act") indicates that the relief may be
accompanied by sanctions, such as the imposition of a corporate tax on all or a
portion of the REMIC Pool's income for the period of time in which the
requirements for REMIC status are not satisfied.
TAXATION OF REGULAR CERTIFICATES
General. Payments received by holders of Regular Certificates generally
should be accorded the same tax treatment under the Code as payments received
on ordinary taxable corporate debt instruments. In general, interest, original
issue discount and market discount on a Regular Certificate will be treated as
ordinary income to a holder of the Regular Certificate (the "Regular
Certificateholder") as they accrue, and principal payments on a Regular
Certificate will be treated as a return of capital to the extent of the Regular
Certificateholder's basis in the Regular Certificate allocable thereto.
Regular Certificateholders must use the accrual method of accounting with
regard to Regular Certificates, regardless of the method of accounting
otherwise used by such Regular Certificateholders.
Original Issue Discount. Regular Certificates may be issued with
"original issue discount" within the meaning of Code Section 1273(a). Holders
of any class of Regular Certificates having original issue discount generally
must include original issue discount in ordinary income for federal income tax
purposes as it accrues, in accordance with a constant interest method that
takes into account the compounding of interest, in advance of receipt of the
cash attributable to such income. While the Depositor anticipates that the
amount of original issue discount
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required to be included in a Regular Certificateholder's income in any taxable
year will be computed as described below, there can be no assurance that the
rules described below will be applied to the Regular Certificates in the manner
described.
Each Regular Certificate (except to the extent described below with
respect to a Regular Certificate on which distributions of principal are made
in a single installment or upon an earlier distribution by lot of a specified
principal amount upon the request of a Regular Certificateholder or by random
lot (a "Retail Class Certificate")) will be treated as a single installment
obligation for purposes of determining the original issue discount includible
in a Regular Certificateholder's income. The total amount of original issue
discount on a Regular Certificate is the excess of the "stated redemption price
at maturity" of the Regular Certificate over its "issue price." The issue price
of a Regular Certificate is the first price at which a substantial amount of
Regular Certificates of that class are first sold to the public. The Depositor
will determine original issue discount by including the amount paid by an
initial Regular Certificateholder for accrued interest that relates to a period
prior to the issue date of the Regular Certificate in the issue price of a
Regular Certificate and will include in the stated redemption price at maturity
any interest paid on the first Distribution Date to the extent such interest is
attributable to a period in excess of the number of days between the issue date
and such first Distribution Date. The stated redemption price at maturity of a
Regular Certificate always includes the original principal amount of the
Regular Certificate, but generally will not include distributions of stated
interest if such interest distributions constitute "qualified stated interest."
Qualified stated interest generally means stated interest that is
unconditionally payable in cash or in property (other than debt instruments of
the issuer) at least annually at (i) a single fixed rate, (ii) one or more
qualified floating rates (as described below), (iii) a fixed rate followed by
one or more qualified floating rates, (iv) a single objective rate (as
described below) or (v) a fixed rate and an objective rate that is a qualified
inverse floating rate. The OID Regulations state that interest payments are
unconditionally payable only if a late payment or nonpayment is expected to be
penalized or reasonable remedies exist to compel payment. Certain debt
securities may provide for default remedies in the event of late payment or
nonpayment of interest. The interest on such debt securities will be
unconditionally payable and constitute qualified stated interest, not OID.
However, absent clarification of the OID Regulations, where debt securities do
not provide for default remedies, the interest payments will be included in the
debt security's stated redemption price at maturity and taxed as OID. Any
stated interest in excess of the qualified stated interest is included in the
stated redemption price at maturity. If the amount of original issue discount
is "de minimis" as described below, the amount of original issue discount is
treated as zero, and all stated interest is treated as qualified stated
interest. Distributions of interest on Regular Certificates with respect to
which deferred interest will accrue may not constitute qualified stated
interest, in which case the stated redemption price at maturity of such Regular
Certificates includes all distributions of interest as well as principal
thereon. Moreover, if the interval between the issue date and the first
Distribution Date on a Regular Certificate is longer than the interval between
subsequent Distribution Dates (and interest paid on the first Distribution Date
is less than would have been earned if the stated interest rate were applied to
outstanding principal during each day in such interval), the stated interest
distributions on such Regular Certificate technically do not constitute
qualified stated interest. In such case a special rule, applying solely for
the purpose of determining whether original issue discount is de minimis,
provides that the interest shortfall for the long first period (i.e., the
interest that would have been earned if interest had been paid on the first
Distribution Date for each day the Regular Certificate was outstanding) is
treated as made at a fixed rate if the value of the rate on which the payment
is based is adjusted in a reasonable manner to take into account the length of
the interval. Regular Certificateholders should consult their own tax advisors
to determine the issue price and stated redemption price at maturity of a
Regular Certificate.
Under a de minimis rule, original issue discount on a Regular
Certificate will be considered to be zero if such original issue discount is
less than 0.25% of the stated redemption price at maturity of the Regular
Certificate multiplied by the weighted average maturity of the Regular
Certificate. For this purpose, the weighted maturity of the Regular
Certificate is computed as the sum of the amounts determined by multiplying the
number of full years (i.e., rounding down partial years) from the issue date
until each distribution in reduction of stated redemption price at maturity is
scheduled to be made by a fraction, the numerator of which is the amount of
each distribution included in the stated redemption price at maturity of the
Regular Certificate and the denominator of which is the stated redemption price
at maturity of the Regular Certificate. Although currently unclear, it appears
that the schedule of such distributions should be determined in accordance with
the assumed rate of prepayment of the Mortgage Assets and the anticipated
reinvestment rate, if any, relating to the Regular Certificates (the
"Prepayment Assumption"). The Prepayment Assumption with respect to a series
of Regular Certificates will be set forth in the related Prospectus
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Supplement. The holder of a debt instrument includes any de minimis original
issue discount in income pro rata as stated principal payments are received.
Of the total amount of original issue discount on a Regular Certificate,
the Regular Certificateholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue discount on the Regular Certificate accrued during an accrual period for
each day on which he holds the Regular Certificate, including the date of
purchase but excluding the date of disposition. Although not free from doubt,
the Depositor intends to treat the monthly period ending on the day before each
Distribution Date as the accrual period, rather than the monthly period
corresponding to the prior calendar month. With respect to each Regular
Certificate, a calculation will be made of the original issue discount that
accrues during each successive full accrual period (or shorter period from the
date of original issue) that ends on the day before the related Distribution
Date on the Regular Certificate. For a Regular Certificate, original issue
discount is to be calculated initially based on a schedule of maturity dates
that takes into account the level of prepayments and an anticipated
reinvestment rate that are most likely to occur, which is expected to be based
on the Prepayment Assumption. The original issue discount accruing in a full
accrual period would be the excess, if any, of (i) the sum of (a) the present
value of all of the remaining distributions to be made on the Regular
Certificate as of the end of that accrual period that are included in the
Regular Certificate's stated redemption price at maturity and (b) the
distributions made on the Regular Certificate during the accrual period that
are included in the Regular Certificate's stated redemption price at maturity
over (ii) the adjusted issue price of the Regular Certificate at the beginning
of the accrual period. The present value of the remaining distributions
referred to in the preceding sentence is calculated based on (i) the yield to
maturity of the Regular Certificate at the issue date, (ii) events (including
actual prepayments) that have occurred prior to the end of the accrual period
and (iii) the Prepayment Assumption. For these purposes, the adjusted issue
price of a Regular Certificate at the beginning of any accrual period equals
the issue price of the Regular Certificate, increased by the aggregate amount
of original issue discount with respect to the Regular Certificate that accrued
in all prior accrual periods and reduced by the amount of distributions
included in the Regular Certificate's stated redemption price at maturity that
were made on the Regular Certificate in such prior period. The original issue
discount accruing during any accrual period (as determined in this paragraph)
will then be divided by the number of days in the period to determine the daily
portion of original issue discount for each day in the period.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Certificateholder
generally will increase to take into account prepayments on the Regular
Certificates as a result of prepayments on the Mortgage Assets or that exceed
the Prepayment Assumption, and generally will decrease (but not below zero for
any period) if the prepayments are slower than the Prepayment Assumption. In
the event of a change in circumstances that does not result in a substantially
contemporaneous pro rata prepayment, the yield and maturity of the Regular
Certificates are redetermined by treating the Regular Certificates as reissued
on the date of the change for an amount equal to the adjusted issue price of
the Regular Certificates. To the extent specified in the applicable Prospectus
Supplement, an increase in prepayments on the Mortgage Assets with respect to a
series of Regular Certificates can result in both a change in the priority of
principal payments with respect to certain classes of Regular Certificates and
either an increase or decrease in the daily portions of original issue discount
with respect to such Regular Certificates.
A purchaser of a Regular Certificate at a price greater than the issue
price also will be required to include in gross income the daily portions of
the original issue discount on the Regular Certificate. With respect to such a
purchaser, the daily portion for any day is reduced by the amount that would be
the daily portion for such day (computed in accordance with the rules set forth
above) multiplied by a fraction, the numerator of which is the amount, if any,
by which the price paid by such purchaser for the Regular Certificate exceeds
the sum of the issue price and the aggregate amount of original issue discount
that would have been includible in the gross income of an original holder of
the Regular Certificate who purchased the Regular Certificate at its issue
price, less any prior distributions included in the stated redemption price at
maturity, and the denominator of which is the sum of the daily portions for
such Regular Certificate (computed in accordance with the rules set forth
above) for all days after the date of purchase and ending on the date on which
the remaining principal amount of such Regular Certificate is expected to be
reduced to zero under the Prepayment Assumption.
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A Certificateholder may elect to include in gross income all stated
interest, original issue discount, de minimis original issue discount, market
discount (as described below under "Market Discount"), de minimis market
discount and unstated interest (as adjusted for any amortizable bond premium or
acquisition premium) currently as it accrues using the constant yield to
maturity method. If this election is made, the holder is treated as satisfying
the requirements for making the elections with respect to amortization of
premium and current inclusion of market discount, each as described under
"Premium" and "Market Discount" below.
Variable Rate Regular Certificates. Regular Certificates may provide
for interest based on a variable rate. The OID Regulations provide special
rules for variable rate instruments that meet three requirements. First, the
noncontingent principal payments may not exceed the instrument's issue price by
more than a specified amount equal to the lesser of (i) .015 multiplied by the
product of the total noncontingent payments and the weighted average maturity
or (ii) 15% of the total noncontingent principal payments. Second, the
instrument must provide for stated interest (compounded or paid at least
annually) at (i) one or more qualified floating rates, (ii) a single fixed rate
followed by one or more qualified floating rates, (iii) a single objective rate
or (iv) a single fixed rate and a single objective rate that is a qualified
inverse floating rate. Third, the instrument must provide that each qualified
floating rate or objective rate in effect during an accrual period is set at a
current value of that rate (one occurring in the interval beginning three
months before and ending one year after the rate is first in effect on the
Regular Certificate). A rate is a qualified floating rate if variations in the
rate can reasonably be expected to measure contemporaneous variations in the
cost of newly borrowed funds. Generally, neither (i) a multiple of a qualified
floating rate in excess of a fixed multiple that is greater than zero but not
more than 1.35 (and increased or decreased by a fixed rate) nor (ii) a cap or
floor that is likely to cause the interest rate on a Regular Certificate to be
significantly less or more than the overall expected return on the Regular
Certificate is considered a qualified floating rate. An objective rate is a
rate based on changes in the price of actively traded property or an index of
such prices or is a rate based on (including multiples of) one or more
qualified floating rates. An objective rate is a qualified inverse floating
rate if the rate is equal to a fixed rate minus a qualified floating rate and
variations in such rate can reasonably be expected to reflect inversely
contemporaneous variations in the cost of newly borrowed funds. A rate will
not be an objective rate if it is reasonably expected that the average rate
during the first half of the instrument's term will be significantly more or
less than the average rate in the final term. An objective rate must be
determined according to a single formula that is fixed throughout the term of
the Regular Certificate and is based on objective financial or economic
information; however, an objective rate does not include a rate based on
information that is in the control of the issuer or that is unique to the
circumstances of a related party. 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.
The application of the OID Regulations to variable rate debt instruments
is limited and may not apply to some Regular Certificates having variable
rates. In that event, the provisions of regulations issued on June 11, 1996,
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applicable to instruments having contingent payments, may apply to those
Regular Certificates. The application of these provisions to instruments such
as variable rate Regular Certificates is subject to varying interpretations.
Prospective purchasers of variable rate Regular Certificates are advised to
consult their tax advisors concerning the tax treatment of such Regular
Certificates.
Market Discount. A purchaser of a Regular Certificate also may be
subject to the market discount rules of Code Sections 1276 through 1278. Under
these sections and the principles applied by the OID Regulations in the context
of original issue discount, "market discount" is the amount by which a
subsequent purchaser's initial basis in the Regular Certificate (i) is exceeded
by the stated redemption price at maturity of the Regular Certificate or (ii)
in the case of a Regular Certificate having original issue discount, is exceed
by the sum of the issue price of such Regular Certificate plus any original
issue discount that would have previously accrued thereon if held by an
original Regular Certificateholder (who purchased the Regular Certificate at
its issue price), in either case less any prior distributions included in the
stated redemption price at maturity of such Regular Certificate. Such
purchaser generally will be required to recognize accrued market discount as
ordinary income as distributions includible in the stated redemption price at
maturity of such Regular Certificate are received in an amount not exceeding
any such distribution. That recognition rule would apply regardless of whether
the purchaser is a cash-basis or accrual-basis taxpayer. Such market discount
would accrue in a manner to be provided in Treasury regulations and should take
into account the Prepayment Assumption. The Conference Committee Report to the
1986 Act provides that until such regulations are issued, such market discount
would accrue either (i) on the basis of a constant interest rate or (ii) in the
ratio of stated interest allocable to the relevant period to the sum of the
interest for such period plus the remaining interest as of the end of such
period, or in the case of a Regular Certificate issued with original issue
discount, in the ratio of original issue discount accrued for the relevant
period to the sum of the original issue discount accrued for such period plus
the remaining original issue discount as of the end of such period. Such
purchaser also generally will be required to treat a portion of any gain on a
sale or exchange of the Regular Certificate as ordinary income to the extent of
the market discount accrued to the date of disposition under one of the
foregoing methods, less any accrued market discount previously reported as
ordinary income as partial distributions in reduction of the stated redemption
price at maturity were received. Such purchaser will be required to defer
deduction of a portion of the excess of the interest paid or accrued on
indebtedness incurred to purchase or carry a Regular Certificate over the
interest distributable thereon. The deferred portion of such interest expense
in any taxable year generally will not exceed the accrued market discount on
the Regular Certificate for such year. Any such deferred interest expense is,
in general, allowed as a deduction not later than the year in which the related
market discount income is recognized or the Regular Certificate is disposed of.
As an alternative to the inclusion of market discount in income on the
foregoing basis, the Regular Certificateholder may elect to include market
discount in income currently as it accrues in all market discount instruments
acquired by such Regular Certificateholder in that taxable year or thereafter,
in which case the interest deferral rule will not apply. In Revenue Procedure
92-67, the Internal Revenue Service set forth procedures for taxpayers (1)
electing under Code Section 1278(b) to include market discount in income
currently, (2) electing under rules of Code Section 1276(b) to use a constant
interest rate to determine accrued market discount on a bond where the holder
of the bond is required to determine the amount of accrued market discount at a
time prior to the holder's disposition of the bond, and (3) requesting consent
to revoke an election under Code Section 1278(b).
By analogy to the OID Regulations, market discount with respect to a
Regular Certificate will be considered to be zero if such market discount is
less than 0.25% of the remaining stated redemption price at maturity of such
Regular Certificate multiplied by the weighted average maturity of the Regular
Certificate (determined as described above under "Original Issue Discount")
remaining after the date of purchase. Treasury regulations implementing the
market discount rules have not yet been issued, and therefore investors should
consult their own tax advisors regarding the application of these rules as well
as the advisability of making any of the elections with respect thereto.
Premium. A Regular Certificate purchased at a cost greater than its
remaining stated redemption price at maturity generally is considered to be
purchased at a premium. If the Regular Certificateholder holds such Regular
Certificate as a "capital asset" within the meaning of Code Section 1221, the
Regular Certificateholder may elect under Code Section 171 to amortize such
premium under a constant yield method that reflects compounding based on the
interval between payments on the Regular Certificates. This election, once
made, applies to all obligations held by the taxpayer at the beginning of the
first taxable year to which such section applies and to all taxable debt
obligations thereafter acquired and is binding on such taxpayer in all
subsequent years. The Conference Committee
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Report to the 1986 Act indicates a Congressional intent that the same rules
that apply to the accrual of market discount on installment obligations will
also apply to amortizing bond premium under Code Section 171 on installment
obligations such as the Regular Certificates. On June 27, 1996, the IRS
published proposed regulations (the "Proposed Premium Regulations") covering
the amortization of bond premiums. The Proposed Premium regulations describe
the constant yield method for amortizing premium and provide that the Regular
Certificateholder may offset the premium against corresponding interest income
only as that income is taken into account under the Regular Certificateholder's
method of accounting. For instruments that may be called or prepaid prior to
maturity, a Regular Certificateholder will be deemed to exercise its option and
an issuer will be deemed to exercise its redemption right in a manner that
maximizes the Regular Certificateholder's yield. The Proposed Premium
Regulations are proposed to be effective for debt instruments acquired on or
after 60 days after final regulations are issued. A Regular Certificateholder
may elect to amortize bond premium under the Proposed Premium Regulations for
the taxable year containing the effective date, with the election applying to
all the Regular Certificateholders' debt instruments held on the first day of
that taxable year. The Proposed Premium Regulations are subject to further
administrative action before becoming effective, if at all, and may be modified
before their becoming effective. Purchasers who pay a premium for their
Regular Certificates should consult their tax advisors regarding the election
to amortize premium and the method to be employed.
Sale or Exchange of Regular Certificates. If a Regular
Certificateholder sells or exchanges a Regular Certificate, the Regular
Certificateholder will recognize gain or loss equal to the difference, if any,
between the amount received and his adjusted basis in the Regular Certificate.
The adjusted basis of a Regular Certificate generally will equal the cost of
the Regular Certificate to the seller, increased by any original issue discount
or market discount previously included in the seller's gross income with
respect to the Regular Certificate and reduced by amounts included in the
stated redemption price at maturity of the Regular Certificate that were
previously received by the seller and by any amortized premium.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate
as a capital asset will be capital gain or loss and will be long-term or
short-term depending on whether the Regular Certificate has been held for the
long-term capital gain holding period (currently more than one year). Gain
from the disposition of a Regular Certificate that might otherwise be capital
gain will be treated as ordinary income to the extent that such gain does not
exceed the excess, if any, of (i) the amount that would have been includible in
the gross income of the holder if his yield on such Regular Certificate were
110% of the applicable Federal rate under Code Section 1274(d) as of the date
of purchase over (ii) the amount of income actually includible in the gross
income of such holder with respect to the Regular Certificate. In addition,
gain or loss recognized from the sale of a Regular Certificate by certain banks
or thrift institutions will be treated as ordinary income or loss pursuant to
Code Section 582(c). The current maximum tax rate for individuals on the
excess of net long-term capital gain over net short-term capital loss is 28%,
however, Congress is considering tax legislation which would reduce that rate.
TAXATION OF RESIDUAL CERTIFICATES
Taxation of REMIC Income. Generally, the "daily portions" of REMIC
taxable income or net loss will be includible as ordinary income or loss in
determining the federal taxable income of holders of Residual Certificates
("Residual Certificateholders") and will not be taxed separately to the REMIC
Pool. The daily portions of REMIC taxable income or net loss of a Residual
Certificateholder are determined by allocating the REMIC Pool's taxable income
or net loss for each calendar quarter ratably to each day in such quarter and
by allocating such daily portion among the Residual Certificateholders in
proportion to their respective holdings of Residual Certificates in the REMIC
Pool on such day. REMIC taxable income is generally determined in the same
manner as the taxable income of an individual using a calendar year and the
accrual method of accounting, except that (i) the limitation on deductibility
of investment interest expense and expenses for the production of income do not
apply, (ii) all bad loans will be deductible as business bad debts and (iii)
the limitation on the deductibility of interest and expenses related to tax-
exempt income will apply. REMIC taxable income generally means the REMIC
Pool's gross income, including interest, original issue discount income and
market discount income, if any, on the Mortgage Assets, plus income on
reinvestment of cashflows and reserve assets, minus deductions, including
interest and original issue discount expense on the Regular Certificates,
servicing fees on the Mortgage Assets and other administrative expenses of the
REMIC
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Pool, amortization of premium, if any, with respect to the Mortgage Assets, and
any tax imposed on the REMIC's income from foreclosure property. The
requirement that Residual Certificateholders report their pro rata share of
taxable income or net loss of the REMIC Pool will continue until there are no
Certificates of any class of the related series outstanding.
The taxable income recognized by a Residual Certificateholder in any
taxable year will be affected by, among other factors, the relationship between
the timing of recognition of interest and original issue discount or market
discount income or amortization of premium with respect to the Mortgage Assets,
on the one hand, and the timing of deductions for interest (including original
issue discount) on the Regular Certificates, on the other hand. Because of the
way REMIC taxable income is calculated, a Residual Certificateholder may
recognize "phantom" income (i.e., income recognized for tax purposes in excess
of income as determined under financial accounting or economic principles)
which will be matched in later years by a corresponding tax loss or reduction
in taxable income, but which could lower the yield to Residual
Certificateholders due to the lower present value of such future loss or
reduction. For example, if an interest in the Mortgage Assets is acquired by
the REMIC Pool at a discount, and one or more of such Mortgage Assets is
prepaid, the Residual Certificateholder may recognize taxable income without
being entitled to receive a corresponding amount of cash because (i) the
prepayment may be used in whole or in part to make distributions in reduction
of principal on the Regular Certificates and (ii) the discount income on the
Mortgage Loan which is includible in the REMIC's taxable income may exceed the
discount deduction allowed to the REMIC upon such distributions on the Regular
Certificates. When there is more than one class of Regular Certificates that
distribute principal sequentially, this mismatching of income and deductions is
particularly likely to occur in the early years following issuance of the
Regular Certificates when distributions in reduction of principal are being
made in respect of earlier maturing classes of Certificates to the extent that
such classes are not issued with substantial discount. If taxable income
attributable to such a mismatching is realized in general, losses would be
allowed in later years as distributions on the later classes of Regular
Certificates are made. Taxable income may also be greater in earlier years
than in later years as a result of the fact that interest expense deductions,
expressed as a percentage of the outstanding principal amount of such a series
of Regular Certificates, may increase over time as distributions in reduction
of principal are made on the lower yielding classes of Regular Certificates,
where interest income with respect to any given Mortgage Loan will remain
constant over time as a percentage of the outstanding principal amount of that
loan. Consequently, Residual Certificateholders must have sufficient other
sources of cash to pay any federal, state or local income taxes due as a result
of such mismatching or unrelated deductions against which to offset such
income. Prospective investors should be aware, however, that a portion of such
income may be ineligible for offset by such investor's unrelated deductions.
See the discussion of "excess inclusions" below under "Limitations on Offset or
Exemption of REMIC Income; Excess Inclusions." The timing of such mismatching
of income and deductions described in this paragraph, if present with respect
to a series of Certificates, may have a significant adverse effect upon the
Residual Certificateholders after-tax rate of return. In addition, a Residual
Certificateholder's taxable income during certain periods may exceed the income
reflected by such Certificateholder for such periods in accordance with
generally accepted accounting principles. Investors should consult their own
advisors concerning the proper tax and accounting treatment of their investment
in Residual Certificates.
Basis and Losses. The amount of any net loss of the REMIC Pool that may
be taken into account by the Residual Certificateholder is limited to the
adjusted basis of the Residual Certificate as of the close of the quarter (or
time of disposition of the Residual Certificate if earlier), determined without
taking into account the net loss for the quarter. The initial adjusted basis
of a purchaser of a Residual Certificate is the amount paid for such Residual
Certificate. Such adjusted basis will be increased by the amount of taxable
income of the REMIC Pool reportable by the Residual Certificateholder and
decreased by the amount of loss of the REMIC Pool reportable by the Residual
Certificateholder. A cash distribution from the REMIC Pool also will reduce
such adjusted basis (but not below zero). Any loss that is disallowed on
account of this limitation may be carried over indefinitely with respect to the
Residual Certificateholder as to whom such loss was disallowed and may be used
by such Residual Certificateholder only to offset any income generated by the
same REMIC Pool. Residual Certificateholders should consult their tax advisors
about other limitations on the deductibility of net losses that may apply to
them.
A Residual Certificateholder will not be permitted to amortize directly
the cost of its Residual Certificate as an offset to its share of the taxable
income of the related REMIC Pool. However, such taxable income will not
include cash received by the REMIC Pool that represents a recovery of the REMIC
Pool's basis in its assets. Such
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recovery of basis by the REMIC Pool will have the effect of amortization of the
issue price of the Residual Certificates over their life. However, in view of
the possible acceleration of the income of Residual Certificateholders
described above under "Taxation of REMIC Income," the period of time over which
such issue price is effectively amortized may be longer than the economic life
of the Residual Certificates.
If a Residual Certificate has a negative value, it is not clear whether
its issue price would be considered to be zero or such negative amount for
purposes of determining the REMIC Pool's basis in its assets. The REMIC
Regulations do not address whether residual interests could have a negative
basis and a negative issue price. The Depositor does not intend to treat a
class of Residual Certificates as having a value of less than zero for purposes
of determining the bases of the related REMIC Pool in its assets.
Further, to the extent that the initial adjusted basis of Residual
Certificateholder (other than an original holder) in the Residual Certificate
is greater than the corresponding portion of the REMIC Pool's basis in the
Mortgage Assets, the Residual Certificateholder will not recover a portion of
such basis until termination of the REMIC Pool unless Treasury regulations yet
to be issued provide for periodic adjustments to the REMIC income otherwise
reportable by such holder. The REMIC Regulations do not so provide. See
"Treatment of Certain Items of REMIC Income and Expense -- Market Discount"
below regarding the basis of Mortgage Assets to the REMIC Pool and "Sale or
Exchange of Residual Certificates" below regarding possible treatment of a loss
upon termination of the REMIC Pool as a capital loss.
Mark to Market Rules
Prospective purchasers of a Residual Certificate should be aware that on
December 24, 1996, the Internal Revenue Service issued final regulations (the
"Mark to Market 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 Mark to Market Regulations provide that for purposes of this mark-to-market
requirement, a Residual Certificate acquired after January 4, 1995, is not
treated as a security and thus may not be marked to market.
TREATMENT OF CERTAIN ITEMS OF REMIC INCOME AND EXPENSE
Original Issue Discount. Generally, the REMIC Pool's deductions for
original issue discount will be determined in the same manner as original issue
discount income on Regular Certificates as described above under "Taxation of
Regular Certificates - Original Issue Discount" and "Variable Rate Regular
Certificates," without regard to the de minimis rule described therein.
Market Discount. The REMIC Pool will have market discount income in
respect of Mortgage Assets if, in general, the basis of the REMIC Pool in such
Mortgage Assets is exceeded by their unpaid principal balances. The REMIC
Pool's basis in such Mortgage Assets is generally the fair market value of the
Mortgage Assets immediately after the transfer thereof to the REMIC Pool. The
REMIC Regulations provide that such basis is equal in the aggregate to the
issue prices of all regular and residual interests in the REMIC Pool. In
respect of Mortgage Assets that have market discount to which Code Section 1276
applies, the accrued portion of such market discount would be recognized
currently by the REMIC as an item of ordinary income. Market discount income
generally should accrue in the manner described above under "Taxation of
Regular Certificates - Market Discount." However, the rules of Code Section
1276 concerning market discount income will not apply in the case of Mortgage
Assets originated on or prior to July 18, 1984, if any. With respect to such
Mortgage Assets market discount is generally includible in REMIC taxable income
or ordinary gross income pro rata as principal payments are received. Under
another interpretation of the Code and relevant legislative history, market
discount on such Mortgage Assets might be required to be recognized currently
by the REMIC, in the same manner that market discount would be recognized with
respect to Mortgage Assets originated after July 18, 1984. Under that method,
a REMIC would tend to recognize market discount more rapidly than it would
otherwise. In either case, the deduction of a portion of the interest expense
on the Regular Certificates allocable to such discount may be deferred until
such discount is included in income, and any gain on the sale or exchange
thereof will be treated as ordinary income to the extent of the deferred
interest deductible at that time.
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Premium. Generally, if the basis of the REMIC Pool in the Mortgage
Assets exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired such Mortgage Assets at a premium equal to the
amount of such excess. As stated above, the REMIC Pool's basis in the Mortgage
Assets is the fair market value of the Mortgage Assets, based on the aggregate
of the issue prices of the regular and residual interests in the REMIC Pool
immediately after the transfer thereof to the REMIC Pool. In a manner
analogous to the discussion above under "Taxation of Regular Certificates
- -- Premium," a person that holds a Mortgage Loan as a capital asset under Code
Section 1221 may elect under Code Section 171 to amortize premium on Mortgage
Assets originated after September 27, 1985 under a constant yield method.
Amortizable bond premium will be treated as an offset to interest income on the
Mortgage Assets, rather than as a separate deduction item. Because
substantially all the mortgagors with respect to the Mortgage Assets are
expected to be individuals, Code Section 171 will not be available. Premium on
Mortgage Assets may be deductible in accordance with a reasonable method
regularly employed by the holder thereof. The allocation of such premium pro
rata among principal payments should be considered a reasonable method;
however, the Internal Revenue Service may argue that such premium should be
allocated in a different manner, such as allocating such premium entirely to
the final payment of principal.
Limitations on Offset or Exemption of REMIC Income; Excess Inclusions.
A portion of the income allocable to a Residual Certificate (referred to in the
Code as an "excess inclusion") for any calendar quarter, with an exception
discussed below for certain thrift institutions, will be subject to federal
income tax in all events. Thus, for example, an excess inclusion (i) cannot,
except as described below, be offset by any unrelated losses or loss carryovers
of a Residual Certificateholder, (ii) will be treated as "unrelated business
taxable income" within the meaning of Code Section 512 if the Residual
Certificateholder is a pension fund or any other organization that is subject
to tax only on its unrelated business taxable income and (iii) is not eligible
for any reduction in the rate of withholding tax in the case of a Residual
Certificateholder that is a foreign investor, as further discussed in "Taxation
of Certain Foreign Investors -- Residual Certificates" below. Members of an
affiliated group are treated as one corporation for purposes of applying the
limitation on offset of excess inclusion income. The Small Business Protection
Act of 1996 (the "1996 Act") eliminated a special rule that permitted thrift
institutions to use net operating losses and other allowable deductions to
offset their excess inclusion income from Residual Certificates with
significant value for taxable years beginning after December 31, 1995 (subject
to exceptions for certain Certificates held continuously since November 1,
1995). The 1996 Act also provides new rules affecting the determination of
alternative minimal taxable income ("AMTI") of a Residual Certificateholder.
First, AMTI is calculated without regard to the special rule that taxable
income cannot be less than excess inclusion income for the year. Second, AMTI
cannot be less than excess inclusion income for the year. Finally, any AMTI
net operating loss deduction is computed without regard to excess inclusion
income. These new rules are effective for tax years beginning after December
31, 1986, unless a Residual Certificateholder elects to have the rules apply
only to tax years after August 20, 1996.
Except as discussed in the following paragraph, with respect to excess
inclusions from Residual Certificates without "significant value," for any
Residual Certificateholder, the excess inclusion for any calendar quarter is
the excess, if any, of (i) the income of such Residual Certificateholder for
that calendar quarter from its Residual Certificate over (ii) the sum of the
"daily accruals" (as defined below) for all days during the calendar quarter on
which the Residual Certificateholder holds such Residual Certificate. For this
purpose, the daily accruals with respect to a Residual Certificate are
determined by allocating to each day in the calendar quarter its ratable
portion of the product of the "adjusted issue price" (as defined below) of the
Residual Certificate at the beginning of the calendar quarter and 120 percent
of the "Federal long-term rate" in effect at the time the Residual Certificate
is issued. For this purposes the "adjusted issue price" of a Residual
Certificate at the beginning of any calendar quarter equals the issue price of
the Residual Certificate (adjusted for contributions), increased by the amount
of daily accruals for all prior quarters, and decreased (but not below zero) by
the aggregate amount of payments made on the Residual Certificate before the
beginning of such quarter. The Federal long-term rate is an average of current
yields on Treasury securities with a remaining term of greater than nine years,
computed and published monthly by the IRS.
The Code provides that to the extent provided in regulations, as an
exception to the general rule described above, the entire amount of income
accruing on a Residual Certificate will be treated as an excess inclusion if
the Residual Certificates in the aggregate are considered not to have
"significant value." The Treasury Department has not yet provided regulations
in this respect and the REMIC Regulations did not adopt this rule. However,
the exception from the excess inclusion rules applicable to thrift institutions
does not apply if the Residual Certificates
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do not have significant value. Under the REMIC Regulations, the Residual
Certificates will have significant value if: (i) the aggregate of the issue
prices of the Residual Certificates is at least two percent of the aggregate
issue prices of all Regular Certificates and Residual Certificates in the REMIC
and (ii) the anticipated weighted average life of the Residual Certificates is
at least 20 percent of the REMIC's anticipated weighted average life based on
the prepayment and reinvestment assumptions used in pricing the transaction and
any recognized or permitted clean up calls or any required qualified
liquidation. Although not entirely clear, the REMIC Regulations indicate that
the significant value determination is made only on the Startup Day. The
anticipated weighted average life of a Residual Certificate with a principal
balance and a market rate of interest is computed by multiplying the amount of
each expected principal payment by the number of years (or portions thereof)
from the Startup Day, adding these sums and dividing by the total principal
expected to be paid on such Residual Certificate based on the relevant
prepayment assumption and expected reinvestment income. The anticipated
weighted average life of a Residual Certificate with either no specified
principal balance or a principal balance and rights to interest payments
disproportionate to such principal balance, would be computed under the formula
described above but would include all payments expected on the Residual
Certificate instead of only the principal payments. The anticipated weighted
average life of a REMIC is a weighted average of the anticipated weighted
average lives of all classes of interest in the REMIC.
Under Treasury regulations to be promulgated, a portion of the dividends
paid by a REIT which owns a Residual Certificate are to be designated as excess
inclusions in an amount corresponding to the Residual Certificate's allocable
share of the excess inclusions. Similar rules apply in the case of regulated
investment companies, common trust funds and cooperatives. Thus, investors in
such entities which own a Residual Certificate will be subject to the
limitations on excess inclusions described above. The REMIC Regulations do not
provide guidance on this issue.
TAX-RELATED RESTRICTIONS ON TRANSFER OF RESIDUAL CERTIFICATES
Disqualified Organizations. If legal title or beneficial interest in a
Residual Certificate is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Certificate for periods after the transfer and (ii) the highest
marginal federal corporate income tax rate. The REMIC Regulations provide that
the anticipated excess inclusion are based on actual prepayment experience to
the date of the transfer and projected payments based on the Prepayment
Assumption. The present value discount rate equals the applicable Federal rate
under Code Section 1274(d) that would apply to a debt instrument that was
issued on the date the Disqualified Organization acquired the Residual
Certificate and whose term ended on the close of the last quarter in which
excess inclusion was expected to accrue with respect to the Residual
Certificate. Such a tax generally would be imposed on the transferor of the
Residual Certificate, except that where such transfer is through an agent
(including a broker, nominee, or other middleman) for a Disqualified
Organization, the tax would instead be imposed on such agent. However, a
transferor of a Residual Certificate would in no event be liable for such tax
with respect to a transfer if the transferee furnishes to the transferor an
affidavit that the transferee is not a Disqualified Organization and, as of the
time of the transfer, the transferor does not have actual knowledge that such
affidavit is false. The tax also may be waived by the Treasury Department if
the Disqualified Organization promptly disposes of the Residual Certificate and
the transferor pays income tax at the highest corporate rate on the excess
inclusion for the period the Residual Certificate is actually held by the
Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period such interest is held by such
Disqualified Organization and (ii) the highest marginal federal corporate
income tax rate. Such tax would be deductible from the ordinary gross income
of the Pass-Through Entity for the taxable year. The Pass-Through Entity would
not be liable for such tax if it has received an affidavit from such record
holder that (i) states under penalty of perjury that it is not a Disqualified
Organization or (ii) furnishes a social security number and states under
penalties of perjury that the social security number is that of the transferee,
provided that during the period such person is the record holder of the
Residual Certificate, the Pass-Through Entity does not have actual knowledge
that such affidavit is false.
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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 Certificates will provide that
neither legal title nor beneficial interest in a Residual Certificate may be
transferred or registered unless (i) the proposed transferee provides to the
Depositor and the Trustee an affidavit to the effect that such transferee is
not a Disqualified Organization, is not purchasing such Residual Certificates
on behalf of a Disqualified Organization (i.e., as a broker, nominee or
middleman thereof) and is not an entity that holds REMIC residual securities as
nominee to facilitate the clearance and settlement of such securities through
electronic book-entry changes in accounts of participating organizations and
(ii) the transferor provides a statement in writing to the Depositor and the
Trustee that it has no actual knowledge that such affidavit is false.
Moreover, the Agreement will provide that any attempted or purported transfer
in violation of these transfer restrictions will be null and void and will vest
no rights in any purported transferee. Each Residual Certificate with respect
to a series will have a legend referring to such restrictions on transfer, and
each Residual Certificateholder will be deemed to have agreed, as a condition
of ownership thereof, to any amendments to the related Agreement required under
the Code or applicable Treasury regulations to effectuate the foregoing
restrictions. Information necessary to compute an applicable excise tax must
be furnished to the Internal Revenue Service and to the requesting party within
60 days of the request, and the Depositor or the Trustee may charge a fee for
computing and providing such information.
Noneconomic Residual Interests. Under the REMIC Regulations certain
transfers of Residual Certificates are disregarded, in which case the
transferor continues to be treated as the owner of the Residual Certificates
and thus continues to be subject to tax on its allocable portion of the net
income of the REMIC Pool. Under the Final REMIC Regulations, a transfer of a
Noneconomic Residual Interest (defined below) to a Residual Certificateholder
(other than a Residual Certificateholder who is not a U.S. Person, as defined
below under "Foreign Investors") is disregarded for all federal income tax
purposes unless no significant purpose of the transfer is to impede the
assessment or collection of tax. A residual interest in a REMIC (including a
residual interest with a positive value at issuance) is a "Noneconomic Residual
Interest" unless, at the time of the transfer, (i) the present value of the
expected future distributions on the residual interest at least equals the
product of the present value of the anticipated excess inclusions and the
highest federal corporate income tax rate in effect for the year in which the
transfer occurs, and (ii) the transferor reasonably expects that the transferee
will receive distributions from the REMIC at or after the time at which taxes
accrue on the anticipated excess inclusions in an amount sufficient to satisfy
the accrued taxes. The anticipated excess inclusions and the present value
rate are determined in the same manner as set forth above under "Disqualified
Organizations." A significant purpose to impede the assessment or collection
of tax exists if the transferor, at the time of the transfer, either knew or
should have known (had "improper knowledge") that the transferor would be
unwilling or unable to pay taxes due on its share of the taxable income of the
REMIC. Under the REMIC Regulations, a transferor is presumed not to have
improper knowledge if (i) the transferor conducted, at the time of the
transfer, a reasonable investigation of the financial condition of the
transferee and, as a result of the investigation, the transferor found that the
transferee had historically paid its debts as they came due and found no
significant evidence to indicate that the transferor will not continue to pay
its debts as they come due in the future; and (ii) the transferee represents to
the transferor that it understands that, as the holder of the Noneconomic
Residual Interest, the transferee may incur tax liabilities in excess of any
cash flows generated by the residual interest and that the transferee intends
to pay taxes associated with holding of residual interest as they become due.
The Agreement will require the transferee of a Residual Certificate to state as
part of the affidavit described above under the heading "Disqualified
Organizations" that such transferee (i) has historically paid its debts as they
come due, (ii) intends to continue to pay its debts as they come due in the
future, (iii) understands that, as the holder of a Noneconomic
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Residual Interest, it may incur tax liabilities in excess of any cash flows
generated by the Residual Certificate, and (iv) intends to pay any and all
taxes associated with holding the Residual Certificate as they become due. The
transferor must have no reason to believe that such statement is untrue.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Certificate that has "tax avoidance potential" to a "foreign person"
will be disregarded for all federal tax purposes. This rule appears intended
to apply to a transferee who is not a "U.S. Person" (as defined below), unless
such transferee's income is effectively connected with the conduct of a trade
or business within the United States. A Residual Certificate is deemed to have
tax avoidance potential unless, at the time of the transfer, the transferor
reasonably expects that, for each excess inclusion, (i) the REMIC Pool will
distribute to the transferee residual interest holder an amount that will equal
at least 30% of the excess inclusions and (ii) that each such amount will be
distributed at or after the time at which the excess inclusion accrues and not
later than the close of the calendar year following the calendar year of
accrual. If the non-U.S. Person transfers the Residual Certificate back to a
U.S. Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The Prospectus Supplement relating to a series of Certificates may
provide that a Residual Certificate may not be purchased by or transferred to
any person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term "U.S.
Person" means a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof or an estate or trust that
is subject to U.S. federal income tax regardless of the source of its income.
SALE OR EXCHANGE OF A RESIDUAL CERTIFICATE
Upon the sale or exchange of a Residual Certificate, the Residual
Certificateholder will recognize gain or loss equal to the excess, if any, of
the amount realized over the adjusted basis (as described above under "Taxation
of Residual Certificates -- Basis and Losses") of such Residual
Certificateholder in such Residual Certificate at the time of the sale or
exchange. In addition to reporting the taxable income of the REMIC Pool, a
Residual Certificateholder will have taxable income to the extent that any cash
distribution to him from the REMIC Pool exceeds such adjusted basis on that
Distribution Date. Such income will be treated as gain from the sale or
exchange of the Residual Certificate. It is possible that the termination of
the REMIC Pool may be treated as a sale or exchange of a Residual
Certificateholder's Residual Certificate, in which case, if the Residual
Certificateholder has an adjusted basis in his Residual Certificate remaining
when his interest in the REMIC Pool terminates, and if he holds such Residual
Certificate as a capital asset under Code Section 1221, then he will recognize
a capital loss at that time in the amount of such remaining adjusted basis.
The Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued, the wash sale rules of Code
Section 1091 will apply to disposition of Residual Certificates. Consequently,
losses on dispositions of Residual Certificates will be disallowed where the
seller of the Residual Certificate, during the period beginning six months
before the sale or disposition of the Residual Certificate and ending six
months after such sale or disposition, acquires (or enters into any other
transaction that results in the application of Code Section 1091) any residual
interest in any REMIC or any interest in a "taxable mortgage pool" (such as a
non-REMIC owner trust) that is economically comparable to a Residual
Certificate.
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
Prohibited Transactions. Net income from certain transactions by the
REMIC Pool, called prohibited transactions, will not be part of the calculation
of income or loss includible in the federal income tax returns of Residual
Certificateholders, but rather will be taxed directly to the REMIC Pool at a
100% rate. Prohibited transactions generally include (i) the disposition of a
qualified mortgage other than for (a) substitution within two years of the
Startup Day for a defective (including a defaulted) obligation (or repurchase
in lieu of substitution of a defective (including a defaulted) obligation at
any time) or for any qualified mortgage within three months of the Startup Day,
(b) foreclosure, default or imminent default of a qualified mortgage, (c)
bankruptcy or insolvency of the REMIC Pool
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or (d) a qualified (complete) liquidation, (ii) the receipt of income from
assets that are not the type of mortgages or investments that the REMIC Pool is
permitted to hold, (iii) the receipt of compensation for services or (iv) the
receipt of gain from disposition of cash flow investments other than pursuant
to a qualified liquidation. Notwithstanding (i) and (iv), it is not a
prohibited transaction to sell REMIC Pool property to prevent a default on
Regular Certificates as a result of a default on qualified mortgages or to
facilitate a clean-up call (generally, an optional termination to save
administrative costs when no more than a small percentage of the Certificates
is outstanding). The REMIC Regulations indicate that the modification of a
Mortgage Loan generally will not be treated as a disposition if it is
occasioned by a default or reasonably foreseeable default, an assumption of the
Mortgage Loan, the waiver of a due-on-sale or encumbrance clause or the
conversion of an interest rate by a mortgagor pursuant to the terms of a
convertible adjustable rate Mortgage Loan. The REMIC Regulations also provide
that the modification of mortgage loans underlying Mortgage-Backed Securities
will not be treated as a modification of the Mortgage-Backed Securities,
provided that the trust including the was not created to avoid prohibited
transaction rules.
Contributions to the REMIC Pool After the Startup Day. In general, the
REMIC Pool will be subject to a tax at a 100% rate on the value of any property
contributed to the REMIC Pool after the Startup Day. Exceptions are provided
for cash contributions to the REMIC Pool (i) during the three months following
the Startup Day, (ii) made to a qualified reserve fund by a Residual
Certificateholder, (iii) in the nature of a guarantee, (iv) made to facilitate
a qualified liquidation or clean-up call and (v) as otherwise permitted in
Treasury regulations yet to be issued.
Net Income from Foreclosure Property. The REMIC Pool will be subject to
federal income tax at the highest corporate rate on "net income from
foreclosure property," determined by reference to the rules applicable to real
estate investment trusts. Generally, property acquired by the REMIC Pool
through foreclosure or deed in lieu of foreclosure would be treated as
"foreclosure property" for a period of two years, with possible extensions.
Net income from foreclosure property generally means (i) gain from the sale of
a foreclosure property that is inventory property and (ii) gross income from
foreclosure property other than qualifying rents and other qualifying income
for a real estate investment trust.
LIQUIDATION OF THE REMIC POOL
If a REMIC Pool and the Trustee adopt a plan of complete liquidation,
within the meaning of Code Section 860F(a)(4)(A)(i) and sell all of the REMIC
Pool's assets (other than cash) within a 90-day period beginning on the date of
the adoption of the plan of liquidation, the REMIC Pool will recognize no gain
or loss on the sale of its assets, provided that the REMIC Pool credits or
distributes in liquidation all of the sale proceeds plus its cash (other than
amounts retained to meet claims against the REMIC Pool) to holders of Regular
Certificates and Residual Certificateholders within the 90-day period.
ADMINISTRATIVE MATTERS
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes in
a manner similar to a partnership. The form for such income tax return is Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. The
Trustee will be required to sign the REMIC Pool's returns. Treasury
regulations provide that, except where there is a single Residual
Certificateholder for an entire taxable year, the REMIC Pool generally will be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination by the Internal Revenue Service of
any adjustments to, among other things, items of REMIC income, gain, loss,
deduction or credit in a unified administrative proceeding. The Depositor or
other designated Residual Certificateholders will be obligated to act as "tax
matters person," as defined in applicable Treasury regulations, with respect to
the REMIC Pool. If the Code or applicable Treasury regulations do not permit
the Depositor to act as tax matters person in its capacity as agent of the
Residual Certificateholders, the Residual Certificateholder chosen by the
Residual Certificateholders or such other person specified pursuant to Treasury
regulations will be required to act as tax matters person.
Treasury regulations provide that a holder of a Residual Certificate is
not required to treat items on its return consistently with their treatment on
the REMIC Pool's return if a holder owns 100% of the Residual Certificates for
the entire calendar year. Otherwise, each holder of a Residual Certificate is
required to treat items on its return
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consistently with their treatment on the REMIC Pool's return, unless the holder
of a Residual Certificate either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC Pool. The Service may assess a deficiency
resulting from a failure to comply with the consistency requirement without
instituting an administrative proceeding at the REMIC Pool level.
LIMITATIONS ON DEDUCTION OF CERTAIN EXPENSES
An investor who is an individual, estate or trust will be subject to
limitation with respect to certain itemized deductions described in Code
Section 67, to the extent that such itemized deductions, in the aggregate, do
not exceed 2% of the investor's adjusted gross income. In addition, Code
Section 68 provides that itemized deductions otherwise allowable for a taxable
year of an individual taxpayer will be reduced by the lesser of (i) 3% of the
excess, if any, of adjusted gross income over $100,000, adjusted yearly for
inflation ($50,000, adjusted yearly for inflation, in the case of a married
individual filing a separate return), or (ii) 80% of the amount of itemized
deductions otherwise allowable for such year. In the case of a REMIC Pool,
such deductions may include deductions under Code Section 212 for servicing
fees and all administrative and other expenses relating to the REMIC Pool or
any similar expenses allocated to the REMIC Pool with respect to a regular
interest it holds in another REMIC. Such investors who hold REMIC Certificates
either directly or indirectly through certain pass-through entities may have
their pro rata share of such expenses allocated to them as additional gross
income, but may be subject to such limitation on deductions. In addition, such
expenses are not deductible at all for purposes of computing the alternative
minimum tax, and may cause such investors to be subject to significant
additional tax liability. Treasury regulations provide that the additional
gross income and corresponding amount of expenses generally are to be allocated
entirely to the holders of Residual Certificates in the case of a REMIC Pool
that would not qualify as a fixed investment trust in the absence of a REMIC
election. However, such additional gross income and limitation on deductions
will apply to the allocable portion of such expenses to holders of Regular
Certificates, as well as holders of Residual Certificates, where such Regular
Certificates are issued in a manner that is similar to pass-through
certificates in a fixed investment trust. In general, such allocable portion
will be determined based on the ratio that a REMIC Certificateholder's income,
determined on a daily basis, bears to the income of all holders of Regular
Certificates and Residual Certificates with respect to a REMIC Pool. As a
result, individuals, estates or trusts holding REMIC Certificates (either
directly or indirectly through a grantor trust, partnership, S corporation,
REMIC, or certain other pass-through entities described in the foregoing
Treasury regulations) may have taxable income in excess of the interest income
at the pass-through rate on Regular Certificates that are issued in a single
class or otherwise consistently with fixed investment trust status or in excess
of cash distributions for the related period on Residual Certificates.
TAXATION OF CERTAIN FOREIGN INVESTORS
Regular Certificates. Interest, including original issue discount,
distributable to Regular Certificateholders who are nonresident aliens, foreign
corporations, or other Non-U.S. Persons (as defined below), will be considered
"portfolio interest" and therefore, generally will not be subject to 30% United
States withholding tax, provided that such Non-U.S. Person (i) is not a
"10-percent shareholder" within the meaning of Code Section 871(h)(3)(B) or a
controlled foreign corporation described in Code Section 881(c)(3)(C) and (ii)
provides the Trustee, or the person who would otherwise be required to withhold
tax from such distributions under Code Sections 1441 or 1442, with an
appropriate statement, signed under penalties of perjury, identifying the
beneficial owner and stating, among other things, that the beneficial owner of
the Regular Certificate is a Non-U.S. Person. If such statement, or any other
required statement, is not provided, 30% withholding will apply unless reduced
or eliminated pursuant to an applicable tax treaty or unless the interest on
the Regular Certificate is effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Person. In the latter case,
such Non-U.S. Person will be subject to United States federal income tax at
regular rates. Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Regular
Certificate. The term "Non-U.S. Person" means any person who is not a U.S.
Person.
Residual Certificates. The Conference Committee Report to the 1986 Act
indicates that amounts paid to Residual Certificateholders who are Non-U.S.
Persons are treated as interest for purposes of the 30% (or lower treaty rate)
United States withholding tax. Treasury regulations provide that amounts
distributed to Residual Certificateholders qualify as "portfolio interest,"
subject to the conditions described in "Regular Certificates" above,
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but only to the extent that (i) the Mortgage Assets were issued after July 18,
1984 and (ii) the Trust fund or segregated pool of assets therein (as to which
a separate REMIC election will be made), to which the Residual Certificate
relates, consists of obligations issued in "registered form" within the meaning
of Code Section 163(f)(1). Generally, Mortgage Assets will not be, but regular
interests in another REMIC Pool will be, considered obligations issued in
registered form. Furthermore, a Residual Certificateholder will not be
entitled to any exemption from the 30% withholding tax (or lower treaty rate)
to the extent of that portion of REMIC taxable income that constitutes an
"excess inclusion." See "Taxation of Residual Certificates -- Limitations on
Offset or Exemption of REMIC Income; Excess Inclusions." If the amounts paid to
Residual Certificateholders who are Non-U.S. Persons are effectively connected
with the conduct of a trade or business within the United States by such
Non-U.S. Persons, 30% (or lower treaty rate) withholding will not apply.
Instead, the amounts paid to such Non-U.S. Persons will be subject to United
States federal income tax at regular rates. If 30% (or lower treaty rate)
withholding is applicable, such amounts generally will be taken into account
for purposes of withholding only when paid or otherwise distributed (or when
the Residual Certificate is disposed of) under rules similar to withholding
upon disposition of debt instruments that have original issue discount. See
"Tax-Related Restrictions on Transfer of Residual Certificates -- Foreign
Investors" above concerning the disregard of certain transfers having "tax
avoidance potential."
On April 22, 1996, the IRS issued proposed regulations which, if adopted
in final form, could have an effect on the United States taxation of foreign
investors owning Regular Certificates or Residual Certificates. The proposed
regulations would apply to payments after December 31, 1997. Investors who are
Non-U.S. Persons should consult their tax advisors regarding the specific tax
consequences to them of owning Residual Certificates.
BACKUP WITHHOLDING
Distributions made on the Regular Certificates, and proceeds from the
sale of the Regular Certificates to or through certain brokers, may be subject
to a "backup" withholding tax under Code Section 3406 of 31% on "reportable
payments" (including interest distributions, original issue discount, and,
under certain circumstances, principal distributions) unless the Regular
Certificateholder complies with certain reporting and/or certification
procedures, including the provision of its taxpayer identification number to
the Trustee, its agent or the broker who effected the sale of the Regular
Certificate, or such Certificateholder is otherwise an exempt recipient under
applicable provisions of the Code. Any amounts to be withheld from
distribution on the Regular Certificates would be refunded by the Internal
Revenue Service or allowed as a credit against the Regular Certificateholder's
federal income tax liability.
REPORTING REQUIREMENTS
Reports of accrued interest and original issue discount will be made
annually to the Internal Revenue Service and to individuals, estates,
non-exempt and non-charitable trusts, and partnerships who are either holders
of record of Regular Certificates or beneficial owners who own Regular
Certificates through a broker or middleman as nominee. All brokers, nominees
and all other non-exempt holders of record of Regular Certificates (including
corporations, non-calendar year taxpayers, securities or commodities dealers,
real estate investment trusts, investment companies, common trust funds, thrift
institutions and charitable trusts) may request such information for any
calendar quarter by telephone or in writing by contacting the person designated
in Internal Revenue Service Publication 938 with respect to a particular series
of Regular Certificates. Holders through nominees must request such
information from the nominee. Treasury regulations provide that information
necessary to compute the accrual of any market discount on the Regular
Certificates must be furnished for calendar years beginning after 1990.
The Internal Revenue Service's Form 1066 has an accompanying Schedule Q,
Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each Residual Certificateholder by the end of the month
following the close of each calendar quarter (41 days after the end of a
quarter under proposed Treasury regulations) in which the REMIC Pool is in
existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual
Certificateholders, furnished annually, if applicable, to holders of Regular
Certificates, and filed
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annually with the Internal Revenue Service concerning Code Section 67 expenses
(see "Limitations on Deduction of Certain Expenses" above) allocable to such
holders. Furthermore, under such regulations, information must be furnished
quarterly to Residual Certificateholders, furnished annually to holders of
Regular Certificates, and filed annually with the Internal Revenue Service
concerning the percentage of the REMIC Pool's assets meeting the qualified
asset tests described above under "Federal Income Tax Consequences for REMIC
Certificates," above."
FEDERAL INCOME TAX CONSEQUENCES FOR CERTIFICATES AS TO WHICH NO REMIC ELECTION
IS MADE
Arter & Hadden, special counsel to the Depositor, is of the opinion that
if the Trust does not elect REMIC status and is not treated as a partnership
the tax consequences to the Owners will be as discussed below.
STANDARD CERTIFICATES
General. If no election is made to treat a Trust (or a segregated pool
of assets therein) with respect to a series of Certificates as a REMIC, the
Trust may be classified as a grantor trust under subparagraph E, Part 1 of
subchapter J of the Code and not as a partnership or association taxable as a
corporation. Where there is no fixed retained yield with respect to the
Mortgage Assets underlying the Certificates of a series, and where such
Certificates are not designated as Stripped Certificates, as described below
under "Stripped Certificates" or as Partnership Interests described under
"Taxation of Securities Classified as Partnership Interests," the holder of
each such "Standard Certificate" in such series will be treated as the owner of
a pro rata undivided interest in the ordinary income and corpus portions of the
Trust represented by his Certificate and will be considered the beneficial
owner of a pro rata undivided interest in each of the Mortgage Assets, subject
to the discussion below under "Recharacterization of Servicing Fees."
Accordingly, the holder of a Certificate (a "Certificateholder") of a
particular series will be required to report on its federal income tax return
its pro rata share of the entire income from the Mortgage Assets, original
issue discount (if any), prepayment fees, assumption fees, and late payment
charges received by or on behalf of the Trust, in accordance with such
Certificateholder's method of accounting. A Certificateholder generally will
be able to deduct its share of servicing fees and all administrative and other
expenses of the Trust in accordance with his method of accounting, provided
that such amounts are reasonable compensation for services rendered to that
Trust. However, investors who are individuals, estates or trusts who own
Certificates, either directly or indirectly through certain pass-through
entities, will be subject to limitation with respect to certain itemized
deductions described in Code Section 67, including deductions under Code
Section 212 for servicing fees and all such administrative and other expenses
of the Trust, to the extent that such deductions, in the aggregate, do not
exceed two percent of an investor's adjusted gross income. In addition, Code
Section 68 provides that itemized deductions otherwise allowable for a taxable
year of an individual taxpayer will be reduced by the lesser of (i) 3% of the
excess, if any, of adjusted gross income over $100,000, adjusted yearly for
inflation ($50,000, adjusted yearly for inflation, in the case of a married
individual filing a separate return), or (ii) 80% of the amount of itemized
deductions otherwise allowable for such year. As a result such investors
holding Certificates, directly or indirectly through a pass-through entity, may
have aggregate taxable income in excess of the aggregate amount of cash
received on such Certificates with respect to interest at the pass-through rate
on such Certificates or discount thereon. In addition, such expenses are not
deductible at all for purposes of computing the alternative minimum tax and may
cause such investors to be subject to significant additional tax liability.
Moreover, where there is fixed retained yield with respect to the Mortgage
Assets underlying a series of Certificates or where the servicing fees are in
excess of reasonable servicing compensation, the transaction will be subject to
the application of the "stripped bond" and "stripped coupon" rules of the Code,
as described below under "Stripped Certificates" and "Premium and Discount
- -- Recharacterization of Servicing Fees," respectively.
Tax Status. Subject to the discussion below, Arter & Hadden, special
counsel to the Depositor, is of the opinion that:
1. A Standard Certificate owned by a "domestic building and
loan association" within the meaning of Code Section 7701(a)(19) will be
considered to represent "loans . . . secured by an interest in real
property" within the meaning of Code Section 7701(a)(19)(C)(v), provided
that the real property securing the Mortgage Assets represented by that
Certificate is of the type described in such section.
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2. A Standard Certificate owned by a financial institution
described in Code Section 593(a) will be considered to represent
"qualifying real property loans" within the meaning of Code Section
592(d)(1), provided that the real property securing the Mortgage Assets
represented by that Certificate is of the type described in such
section.
3. A Standard Certificate owned by a real estate investment
trust will be considered to represent "real estate assets" within the
meaning of Code Section 856(C) (5) (A) to the extent that the assets of
the related Trust consist of qualified assets, and interest income on
such assets will be considered "interest on obligations secured by
mortgages on real property" within the meaning of Code Section
856(c)(3)(B).
4. A Standard Certificate owned by a REMIC will be considered
to represent an "obligation (including any participation or certificate
of beneficial ownership therein) which is principally secured by an
interest in real property" within the meaning of Code Section
860G(a)(3)(A) to the extent that the assets of the related Trust consist
of "qualified mortgages" within the meaning of Code Section 860G(a)(3).
An issue arises as to whether buy-down Mortgage Assets may be
characterized in their entirety under the Code provisions cited in the
immediately preceding paragraph. Code Section 593(d)(l)(C) provides that the
term "qualifying real property loan" does not include a loan "to the extent
secured by a deposit in or share of the taxpayer." The application of this
provision to a buy-down fund with respect to a buy-down Mortgage Loan is
uncertain, but may require that a taxpayer's investment in a buy-down Mortgage
Loan be reduced by the buy-down fund. As to the treatment of buy-down Mortgage
Assets as "qualifying real property loans" under Code Section 593(d)(i) if the
exception of Code Section 593(d)(1)(C) is inapplicable, as "loans . . . secured
"by an interest in real property" under Code Section 7701(a)(19)(C)(v), as
"real estate assets" under Code Section 856(c)(5)(A), and as "obligation[s]
principally secured by an interest in real property" under Code Section
860G(a)(3)(A), there is indirect authority supporting treatment of an
investment in a buy-down Mortgage Loan as entirely secured by real property if
the fair market value of the real property securing the loan exceeds the
principal amount of the loan at the time of issuance or acquisition, as the
case may be. There is no assurance that the treatment described above is
proper. Accordingly, Certificateholders are urged to consult their own tax
advisors concerning the effects of such arrangements on the characterization of
such Certificateholder's investment for federal income tax purposes.
PREMIUM AND DISCOUNT
Certificateholders are advised to consult with their tax advisors as to
the federal income tax treatment of premium and discount arising either upon
initial acquisition of Certificates or thereafter.
Premium. The treatment of premium incurred upon the purchase of a
Certificate will be determined generally as described above under " -- Taxation
of Regular Certificates -- Premium."
Original Issue Discount. The Internal Revenue Service has stated in
published rulings that, in circumstances similar to those described herein, the
original issue discount rules will be applicable to a Certificateholder's
interest in those Mortgage Assets as to which the conditions for the
application of those sections are met. Rules regarding periodic inclusion of
original issue discount income are applicable to mortgages of corporations
originated after May 27, 1969, mortgages of noncorporate mortgagors (other than
individuals) originated after July l, 1982, and mortgages of individuals
originated after March 2, 1984. Such original issue discount could arise by
the charging of points by the originator of the mortgages in an amount greater
than a statutory de minimis exception, to the extent that the points are not
currently deductible under applicable Code provisions or are not for services
provided by the lender. It is generally not anticipated that adjustable rate
Mortgage Assets will be treated as issued with original issue discount.
However, the application of the OID Regulations to adjustable rate mortgage
loans with incentive interest rates or annual or lifetime interest rate caps
may result in original issue discount.
Original issue discount must generally be reported as ordinary gross
income as it accrues under a constant yield method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
However, Code Section 1272 provide for a reduction in the amount of original
issue discount includible in the income of a holder of an obligation that
acquires the obligation after its initial issuance at a price greater than the
sum of the
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original issue price and the previously accrued original issue discount, less
prior payments of principal. Accordingly, if such Mortgage Assets acquired by
a Certificateholder are purchased at a price equal to the then unpaid principal
amount of such Mortgage Assets, no original issue discount attributable to the
difference between the issue price and the original principal amount of such
Mortgage Assets (i.e., points) will be includible by such holder.
Market Discount. Certificateholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the Mortgage Assets will be determined
and will be reported as ordinary income generally in the manner described above
under " -- Taxation of Regular Certificates -- Market Discount."
Recharacterization of Servicing Fees. If the servicing fees paid to
Servicers were deemed to exceed reasonable servicing compensation, the amount
of such excess would be nondeductible under Code Section 162 or 212. In this
regard, there are no authoritative guidelines for federal income tax purposes
as to either the maximum amount of servicing compensation that may be
considered reasonable in the context of this or similar transactions or
whether, in the case of the Certificates, the reasonableness of servicing
compensation should be determined on a weighted average or loan-by-loan basis.
If a loan-by-loan basis is appropriate, the likelihood that such amount would
exceed reasonable servicing compensation as to some of the Mortgage Assets
would be increased. Recently issued Internal Revenue Service guidance
indicates that a servicing fee in excess of reasonable compensation ("excess
servicing") will cause the Mortgage Assets to be treated under the "stripped
bond" rules. Such guidance provides safe harbors for servicing deemed to be
reasonable and requires taxpayers to demonstrate that the value of servicing
fees in excess of such amounts is not greater than the value of the services
provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a
servicer that receives excess servicing fees would be viewed as retaining an
ownership interest in a portion of the interest payments on the Mortgage
Assets. Under the rules of Code Section 1286, the separation of the right to
receive some or all of the interest payments on an obligation from the right to
receive some or all of the principal payments on the obligation would result in
treatment of such Mortgage Assets as "stripped coupons" and "stripped bonds."
While Certificateholders would still be treated as owners of beneficial
interests in a grantor trust for federal income tax purposes, the corpus of
such trust could be viewed as excluding the portion of the Mortgage Assets the
ownership of which is attributed to a servicer, or as including such portion as
a second class of equitable interest. Applicable Treasury regulations treat
such an arrangement as a fixed investment trust, since the multiple classes of
trust interests should be treated as merely facilitating direct investments in
the trust assets and the existence of multiple classes of ownership interests
is incidental to that purpose. In general, such a recharacterization should
not have any significant effect upon the timing or amount of income reported by
a Certificateholder, except that the income reported by a cash method holder
may be slightly accelerated. See "Stripped Certificates" below for a further
description of the federal income tax treatment of stripped bonds and stripped
coupons.
In the alternative, the amount, if any, by which the servicing fees paid
to the servicers are deemed to exceed reasonable compensation for servicing
could be treated as deferred payments of purchase price by the
Certificateholders to purchase an undivided interest in the Mortgage Assets.
In such event, the present value of such additional payments might be included
in the Certificateholder's basis in such undivided interests for purposes of
determining whether the Certificate was acquired at a discount, at par, or at a
premium. Under this alternative, Certificateholders may also be entitled to a
deduction for unstated interest with respect to each deferred payment. The
Internal Revenue Service may take the position that the specific statutory
provisions of Code Section 1286 described above override the alternative
described in this paragraph. Certificateholders are advised to consult their
tax advisors as to the proper treatment of the amounts paid to the servicers as
set forth herein as servicing compensation or under either of the alternatives
set forth above.
Sale or Exchange of Certificates. Upon sale or exchange of a
Certificate, a Certificateholder will recognize gain or loss equal to the
difference between the amount realized on the sale and its aggregate adjusted
basis in the Mortgage Assets and other assets represented by the Certificate.
In general, the aggregate adjusted basis will equal the Certificateholder's
cost for the Certificate, increased by the amount of any income previously
reported with respect to the Certificate and decreased by the amount of any
losses previously reported with respect to the Certificate and the amount of
any distributions received thereon. Except as provided above with respect to
market discount on any
54
<PAGE> 338
Mortgage Assets, and except for certain financial institutions subject to the
provisions of Code Section 582(c), any such gain or loss would be capital gain
or loss if the Certificate was held as a capital asset.
STRIPPED CERTIFICATES
General. Pursuant to Code Section 1286, the separation of ownership of
the right to receive some or all of the principal payments on an obligation
from ownership of the right to receive some or all of the interest payments
results in the creation of "stripped bonds" with respect to principal payments
and "stripped coupons" with respect to interest payments. For purposes of this
discussion, Certificates that are subject to those rules will be referred to as
"Stripped Certificates." The Certificates will be subject to those rules if
(i) the Depositor or any of its affiliates retains (for its own account or for
purposes of resale), in the form of fixed retained yield or otherwise, an
ownership interest in a portion of the payments on the Mortgage Assets, (ii)
the Depositor, any of its affiliates or a servicer is treated as having an
ownership interest in the Mortgage Assets to the extent it is paid (or retains)
servicing compensation in an amount greater than reasonable consideration for
servicing the Mortgage Assets (see "Standard Certificates -- Recharacterization
of the Servicing Fees" above) and (iii) a class of Certificates are issued in
two or more classes or subclasses representing the right to non pro rata
percentages of the interest and principal payments on the Mortgage Assets.
In general, a holder of a Stripped Certificate (a "Stripped
Certificateholder") will be considered to own "stripped bonds" with respect to
its pro rata share of all or a portion of the principal payments on each
Mortgage Loan and/or "stripped coupons" with respect to its pro rata share of
all or a portion of the interest payments on each Mortgage Loan, including the
Stripped Certificate's allocable share of the servicing fees paid, to the
extent that such fees represent reasonable compensation for services rendered.
See discussion above under "Standard Certificates -- Recharacterization of
Servicing Fees." For this purpose the servicing fees will be allocated to the
Stripped Certificates in proportion to the respective offering price of each
class (or subclass) of Stripped Certificates. The holder of a Stripped
Certificate generally will be entitled to a deduction each year in respect of
the servicing fees, as described above under " -- Federal Income Tax
Consequences for Certificates as to Which No REMIC Election is Made -- Standard
Certificates -- General," subject to the limitation described therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally
as a new obligation issued (i) on the date that the stripped interest is
purchased and (ii) at a price equal to its purchase price or, if more than one
stripped interest is purchased, the share of the purchase price allocable to
such stripped interest. Each stripped interest generally will have original
issue discount equal to the excess of its stated redemption price at maturity
(or, in the case of a stripped coupon, the amount payable on the due date of
such coupon) over its issue price. This treatment is based on the
interrelationship of Code Section 1286 and the regulations thereunder, Code
Sections 1272 through 1275, and the OID Regulations. While under Code Section
1286 computations with respect to Stripped Certificates arguably should be made
in one of the ways described below, the OID Regulations state, in general, that
all debt instruments issued in connection with the same transaction must be
treated as a single debt instrument. The Trustee will make and report all
computations described below using this aggregate approach, unless substantial
legal authority requires otherwise.
Furthermore, the regulations under Code Section 1286 support the
treatment of a Stripped Certificate as a single debt instrument issued on the
date it is originated for purposes of calculating any original issue discount.
The preamble to such regulations state that such regulations are premised on
the assumption that an aggregation approach is appropriate in determining
whether original issue discount on a stripped bond or stripped coupon is de
minimis. In addition, under these regulations, a Stripped Certificate that
represents a right to payments of both interest and principal may be viewed
either as issued with original issue discount or market discount (as described
below), at a de minimis original issue discount, or presumably, at a premium.
The preamble to such regulations also provide that such regulations are
premised on the assumption that generally the interest component of such a
Stripped Certificate would be treated as stated interest under the original
issue discount rules. Further, the regulations provide that the purchaser of
such a Stripped Certificate may be required to account for any discount as
market discount rather than original issue discount if either (i) the initial
discount with respect to the Strip Certificate was treated as zero under the de
minimis rule or (ii) no more than 100 basis points in excess of reasonable
servicing is stripped off the related Mortgage Assets. Any such market
discount would be reportable as described above under "Federal Income Tax
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<PAGE> 339
Consequences for REMIC Certificates -- Taxation of Regular Certificates
- -- Market Discount," without regard to the de minimis rule therein.
Status of Stripped Certificates. No specific legal authority exists as
to whether the character of the Stripped Certificates, for federal income tax
purposes, will be the same as that of the Mortgage Assets. Stripped
Certificates owned by applicable holders should be considered to represent
"qualifying real property loans" within the meaning or Code Section 593(d)(1),
"real estate assets" within the meaning of Code Section 856(c)(A),
"obligations(s) . . . principally secured by an interest in real property"
within the meaning of Code Section 860G(a)(3)(A), and "loans . . . secured by
an interest in real property" within the meaning of Code Section
7701(a)(19)(C)(v), and interest (including original issue discount) income
attributable to Stripped Certificates should be considered to represent
"interest on obligations secured by mortgages on real property" within the
meaning or Code Section 856(c)(3)(B), provided that in each case the Mortgage
Assets and interest on such Mortgage Assets qualify for such treatment. The
application of such Code provisions to buy-down Mortgage Assets is uncertain.
See " -- Federal Income Tax Consequences for Certificates as to Which No REMIC
Election is Made" and " -- Standard Certificates -- Tax Status" above.
Original Issue Discount. Except as described above under " -- General,"
each Stripped Certificate will be considered to have been issued (i) on the
date that the stripped interest is purchased and (ii) at a price equal to its
purchase price or, if more than one stripped interest is purchased, the share
of the purchase price allocable to such stripped interest. Each stripped
interest generally will have original issue discount equal to the excess of its
stated redemption price at maturity (or, in the case of a stripped coupon, the
amount payable on the due date of such coupon) over its issue price. Original
issue discount with respect to a Stripped Certificate must be included in
ordinary income as it accrues, in accordance with a constant yield method that
takes into account the compounding of interest, which may be prior to the
receipt of the cash attributable to such income. The amount of original issue
discount required to be included in the income of a Stripped Certificateholder
in any taxable year should be computed generally as described above under
"Federal Income Tax Consequences for REMIC Certificates -- Taxation of Regular
Certificates -- Original Issue Discount" and " -- Variable Rate Regular
Certificates." However, with the apparent exception of a Stripped Certificate
issued with de minimis original issue discount, as described above under "
- -- General," the issue price of a Stripped Certificate will be the purchase
price paid by each holder thereof, and the stated redemption price at maturity
will include the aggregate amount of the payments to be made on the Stripped
Certificate to such Stripped Certificateholder, presumably under the Prepayment
Assumption, other than amounts treated as qualified stated interest.
If the Mortgage Assets prepay at a rate either faster or slower than
that under the Prepayment Assumption, a Stripped Certificateholder's
recognition of original issue discount will be either accelerated or
decelerated and the amount of such original issue discount will be either
increased or decreased depending on the relative interests in principal and
interest on each Mortgage Loan represented by such Stripped Certificateholder's
Stripped Certificate. While the matter is not free from doubt, the holder of a
Stripped Certificate should be entitled in the year that it becomes certain
(assuming no further prepayments) that the holder will not recover a portion of
its adjusted basis in such Stripped Certificate to recognize an ordinary loss
equal to such portion of unrecoverable basis.
As an alternative to the method described above, the fact that some of
or all the interest payments with respect to the Stripped Certificates will not
be made if the Mortgage Assets are prepaid could lead to the interpretation
that such interest payments are "contingent" within the meaning of the proposed
regulations issued under Code Section 1274 that address the treatment of
contingent payments. If the rules of those proposed regulations apply,
treatment of a Stripped Certificate under such rules depends on whether the
aggregate amount of principal payments, if any, to be made on the Stripped
Certificate is less than or greater than its issue price. If the aggregate
principal payments are greater than or equal to the issue price, the principal
payments would be treated as a separate installment obligation issued at a
price equal to the purchase price for the Stripped Certificate. In such case,
original issue discount would be calculated and accrued under the method
described above without consideration of the interest payments with respect to
the Stripped Certificate. Such payments of interest would be includible in the
Stripped Certificateholder's gross income in the taxable year in which the
amounts become fixed. If the aggregate amount of principal payments to be made
on the Stripped Certificate is less than its issue price, each payment of
principal would be treated as a return of basis. Each payment of interest
would be treated as includible in gross income to the extent of the applicable
Federal rate under Code Section 1274(d), as applied to the adjusted basis of
the Stripped Certificate, while amounts
56
<PAGE> 340
received in excess of the applicable Federal rate, as applied to the adjusted
basis of the Stripped Certificate, would be characterized as a return of basis
until the total amount of interest payments treated as a return of basis
equaled the excess of the purchase price over the aggregate stated principal
payments. Any additional interest payments thereafter would be treated as
ordinary income. While not free from doubt uncertainty as to the payment of
interest arising as a result of the possibility of prepayment of the Mortgage
Assets should not cause the rules under the proposed contingent payment
regulations to apply to interest with respect to the Stripped Certificates.
Sale or Exchange of Stripped Certificates. Sale or exchange of a
Stripped Certificate prior to its maturity will result in gain or loss equal to
the difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under "Federal Income Tax Consequences for REMIC Certificates -- Taxation
of Regular Certificates -- Sale or Exchange of Regular Certificates." To the
extent that a subsequent purchaser's purchase price is exceeded by the
remaining payments on the Stripped Certificates, such subsequent purchaser will
be required for federal income tax purposes to accrue and report such excess as
if it were original issue discount in the manner described above. It is not
clear for this purpose whether the assumed prepayment rate that is to be used
in the case of a Stripped Certificateholder other than by original Stripped
Certificateholder should be the Prepayment Assumption or a new rate based on
the circumstances at the date of subsequent purchase.
Purchase of More Than One Class of Stripped Certificates. Where an
investor purchases more than one class of Stripped Certificates, it is
currently unclear whether for federal income tax purposes such classes of
Stripped Certificates should be treated separately or aggregated for purposes
of the rules described above.
Because of these possible varying characterizations of Stripped
Certificates and the resultant differing treatment of income recognition,
Stripped Certificateholders are urged to consult their own tax advisors
regarding the proper treatment of Stripped Certificates for federal income tax
purposes.
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Trustee will furnish, within a reasonable time after the end of each
calendar year, to each Certificateholder or Stripped Certificateholder at any
time during such year, such information (prepared on the basis described above)
as the Trustee deems to be necessary or desirable to enable such
Certificateholders to prepare their federal income tax returns. Such
information will include the amount of original issue discount accrued on
Certificates held by persons other than Certificateholders exempted from the
reporting requirements. The amounts required to be reported by the Trustee may
not be equal to the proper amount of original issue discount required to be
reported as taxable income by a Certificateholder, other than an original
Certificateholder. The Trustee will also file such original issue discount
information with the Internal Revenue Service. If a Certificateholder fails to
supply an accurate taxpayer identification number or if the Secretary of the
Treasury determines that a Certificateholder has not reported all interest and
dividend income required to be shown on his federal income tax return, 31%
backup withholding may be required in respect of any reportable payments, as
described above under " -- Backup Withholding."
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a Certificate evidences ownership in Mortgage Assets
that are issued on or before July 18, 1984, interest or original issue discount
paid by the person required to withhold tax under Code Section 1441 or 1442,
which apply to nonresident aliens, foreign corporations, or other Non-U.S.
Persons generally will be subject to 30% United States withholding tax, or such
lower rate as may be provided for interest by an applicable tax treaty.
Accrued original issue discount or market discount recognized by the
Certificateholder on the sale or exchange of such a Certificate also will be
subject to federal income tax at the same rate.
Treasury regulations provide that interest or original issue discount
paid by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Assets issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will
be subject to the same certification requirements described above under
"-- Taxation of Certain Foreign Investors -- Regular Certificates."
57
<PAGE> 341
Certificateholders should be aware that the IRS issued proposed
Regulations on April 22, 1996, which, if adopted in final form, could affect
the United States taxation of foreign investors owning Certificates. The
proposed regulations would apply to payments after December 31, 1997.
Investors who are Non-U.S. Persons should consult their own tax advisors
regarding the specific tax consequences to them of owning Certificates.
TAXATION OF SECURITIES CLASSIFIED AS PARTNERSHIP INTERESTS
Certain Trusts may be treated as partnerships for Federal income tax
purposes. In such event, the Trusts may issue Certificates characterized as
"Partnership Interests" as discussed in the related Prospectus Supplement which
will also cover any material federal income tax consequences applicable to the
Owners. With respect to such series of Partnership Interests, Arter & Hadden,
special counsel to the Depositor, is of the opinion 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.
PLAN OF DISTRIBUTION
Certificates are being offered hereby in series through one or more
underwriters or groups of underwriters (the "Underwriters"). The Prospectus
Supplement will set forth the terms of offering of the series of Certificates,
including the public offering or purchase price of each class of Certificates
of such series being offered thereby or the method by which such price will be
determined and the net proceeds to the Depositor from the sale of each such
class. Such Certificates will be acquired by the Underwriters for their own
account and may be resold from time to time in one or more transactions
including negotiated transactions, at fixed public offering prices or at
varying prices to be determined at the time of sale or at the time of
commitment therefor. The managing Underwriter or Underwriters with respect to
the offer and sale of a particular series of Certificates will be set forth on
the cover of the Prospectus Supplement relating to such series and the members
of the underwriting syndicate, if any, will be named in such Prospectus
Supplement.
In connection with the sale of the Certificates, Underwriters may
receive compensation from the Depositor or from purchasers of the Certificates
in the form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the Certificates may be deemed to be
underwriters in connection with such Certificates, and any discounts or
commissions received by them from the Depositor and any profit on the resale of
Certificates by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended. The Prospectus Supplement will
describe any such compensation paid by the Depositor.
It is anticipated that the underwriting agreement pertaining to the sale
of any series of Certificates will provide that the obligations of the
underwriters will be subject to certain conditions precedent, that the
Underwriters will be obligated to purchase all such Certificates if any are
purchased and that the Depositor will indemnify the underwriters against
certain civil liabilities, including liabilities under the Securities Act of
1933, as amended.
RATINGS
Each class of Certificates 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
Certificates will be passed upon for the Depositor by Arter & Hadden,
Washington, D.C. and by L. Keith Blackwell, General Counsel for the Depositor.
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<PAGE> 342
Certain federal income tax matters concerning the Certificates will be passed
upon for the Depositor by Arter & Hadden.
FINANCIAL INFORMATION
A Trust will be formed with respect to each series of Certificates. No
Trust will have any assets or obligations prior to the issuance of the related
series of Certificates. No Trust will engage in any activities other than
those described herein or in the Prospectus Supplement. Accordingly, no
financial statement with respect to any Trust is included in this Prospectus or
will be included in the Prospectus Supplement.
The Depositor has determined that its financial statements are not
material to the offering made hereby.
A Prospectus Supplement and the related Form 8-K (which will be
incorporated by reference to the Registration Statement) may contain financial
statements of the related credit enhancer, if any.
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<PAGE> 343
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
<S> <C>
1986 Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Adjustable Mortgage Loan Rates . . . . . . . . . . . . . . . . . . . . . . . 2
Adjustable Rate Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . 2
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Applicable Accounting Standards . . . . . . . . . . . . . . . . . . . . . . . 24
Balloon Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Beneficial Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
BIF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Book Entry Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Certificate Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Certificate Interest Rate . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Certificate Principal Balance . . . . . . . . . . . . . . . . . . . . . . . . 9
Certificate Register . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
CERCLA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Certificate Registrar . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Certificateholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Clearing Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Clearing Agency Participants . . . . . . . . . . . . . . . . . . . . . . . . 4
Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Commercial Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Companion Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Compound Interest Certificates . . . . . . . . . . . . . . . . . . . . . . . 10
Conventional Multifamily Loans . . . . . . . . . . . . . . . . . . . . . . . 1
Cooperative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Credit Enhancement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Custodial Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Cut-Off Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Debt Service Coverage Ratio . . . . . . . . . . . . . . . . . . . . . . . . . 15
Defective Mortgage Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Delivery Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Deposit Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Depositor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Disqualified Organization . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Distribution Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
DOL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Due Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Eligible Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
EPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
FAMC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
FDIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
FHA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
FHA-Insured Multifamily Loans . . . . . . . . . . . . . . . . . . . . . . . . 1
FHLMC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
FNMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Garn-St. Germain Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
GNMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Housing Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Installment Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Insurance Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Interest Accrual Period . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Liquidation Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Loan-to-Value Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
MBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
MBS Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
MBS Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
MBS Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
MBS Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Monthly Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Mortgage Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Mortgage Loan Pool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Mortgage Loan Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Mortgage Loan Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Mortgage-Backed Securities . . . . . . . . . . . . . . . . . . . . . . . . . 2
Mortgagors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Multifamily Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
NCUA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>
A-1
<PAGE> 344
<TABLE>
<S> <C>
Net Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Net Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Non-U.S. Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Noneconomic Residual Interest . . . . . . . . . . . . . . . . . . . . . . . . 47
Nonrecoverable Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Non-Priority Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Notional Principal Balance . . . . . . . . . . . . . . . . . . . . . . . . . 9
OID Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
OTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Parties in Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Partnership Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Pass-Through Entity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Pass-Through Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Policy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Prepayment Assumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Pre-Funding Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Pre-Funding Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Principal Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Priority Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
PTE 83-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
REIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
REMIC Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
REMIC Pool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
REMIC Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Regular Certificateholder . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Regular Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Remittance Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Remittance Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Reserve Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Residual Certificateholders . . . . . . . . . . . . . . . . . . . . . . . . . 42
Residual Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Retail Class Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SAIF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Scheduled Amortization Certificates . . . . . . . . . . . . . . . . . . . . . 10
Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Senior Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SMMEA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Special Allocation Certificates . . . . . . . . . . . . . . . . . . . . . . . 11
Standard Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Stripped Certificateholder . . . . . . . . . . . . . . . . . . . . . . . . . 55
Stripped Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Subordinated Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Thrift Institution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
TMP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Trust Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
U.S. Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
UCC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Underlying Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Underwriters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
A-2
<PAGE> 345
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses in connection with
the issuance and distribution of the Certificates, other than underwriting
discounts and commissions.*
<TABLE>
<S> <C>
Filing Fee for Registration Statement................................. $ 303.03
Legal Fees and Expenses*.............................................. **
Accounting Fees and Expenses*......................................... **
Trustee's Fees and Expenses (including counsel fees)*................. **
Printing and Engraving Fees*.......................................... **
Blue Sky Fees and Expenses*........................................... **
Rating Agency Fees*................................................... **
Miscellaneous*........................................................ **
Total........................................................... $______
</TABLE>
- ---------------------
* Estimated in accordance with Item 511 of Regulation S-K.
** To be filed by Amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The form of Underwriting Agreement to be filed as Exhibit 1.1 hereto, will
provide for indemnification by each Underwriter of any officer, director or
controlling person of the Registrant who becomes subject to liability arising
out of an untrue or alleged untrue statement of a material fact contained in
this Registration Statement, the Prospectus filed herewith or any Preliminary
Prospectus, related Prospectus Supplement or related Preliminary Prospectus
Supplement, or omission or alleged omission, that was made in reliance on
written information provided to the Registrant by such Underwriter.
The Certificate of Incorporation and Bylaws for the Registrant (Exhibits
3.1 and 3.2 to the Form S-3, Registration No. 33-99346 filed by the Registrant
on November 14, 1995 provide for indemnification of directors and officers to
the full extent permitted by Delaware law. Section 145 of the Delaware General
Corporation Law provides, in substance, that Delaware corporations shall have
the power, under specific circumstances, to indemnify their directors,
officers, employees and agents in connection with actions, suits or proceedings
brought against them by a third party or in the right of the corporation, by
reason of the fact that they were or are such directors, officers, employees or
agents, against expenses incurred in any such action, suit or proceeding.
The Bylaws also provide that the Registrant may, to the full extent
permitted by law, purchase and maintain insurance on behalf of any corporate
agent against any liability which may be asserted against him.
II-1
<PAGE> 346
ITEM 16. EXHIBITS.
1.1 ** -- Form of Underwriting Agreement.
3.1 ** -- Certificate of Incorporation of AMRESCO Residential
Securities Corporation.
3.2 ** -- Bylaws of AMRESCO Residential Securities Corporation.
4.1 ** -- Form of Single Family Pooling and Servicing
Agreement.
4.2 ** -- Form of Multifamily/Commercial Pooling and Servicing
Agreement.
4.3 *** -- Form of Trust Agreement for Debt Securities.
4.4 *** -- Form of Trust Indenture for Debt Securities.
5.1 * -- Opinion of Arter & Hadden regarding the legality of
the Certificates.
8.1 * -- Opinion of Arter & Hadden regarding tax matters.
8.2 * -- Opinion of Arter & Hadden regarding tax matters.
10.1 ** -- Representative Form(s) of Mortgage Note(s).
10.2 ** -- Representative Form of Mortgage.
10.10 ** -- Form of Agreement with Clearing Agency.
23.1 * -- Consent of Arter & Hadden (included as part of
Exhibit 5.1, 8.1 and 8.2).
24.1 * -- Powers of Attorney (included on Page II-4).
24.3 **** -- Consent of Independent Auditor of Certificate
Insurer.
- -----------------
* Filed herewith.
** Incorporated by reference from the Registrant's Registration Statement
Number 33-99346.
*** Incorporated by reference from the Registrant's Registration Statement
Number 333-8687.
**** To be filed by post-effective amendment.
ITEM 17. UNDERTAKINGS
A. Undertaking in Respect of Indemnification. Insofar as indemnification
for liabilities arising under the Securities Act of 1933, as amended (the
"Act") may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
B. Undertaking pursuant to Rule 415.
The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement;
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any acts or events arising after
the effective date of this Registration Statement (or the more recent
post-effective amendment thereof) which, individually or in the aggregate,
represents a fundamental change in the information set forth in this
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which is
II-2
<PAGE> 347
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or
any material change to such information in this Registration Statement;
provided, however, that paragraphs (i) and (ii) do not apply if the
Registration Statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed or furnished to the
Commission by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
C. Undertaking pursuant to Rule 430A.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(l) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
[Remainder of Page Intentionally Left Blank]
II-3
<PAGE> 348
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
hereby certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Dallas, State of Texas, on the 24th day of June,
1997.
AMRESCO RESIDENTIAL SECURITIES
CORPORATION
By: /s/ Scott J. Reading
------------------------
Scott J. Reading
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
Each person whose signature appears below hereby authorizes Robert L. Adair
III, Ronald B. Kirkland or Scott J. Reading and each of them, to file one or
more amendments (including post-effective amendments) to this Registration
Statement, which amendments may make such changes as any of such persons deems
appropriate, and each such person individually and in the capacity stated
below, hereby appoints each of such persons as attorney-in-fact to execute in
his name and his behalf any such amendments to the Registration Statement.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Robert L. Adair, III Chief Executive Officer and June 24, 1997
- ------------------------------ Director
Robert L. Adair, III
/s/ Ronald B. Kirkland Chief Financial Officer and June 24, 1997
- ------------------------------ Chief Accounting Officer
Ronald B. Kirkland
/s/ M. Katheryn Boyle Director June 24, 1997
- ------------------------------
M. Katheryn Boyle
</TABLE>
<PAGE> 349
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
EXHIBITS
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------
AMRESCO RESIDENTIAL SECURITIES
CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
===============================================================================
<PAGE> 350
EXHIBIT INDEX
<TABLE>
<CAPTION>
Location of Exhibit
Exhibit in Sequential
Number Description of Document Numbering System
- ------- ----------------------- --------------------
<S> <C> <C>
5.1 Opinion of Arter & Hadden regarding the
legality of the Certificates. _____
8.1 Opinion of Arter & Hadden regarding tax
matters. _____
8.2 Opinion of Arter & Hadden regarding tax
matters. _____
23.1 Consent of Arter & Hadden (included as part
of Exhibit 5.1, 8.1 and 8.2). _____
24.1 Powers of Attorney (included as part of
signature page). _____
</TABLE>
<PAGE> 1
EXHIBIT 5.1
[Letterhead]
June 20, 1997
AMRESCO Residential Securities Corporation
700 N. Pearl Street, Suite 2400
Dallas, Texas 75201
Re: AMRESCO Residential Securities Corporation Mortgage Loan Asset-Backed
Securities and Mortgage Pass-Through Certificates, Series 1997-__
Registration Statement on Form S-3 No. 333-
Ladies and Gentlemen:
We have acted as counsel to AMRESCO Residential Securities Corporation
(the "Depositor") in connection with the preparation and filing of the
registration statement on Form S-3 (such registration statement, the
"Registration Statement") filed with the Securities and Exchange Commission
pursuant to the Securities Act of 1933, as amended (the "Act"), in respect of
Mortgage Loan Asset-Backed Securities and Mortgage Pass-Through Certificates
(the "Certificates") which you plan to offer in series, each series to be
issued under a separate pooling and servicing agreement (a "Pooling and
Servicing Agreement"), in substantially the form set forth as an exhibit to the
Registration Statement, among the Depositor, AMRESCO Residential Mortgage
Corporation (the "Seller"), the various servicers to be identified in the
prospectus supplement for such series of Certificates, and a trustee (the
"Trustee") to be identified in the prospectus supplement for such series of
Certificates.
We have examined and relied on the originals or copies certified or
otherwise identified to our satisfaction of all such documents and records of
the Depositor and such other instruments and other certificates of public
officials, officers and representatives of the Depositor and such other
persons, and we have made such investigations of law, as we deemed appropriate
as a basis for the opinions expressed below.
The opinions expressed below are subject to bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting creditors'
rights generally and to general equity principles.
This opinion is limited to matters involving the Federal laws of the
United States of America, and to the extent relevant to the opinions expressed
herein, the General Corporation Law of the State of Delaware. All opinions
expressed herein are based on laws, regulations and policy guidelines currently
in force and may be affected by future regulations.
<PAGE> 2
Based upon the foregoing, we are of the opinion that:
1. When, in respect of a series of Certificates, a Pooling and Servicing
Agreement has been duly authorized by all necessary action and duly executed
and delivered by the Depositor, the Seller, the Servicers and the Trustee for
such series, such Pooling and Servicing Agreement, will be a valid and legally
binding obligation of the Depositor; and
2. When a Pooling and Servicing Agreement for a series of Certificates has
been duly authorized by all necessary action and duly executed and delivered by
the Depositor, the Seller, the Servicers and the Trustee for such series, and
when the Certificates of such series have been duly executed and authenticated
in accordance with the provisions of the Pooling and Servicing Agreement, and
issued and sold as contemplated in the Registration Statement and the
prospectus, as amended or supplemented, delivered pursuant to Section 5 of the
Act in connection therewith, such Certificates will be legally and validly
issued, fully paid and nonassessable, and the holders of such Certificates will
be entitled to the benefits of such Pooling and Servicing Agreement.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to this firm in the Registration
Statement and the related prospectus under the heading "Legal Matters".
This opinion is furnished by us as counsel to the company and is solely
for the benefit of the addressee thereof. It may not be relied upon by any
other person or for any other purpose without our prior written consent.
Very truly yours,
/s/ Arter & Hadden
Arter & Hadden
<PAGE> 1
EXHIBIT 8.1
[Letterhead]
June 20, 1997
Re: AMRESCO Residential Securities Corporation Mortgage Loan
Asset-Backed Securities and Mortgage Pass-Through Certificates,
Series 1997-__
Registration Statement on Form S-3 No. 333-
Ladies and Gentlemen:
We have acted as counsel to AMRESCO Residential Securities Corporation in
connection with the preparation and filing of the registration statement on
Form S-3 (such registration statement, the "Registration Statement") being
filed today with the Securities and Exchange Commission pursuant to the
Securities Act of 1933, as amended (the "Act"), in respect of Mortgage Loan
Asset-Backed Securities and Mortgage Pass-Through Certificates, (the
"Certificates") which you plan to offer in series. Our opinions formed the
basis for the description of federal income tax consequences appearing under
the heading "Certain Federal Income Tax Consequences" in each of the prospectus
supplements contained in the Registration Statement. Assuming issuance of
Certificates of a series and assuming the federal income tax characterization
of those Certificates as REMIC interests, standard interests, stripped
interests or partnership interests at that time, we confirm that the
description under "Certain Federal Income Tax Consequences" in the prospectus
of the federal income tax consequences with respect to a series of Certificates
presents our opinion of the material tax issues relating to an investment in
those Certificates.
We hereby consent to the filing of this letter as Exhibit 8.1 to the
Registration Statement and to the reference to this firm in the Registration
Statement and related prospectus supplement under the heading "Certain Federal
Income Tax Consequences."
Very truly yours,
/s/ Arter & Hadden
Arter & Hadden
<PAGE> 1
EXHIBIT 8.2
[Letterhead]
June 20, 1997
Re: AMRESCO Residential Securities Corporation Mortgage Loan
Asset-Backed Securities and Mortgage Pass-Through Certificates,
Series 1997-__
Registration Statement on Form S-3 No. 333-
Ladies and Gentlemen:
We have acted as counsel to AMRESCO Residential Securities Corporation in
connection with the preparation and filing of the registration statement on
Form S-3 (such registration statement, the "Registration Statement") being
filed today with the Securities and Exchange Commission pursuant to the
Securities Act of 1933, as amended (the "Act"), in respect of Mortgage Loan
Asset-Backed Securities and Mortgage Pass-Through Certificates, Series 1997-__
(the "Certificates") which you plan to offer in series. Our advice formed the
basis for the description of federal income tax consequences appearing under
the heading "Certain Federal Income Tax Consequences" in each of the prospectus
supplements contained in the Registration Statement. Such description does not
purport to discuss all possible federal income tax consequences of an
investment in Certificates but with respect to those tax consequences which are
discussed, it is our opinion that the description is accurate. In addition,
assuming (i) REMIC elections are made, (ii) the Pooling and Servicing Agreement
is fully executed, delivered and enforceable against the parties thereto in
accordance with its terms, (iii) the transaction described in the related
prospectus supplement is completed on substantially the terms and conditions
set forth therein and (iv) compliance with the Pooling and Servicing Agreement,
it is our opinion that for federal income tax purposes the Trust Estate [(other
than the Pre-Funding Account and the Capitalized Interest Account)] will be
treated as a REMIC, the Class A Certificates will be treated as "regular
interests" in the REMIC and the Class R Certificates will be the sole "residual
interests" in the REMIC.
We hereby consent to the filing of this letter as Exhibit 8.2 to the
Registration Statement and to the reference to this firm in the Registration
Statement and related prospectus supplement under the heading "Certain Federal
Income Consequences."
Very truly yours,
/s/ Arter & Hadden
Arter & Hadden
