<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-30759
PROSPECTUS SUPPLEMENT
(To Prospectus Dated September 5, 1997)
- --------------------------------------------------------------------------------
$950,000,000
AMRESCO RESIDENTIAL SECURITIES CORPORATION MORTGAGE LOAN TRUST 1997-3
AMRESCO RESIDENTIAL SECURITIES CORPORATION
DEPOSITOR
-----------
ADVANTA MORTGAGE CORP. USA
LONG BEACH MORTGAGE COMPANY
OPTION ONE MORTGAGE CORPORATION
SERVICERS
-----------
LOGO
AMRESCO
AMRESCO Residential Securities Corporation
The AMRESCO Residential Securities Corporation Mortgage Loan
Pass-Through Certificates, Series 1997-3 (the "Certificates") will consist of
(i) the Class A-1 Certificates, Class A-2 Certificates, Class A-3 Certificates,
Class A-4 Certificates, Class A-5 Certificates, Class A-6 Certificates, Class
A-7 Certificates, Class A-8 Certificates, Class A-9 Certificates, Class A-10
Certificates (collectively, the "Class A Certificates"); (ii) the Class M-1F
Certificates and the Class M-1A Certificates (collectively, the "Class M-1
Certificates"); (iii) the Class M-2F Certificates and the Class M-2A
Certificates (collectively, the "Class M-2 Certificates" and, collectively with
the Class M-1 Certificates, the "Mezzanine Certificates"); (iv) the Class B-1F
Certificates and the Class B-1A Certificates (collectively, the "Class B-1
Certificates"), (v) the Class B-2F Certificates, (vi) the Class C-FIO and Class
C-AIO Certificates (collectively, the "Class C-IO Certificates" and,
collectively with the Mezzanine Certificates, the Class B-1 Certificates and
the Class B-2F Certificates, the "Subordinate Certificates"); (vii) the Class S
Certificates; (viii) the Class D Certificates; and (ix) the residual class with
respect to each REMIC held by the Trust (together with the Class B-2F
Certificates, the Class C-IO Certificates, the Class D Certificates and the
Class S Certificates, the "Private Certificates"). Only the Class A
Certificates, the Mezzanine Certificates and the Class B-1 Certificates
(collectively, the "Offered Certificates") are offered hereby.
FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENT IN THE
CERTIFICATES, SEE "RISK FACTORS" BEGINNING ON PAGE S-25 AND "PREPAYMENT AND
YIELD CONSIDERATIONS" BEGINNING ON PAGE S-63 HEREIN AND "RISK FACTORS"
BEGINNING ON PAGE 7 IN THE 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 THE DEPOSITOR, THE
SELLER, THE SERVICERS, THE TRUSTEE 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.
<TABLE>
<CAPTION>
Initial Certificate Pass-Through Price to Underwriting Proceeds to
Principal Balance Rate Public(1) Discount Depositor(1)(2)
<S> <C> <C> <C> <C> <C>
Class A-1 Certificate $ 31,500,000 6.75% 99.984375% 0.100% 99.884375%
Class A-2 Certificate $ 36,000,000 6.61% 100.000000% 0.125% 99.875000%
Class A-3 Certificate $ 41,800,000 6.60% 100.000000% 0.150% 99.850000%
Class A-4 Certificate $ 29,100,000 6.68% 100.000000% 0.200% 99.800000%
Class A-5 Certificate $ 14,600,000 6.88% 100.000000% 0.225% 99.775000%
Class A-6 Certificate $ 14,200,000 6.98% 99.984375% 0.250% 99.734375%
Class A-7 Certificate $ 15,300,000 7.14% 99.968750% 0.300% 99.668750%
Class A-8 Certificate $ 19,790,000 7.68% (3) 101.468750% 0.325% 101.143750%
Class A-9 Certificate $ 22,480,000 6.96% 100.000000% 0.300% 99.700000%
Class A-10 Certificate $ 554,040,000 (4) 100.000000% 0.260% 99.740000%
Class M-1F Certificate $ 14,630,000 7.24% 99.968750% 0.300% 99.668750%
Class M-1A Certificate $ 54,720,000 (4) 100.000000% 0.300% 99.700000%
Class M-2F Certificate $ 11,970,000 7.47% 99.984375% 0.325% 99.659375%
Class M-2A Certificate $ 41,040,000 (4) 100.000000% 0.325% 99.675000%
Class B-1F Certificate $ 10,640,000 7.77% 100.000000% 0.400% 99.600000%
Class B-1A Certificate $ 34,200,000 (4) 100.000000% 0.400% 99.600000%
</TABLE>
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(1) Plus accrued interest, if any, from September 1, 1997 with
respect to the Fixed Rate Group Certificates.
(2) Before deducting expenses, estimated to be $425,000.
(3) The Class A-8 Pass-Through Rate is subject to adjustment on the
Step Up Date as described herein.
(4) The Pass-Through Rate on each Class of the Adjustable Rate Group
Certificates is adjustable based on one month LIBOR as described
herein.
-----------
The Offered 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 Offered
Certificates will be made in book-entry form through the facilities of The
Depository Trust Company ("DTC"), Cedel Bank, S.A. and the Euroclear System on
or about September 17, 1997. The Offered Certificates will be offered in
Europe and the United States of America.
- ---------
MORGAN STANLEY DEAN WITTER
CREDIT SUISSE FIRST BOSTON
LEHMAN BROTHERS
PRUDENTIAL SECURITIES INCORPORATED
- --------------------------------------------------------------------------------
The date of this Prospectus Supplement is September 5 1997.
<PAGE> 2
(Cover continued from previous page)
The Certificates represent undivided ownership interests in 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 1997-3 (the "Trust"). The Class A-1 through Class A-9,
Class M-1F, Class M-2F, Class B-1F, Class B-2F and Class C-FIO Certificates
(collectively, the "Fixed Rate Group Certificates") will represent undivided
ownership interests in the Mortgage Loans in the Fixed Rate Group and the
respective Pre-Funding Account (as defined herein) solely. The Class A-10,
Class M-1A, Class M-2A, Class B-1A and Class C-AIO Certificates (collectively,
the "Adjustable Rate Group Certificates") will represent undivided ownership
interests in the Mortgage Loans in the Adjustable Rate Group and the respective
Pre-Funding Account solely. The Mortgage Loans are secured by first and second
lien mortgages or deeds of trust. The Offered Certificates also represent an
undivided ownership interest in all monies due under the respective Mortgage
Loans after September 1, 1997 (the "Cut-Off Date"), security interests in the
properties which secure the Mortgage Loans (the "Mortgaged Properties"), funds
on deposit in certain trust accounts, and certain other property.
The Class M-1 Certificates issued with respect to a Mortgage Loan
Group are subordinate in right of distribution to the related Class A
Certificates to the extent described herein. The Class M-2 Certificates issued
with respect to a Mortgage Loan Group are subordinate in right of distribution
to the related Class A Certificates and the related Class M-1 Certificates to
the extent described herein. The Class B-1 Certificates issued with respect to
a Mortgage Loan Group are subordinate in right of distribution to the related
Class A Certificates and the related Mezzanine Certificates to the extent
described herein. The Class B-2F Certificates issued with respect to the Fixed
Rate Group are subordinate in right of distribution to the related Class A
Certificates, the related Mezzanine Certificates and the Class B-1F
Certificates to the extent described herein. The Class C-IO Certificates
issued with respect to a Mortgage Loan Group are subordinate in right of
distribution to the related Class A Certificates, the related Mezzanine
Certificates , the related Class B-1 Certificates and, with respect to the
Fixed Rate Group Certificates, the Class B-2F Certificates to the extent
described herein. The initial aggregate Certificate Principal Balance of the
Subordinate Certificates related to the Fixed Rate Group will equal 15.50% of
the initial aggregate Certificate Principal Balance of the Fixed Rate Group
Certificates and the initial aggregate Certificate Principal Balance of the
Subordinate Certificates related to the Adjustable Rate Group will equal 19.00%
of the initial aggregate Certificate Principal Balance of the Adjustable Rate
Group Certificates.
The Trust will be created pursuant to a Pooling and Servicing
Agreement (the "Pooling and Servicing Agreement") to be dated as of September
1, 1997, among the Depositor, AMRESCO Residential Capital Markets, Inc., as
Seller (the "Seller"), the Servicers and The Bank of New York, 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 October 31, 1997 from funds on deposit
in the Pre-Funding Account. Each Subsequent Mortgage Loan so acquired by the
Trust will be assigned to one of the Mortgage Loan Groups. On the Closing Date
aggregate cash amounts of approximately $37,500,000 and $99,800,000 will be
deposited with the Trustee in the Pre-Funding Account to be used to acquire
Subsequent Mortgage Loans for the Fixed Rate Group and the Adjustable Rate
Group, respectively.
The Offered Certificates initially will be represented by certificates
registered in the name of Cede & Co., as nominee of The Depository Trust
Company ("DTC"), as further described herein. The interests of beneficial
owners of the Offered Certificates will be represented by book entries on the
records of participating members of DTC. Definitive certificates will be
available for the Offered Certificates only under the limited circumstances
described herein. See "Description of the Offered Certificates--Book-Entry
Registration of the Offered Certificates" herein.
Distributions of interest will be made to the Owners of the
Certificates on the 25th day of each month (or, if such day is not a business
day, the next business day) beginning October 27, 1997 (each such date, a
"Payment Date"). To the extent available, interest will be passed through on
each Payment Date to the Owners of the Offered Certificates based on the
related Certificate Principal Balance (as defined herein), and at the rate
applicable to the related Class of the Offered Certificates (each, a
"Pass-Through Rate"). The Pass-Through Rate for each Class of the Adjustable
Rate Group Certificates adjusts monthly based upon One-Month LIBOR (as defined
herein) or as otherwise described herein. Distributions of principal in
reduction of the Certificate Principal Balances will be made on each Payment
Date in the manner and the amounts described herein.
Except as described further herein, only the Class A Certificates may
be acquired by Plans (as defined herein). See "ERISA Considerations" herein.
The yield to investors on the Offered 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 Mortgage Loan Group, which may vary over time. See
"Prepayment and Yield Considerations" herein and "Risk Factors" and "Yield,
Prepayment and Maturity Considerations" in the Prospectus.
The Trust will make one or more elections to treat certain assets
thereof as a "real estate mortgage investment conduit" (a "REMIC") for federal
income tax purposes. As described more fully herein, all Classes of the
Offered Certificates will constitute "regular interests" in a REMIC. See
"Certain Federal Income Tax Consequences" 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 Certificates. The Underwriters
intend, but are not obligated, to make a market in the Offered Certificates.
--------------------
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 SEPTEMBER 5, 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.
<PAGE> 3
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 Offered Certificates. So long as
any Offered Certificate is in book-entry form, such reports will be sent to
Cede & Co., as the nominee of DTC and as Owner of such Offered Certificates
pursuant to the Pooling and Servicing Agreement. DTC will supply such reports
to Owners of any such Offered 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> 4
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY OF TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-25
THE PORTFOLIO OF MORTGAGE LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-29
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-29
Underwriting Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-29
Prepayment Penalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-33
Representations Relating to the Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-34
The Servicers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-34
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-47
THE DEPOSITOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-47
THE SELLER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-47
THE MORTGAGE LOAN POOLS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-47
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-47
Initial Mortgage Loans -- Fixed Rate Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-48
Initial Mortgage Loans -- Adjustable Rate Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-54
Conveyance of Subsequent Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-62
PREPAYMENT AND YIELD CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-63
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-63
Mandatory Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-64
Prepayment and Yield Scenarios for Offered Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . S-64
Payment Lag Feature of Fixed Rate Group Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-73
THE ORIGINATORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-73
FORMATION OF THE TRUST AND TRUST PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-73
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-74
DESCRIPTION OF THE OFFERED CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-74
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-74
Payment Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-74
Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-75
Pre-Funding Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-77
Capitalized Interest Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-78
Calculation of One-Month LIBOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-78
Book Entry Registration of the Offered Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-78
Assignment of Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-82
OTHER CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-82
CREDIT ENHANCEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-82
Subordination of Subordinate Certificates and Certain of the Private Certificates . . . . . . . . . . . . . . S-82
Application of Realized Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-83
Application of Monthly Excess Cashflow Amounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-84
THE POOLING AND SERVICING AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-87
Covenant of the Seller to Take Certain Actions with Respect to the Mortgage Loans in Certain Situations . . . S-87
Assignment of Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-88
Servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-89
Removal and Resignation of a Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-93
Reporting Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-94
Removal of Trustee for Cause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-96
Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-96
Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-96
Termination of the Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-96
Auction Sale; Step Up on Certain Pass-Through Rates; Termination . . . . . . . . . . . . . . . . . . . . . . . S-97
CERTAIN FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-97
REMIC Elections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-97
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-98
RATINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-101
LEGAL INVESTMENT MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-102
UNDERWRITING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-102
CERTAIN LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-106
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annex I
INDEX TO LOCATION OF PRINCIPAL
DEFINED TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
</TABLE>
PROSPECTUS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY OF PROSPECTUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
DESCRIPTION OF THE SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Classes of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Distributions of Principal and Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Book Entry Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
List of Owners of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
THE TRUSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Mortgage-Backed Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Other Mortgage Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
CREDIT ENHANCEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SERVICING OF MORTGAGE LOANS AND CONTRACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Payments on Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Collection and Other Servicing Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Primary Mortgage Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Standard Hazard Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Title Insurance Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Claims Under Primary Mortgage Insurance Policies and Standard Hazard Insurance Policies; Other Realization Upon
Defaulted Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Servicing Compensation and Payment of Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Master Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Assignment of Mortgage Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Evidence as to Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
The Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Administration of the Security Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Forward Commitments; Pre-Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Servicer Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Rights Upon Servicer Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
THE DEPOSITOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Soldiers' and Sailors' Civil Relief Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
The Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
The Title I Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
LEGAL INVESTMENT MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
CERTAIN FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Federal Income Tax Consequences For REMIC Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Taxation of Regular Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Taxation of Residual Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Treatment of Certain Items of REMIC Income and Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Tax-Related Restrictions on Transfer of Residual Securities . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Sale or Exchange of a Residual Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Taxes That May Be Imposed on the REMIC Pool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Liquidation of the REMIC Pool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Administrative Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Limitations on Deduction of Certain Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Taxation of Certain Foreign Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Backup Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Reporting Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Federal Income Tax Consequences for Securities as to Which No REMIC Election Is Made . . . . . . . . . . . . . . 63
Standard Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Premium and Discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Stripped Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Reporting Requirements and Backup Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
Taxation of Certain Foreign Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Debt Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Taxation of Securities Classified as Partnership Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
RATINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
</TABLE>
<PAGE> 5
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 1997-3 (the "Trust").
CERTIFICATES OFFERED: $950,000,000 Mortgage Loan Pass-Through
Certificates, Series 1997-3 to be issued in
the following Classes (each, a "Class") and
original Certificate Principal Balances
(each, an "Original Certificate Principal
Balance") set forth below:
<TABLE>
<CAPTION>
Original Certificate Pass-Through
Principal Balance Rate (1) Class
----------------- ------------ ------
<S> <C> <C>
$ 31,500,000 6.75% Class A-1 Certificates
$ 36,000,000 6.61% Class A-2 Certificates
$ 41,800,000 6.60% Class A-3 Certificates
$ 29,100,000 6.68% Class A-4 Certificates
$ 14,600,000 6.88% Class A-5 Certificates
$ 14,200,000 6.98% Class A-6 Certificates
$ 15,300,000 7.14% Class A-7 Certificates
$ 19,790,000 7.68%(2) Class A-8 Certificates
$ 22,480,000 6.96% Class A-9 Certificates
$ 554,040,000 (3)(7) Class A-10 Certificates
$ 14,630,000 7.24% Class M-1F Certificates
$ 54,720,000 (4)(7) Class M-1A Certificates
$ 11,970,000 7.47% Class M-2F Certificates
$ 41,040,000 (5)(7) Class M-2A Certificates
$ 10,640,000 7.77% Class B-1F Certificates
$ 34,200,000 (6)(7) Class B-1A Certificates
</TABLE>
(1) The Pass-Through Rate with respect to
each Class of the Fixed Rate Group
Certificates will on any Payment Date equal
the lesser of (x) the Pass-Through Rate for
such Class set out above and (y) the weighted
average Coupon Rate of the Mortgage Loans in
the Fixed Rate Group less approximately 0.50%
per annum.
(2) For any Payment Date after the Step Up
Date, the Class A-8 Pass Through Rate will
equal the lesser of (x) 8.43% and (y) the
weighted average Coupon Rate for the Mortgage
Loans in the Fixed Rate Group less
approximately 0.50% per annum.
(3) On each Payment Date, the Class A-10
Pass-Through Rate will be equal to the lesser
of (i) with respect to any Payment Date which
occurs on or prior to the Step Up Date, the
rate equal to One-Month LIBOR plus 0.19% per
annum (and for any Payment Date thereafter,
One-Month LIBOR plus 0.38% per annum) and
(ii) the Adjustable Rate Group Available
Funds Cap (as defined herein).
(4) On each Payment Date, the Class M-1A
Pass-Through Rate will be equal to the lesser
of (i) with respect to any Payment Date which
occurs on or prior to the Step Up Date, the
rate equal to the One-Month LIBOR plus 0.37%
per annum (and for any Payment Date
thereafter, One-Month LIBOR plus 0.555% per
annum) and (ii) the Adjustable Rate Group
Available Funds Cap.
(5) On each Payment Date, the Class M-2A
Pass-Through Rate will be equal to the lesser
of (i) with respect to any Payment Date which
occurs on or prior to the Step Up Date, the
rate equal to the One-Month LIBOR plus 0.57%
per annum (and for any Payment Date
thereafter, One-Month LIBOR plus 0.855% per
annum) and (ii) the Adjustable Rate Group
Available Funds Cap.
(6) On each Payment Date, the Class B-1A
Pass-Through Rate will be equal to the lesser
of (i) with respect to any Payment Date which
occurs on or prior to the Step Up Date, the
rate equal to One-Month LIBOR plus 0.97% per
annum (and for any Payment Date thereafter,
One-Month LIBOR plus 1.455% per annum) and
(ii) the Adjustable Rate Group Available
Funds Cap.
(7) On any Payment Date, the weighted
average of the Pass-Through Rates applicable
to each Class of the Adjustable Rate Group
Certificates will be limited to the weighted
average of the Coupon Rates on
S-1
<PAGE> 6
the Mortgage Loans in the Adjustable Rate
Group during the related Remittance Period
(such weighted average Coupon Rate, the "ARM
WAC"). Since, however, the margin over LIBOR
is different for each Class of the Adjustable
Rate Group Certificates, it is possible that,
on any particular Payment Date, the "Formula
Pass-Through Rate(s)" (the rates described
using the margins above One-Month LIBOR)
i.e., the rates described in clause (i) of
each of the foregoing footnotes (3), (4),
(5) and (6) applicable to certain Class(es)
of Adjustable Rate Group Certificates, may be
less than the ARM WAC, while the Formula
Pass-Through Rate(s) applicable to certain
other Class(es) of Adjustable Rate Group
Certificates, may exceed the ARM WAC. In
such event, the Pooling and Servicing
Agreement provides that the excess moneys
resulting from the Class(es) having Formula
Pass-Through Rates less than the ARM WAC
shall be applied to increase the maximum rate
of interest payable with respect to any
Class(es) having Formula Pass-Through Rates
greater than the ARM WAC. The ARM WAC,
increased by the amount of such excess
moneys, less approximately 0.50% per annum,
is the "Adjustable Rate Group Available Funds
Cap" for a Payment Date.
The Class A-1 Certificates, Class A-2
Certificates, Class A-3 Certificates, Class
A-4 Certificates, Class A-5 Certificates,
Class A-6 Certificates, Class A-7
Certificates, Class A-8 Certificates, Class
A-9 Certificates and Class A-10 Certificates
are collectively referred to herein as the
"Class A Certificates." The Class M-1F
Certificates and the Class M-1A Certificates
are collectively referred to as the "Class
M-1 Certificates". The Class M-2F
Certificates and the Class M-2A Certificates
are collectively referred to as the "Class
M-2 Certificates". The Class M-1
Certificates and the Class M-2 Certificates
are collectively referred to as the
"Mezzanine Certificates". The Class B-1F
Certificates and the Class B-1A Certificates
are collectively referred to as the "Class
B-1 Certificates". The Class B-2 F
Certificates are referred to as the "Class
B-2F Certificates". The Class C-FIO
Certificates and the Class C-AIO Certificates
are collectively referred to as the "Class
C-IO Certificates". The Mezzanine
Certificates, the Class B-1 Certificates, the
Class B-2F Certificates and the Class C-IO
Certificates are collectively referred to as
the "Subordinate Certificates". The Class A
Certificates, the Mezzanine Certificates and
the Class B-1 Certificates are collectively
referred to as the "Offered Certificates".
In addition, the Class A Certificates (other
than the Class A-10 Certificates), the Class
M-1F Certificates, the Class M-2F
Certificates, the Class B-1F Certificates,
the Class B-2F Certificates and the Class
C-FIO Certificates are collectively referred
to as the "Fixed Rate Group Certificates" and
the Class A-10 Certificates, the Class M-1A
Certificates, the Class M-2A Certificates,
the Class B-1A Certificates and the Class
C-AIO Certificates are collectively referred
to herein as the "Adjustable Rate Group
Certificates".
The initial aggregate Certificate Principal
Balance of the Subordinate Certificates
related to the Fixed Rate Group will equal
15.50% of the initial aggregate Certificate
Principal Balance of the Fixed Rate Group
Certificates and the initial aggregate
Certificate Principal Balance of the
Subordinate Certificates related to the
Adjustable Rate Group will equal 19.00% of
the initial aggregate Certificate Principal
Balance of the Adjustable Rate Group
Certificates.
The Subordinate Certificates are subordinate
in right of distribution to the related Class
A Certificates to the extent described
herein. The Class M-1 Certificates are
subordinate to the related Class A
Certificates to the extent described herein.
The Class M-2 Certificates are subordinate to
the related Class A Certificates and the
related Class M-1 Certificates to the extent
described herein. The Class B-1 Certificates
are subordinate to the related Class A
Certificates and the related Mezzanine
Certificates to the extent described herein.
The Class B-2F Certificates issued with
respect to the Fixed Rate Group Certificates
are subordinate in right of distribution to
the related Class A Certificates, the related
Mezzanine Certificates and the Class B-1F
Certificates to the extent described herein.
The Class C-IO Certificates issued with
respect to a Mortgage Loan Group are
subordinate in right of distribution to the
related Class A Certificates, the related
Mezzanine Certificates, the related Class B-1
Certificates and, in respect of the Fixed
Rate Group Certificates, the Class B-2F
Certificates to the extent described herein.
S-2
<PAGE> 7
On any date after the Closing Date, the
"Aggregate Certificate Principal Balance" is
the sum of the Certificate Principal Balance
of all Classes of the Class A Certificates
and the Subordinate Certificates (other than
the Class C-IO Certificates) and the
Aggregate Certificate Principal Balance for a
particular Mortgage Loan Group is the sum of
the Certificate Principal Balances of all
Classes of the Class A Certificates and the
Subordinate Certificates (other than the
Class C-IO Certificates) relating to such
Group.
DEPOSITOR: AMRESCO Residential Securities Corporation
(the "Depositor"), a Delaware corporation.
SELLER: AMRESCO Residential Capital Markets, Inc.
(the "Seller"), a Delaware corporation.
SERVICERS: Advanta Mortgage Corp. USA ("Advanta"), with
principal executive offices located at 16875
West Bernardo Drive, San Diego, CA 92127;
Long Beach Mortgage Company ("Long Beach"),
with principal executive offices located at
1100 Town and Country Road, Orange,
California 92868; and Option One Mortgage
Corporation ("Option One") with principal
executive offices located at 2020 East First
Street, Suite 100, Santa Ana, CA 92705
(each, a "Servicer" and collectively, the
"Servicers").
TRUSTEE: The Bank of New York, a New York banking
corporation (the "Trustee"). The corporate
trust office of the Trustee is located at 101
Barclay Street, New York, New York 10286.
CUSTODIAN: Bankers Trust Company of California, N.A., a
national banking association (the
"Custodian"). The Custodian's principal
executive offices are located at 3 Park
Plaza, 16th Floor, Irvine, California 92714.
CUT-OFF DATE: As of the close of business on September 1,
1997.
CLOSING DATE: On or about September 17, 1997.
DESCRIPTION OF
THE CERTIFICATES: The Mortgage Loan Pass-Through Certificates,
Series 1997-3 (the "Certificates") will
consist of the Offered Certificates, the
Class B-2F Certificates, the Class C-IO
Certificates, a Class of interest-only
Certificates (the "Class S Certificates"),
the Class D Certificates and a residual class
(the "Class R Certificates" and together with
the Class B-2F Certificates, the Class C-IO
Certificates, Class S Certificates and the
Class D Certificates, the "Private
Certificates"). The Certificates will be
issued pursuant to a Pooling and Servicing
Agreement (the "Pooling and Servicing
Agreement") to be dated as of September 1,
1997, among the Depositor, the Seller, the
Servicers and the Trustee. Only the Offered
Certificates will be offered hereby.
On the Closing Date, an aggregate cash amount
of approximately $137,300,000 (approximately
$37,500,000 and $99,800,000 of which shall be
allocated to the Fixed Rate Group and the
Adjustable Rate Group, respectively) (the
"Original Pre-Funded Amount") will be
deposited in a trust account in the name of
the Trustee (the "Pre-Funding Account"). It
is intended that additional fixed rate and
adjustable rate Mortgage Loans satisfying the
criteria specified in the Pooling and
Servicing Agreement (the "Subsequent Mortgage
Loans") will be purchased by the Trust from
the Depositor from time to time on or before
October 31, 1997 from funds on deposit in the
Pre-Funding Account. Each Subsequent
Mortgage Loan so acquired by the Trust will
be assigned to one of the Mortgage Loan
Groups. As a result, the aggregate principal
balance of the Mortgage Loans in each
Mortgage Loan Group will increase by an
amount equal to the aggregate principal
balance of the related Subsequent Mortgage
Loans so purchased and the amount in the
Pre-Funding Account will decrease by the same
amount.
S-3
<PAGE> 8
As described below, on the Closing Date, cash
will be deposited in the Capitalized Interest
Account (as defined herein) held by the
Trustee. Funds in the Capitalized Interest
Account will be applied by the Trustee to
cover shortfalls in interest on the
Certificates attributable to the provisions
allowing for purchases of Subsequent Mortgage
Loans during the Funding Period (as described
under "Pre-Funding Account").
DENOMINATIONS: The Offered Certificates are issuable in book
entry form in minimum original principal
amounts of $1,000 and integral multiples
thereof; provided, that one Certificate of
each Class may be issued in a principal
amount that is not an integral multiple of
$1,000.
THE MORTGAGE LOANS: Unless otherwise noted, all statistical
percentages in this Prospectus Supplement are
approximate and are measured by the aggregate
Loan Balance of the related Mortgage Loans
(the "Mortgage Loans"), in relation to the
Initial Mortgage Loans in the applicable
Mortgage Loan Group or of all of the Initial
Mortgage Loans in the Trust (the "Original
Aggregate Loan Balance") in each case as of
the Cut-Off Date. The statistical
characteristics of the Mortgage Loans will
vary upon the transfer into the Fixed Rate
Group and the Adjustable Rate Group of
Subsequent Mortgage Loans. See "Additional
Information" herein.
The Mortgage Loans to be conveyed to the
Trust by the Depositor on the Cut-Off Date
(the "Initial Mortgage Loans") consist of
fixed and adjustable rate conventional
mortgage loans evidenced by promissory notes
(the "Notes") secured by first and second
lien deeds of trust, security deeds or
mortgages (the "Mortgages"), which are
located in 48 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 Combined Loan- to-Value Ratio (as defined
below) (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. See "Credit
Enhancement" herein. The Mortgage Loans are
not guaranteed by the Seller or any affiliate
thereof.
Fixed Rate Group. As of the Cut-Off Date,
the average Loan Balance of the Initial
Mortgage Loans in the Fixed Rate Group was
$77,733.00; the interest rates (the "Coupon
Rates") of such Initial Mortgage Loans ranged
from 7.100% to 16.500% per annum; the
weighted average combined loan-to-value ratio
of such Initial Mortgage Loans (based on the
lower of sales prices and appraisals made at
the time of origination) and in the case of
second lien mortgages, the Loan Balance of
the first lien mortgage added to the original
balance (the "Combined Loan-to-Value Ratio")
was 72.137%; the weighted average Coupon Rate
of such Initial Mortgage Loans was 10.394%
per annum; and the weighted average remaining
term to maturity of such Initial Mortgage
Loans was 319 months. The remaining terms to
maturity as of the Cut-Off Date of the
Initial Mortgage Loans in the Fixed Rate
Group ranged from 115 months to 360 months.
The maximum Loan Balance of the Initial
Mortgage Loans in the Fixed Rate Group as of
the Cut-Off Date was $497,142.69. Not more
than 8.95% of the aggregate Loan Balance of
the Initial Mortgage Loans in the Fixed Rate
Group require "balloon" payments. No Initial
Mortgage Loan in the Fixed Rate Group will
mature later than September 1, 2027.
Approximately 97.09% of the Initial Mortgage
Loans in the Fixed Rate Group are secured by
first lien mortgages or deeds of trust. As a
percentage of the aggregate Loan Balance of
the Initial Mortgage Loans in the Fixed Rate
Group, 87.05% were secured by mortgages on
single-family dwellings, 7.08% by mortgages
on two- to four- family dwellings, 3.36% by
mortgages on condominiums, 1.57% by
S-4
<PAGE> 9
mortgages on planned unit developments, 0.64%
by mortgages on manufactured homes and 0.30%
by mortgages on townhouses. See "The Initial
Mortgage Loan Pools -- Initial Mortgage Loans
-- Fixed Rate Group" herein.
29.03%, 21.00%, 19.47% and 12.44% of the
Initial Mortgage Loans in the Fixed Rate
Group were originated by AMRESCO Residential
Mortgage Corporation ("ARMC"), New Century
Mortgage Corporation ("New Century"), Option
One and BNC Mortgage, Inc. ("BNC"),
respectively. In addition, 18.06% of the
Initial Mortgage Loans in the Fixed Rate
Group were originated by thirty-six (36)
other Originators.
94.79% of the Initial Mortgage Loans in the
Fixed Rate Group (the "Fixed Rate Loans")
bear interest at a fixed rate for the life of
such Initial Mortgage Loans. 5.21% of the
Initial Mortgage Loans in the Fixed Rate
Group (the "5/25 Loans") bear interest at a
fixed rate for a period of five years after
origination and thereafter have semi-annual
interest rate and payment adjustments at
frequencies and in the same manner as the
Six-Month LIBOR Loans (defined below).
Substantially all of the 5/25 Loans are
subject to a 1.0% periodic rate adjustment
cap and have a lifetime reset cap ranging
from 6.5% to 7.0%. The 5/25 Loans consist
of Initial Mortgage Loans aggregating
$11,866,768.81.
Adjustable Rate Group. As of the Cut-Off
Date, the average Loan Balance of the Initial
Mortgage Loans in the Adjustable Rate Group
was $103,147.33; the Coupon Rates of such
Initial Mortgage Loans ranged from 7.020% to
16.775% per annum; the weighted average
Loan-to-Value Ratio of such Initial Mortgage
Loans was 74.926%; the weighted average
Coupon Rate of such Initial Mortgage Loans
was 10.053% per annum; and the weighted
average remaining term to maturity of such
Initial Mortgage Loans was 355 months. The
remaining terms to maturity as of the Cut-Off
Date of the Initial Mortgage Loans in the
Adjustable Rate Group ranged from 167 months
to 360 months. The maximum Loan Balance of
the Initial Mortgage Loans in the Adjustable
Rate Group as of the Cut-Off Date was
$500,000. No Initial Mortgage Loan in the
Adjustable Rate Group will mature later than
September 1, 2027. As a percentage of the
aggregate Loan Balance of the Initial
Mortgage Loans in the Adjustable Rate Group,
85.53% were secured by mortgages on
single-family dwellings, 5.31% by mortgages on
two- to four-family dwellings, 4.04% by
mortgages on planned unit developments, 4.02%
by mortgages on condominiums, 1.00% by
mortgages on manufactured home and 0.10% by
mortgages on townhouses. See "The Mortgage
Loan Pools -- Initial Mortgage Loans --
Adjustable Rate Group" herein.
All of the Initial Mortgage Loans in the
Adjustable Rate Group have maximum Coupon
Rates. The weighted average maximum Coupon
Rate of the Initial Mortgage Loans in the
Adjustable Rate Group is 16.410% per annum,
with maximum Coupon Rates that range from
approximately 10.250% to 23.755% per annum.
The Initial Mortgage Loans in the Adjustable
Rate Group have a weighted average gross
margin as of the Cut-Off Date of 5.870%. The
gross margin for the Initial Mortgage Loans
in the Adjustable Rate Group ranges from
4.000% to 11.250%. The minimum Coupon Rates
for the Initial Mortgage Loans in the
Adjustable Rate Group range from 5.500% to
16.755%.
16.27% of the Initial Mortgage Loans in the
Adjustable Rate Group (the "Six-Month LIBOR
Loans") bear interest at rates that adjust,
along with the related monthly payments,
semiannually based on Six-Month LIBOR.
96.52% of the Six-Month LIBOR Loans have a
semiannual reset cap of 1.0% and
substantially all have a lifetime reset cap
ranging from 6.0% to 7.0%. 3.48% of the
Six-Month LIBOR Loans have a semiannual reset
cap of 1.5% and substantially all have a
lifetime reset cap of 7.0%. The Six-Month
LIBOR Loans consist of Initial Mortgage Loans
aggregating $95,216,117.34.
S-5
<PAGE> 10
78.14% of the Initial Mortgage Loans in the
Adjustable Rate Group (the "2/28 Loans") bear
interest at a fixed rate of interest for a
period of two years after origination and
thereafter have semiannual interest rate and
payment adjustments at frequencies and in the
same manner as the Six-Month LIBOR Loans.
85.07% of the 2/28 Loans have a periodic rate
adjustment cap of 1.0% and substantially all
of which have a lifetime reset cap of 6.0% to
7.0%. 13.32% of the 2/28 Loans have a
periodic rate adjustment cap of 1.5% and
generally have a lifetime reset cap of 7.0%.
1.61% of the 2/28 Loans have a periodic rate
adjustment cap of 3.0% and have a lifetime
reset cap ranging from 5.0% to 7.0%. The
2/28 Loans consist of Initial Mortgage Loans
aggregating $457,163,200.44.
5.54% of the Initial Mortgage Loans in the
Adjustable Rate Group (the "3/27 Loans") bear
interest at a fixed rate of interest for a
period of three years after origination and
thereafter have semiannual interest rate and
payment adjustments at frequencies and in the
same manner as the Six-Month LIBOR Loans with
51.60% of such Initial Mortgage Loans being
subject to a 1.0% periodic rate adjustment
cap and 48.40% of such Initial Mortgage Loans
being subject to a 1.5% periodic rate
adjustment cap. Substantially all of the
3/27 Loans have a lifetime reset cap of 6.0%
to 7.0%. The 3/27 Loans consist of Initial
Mortgage Loans aggregating $32,432.621.32
0.05% of the Initial Mortgage Loans in the
Adjustable Rate Group (the "CMT Loans") bear
interest at a rate that adjusts annually
based on the weekly average yield on United
States treasury securities adjusted to a
constant maturity of one year.
56.55%, 16.32% and 12.91% of the Initial
Mortgage Loans in the Adjustable Rate Group
by Loan Balance were originated by Option
One, ARMC and New Century, respectively. In
addition, 14.22% of the Initial Mortgage
Loans in the Adjustable Rate Group were
originated by forty-two (42) other
Originators.
FINAL SCHEDULED
PAYMENT DATES: The Final Scheduled Payment Dates for each of
the respective Classes of Offered
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.
<TABLE>
<CAPTION>
Month and Year of Final
Scheduled Payment Date
-----------------------
<S> <C>
Class A-1 Certificates: December 2007
Class A-2 Certificates: June 2012
Class A-3 Certificates: January 2018
Class A-4 Certificates: January 2022
Class A-5 Certificates: July 2023
Class A-6 Certificates: November 2024
Class A-7 Certificates: January 2026
Class A-8 Certificates: May 2027
Class A-9 Certificates: March 2027
Class A-10 Certificates: July 2027
Class M-1F Certificates: September 2027
Class M-2F Certificates: September 2027
Class M-1A Certificates: September 2027
Class M-2A Certificates: September 2027
Class B-1F Certificates: September 2027
Class B-1A Certificates: September 2027
</TABLE>
S-6
<PAGE> 11
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 October
27, 1997 (each such day being a "Payment
Date"), the Trustee will be required, subject
to the availability of amounts therefor,
pursuant to the cashflow priority hereinafter
described, to distribute to the Owners of the
Fixed Rate Group Certificates of record as of
the last day of the calendar month
immediately preceding the calendar month in
which such Payment Date occurs and to the
Owners of the Adjustable Rate Group
Certificates of record as of the day
immediately preceding such Payment Date (each
such date, the "Record Date") the applicable
"Class Distribution Amount" which shall be
the sum of (x) related Current Interest, (y)
the related Interest Carry Forward Amount and
(z) the related Principal Distribution Amount
(each as defined below).
For each Payment Date, interest due with
respect to the Fixed Rate Group Certificates
will be interest which has accrued thereon
during the calendar month immediately
preceding the month in which such Payment
Date occurs; the interest due with respect to
the Adjustable Rate Group Certificates will
be the interest which has accrued thereon at
the applicable Pass-Through Rate from the
preceding Payment Date (or from the Closing
Date in the case of the first Payment Date)
to and including the day prior to the current
Payment Date. Each period referred to in the
prior sentence relating to the accrual of
interest is the "Accrual Period" for the
related Class of Offered Certificates. All
calculations of interest on the Fixed Rate
Group Certificates will be made on the basis
of a 360-day year assumed to consist of
twelve 30-day months. Calculations of
interest on the Adjustable Rate Group
Certificates that are Offered 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, Pennsylvania 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.
INTEREST: On each Payment Date the Interest Remittance
Amount with respect to each Mortgage Loan
Group will be distributed in the following
order of priority:
First, to the Trustee, the Trustee Fee;
Second, to the Owners of the Class A
Certificates related to such Mortgage Loan
Group, the related Current Interest plus the
Interest Carry Forward Amount with respect to
each Class of Class A Certificates without
any priority among such Class A Certificates;
provided, that if the Interest Remittance
Amount less the amount paid to the Trustee as
the Trustee Fee (such amount, the "Interest
Amount Available") is not sufficient to make
a full distribution of interest with respect
to all Classes of the related Class A
Certificates, the Interest Amount Available
will be distributed among the outstanding
related Classes of Class A Certificates pro
rata based on the aggregate amount of
interest due on each such Class, and the
amount of the shortfall will be carried
forward with accrued interest;
Third, to the extent of the Interest Amount
Available with respect to such Mortgage Loan
Group then remaining, to the Owners of the
Class M-1 Certificates related to such
Mortgage Loan Group, the related Current
Interest;
Fourth, to the extent of the Interest Amount
Available with respect to such Mortgage Loan
Group then remaining, to the Owners of the
Class M-2 Certificates related to such
Mortgage Loan Group, the related Current
Interest;
Fifth, to the extent of the Interest Amount
Available with respect to such Mortgage Loan
Group then remaining, to the Owners of the
Class B-1 Certificates related to such
Mortgage Loan Group, the related Current
Interest;
S-7
<PAGE> 12
Sixth, only with respect to the Fixed Rate
Group, to the extent of the Interest Amount
Available then remaining, to the Owners of
the Class B-2F Certificates, the related
Current Interest;
Seventh, to the extent of the Interest Amount
Available with respect to such Mortgage Loan
Group then remaining, to the Owners of the
Class C-IO Certificates related to such
Mortgage Loan Group, the related Current
Interest; and
Eighth, the amount, if any, of the Interest
Amount Available remaining in the Certificate
Account with respect to such Mortgage Loan
Group after application with respect to the
priorities set forth above is defined for
such Mortgage Loan Group, as the "Monthly
Excess Interest Amount" for such Payment Date
and shall be applied as described below under
"Credit Enhancement--Application of Monthly
Excess Cashflow Amounts" in this Summary of
Terms.
"Current Interest" with respect to each Class
of 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
(or the Notional Principal Amount (as defined
below) with respect to the Class C-IO
Certificates) of the related Class of
Certificates plus (ii) the Preference Amount
as it relates to interest previously paid on
such Class of Certificates prior to such
Payment Date.
"Interest Remittance Amount" means, with
respect to each Mortgage Loan Group and as of
any Monthly Remittance Date, the sum, without
duplication, of (i) all interest collected or
required to be advanced during the related
Remittance Period on the Mortgage Loans in
such Mortgage Loan Group (less the Servicing
Fee), (ii) all Compensating Interest paid by
the Servicers on such Monthly Remittance Date
with respect to such Mortgage Loan Group,
(iii) the portion of any Substitution Amount
relating to interest with respect to such
Mortgage Loan Group and (iv) all Net
Liquidation Proceeds relating to interest not
previously advanced with respect to the
Mortgage Loans in such Mortgage Loan Group.
The "Interest Carry Forward Amount" with
respect to any Class of Certificates for any
Payment Date is the sum of (x) the amount, if
any, by which (i) the Current Interest for
such Class as of the immediately preceding
Payment Date (and including all prior Payment
Dates) exceeded (ii) the amount of the actual
distribution with respect to interest made to
the Owners of such Class of Certificates on
such immediately preceding Payment Date plus
(y) interest on such amount calculated for
the related Accrual Period at the related
Pass-Through Rate in effect with respect to
such Class of Certificates.
PRINCIPAL: With respect to each Mortgage Loan Group and
on each Payment Date (a) before the Stepdown
Date or (b) with respect to which a Trigger
Event is in effect with respect to such
Mortgage Loan Group, Owners of the Class A
Certificates will be entitled to receive
payment of 100% of the Principal Distribution
Amount with respect to such Mortgage Loan
Group for such Payment Date as follows: in
the case of the Fixed Rate Group, first, to
the Owners of the Class A-9 Certificates, the
Class A-9 Lockout Distribution Amount and
then sequentially to the Owners of each Class
of the Class A Certificates related to the
Fixed Rate Group in the order of their
numerical Class designations beginning with
the Class A-1 Certificates until the
Certificate Principal Balance of each Class
of Class A Certificates related to the Fixed
Rate Group has been reduced to zero and in
the case of the Adjustable Rate Group to the
Owners of the Class A-10 Certificates until
the Class A-10 Certificate Principal Balance
has been reduced to zero.
With respect to each Mortgage Loan Group and
on each Payment Date (a) on or after the
related Stepdown Date and (b) as long as a
Trigger Event is not in effect,
S-8
<PAGE> 13
the Owners of the Class A Certificates and
the Subordinate Certificates (other than the
Class C-IO Certificates) will be entitled to
receive payments of principal, in the order
of priority, in the amounts set forth below
and to the extent of the Principal
Distribution Amount with respect to such
Mortgage Loan Group as follows:
First, in the case of the Fixed Rate Group,
the lesser of (x) the Principal Distribution
Amount with respect to such Mortgage Loan
Group and (y) the Class A Principal
Distribution Amount with respect to such
Mortgage Loan Group shall be distributed to
the Owners of the Class A-9 Certificates, in
an amount equal to the Class A-9 Lockout
Distribution Amount, with the remainder paid
sequentially to the Owners of each Class of
the Class A Certificates related to the Fixed
Rate Group in the order of their numerical
Class designations beginning with the Class
A-1 Certificates until the Certificate
Principal Balance of each Class of Class A
Certificates related to the Fixed Rate Group
has been reduced to zero; and in the case of
the Adjustable Rate Group, the lesser of (x)
the Principal Distribution Amount with
respect to such Mortgage Loan Group and (y)
the Class A Principal Distribution Amount
with respect to such Mortgage Loan Group
shall be distributed to the Owners of the
Class A-10 Certificates until the Class A-10
Certificate Principal Balance has been
reduced to zero;
Second, the lesser of (x) the excess of (i)
the Principal Distribution Amount with
respect to such Mortgage Loan Group over (ii)
the amount distributed to the Owners of the
related Class A Certificates in clause First
above and (y) the Class M-1 Principal
Distribution Amount with respect to such
Mortgage Loan Group shall be distributed to
the Owners of the related Class M-1
Certificates, until the related Class M-1
Certificate Principal Balance has been
reduced to zero;
Third, the lesser of (x) the excess of (i)
the Principal Distribution Amount with
respect to such Mortgage Loan Group over (ii)
the sum of the amount distributed to the
Owners of the related Class A Certificates in
clause First above and the amount distributed
to the Owners of the related Class M-1
Certificates in clause Second above and (y)
the Class M-2 Principal Distribution Amount
with respect to such Mortgage Loan Group,
shall be distributed to the Owners of the
related Class M-2 Certificates, until the
related Class M-2 Certificate Principal
Balance has been reduced to zero;
Fourth, the lesser of (x) the excess of (i)
the Principal Distribution Amount with
respect to such Mortgage Loan Group over (ii)
the sum of the amount distributed to the
Owners of the related Class A Certificates
pursuant to clause First above, the amount
distributed to the Owners of the related
Class M-1 Certificates pursuant to clause
Second above and the amount distributed to
the Owners of the related Class M-2
Certificates pursuant to clause Third above
and (y) the Class B-1 Principal Distribution
Amount with respect to such Mortgage Loan
Group, shall be distributed to the Owners of
the related Class B-1 Certificates until the
related Class B-1 Certificate Principal
Balance has been reduced to zero;
Fifth, the lesser of (x) the excess of (i)
the Principal Distribution Amount with
respect to the Fixed Rate Group over (ii)
the sum of the amount distributed to the
Owners of the related Class A Certificates
pursuant to clause First above, the amount
distributed to the Owners of the Class M-1F
Certificates pursuant to clause Second above,
the amount distributed to the Owners of the
Class M-2F Certificates pursuant to clause
Third above, the amount distributed to the
Owners of the Class B-1F Certificates
pursuant to clause Fourth above and (y) the
Class B-2F Principal Distribution Amount
shall be distributed to the Owners of the
Class B-2F Certificates, until the Class B-2F
Certificate Principal Balance has been
reduced to zero; and
S-9
<PAGE> 14
Sixth, any amount of the Principal Remittance
Amount with respect to such Mortgage Loan
Group remaining after making all of the
distributions in clauses First, Second,
Third, Fourth and Fifth above shall be
included as part of the Monthly Excess
Cashflow Amount with respect to such Mortgage
Loan Group and shall be applied as described
below under "Credit Enhancement--Application
of Monthly Excess Cashflow Amounts" in this
Summary of Terms.
Notwithstanding the foregoing, in the event
that the Certificate Principal Balance of all
of the Class A Certificates relating to a
Group have been reduced to zero, all amounts
of principal that would have been distributed
to such Class A Certificates will be
distributed to the related Subordinate
Certificates of such Group sequentially in
the following order: Class M-1, Class M-2,
Class B-1 and , in respect of the Fixed Rate
Group, the Class B-2F Certificates.
Similarly, if the Certificate Principal
Balance of the Class M-1 Certificates has
been reduced to zero, all amounts of
principal that would have been distributed to
such Class M-1 Certificates will be
distributed to the related Class M-2, Class
B-1 Certificates and, in respect of the Fixed
Rate Group, the Class B-2F Certificates in
that order. If the Certificate Principal
Balance of the Class M-2 Certificates has
been reduced to zero, all amounts of
principal that would have been distributed on
such Class M-2 Certificates will be
distributed to the related Class B-1
Certificates and, in respect of the Fixed
Rate Group, the Class B-2F Certificates in
that order. Finally, if the Certificate
Principal Balance of the Class B-1F
Certificates has been reduced to zero, all
amounts of principal that would have been
distributed on the Class B-1F Certificates
will be distributed to the Class B-2F
Certificates.
The Class A Certificates in the Fixed Rate
Group (other than the Class A-9 Certificates)
are "sequential pay" classes such that the
Owners of the Class A-8 Certificates will
receive no payments of principal until the
Class A-7 Certificate Principal Balance is
reduced to zero, the Owners of the Class A-7
Certificates will receive no payments of
principal until the Class A-6 Certificate
Principal Balance is 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 is
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; provided, however,
that on any Payment Date on which the sum of
the Certificate Principal Balance of the
Subordinate Certificates in the Fixed Rate
Group and the Overcollateralization Amount is
zero, any amounts of principal payable to the
Owners of the Class A Certificates in the
Fixed Rate Group on such Payment Date shall
be distributed pro rata and not sequentially.
The Owners of the Class A-9 Certificates are
entitled to receive payments of the Class A-9
Lockout Distribution Amount specified herein;
provided, that if on any Payment Date the
Class A-8 Certificate Principal Balance is
zero, the Owners of the Class A-9
Certificates will be entitled to receive the
entire Class A Principal Distribution Amount
with respect to the Fixed Rate Group for such
Payment Date.
In addition to the following definitions, the
above discussion makes use of a number of
defined terms which are defined under
"Description of the Offered Certificates --
Distributions" herein.
"Principal Distribution Amount" means, with
respect to either Mortgage Loan Group and as
of any Payment Date, the sum of (i) the
Principal Remittance Amount
S-10
<PAGE> 15
with respect to such Mortgage Loan Group
(minus, for Payment Dates occurring on and
after the related Stepdown Date, and with
respect to which a Trigger Event is not
existing the Overcollateralization Release
Amount with respect to such Mortgage Loan
Group, if any), and (ii) the Extra Principal
Distribution Amount with respect to such
Mortgage Loan Group, if any.
The "Class A-9 Lockout Distribution Amount"
for any Payment Date will be the product of
(i) the applicable Class A-9 Lockout
Percentage for such Payment Date and (ii) the
Class A-9 Lockout Pro Rata Distribution
Amount for such Payment Date.
The "Class A-9 Lockout Percentage" for each
Payment Date shall be as follows:
<TABLE>
<CAPTION>
Payment Dates Lockout Percentage
------------- ------------------
<S> <C>
October 1997 - September 2000 0%
October 2000 - September 2002 45%
October 2002 - September 2003 80%
October 2003 - September 2004 100%
October 2004 and thereafter 300%
</TABLE>
The "Class A-9 Lockout Pro Rata Distribution
Amount" for any Payment Date will be an
amount equal to the product of (x) a
fraction, the numerator of which is the
Certificate Principal Balance of the Class
A-9 Certificates immediately prior to such
Payment Date and the denominator of which is
the aggregate Certificate Principal Balance
of all Classes of the Class A Certificates in
the Fixed Rate Group immediately prior to
such Payment Date and (y) the Class A
Principal Distribution Amount with respect to
the Fixed Rate Group for such Payment Date.
The "Remittance Period" with respect to any
Monthly Remittance Date is the calendar month
preceding the month in which the 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 October 1997.
A "Liquidated Mortgage Loan" is, in general,
a defaulted Mortgage Loan as to which the
Servicer has determined that all amounts that
it expects to recover on such Mortgage Loan
with respect to the related Mortgaged
Property have been recovered (exclusive of
any possibility of a deficiency judgment).
"Principal Remittance Amount" means for a
Mortgage Loan Group and as of any Monthly
Remittance Date, the sum, without
duplication, of (i) the principal collected
or required to be advanced by the Servicers
with respect to Mortgage Loans in such
Mortgage Loan Group during the related
Remittance Period, (ii) the Loan Balance of
each Mortgage Loan in such Mortgage Loan
Group that was repurchased from the Trust
during the related Remittance Period, (iii)
any Substitution Amount relating to principal
delivered to the Trust in connection with a
substitution of a Mortgage Loan in such
Mortgage Loan Group during the related
Remittance Period, and (iv) all Net
Liquidation Proceeds actually collected by
the related Servicers during the related
Remittance Period with respect to Mortgage
Loans in such Mortgage Loan Group (to the
extent such Net Liquidation Proceeds relate
to principal).
A "Trigger Event" has occurred with respect
to a Mortgage Loan Group on a Payment Date if
the percentage obtained by dividing (x) the
principal amount of 60+ Day Delinquent Loans
in such Mortgage Loan Group by (y) the
aggregate
S-11
<PAGE> 16
outstanding Loan Balance of the Mortgage
Loans in such Mortgage Loan Group, in each
case, as of the last day of the immediately
preceding Remittance Period equals or exceeds
(A) in the case of the Fixed Rate Group, 50%
of the related Senior Specified Enhancement
Percentage as of the last day of the
immediately preceding Remittance Period or
(B) in the case of the Adjustable Rate Group,
40% of the related Senior Specified
Enhancement Percentage.
"Stepdown Date" means, with respect to a
Mortgage Loan Group, the later to occur of
(x) the Payment Date in October 2000 and (y)
the first Payment Date on which the Senior
Enhancement Percentage (calculated for this
purpose only after taking into account
distributions of principal on the related
Mortgage Loans on such Payment Date, but
prior to any applications of Principal
Distribution Amounts to the Certificates) is
greater than or equal to the related Senior
Specified Enhancement Percentage.
"Class A Principal Distribution Amount"
means, with respect to a Mortgage Loan Group
and as of any Payment Date (a) prior to the
related Stepdown Date or with respect to
which a Trigger Event is in effect for such
Mortgage Loan Group, 100% of the Principal
Distribution Amount for such Mortgage Loan
Group and (b) on or after the related
Stepdown Date and as long as a Trigger Event
has not occurred the excess, if any, of (x)
the Certificate Principal Balance of the
Class A Certificates related to such Mortgage
Loan Group immediately prior to such Payment
Date over (y) the lesser of (A) the product
of (i) approximately 67.40% in the case of
the Fixed Rate Group and approximately 57.20%
in the case of the Adjustable Rate Group and
(ii) the outstanding Loan Balance of the
Mortgage Loans in such Mortgage Loan Group as
of the last day of the related Remittance
Period and (B) the aggregate outstanding Loan
Balance of the Mortgage Loans in such
Mortgage Loan Group as of the last day of the
related Remittance Period minus $1,330,000
for the Fixed Rate Group and $3,420,000 for
the Adjustable Rate Group.
"Class M-1 Principal Distribution Amount"
means, with respect to a Mortgage Loan Group
and as of any Payment Date on or after the
related Stepdown Date and as long as a
Trigger Event is not in effect for such
Mortgage Loan Group, the excess, if any, of
(x) the sum of (i) the Certificate Principal
Balance of the Class A Certificates related
to such Mortgage Loan Group (after taking
into account the payment of the related Class
A Principal Distribution Amount on such
Payment Date) and (ii) the related Class M-1
Certificate Principal Balance immediately
prior to such Payment Date over (y) the
lesser of (A) the product of (i)
approximately 78.40% in the case of the Fixed
Rate Group and approximately 73.20% in the
case of the Adjustable Rate Group and (ii)
the outstanding Loan Balance of the Mortgage
Loans in such Mortgage Loan Group as of the
last day of the related Remittance Period and
(B) the aggregate outstanding Loan Balance of
the Mortgage Loans in such Mortgage Loan
Group as of the last day of the related
Remittance Period minus $1,330,000 for the
Fixed Rate Group and $3,420,000 for the
Adjustable Rate Group.
"Class M-2 Principal Distribution Amount"
means, with respect to a Mortgage Loan Group
and as of any Payment Date on or after the
related Stepdown Date and as long as a
Trigger Event is not in effect for such
Mortgage Loan Group, the excess, if any, of
(x) the sum of (i) the Certificate Principal
Balance of the Class A Certificates related
to such Mortgage Loan Group (after taking
into account the payment of the related Class
A Principal Distribution Amount on such
Payment Date), (ii) the related Class M-1
Certificate Principal Balance (after taking
into account the payment of the related Class
M-1 Principal Distribution Amount on such
Payment Date) and (iii) the related Class M-2
Certificate Principal Balance immediately
prior to such Payment Date over (y) the
lesser of (A) the product of (i)
approximately 87.40% in the case of the Fixed
Rate Group and approximately 85.20% in the
case of the Adjustable Rate Group and (ii)
the outstanding aggregate
S-12
<PAGE> 17
Loan Balance of the Mortgage Loans in such
Mortgage Loan Group as of the last day of the
related Remittance Period and (B) the
aggregate outstanding Loan Balance of the
Mortgage Loans in such Mortgage Loan Group as
of the last day of the related Remittance
Period minus $1,330,000 for the Fixed Rate
Group and $3,420,000 for the Adjustable Rate
Group.
"Class B-1 Principal Distribution Amount"
means, with respect to a Mortgage Loan Group
and as of any Payment Date on or after the
related Stepdown Date and as long as a
Trigger Event is not in effect for such
Mortgage Loan Group, the excess, if any, of
(x) the sum of (i) the Certificate Principal
Balance of the Class A Certificates related
to such Mortgage Loan Group (after taking
into account the payment of the related Class
A Principal Distribution Amount on such
Payment Date), (ii) the related Class M-1
Certificate Principal Balance (after taking
into account the payment of the related Class
M-1 Principal Distribution Amount on such
Payment Date), (iii) the related Class M-2
Certificate Principal Balance (after taking
into account the payment of the related Class
M-2 Principal Distribution Amount on such
Payment Date) and (iv) the related Class B-1
Certificate Principal Balance immediately
prior to such Payment Date over (y) the
lesser of (A) the product of (i)
approximately 95.40% in the case of the Fixed
Rate Group and approximately 95.20% in the
case of the Adjustable Rate Group and (ii)
the outstanding aggregate Loan Balance of the
Mortgage Loans in such Mortgage Loan Group as
of the last day of the related Remittance
Period and (B) the aggregate outstanding Loan
Balance of the Mortgage Loans in such
Mortgage Loan Group as of the last day of the
related Remittance Period minus $1,330,000
for the Fixed Rate Group and $3,420,000 for
the Adjustable Rate Group.
"Class B-2F Principal Distribution Amount"
means, with respect to the Fixed Rate Group
and as of any Payment Date on or after the
related Stepdown Date and as long as a
Trigger Event is not in effect for the Fixed
Rate Group, the excess, if any, of (x) the
sum of (i) the Certificate Principal Balance
of the Class A Certificates related to the
Fixed Rate Group (after taking into account
the payment of the Class A Principal
Distribution Amount related to the Fixed Rate
Group on such Payment Date), (ii) the Class
M-1F Certificate Principal Balance (after
taking into account the payment of the Class
M-1F Principal Distribution Amount on such
Payment Date), (iii) the Class M-2F
Certificate Principal Balance (after taking
into account the payment of the Class M-2F
Principal Distribution Amount on such Payment
Date), (iv) the Class B-1F Certificate
Principal Balance (after taking into account
the payment of the Class B-1F Principal
Distribution Amount on such Payment Date) and
(v) the Class B-2F Certificate Principal
Balance immediately prior to such Payment
Date, over (y) the lesser of (A) the product
of (i) approximately 98.40% and (ii) the
aggregate outstanding Loan Balance of the
Mortgage Loans in the Fixed Rate Group as of
the last day of the related Remittance Period
and (B) the aggregate outstanding Loan
Balance of the Mortgage Loans in the Fixed
Rate Group as of the last day of the related
Remittance Period minus $1,330,000.
"Overcollateralization Amount" means with
respect to a Mortgage Loan Group and as of
any Payment Date the excess, if any, of (x)
the Loan Balance of the Mortgage Loans in
such Mortgage Loan Group as of the last day
of the immediately preceding Remittance
Period over (y) the Certificate Principal
Balance of the Class A Certificates and the
Subordinate Certificates (other than the
Class C-IO Certificates) related to such
Mortgage Loan Group (after giving effect to
all principal distributions for such Payment
Date).
"Senior Enhancement Percentage" with respect
to a Mortgage Loan Group and for any Payment
Date is the percentage obtained by dividing
(x) the sum of (i) the aggregate Certificate
Principal Balance of the Subordinate
Certificates (other than the Class C-IO
Certificates) related to such Mortgage Loan
Group and (ii) the
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<PAGE> 18
related Overcollateralization Amount in each
case after taking into account the
distribution of the related Principal
Distribution Amount on such Payment Date by
(y) the aggregate Loan Balance of the
Mortgage Loans in such Mortgage Loan Group as
of the last day of the related Remittance
Period.
"Senior Specified Enhancement Percentage" on
any date of determination thereof is
approximately 32.60% with respect to the
Fixed Rate Group and approximately 42.80%
with respect to the Adjustable Rate Group.
"Extra Principal Distribution Amount" means,
for a Mortgage Loan Group and as of any
Payment Date, the lesser of (x) the Monthly
Excess Interest Amount for such Mortgage Loan
Group and Payment Date and (y) the
Overcollateralization Deficiency for such
Mortgage Loan Group and Payment Date.
"Overcollateralization Deficiency" means, for
a Mortgage Loan Group and as of any Payment
Date, the excess, if any, of (x) the Targeted
Overcollateralization Amount for such
Mortgage Loan Group and Payment Date over (y)
the Overcollateralization Amount for such
Mortgage Loan Group and Payment Date,
calculated for this purpose after taking into
account the reduction on such Payment Date of
the Certificate Principal Balance of the
Class A Certificates and the Subordinate
Certificates related to such Mortgage Loan
Group resulting from the distribution of the
related Principal Remittance Amount (but not
the related Extra Principal Distribution
Amount) on such Payment Date, but prior to
taking into account any related Applied
Realized Loss Amount on such Payment Date.
"Overcollateralization Release Amount" means,
for a Mortgage Loan Group and as of any
Payment Date, the lesser of (x) the related
Principal Remittance Amount for such Payment
Date and (y) the excess, if any, of (i) the
related Overcollateralization Amount for such
Payment Date, assuming that 100% of the
related Principal Remittance Amount is
applied on such Payment Date to the payment
of principal on the Class A Certificates and
the Subordinate Certificates related to such
Mortgage Loan Group and (ii) the Targeted
Overcollateralization Amount for such
Mortgage Loan Group and Payment Date.
Notwithstanding the foregoing, the
Overcollateralization Release Amount will be
$0 on any Payment Date if certain loss and
delinquency events are continuing on such
Payment Date as described more fully in the
Pooling and Servicing Agreement.
"Targeted Overcollateralization Amount"
means, (A) for the Fixed Rate Group and as of
any Payment Date, (x) prior to the related
Stepdown Date, 0.80% of the Original
Certificate Principal Balance of the Fixed
Rate Group Certificates and (y) on and after
the Stepdown Date, the greater of (i) 1.60%
of the aggregate outstanding Loan Balance of
the Mortgage Loans in the Fixed Rate Group as
of the last day of the related Remittance
Period and (ii) $1,330,000; and (B) for the
Adjustable Rate Group and as of any Payment
Date, (x) prior to the related Stepdown Date,
2.40% of the Original Certificate Principal
Balance of the Adjustable Rate Group
Certificates and (y) on or after the related
Stepdown Date, the greater of (i) 4.80% of
the aggregate outstanding Loan Balance of the
Mortgage Loans in the Adjustable Rate Group
as of the last day of the related Remittance
Period and (ii) $3,420,000.
"Preference Amount" means any amount
previously distributed to an Owner on a Class
A Certificate or a Subordinate Certificate
that is recoverable and sought to be
recovered as a voidable preference by a
trustee in bankruptcy under 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.
SERVICING: Advanta, Long Beach and Option One will each
serve as a Servicer under the Pooling and
Servicing Agreement with respect to certain
Mortgage Loans. Each
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<PAGE> 19
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.
Ameriquest Mortgage Company ("Ameriquest")
will act as subservicer of the Mortgage Loans
serviced by Long Beach pursuant to a
Subservicing Agreement between Ameriquest and
Long Beach. See "The Portfolio of Mortgage
Loans -- The Servicers".
OTHER CERTIFICATES: The Class B-2F Certificates, the Class C-IO
Certificates, the Class D Certificates, the
Class S and the Class R Certificates are not
offered hereby. The Pass-Through Rate on the
Class B-2F Certificates will on any Payment
Date equal the lesser of (i) 9.25% and (ii)
the weighted average Coupon Rate of the
Mortgage Loans in the Fixed Rate Group less
approximately 0.50% per annum. The Class
B-2F Certificate Principal Balance will be
$3,990,000. The Pass-Through Rate of the
Class C-FIO Certificates is 15% per annum.
Interest will be calculated on the Class
C-FIO Certificates on each Payment Date on
the basis of a principal balance equal to (i)
for the period from the Closing Date through
the Payment Date in September 1999, the sum
of the original Class M-1F Certificate
Principal Balance and the original Class M-2F
Certificate Principal Balance ($26,600,000)
and (ii) thereafter, zero, with the result
that the Owners of the Class C-FIO
Certificates will receive no distributions
after the Payment Date in September 1999.
The Pass-Through Rate of the Class C-AIO
Certificates on any Payment Date is 6.82% per
annum. Interest will be calculated on the
Class C-AIO Certificates on each Payment Date
on the basis of a principal balance equal to
(i) for the period from the Closing Date
through the Payment Date in September 1999,
the sum of the original Class M-2A
Certificate Principal Balance and the
original Class B-1A Certificate Principal
Balance ($75,240,000) and (ii) thereafter,
zero, with the result that the Owners of the
Class C-AIO Certificates will receive no
distribution after the Payment Date in
September 1999. The principal balance of the
Class C-IO Certificates is sometimes referred
to herein as the "Notional Principal Amount".
The Class C-IO Certificates will not be
entitled to distributions of principal. The
Class D Certificates, the Class S
Certificates and the Class R Certificates
will not have Certificate Principal Balances
or Pass-Through Rates.
CREDIT ENHANCEMENT: The Credit Enhancement provided for the
benefit of the Owners of the Offered
Certificates consists of the subordination of
the related Subordinate Certificates and
certain classes of the Private Certificates
to the related Class A Certificates, the
further subordination within the Subordinate
Certificates, the priority of application of
Realized Losses, the application of Monthly
Excess Cashflow Amounts and the
crosscollateralization feature of the Trust.
Subordination of Subordinate Certificates and
certain of the Private Certificates. The
rights of the Owners of the Subordinate
Certificates (other than the Class C-IO
Certificates) and certain of the Private
Certificates to receive distributions with
respect to the Mortgage Loans in a particular
Mortgage Loan Group will be subordinated, to
the extent described herein, to such rights
of the Owners of the
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<PAGE> 20
Class A Certificates related to such Mortgage
Loan Group. This subordination is intended
to enhance the likelihood of regular receipt
by the Owners of the Class A Certificates of
the full amount of their scheduled monthly
payment of interest and principal and to
afford such Owners protection against
Realized Losses allocated against such
Mortgage Loan Group.
The protection afforded to the Owners of the
Class A Certificates by means of the
subordination of the related Subordinate
Certificates and certain of the Private
Certificates will be accomplished by the
preferential right of the Owners of the Class
A Certificates to receive, prior to any
distribution being made on a Payment Date in
respect of such Subordinate Certificates and
such Private Certificates, the amounts of
interest due them and principal available for
distribution on such Payment Date, and, if
necessary, by the right of the Owners of the
Class A Certificates to receive future
distributions of amounts that would otherwise
be payable to the Owners of such Subordinate
Certificates and such Private Certificates.
In addition, the rights of the Owners of the
Class M-2, Class B-1 and certain of the
Private Certificates issued with respect to a
Mortgage Loan Group to receive distributions
will be subordinated, to the extent described
herein, to such rights of the Owners of the
related Class A and Class M-1 Certificates.
This subordination is intended to enhance the
likelihood of regular receipt by the Owners
of the related Class A and Class M-1
Certificates of the amount of interest due
them and principal available for distribution
and to afford such Owners with protection
against Realized Losses.
The rights of the Owners of the Class B-1 and
certain of the Private Certificates issued
with respect to a Mortgage Loan Group to
receive distributions will be subordinated in
the same manner to such rights of the Owners
of the related Class A, Class M-1 and Class
M-2 Certificates.
Application of Realized Losses. The Pooling
and Servicing Agreement provides that if a
Mortgage Loan becomes a Liquidated Loan
during a Remittance Period, the Net
Liquidation Proceeds relating thereto and
allocated to principal may be less than the
Loan Balance of such Mortgage Loan. The
amount of such insufficiency is a "Realized
Loss". Realized Losses which occur in a
Mortgage Loan Group will, in effect, be
absorbed first, by the related Private
Certificates (other than the Class B-2F
Certificates, the Class C-IO Certificates and
the Class S Certificates) as a result of the
application of the Monthly Excess Interest
Amount to fund such deficiency and through a
reduction in the related
Overcollateralization Amount, second, in
respect of the Fixed Rate Group, by the
Owners of the Class B-2F Certificates, third,
by the Owners of the related Class B-1
Certificates, fourth, by the Owners of the
related Class M-2 Certificates, and fifth, by
the Owners of the related Class M-1
Certificates.
To the extent that a Mortgage Loan Group
experiences Realized Losses, such Realized
Losses will reduce the aggregate outstanding
Loan Balance of the Mortgage Loans in such
Mortgage Loan Group (i.e, a reduction in the
collateral balance will occur). Since the
Overcollateralization Amount with respect to
a Mortgage Loan Group is the excess, if any,
of the related collateral balance over the
related Aggregate Certificate Principal
Balance, Realized Losses, to the extent
experienced, will in the first instance
reduce the related Overcollateralization
Amount.
The Pooling and Servicing Agreement requires
that the Overcollateralization Amount with
respect to a Mortgage Loan Group be initially
increased to, and thereafter maintained at,
the related Targeted Overcollateralization
Amount. This increase and subsequent
maintenance is intended to be accomplished by
the
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<PAGE> 21
application of related Monthly Excess
Interest Amounts to the funding of the
related Extra Principal Distribution Amount.
Such Extra Principal Distribution Amounts,
since they are funded from interest
collections on the collateral but are
distributed as principal on the related Class
A Certificates and Subordinate Certificates
(other than the Class C-IO Certificates),
will increase the related
Overcollateralization Amount.
If, on any Payment Date after taking into
account all Realized Losses experienced
during the prior Remittance Period and after
taking into account the distribution of
principal (including the Extra Principal
Distribution Amount) with respect to the
related Class A Certificates and the
Subordinate Certificates on such Payment
Date, the Aggregate Certificate Principal
Balance with respect to a Mortgage Loan Group
exceeds the aggregate Loan Balance of the
Mortgage Loans in such Mortgage Loan Group as
of the end of the related Remittance Period
(i.e., if the level of overcollateralization
is negative), then the Certificate Principal
Balance of the related Subordinate
Certificates (other than the Class C-IO
Certificates) will be reduced (in effect,
"written down") such that the level of
overcollateralization is zero, rather than
negative. Such a negative level of
overcollateralization is an "Applied Realized
Loss Amount", which will be applied as a
reduction in the Certificate Principal
Balance of the related Subordinate
Certificates (other than the Class C-IO
Certificates) in reverse order of seniority
(i.e., first, in respect of the Fixed Rate
Group, against the Class B-2F Certificate
Principal Balance until it is reduced to
zero, then with respect to both Mortgage Loan
Groups against the related Class B-1
Certificate Principal Balance until it is
reduced to zero, then against the related
Class M-2 Certificate Principal Balance until
it is reduced to zero and then against the
related Class M-1 Certificate Principal
Balance until it is reduced to zero). The
Pooling and Servicing Agreement does not
permit the "write down" of the Certificate
Principal Balance of any Class A Certificate.
Once the Certificate Principal Balance of a
Class of Subordinate Certificates (other than
the Class C-IO Certificates) has been
"written down," the amount of such write down
will no longer bear interest, nor will such
amount thereafter be "reinstated" or "written
up," although the amount of such write down
may, on future Payment Dates, be paid to
Owners of the Subordinate Certificates which
experienced the write down, in direct order
of seniority (i.e., first, the related Class
M-1 Certificates, second, the related Class
M-2 Certificates, third, the related Class
B-1 Certificates and, fourth, in respect of
the Fixed Rate Group, the Class B-2F
Certificates). The source of funding of such
payments will be the amount, if any, of the
Monthly Excess Cashflow Amount remaining on
such future Payment Dates after the funding
of the Extra Principal Distribution Amount
and after the payment of Interest Carry
Forward Amounts with respect to the related
Subordinate Certificates on such Payment
Date.
Application of Monthly Excess Cashflow
Amounts. The weighted average net Coupon
Rate for the Mortgage Loans in each Mortgage
Loan Group is generally expected to be higher
than the weighted average of the Pass-Through
Rates on the Class A Certificates and
Subordinated Certificates related to such
Mortgage Loan Group, thus generating certain
excess interest collections which, in the
absence of losses will not be necessary to
fund interest distributions on the Class A
Certificates and Subordinated Certificates.
The Pooling and Servicing Agreement provides
that this excess interest be applied to the
extent available to make accelerated payments
of principal (i.e., the Extra Principal
Distribution Amount) to the Class or Classes
then entitled to receive distributions of
principal; such application will cause the
Aggregate Certificate Principal Balance with
respect to a Mortgage Loan Group to amortize
more rapidly than the Mortgage Loans in such
Mortgage Loan Group, resulting in
overcollateralization.
The required level of overcollateralization
for any Mortgage Loan Group and Payment Date
is the Targeted Overcollateralization Amount
for such Mortgage
S-17
<PAGE> 22
Loan Group and Payment Date. The Targeted
Overcollateralization Amount is initially
(i.e., prior to the related Stepdown Date)
0.80% of the Original Certificate Principal
Balance with respect to the Fixed Rate Group
and 2.40% of the Original Certificate
Principal Balance with respect to the
Adjustable Rate Group. Since the actual
Overcollateralization Amount with respect to
each Mortgage Loan Group is essentially zero
as of the Closing Date, in the early months
of the transaction, subject to the
availability of Monthly Excess Interest
Amounts, Extra Principal Distribution Amounts
will be paid, with the result that the
Overcollateralization Amount with respect to
each Mortgage Loan Group is expected to
increase to the level of the related Targeted
Overcollateralization Amount.
If, once the Targeted Overcollateralization
Amount with respect to each Mortgage Loan
Group has been reached, Realized Losses occur
in such Mortgage Loan Group, such Realized
Losses will result in an
Overcollateralization Deficiency (since such
Realized Losses reduce the Loan Balance of
the related Mortgage Loans without giving
rise to a corresponding reduction of the
related Aggregate Certificate Principal
Balance). The cashflow priorities of the
Trust require that, in this situation, an
Extra Principal Distribution Amount be paid
(subject to the availability of any Monthly
Excess Interest Amount) for the purpose of
re-establishing the Overcollateralization
Amount at the then-required Targeted
Overcollateralization Amount.
On and after the Stepdown Date, the Targeted
Overcollateralization Amount with respect to
the Fixed Rate Group and the Adjustable Rate
Group, respectively, is permitted to decrease
or "step-down" below 0.80% and 2.40% to
levels equal to 1.60% and 4.80% of the then
current aggregate outstanding Loan Balance of
the related Mortgage Loan Group (subject to a
floor of $1,330,000 and $3,420,000). If the
Targeted Overcollateralization Amount with
respect to each Mortgage Loan Group is
permitted to "step-down" on a Payment Date,
the Pooling and Servicing Agreement permits a
portion of the related Principal Remittance
Amount for such Payment Date not to be passed
through as a distribution of principal on
such Payment Date. This has the effect of
decelerating the amortization of the Offered
Certificates with respect to each Mortgage
Loan Group relative to the aggregate
outstanding Loan Balance of the Mortgage
Loans, thereby reducing the actual level of
the related Overcollateralization Amount.
This portion of the Principal Remittance
Amount not distributed as principal on the
related Certificates therefore releases
overcollateralization from the Trust with
respect to the related Mortgage Loan Group.
The amount of such releases are the
Overcollateralization Release Amounts.
On any Payment Date, the sum of the Monthly
Excess Interest Amount (plus any interest on
the Overcollateralization Amount) and the
Overcollateralization Release Amount, if any,
with respect to a Mortgage Loan Group is the
"Monthly Excess Cashflow Amount", which is
required to be applied in the following order
of priority on such Payment Date:
(1) to fund the Class A Interest Carry
Forward Amount, if any, with respect
to the related Mortgage Loan Group;
(2) to fund the Extra Principal
Distribution Amount for such Payment
Date with respect to the related
Mortgage Loan Group;
(3) to fund the Class M-1 Interest Carry
Forward Amount, if any, with respect
to the related Mortgage Loan Group;
(4) to fund the Class M-1 Realized Loss
Amortization Amount for such Payment
Date, with respect to the related
Mortgage Loan Group;
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<PAGE> 23
(5) to fund the Class M-2 Interest Carry
Forward Amount, if any, with respect
to the related Mortgage Loan Group;
(6) to fund the Class M-2 Realized Loss
Amortization Amount for such Payment
Date, with respect to the related
Mortgage Loan Group;
(7) to fund the Class B-1 Interest Carry
Forward Amount, if any, with respect
to the related Mortgage Loan Group;
(8) to fund the Class B-1 Realized Loss
Amortization Amount for such Payment
Date, with respect to the related
Mortgage Loan Group;
(9) to fund the Class B-2F Interest
Carry Forward Amount, if any, with
respect to the Fixed Rate Group;
(10) to fund the Class B-2F Realized Loss
Amortization Amount for such Payment
Date, with respect to the Fixed Rate
Group;
(11) to fund the Class C-IO Interest
Carry Forward Amount, if any, with
respect to the related Mortgage Loan
Group;
(12) in respect of Monthly Excess
Cashflow Amount for the Fixed Rate
Group, to fund any amounts listed in
clauses (1) through (8) and (11)
above for such Payment Date with
respect to the Adjustable Rate
Group to the extent that such
amounts have not been funded in full
through the application of such
Mortgage Loan Group's Monthly Excess
Cashflow Amount on such Payment
Date;
(13) to the Servicer to the extent of any
unreimbursed Delinquency Advances or
Servicing Advances;
(14) to pay an Available Funds Cap
Shortfall Amount (defined below), if
any, to the Owners of the Adjustable
Rate Group Certificates on a pro
rata basis among such Owners;
(15) to fund a distribution to Owners of
the Class D Certificates; and
(16) to fund a distribution to Owners of
the Class R Certificates.
The Pooling and Servicing Agreement provides
that if, on any Payment Date, the Adjustable
Rate Group Available Funds Cap limits the
Pass-Through Rate on any Class of the
Adjustable Rate Group Certificates (i.e., the
rate set by the Adjustable Rate Group
Available Funds Cap is less than the Formula
Pass-Through Rate for a Class of Adjustable
Rate Group Certificates) the amount of any
such shortfall will be carried forward and be
due and payable on future Payment Dates and
shall accrue interest at the applicable
Formula Pass-Through Rate, until paid (the
amount of such shortfall, together with such
accrued interest is the "Available Funds Cap
Shortfall Amount").
PRE-FUNDING ACCOUNT: On the Closing Date, the Original Pre-Funded
Amount will be deposited in the Pre-Funding
Account which account will be in the name of,
and maintained by, the Trustee on behalf of
the Trust and used to acquire Subsequent
Mortgage Loans for addition to the Fixed Rate
Group and the Adjustable Rate Group. With
respect to each Mortgage Loan Group, during
the period (the "Funding Period") from and
including the Closing Date until the earlier
of (i) the date on which the amount on
deposit in the Pre-Funding Account with
respect to the related Mortgage Loan Group is
less than $100,000, and (ii) October 31,
1997, the Pre-Funded Amount will be
maintained in the Pre-Funding Account. The
Original Pre-Funded Amount
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<PAGE> 24
will be reduced during the Funding Period by
the amount thereof used to purchase
Subsequent Mortgage Loans in accordance with
the Pooling and Servicing Agreement. The
amount on deposit in the Pre-Funding Account
at any time is the "Pre-Funded Amount".
Subsequent Mortgage Loans purchased by and
added to the Trust on any date (each, a
"Subsequent Transfer Date") must satisfy the
criteria set forth in the Pooling and
Servicing Agreement. Any Pre-Funded Amount
remaining at the end of the Funding Period
for the related Mortgage Loan Group will be
distributed to the Owners of the related
Class(es) of Class A Certificates then
entitled to receive distributions of
principal on the next regular Payment Date,
in reduction of the Certificate Principal
Balance of such Owners' Certificates, thus
resulting in a partial principal prepayment
of such Class(es) 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 either the Upper-Tier REMIC or
the Lower-Tier REMIC.
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 Owners of
any Class of 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 Certificates will occur no
later than the next regular Payment Date in
an amount equal to the Pre-Funded Amount with
respect to the related Mortgage Loan Group
remaining at the end of the applicable
Funding Period.
CAPITALIZED INTEREST ACCOUNT: On the Closing Date, cash will be deposited
in a trust account (the "Capitalized Interest
Account") in the name of, and maintained by,
the Trustee on behalf of the Trust. The
amount on deposit in the Capitalized Interest
Account, including reinvestment income
thereon, will be used by the Trustee to fund
the excess, if any, of (i) the sum of the
amount of interest accruing at the weighted
average Pass-Through Rate of the Fixed Rate
Group Certificates and the weighted average
Pass-Through Rate of the Adjustable Rate
Group Certificates on the amount by which the
aggregate Certificate Principal Balance of
the related Class(es) of Certificates exceeds
the aggregate Loan Balance of the Mortgage
Loans in the related Mortgage Loan Group plus
the Trustee Fee accruing on such excess
balance over (ii) the amount of any
reinvestment income on monies on deposit in
the Pre-Funding Account. Such amounts on
deposit will be so applied by the Trustee on
the Payment Date in October and November
1997 to fund such excess, if any. Any
amounts remaining in the Capitalized Interest
Account not needed for such purpose will be
paid to the Depositor at the end of the
applicable Funding Period. The Capitalized
Interest Account will not be an asset of
either the Upper-Tier REMIC or the Lower-Tier
REMIC.
MANDATORY PREPAYMENT OF
CERTIFICATES: In the event that at the end of the
applicable Funding Period, not all of the
Original Pre-Funded Amount has been used to
acquire Subsequent Mortgage Loans, then the
Owners of the related Class of Certificates
then entitled to receive distributions of
principal will receive a prepayment no later
than the next regular Payment Date in an
amount equal to the portion of the Original
Pre-Funded Amount remaining and allocable to
the related Mortgage Loan Group.
AUCTION SALE; STEP UP ON
CERTAIN PASS-THROUGH
RATES; TERMINATION: The Pooling and Servicing Agreement requires
that, within ninety days following the date
on which the Outstanding Certificate
Principal Balance related to 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
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<PAGE> 25
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 September 2027.
See "The Pooling and Servicing
Agreement--Auction Sale; Step Up on Certain
Pass-Through Rates; Termination" herein.
BOOK-ENTRY REGISTRATION
OF THE OFFERED CERTIFICATES: The Offered Certificates will initially be
issued in book-entry form. Persons acquiring
beneficial ownership interests in such
Offered Certificates ("Beneficial Owners")
may elect to hold their interests through The
Depository Trust Company ("DTC"), in the
United States, or Cedel Bank, 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 Offered 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 (as defined
herein). Cross market transfers between
persons holding directly or indirectly
through DTC, on the one hand, and
counterparties holding directly or indirectly
through Cedel or Euroclear, on the other,
will be effected by DTC through Citibank N.A.
("Citibank") or The Chase Manhattan Bank
("Chase", and together with Citibank, the
"European Depositaries"), the relevant
depositaries of Cedel and Euroclear,
respectively, and each a participating member
of DTC. The Offered 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 Offered
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 Offered
Certificates are held by DTC. See
"Description of the Offered Certificates --
Book-Entry Registration of the Offered
Certificates" herein, and Annex I hereto, and
"Description of the Certificates--Book-Entry
Registration" in the Prospectus.
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<PAGE> 26
RATINGS: It is a condition of issuance of the Offered
Certificates that each Class of the Offered
Certificates receive ratings from Moody's
Investors Service, Inc. ("Moody's"), Standard
& Poor's Ratings Service, a division of the
McGraw-Hill Companies ("Standard & Poor's"),
Fitch Investors Service, L.P. ("Fitch") and
Duff & Phelps Credit Rating Co. ("DCR") as
set out below:
<TABLE>
<CAPTION>
Class Moody's Fitch Standard & Poor's DCR
----- ------- ----- ----------------- ---
<S> <C> <C> <C> <C>
A Aaa AAA AAA AAA
M-1F Aa2 AA AA AA+
M-1A Aa2 AA AA AA
M-2F A2 A A A+
M-2A A2 A A A
B-1F Baa3 BBB- BBB BBB
B-1A Baa3 BBB- BBB- BBB-
</TABLE>
Moody's, Standard & Poor's, Fitch and DCR are
referred to herein collectively as the
"Rating Agencies."
A security rating is not a recommendation to
buy, sell or hold securities, and may be
subject to revision or withdrawal at any time
by the assigning entity. See "Prepayment and
Yield Considerations" and "Ratings" herein.
No person is obligated to maintain any rating
on any Certificate, and, accordingly, there
can be no assurance that the ratings assigned
to any Class of Certificates upon initial
issuance thereof will not be lowered or
withdrawn at any time thereafter.
RISK FACTORS: Credit Considerations. For information with
regard to the Mortgage Loans and their
related risks, see "Risk Factors--Risk of
Higher Delinquencies Associated with
Guidelines" and "The Mortgage Loan Pool"
herein.
Prepayment Considerations. For information
regarding the consequences of prepayments of
the Mortgage Loans and of the failure of the
Depositor to convey Subsequent Mortgage Loans
to the Trust during the Funding Period in an
amount equal to the Original Pre-Funded
Amount, see "Prepayment and Yield
Considerations" and "Risk
Factors--Sensitivity to Prepayments" and
"--The Subsequent Mortgage Loans and the Pre-
Funding Account" herein.
Other Considerations. For a discussion of
other risk factors that should be considered
by prospective investors in the Offered
Certificates, see "Risk Factors" herein and
in the Prospectus.
FEDERAL TAX ASPECTS: For federal income tax purposes, the Trust
Estate (exclusive of the Pre-Funding Account
and the Capitalized Interest Account) created
by the Pooling and Servicing Agreement will
consist of two segregated asset pools (the
"Upper-Tier REMIC" and the "Lower-Tier
REMIC") with respect to which elections will
be made to treat each as a "real estate
mortgage investment conduit" ("REMIC"). Each
Class of Certificates (other than the Class
R Certificates) will constitute "regular
interests" in a REMIC. The Class R
Certificates will be designated as the
"residual interest" in the Upper-Tier REMIC.
Owners of the Offered Certificates, including
Owners that generally report income on the
cash method of accounting, will be required
to include interest on the Offered
Certificates in income in accordance with the
accrual method of accounting. The Offered
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
S-22
<PAGE> 27
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 Offered Certificates as regular
interests in a REMIC, the Offered
Certificates will be treated as "regular . .
. interest(s) in a REMIC" under Section
7701(a)(19)(C) of the Internal Revenue Code
of 1986, as amended (the "Code") and "real
estate assets" under Section 856(c) of the
Code in the same proportion that the assets
in the Upper-Tier REMIC consist of qualifying
assets under such sections. In addition,
interest on the Offered 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 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. ONLY CLASS A CERTIFICATES MAY BE
PURCHASED BY PLANS THAT ARE SUBJECT TO ERISA
EXCEPT AS PROVIDED HEREIN.
A fiduciary of a Plan should review the
sections entitled "ERISA Considerations" in
the Prospectus and this Prospectus Supplement
and consider the issues discussed therein,
and should consult with its legal advisors
prior to making an investment in the Offered
Certificates.
LEGAL INVESTMENT
CONSIDERATIONS: The Offered Certificates (other than the
Class A-10 Certificates and the Class M-1A
Certificates) will not constitute "mortgage
related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"). The appropriate
characterization of the Offered Certificates
(other than the Class A-10 Certificates and
the Class M-1A Certificates) under various
legal investment restrictions applicable to
the investment activities of certain
institutions, and thus the ability of
investors subject to these restrictions to
purchase the Offered Certificates (other than
the Class A-10 Certificates and the Class
M-1A Certificates), may be subject to
significant interpretive uncertainties.
The Class A-10 Certificates and the Class
M-1A 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, the Class A-10
Certificates and the Class M-1A 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
S-23
<PAGE> 28
states have enacted legislation overriding
the legal investment provisions of SMMEA. In
addition, institutions whose activities are
subject to review by federal or state
regulatory authorities may be or may become
subject to restrictions, which may be
retroactively imposed by such regulatory
authorities, on the investment by such
institutions in certain forms of mortgage
related securities.
S-24
<PAGE> 29
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.
SENSITIVITY TO PREPAYMENTS. The Mortgage Loans may be prepaid by the
related mortgagor in whole or in part at any time. However, approximately,
66.73% of the Mortgage Loans require the payment of a fee in connection with
certain prepayments. See "The Portfolio of Mortgage Loans--Prepayment Penalties"
herein for a description of prepayment penalty provisions applicable to the
Mortgage Loans. In addition, all of the Mortgage Loans contain due-on-sale
provisions which, to the extent enforced by the related Servicer, will result
in prepayment of such Mortgage Loans. Furthermore, the Seller may initiate a
refinance policy as described in "The Portfolio of Mortgage Loans-Prepayment
Penalties" herein which could have an impact on prepayments of the Mortgage
Loans. See "Prepayment and Yield Considerations" herein and "Certain Legal
Aspects of Mortgage Assets--Enforceability of Certain Provisions" in the
Prospectus. The rate of prepayments on fixed rate mortgage loans (including the
5/25 Loans), such as the Mortgage Loans in the Fixed Rate Group, and 2/28 Loans
and 3/27 Loans, which are or will be a part of the Adjustable Rate Group, are
sensitive to prevailing interest rates. Generally, if prevailing interest rates
fall significantly below the interest rates on the Mortgage Loans in the Fixed
Rate Group or the applicable rates on the 2/28 Loans and 3/27 Loans, such loans
are likely to be subject to higher prepayment rates than if prevailing rates
remain at or above the interest rates on the Mortgage Loans in the Fixed Rate
Group or the applicable rates on the 2/28 Loans and 3/27 Loans. Conversely, if
prevailing interest rates rise significantly above the interest rates on the
Mortgage Loans in the Fixed Rate Group or the applicable rates on the 2/28 Loans
and the 3/27 Loans, the rate of prepayments is likely to decrease.
The average life of the Offered Certificates, and, if purchased at other
than par, the yields realized by Owners of the Offered Certificates, will be
sensitive to levels of payment (including prepayments relating to the Mortgage
Loans (the "Prepayments")) on the Mortgage Loans and the method of allocating
such payments among the Offered Certificates. In general, the yield on an
Offered 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 an Offered 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 solicitations to
borrowers to refinance their mortgages, unless such solicitation is consistent
with the Seller's refinance policy. See "Prepayment and Yield Considerations"
herein.
TRUST ASSETS ARE THE ONLY SOURCE OF CREDIT ENHANCEMENT. The subordination
of the Subordinate Certificates and the Private Certificates (other than the
Class S Certificates) to the Class A Certificates, the further subordination
within the Subordinate Certificates, and the overcollateralization provisions
of the Trust are the sole sources of protection against losses on the Mortgage
Loans and other shortfalls in available funds. If losses or other shortfalls
exceed the protection afforded by such mechanism, Owners of the Offered
Certificates will bear their proportionate share of such losses and shortfalls.
The Certificates represent interests only in the Trust and do not represent
interests in, or obligations of the Depositor, the Seller, the Servicers, the
Trustee or any of their respective affiliates. The assets of the Trust are the
sole source of funds for distributions on the Certificates.
SUBORDINATION--LIMITED PROTECTION AFFORDED TO CLASS A CERTIFICATES. The
rights of the Owners of the Class M-1 Certificates to receive distributions with
respect to the Mortgage Loans will be subordinate to the rights of the holders
of the related Class A Certificates to receive such distributions. The rights
of Owners of the Class M-2 Certificates to receive distributions with respect
to the Mortgage Loans will be subordinate to the rights of the Owners of the
related Class A and the related Class M-1 Certificates to receive such
distributions. The rights of the Owners of the Class B-1 Certificates to receive
distributions with respect to the Mortgage Loans will be subordinate to the
rights of the Owners of the related Class A, related Class M-1 and related Class
M-2 Certificates to receive such distributions. The rights of the Owners of the
Class B-2F Certificates to receive distributions with respect to the Mortgage
Loans will be subordinate to the rights of the holders of the related Class A
Certificates, the Class M-1F Certificates, the Class M-2F Certificates and the
Class B-1F Certificates to receive such distributions. The rights of the owners
of the Class C-IO Certificates to receive distributions with respect to the
Mortgage Loans will be subordinate to the rights of the holders
S-25
<PAGE> 30
of the related Class A Certificates, the related Class M-1 Certificates, the
related Class M-2 Certificates, the related Class B-1 Certificates and, with
respect to the Class C-FIO Certificates, the Class B-2F Certificates to receive
such distributions. The subordination of the Subordinate Certificates relative
to the Class A Certificates (and of the more lower-ranking Classes of the
Subordinate Certificates to the higher-ranking Classes thereof) is intended to
enhance the likelihood of regular receipt by the Owners of the Class A
Certificates (and such higher-ranking Classes) of the full amount of the
monthly distributions allocable to them, and to afford such Owners protection
against losses.
SUBORDINATION-OF LOSSES TO MEZZANINE CERTIFICATES AND CLASS B-1
CERTIFICATES. The rights of the Owners of each Class of Mezzanine Certificates
and Class B-1 Certificates to receive distributions of principal with respect
to the related Mortgage Loan Group will be subordinate to the rights of the
Owners of the related Class A Certificates to receive such distributions and to
the rights of the Owners of each higher-ranking related Class of Subordinate
Certificates to receive such distributions. See "Credit
Enhancement--Subordination of Subordinate Certificates" herein.
The yields to maturity on the Mezzanine Certificates and the Class B-1
Certificates will be sensitive, in varying degrees, to defaults on the Mortgage
Loans (and the timing thereof). Investors should fully consider the risks
associated with an investment in the Mezzanine Certificates and the Class B-1
Certificates, including the possibility that such investors may not fully
recover their initial investment as a result of Realized Losses on the Mortgage
Loans. See "Credit Enhancement--Application of Realized Losses" and "Prepayment
and Yield Considerations--Projected Payment and Yield for Offered Certificates"
herein.
The Mezzanine Certificates and Class B-1 Certificates will not be
entitled to any principal distributions until at least the related Stepdown Date
and during the continuation of a Trigger Event (unless the aggregate Certificate
Principal Balance of the related Class A Certificates has been reduced to zero).
As a result, the weighted average lives of the Mezzanine Certificates and Class
B-1 Certificates will be longer than would be the case if distributions of
principal were to be allocated on a pro rata basis among the Class A and
Mezzanine Certificates and Class B-1 Certificates. As a result of the longer
weighted average lives of the Mezzanine Certificates and Class B-1 Certificates,
the Owners of such Certificates have a greater risk of suffering a loss on their
investments.
THE SUBSEQUENT MORTGAGE LOANS AND THE PRE-FUNDING ACCOUNT. If the
principal amount of eligible Subsequent Mortgage Loans available during the
applicable Funding Period and sold by the Depositor to the Trust is less than
100% of the Original Pre-Funded Amount, a prepayment of principal to Owners of
the related Class of the Class A Certificates then entitled to receive payments
of principal will occur as described herein. In addition, any conveyance of
Subsequent Mortgage Loans is subject to the following conditions, among others:
(i) each such Subsequent Mortgage Loan must satisfy the representations and
warranties specified in the agreement pursuant to which such Subsequent Mortgage
Loans are transferred to the Trust (each a "Subsequent Transfer Agreement") and
in the Pooling and Servicing Agreement; (ii) the Depositor will not select such
Subsequent Mortgage Loans in a manner that it believes is adverse to the
interest of the Owners of the Certificates; (iii) the Depositor will deliver
certain opinions of counsel with respect to the validity of the conveyance of
such Subsequent Mortgage Loans; and (iv) as of each cut-off date (each, a
"Subsequent Cut-Off Date") applicable thereto, the Mortgage Loans, including the
Subsequent Mortgage Loans to be conveyed by the Depositor as of such Subsequent
Cut-Off Date, will satisfy the criteria set forth in the Pooling and Servicing
Agreement, as described herein under "The Mortgage Loan Pool--Conveyance of
Subsequent Mortgage Loans."
To the extent that amounts on deposit in the Pre-Funding Account have not
been fully applied to the purchase of Subsequent Mortgage Loans by the Trust for
inclusion in the related Mortgage Loan Group by the end of the applicable
Funding Period, the Owners of the related Class of the Class A Certificates then
entitled to receive payments of principal will receive a prepayment of principal
in an amount equal to the related Pre-Funded Amount remaining in the Pre-Funding
Account on the Pre-Funding Payment Date. Although no assurances can be given,
the Depositor expects that the principal amount of Subsequent Mortgage Loans
sold to the Trust will require the application of substantially all amounts on
deposit in the Pre-Funding Account and that there will be no material principal
prepayment to the Owners of the Class A Certificates from the Pre-Funding
Account.
S-26
<PAGE> 31
Each Subsequent Mortgage Loan must satisfy the eligibility criteria
referred to above at the time of its addition. Following the transfer of
Subsequent Mortgage Loans, it is anticipated that the aggregate characteristics
of the Mortgage Loans then held in the related Mortgage Loan Group will not
vary significantly from those of the Initial Mortgage Loans. See "The Mortgage
Loan Pool--Conveyance of Subsequent Mortgage Loans" herein.
RISK OF HIGHER DELINQUENCIES ASSOCIATED WITH GUIDELINES. The Underwriting
Guidelines (as described herein under "The Portfolio of Mortgage Loans--
Guidelines") are intended to assess the credit quality of a mortgagor and the
value of the mortgaged property and to evaluate the adequacy of such property
as collateral for the mortgage loan. The Originators provide loans primarily to
mortgagors who do not qualify for loans conforming to Fannie Mae and FHLMC
guidelines but who have substantial equity in their property. Furthermore, the
Underwriting Guidelines do not prohibit a borrower from obtaining secondary
financing at the time of origination of the Originator's first lien, which
financing would reduce the equity the borrower would otherwise have in the
related mortgaged property from that indicated in the Originators'
loan-to-value determination.
As a result of the Underwriting Guidelines, the Mortgage Loans are likely
to experience rates of delinquency, foreclosure and bankruptcy that are higher,
and that may be substantially higher, than those experienced by mortgage loans
underwritten to Fannie Mae and FHLMC conforming guidelines. Furthermore,
changes in the values of Mortgaged Properties may have a greater effect on the
delinquency, foreclosure, bankruptcy and loss experience of the Mortgage Loans
than on mortgage loans originated in a more traditional manner. No assurance
can be given that the values of the Mortgaged Properties have remained or will
remain at the levels in effect on the dates of origination of the related
Mortgage Loans.
EFFECT OF MORTGAGE LOAN YIELD ON ADJUSTABLE RATE GROUP CERTIFICATES
PASS-THROUGH RATE; BASIS RISK. The calculation of the Pass-Through Rate on
each Class of the Adjustable Rate Group Certificates is based upon the value of
an index (One-Month LIBOR) which is different from the value of the index
applicable to a substantial portion of the Initial Mortgage Loans in the
Adjustable Rate Group (Six-Month LIBOR) as described under "The Mortgage Loan
Pool -- Initial Mortgage Loans -- Adjustable Rate Group" herein and is subject
to the Adjustable Rate Group Available Funds Cap. The Adjustable Rate Group
Available Funds Cap effectively limits the amount of interest accrued on each
Class of the Adjustable Rate Group Certificates to the weighted average of the
Coupon Rates on the Mortgage Loans in the Adjustable Rate Group, less 0.50% per
annum. 99.96% of the Initial Mortgage Loans in the Adjustable Rate Group and
5.21% of the Initial Mortgage Loans in the Fixed Rate Group 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
each Class of the Adjustable Rate Group Certificates adjusts monthly based
upon One-Month LIBOR as described under "Description of the Certificates --
Calculation of One-Month LIBOR" herein, subject to the Adjustable Rate Group
Available Funds Cap. Consequently, the Pass-Through Rate on each Class of the
Adjustable Rate Group Certificates for any Payment Date may not equal the
related Formula Pass-Through Rate for such Class of the Adjustable Rate Group
Certificates during the related Accrual Period. 78.14% of the Initial Mortgage
Loans in the Adjustable Rate Group are 2/28 Loans that provide for a fixed
interest rate for a period of approximately two years following origination.
5.54% of the Initial Mortgage Loans in the Adjustable Rate Group are 3/27
Loans that provide for a fixed interest rate for a period of approximately
three years following origination. Thereafter, such Mortgage Loans provide for
interest rate and payment adjustments in a manner similar to the Six-Month
LIBOR Loans. One-Month LIBOR and Six-Month LIBOR may respond to different
economic and market factors, and there is not necessarily a correlation between
them. Thus, it is possible, for example, that One-Month LIBOR may rise during
periods in which Six-Month LIBOR is stable or is falling or that, even if both
One-Month LIBOR and Six-Month LIBOR rise during the same period, One-Month
LIBOR may rise more rapidly than Six-Month LIBOR. Furthermore, even if
One-Month LIBOR and Six-Month LIBOR were at the same level, various factors
may cause the Adjustable Rate Group Available Funds Cap to limit the amount of
interest that would otherwise accrue on each Class of the Adjustable Rate
Group Certificates. In particular, the Pass-Through Rate on each Class of the
Adjustable Rate Group Certificates adjusts monthly, while the interest rates
of the Initial Mortgage Loans in the Adjustable Rate Group adjust less
frequently, with the result that the Adjustable Rate Group Available Funds Cap
may be lower than the Formula Pass-Through Rate for such Class of the
Adjustable Rate Group Certificates for extended periods in a rising interest
rate environment. In addition, the Mortgage Loans in the Adjustable Rate Group
are subject to periodic (i.e., semiannual) adjustment caps and maximum rate
caps, and the weighted average margin is subject to change based upon
prepayment experience, which also may result in the Adjustable
S-27
<PAGE> 32
Rate Group Available Funds Cap limiting increases in the Pass-Through Rate for
such Class of the Adjustable Rate Group Certificates. Finally, the Mortgage
Loans in the Adjustable Rate Group accrue interest on the basis of a 360-day
year assumed to consist of twelve 30-day months, while calculations of interest
on each Class of the Adjustable Rate Group Certificates which are Offered
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 Pass-Through Rate for
such Class of the Adjustable Rate Group Certificates in Accrual Periods that
have more than 30 days. Consequently, the interest which becomes due on the
Mortgage Loans in the Adjustable Rate Group (net of the sum of the Servicing
Fee, the Trustee Fee and certain required reductions related to the Adjustable
Rate Group) during any Remittance Period may not equal the amount of interest
that would accrue at One-Month LIBOR plus the margin on each Class of the
Adjustable Rate Group Certificates during the related Accrual Period.
Furthermore, if the Available Funds Cap determines the Pass-Through Rate for a
Class of the Adjustable Rate Group Certificates for a Payment Date, the market
value of such Class of the Adjustable Rate Group Certificates may be
temporarily or permanently reduced. It is anticipated that Subsequent Mortgage
Loans in the Adjustable Rate Group will have features similar to the Initial
Mortgage Loans in the Adjustable Rate Group, resulting in the same limitations
on the Pass-Through Rate of the Adjustable Rate Group Certificates as are
described above.
OTHER LEGAL CONSIDERATIONS. Applicable state laws generally regulate
interest rates and other charges, require certain disclosure, and require
licensing of the Originators. In addition, other state laws, public policy and
general principles of equity relating to the protection of consumers, unfair
and deceptive practices and debt collection practices may apply to the
origination, servicing and collection of the Mortgage Loans. The related
Originator will be required to repurchase any Mortgage Loans which, at the time
of origination, fail to comply with applicable federal and state laws and
regulations, which failure results in a material adverse effect on the Trust 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
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Act of 1994. The Riegle Act adds certain additional provisions to Regulation Z,
the implementing regulation of the Truth-In-Lending Act. These provisions
impose additional disclosure and other requirements on creditors with respect
to non-purchase money mortgage loans with high interest rates or high upfront
fees and charges. In general, mortgage loans within the purview of the Riegle
Act have annual percentage rates over 10% greater than the yield on Treasury
Securities of comparable maturity and/or fees and points which exceed the
greater of 8% of the total loan amount or $400. The provisions of the Riegle
Act apply on a mandatory basis to all mortgage loans originated on or after
October 1, 1995. These provisions can impose specific statutory liabilities
upon creditors who fail to comply with their provisions and may affect the
enforceability of the related loans. In addition, any assignee of the creditor
would generally be subject to all claims and defenses that the consumer could
assert against the creditor, including, without limitation, the right to
rescind the mortgage loan.
RISK OF SELLER INSOLVENCY. The Seller believes that the transfer of the
Mortgage Loans to the Depositor and by the Depositor to the Trust constitutes a
sale by the Seller to the Depositor and by the Depositor to the Trust and,
accordingly, that such Mortgage Loans will not be part of the assets of the
Seller in the event of the insolvency of the Seller and will not be available
to the creditors of the Seller. However, in the event of an insolvency of the
Seller, it is possible that a bankruptcy trustee or a creditor of the Seller
may argue that the transaction between the Seller and the Depositor was a pledge
of such Mortgage Loans in connection with a borrowing by the Seller rather than
a true sale. Such an attempt, even if unsuccessful, could result in delays in
distributions on the Certificates.
On the Closing Date with respect to the Initial Mortgage Loans and on
each Subsequent Transfer Date with respect to the Subsequent Mortgage Loans, the
Trustee and the Seller will have received an opinion of Arter & Hadden, counsel
to the Seller and the Depositor, with respect to the true sale of Mortgage Loans
from the Seller to the Depositor and from the Depositor to the Trustee, in form
and substance satisfactory to the Trustee and the Rating Agencies.
RISK OF HIGHER DEFAULT RATES ASSOCIATED WITH CALIFORNIA REAL PROPERTY.
Because 22.83% 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.
THE PORTFOLIO OF MORTGAGE LOANS
GENERAL
The Mortgage Loan Pool primarily includes newly originated loans which
were purchased by the Depositor from the Seller, which acquired such loans from
the related Originators.
Each Originator has made certain representations and warranties with
respect to Mortgage Loans originated or sold by it, as specified below, and,
upon a breach of such representations and warranties 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,
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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 Fannie Mae 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 generally permit single-family loans with loan-to-value ratios at
origination of up to 90% for the highest credit grading category (80% 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 by the
Originator.
The Underwriting Guidelines are less stringent than the standards
generally acceptable to Fannie Mae and FHLMC with regard to the mortgagor's
credit standing and repayment ability. Mortgagors who qualify under the
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Underwriting Guidelines generally have payment histories and debt ratios which
would not satisfy Fannie Mae and FHLMC underwriting guidelines and may have a
record of major derogatory credit items such as outstanding judgments or prior
bankruptcies. The Underwriting Guidelines establish the maximum permitted
loan-to-value ratio for each loan type based upon these and other risk factors.
The Mortgage Loans were originated consistent with and generally conform
to "Full Documentation", "Limited Documentation", or "Stated Income
Documentation" residential loan programs. Under each of the programs, the
related Originator generally reviews the applicant's source of income,
calculates the amount of income from sources indicated on the loan application
or similar documentation, reviews the credit history of the applicant,
calculates the debt service-to-income ratio to determine the applicant's
ability to repay the loan, reviews the type and use of the property being
financed, and reviews the property. In determining the ability of the applicant
to repay the loan, a rate is established that generally is equal to the lesser
of the fully indexed interest rate on the loan being applied for or one percent
above the initial interest rate on such loan. The Underwriting Guidelines
require that mortgage loans be underwritten in a standardized procedure which
complies with applicable federal and state laws and regulations and requires the
Originator's underwriters to be satisfied that the value of the property being
financed, as indicated by an appraisal and a review of the appraisal, currently
supports the outstanding loan balance. In general, the maximum loan amount for
mortgage loans originated under the programs is $350,000. Mortgage loans may,
however, be originated generally up to $500,000, provided the loan-to-value
ratio is at least 5% below the applicable residential loan program maximum that
would otherwise apply. The Underwriting Guidelines permit one- to four-family
loans to have loan-to-value ratios at origination of generally up to 90%,
depending on, among other things, the purpose of the mortgage loan, the
mortgagor's credit history, repayment ability and debt service-to-income ratio,
as well as the type and use of the property. With respect to mortgage loans
secured by mortgaged properties acquired by a mortgagor under a "lease option
purchase," the loan-to-value ratio of the related mortgage loan is generally
based on the appraised value at the time of origination of such mortgage loan.
The Underwriting Guidelines require that income be verified for each
applicant and that the source of funds (if any) required to be deposited by the
applicant into escrow under its various programs as follows: Under the Full
Documentation programs, applicants generally are required to submit two written
forms of verification of stable income for 24 months (or, if the loan-to-value
ratio is less than or equal to 65%, for 12 months). Under the Limited
Documentation programs, generally one such form of verification is required for
12 months. Under the Stated Income Documentation programs, generally an
applicant may be qualified based upon monthly income as stated on the mortgage
loan application if the applicant meets certain criteria. All the foregoing
programs typically require that with respect to each applicant, there be a
telephone verification of the applicant's employment. Verification of the
source of funds (if any) required to be deposited by the applicant into escrow
in the case of a purchase money loan is generally required under the Full
Documentation program guidelines. No such verification is required under the
other programs.
The Underwriting Guidelines require title insurance on all mortgage loans
secured by liens on real property. The Underwriting Guidelines also require that
fire and extended coverage casualty insurance be maintained on the secured
property in an amount at least equal to the principal balance of the related
single-family loan or the replacement cost of the property, whichever is less.
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
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ARCC's review includes a review of the credit-grading process of the related
Originators. ARCC has developed Performance Assumption Groupings ("PAGs") which
are similar to a credit-grading criteria. ARCC determines which PAG the
Originators' related credit grade most closely matches, and all loans which the
Originator has placed in that credit grade are placed in the related PAG
category. Because there are multiple factors in both the credit grades
identified by the Originators and the PAG categories, it is unlikely that any
credit grade designation will match up exactly to any PAG category. ARCC uses
its best efforts to match the categories based upon its projection of asset
performance for the related credit grade and PAG. It should be noted that while
the Originators have specific criteria for credit grades, they have the
discretion to place a loan in a credit grade for which it does not meet all of
the criteria, based upon consideration of all relevant factors. It should
further be noted that ARCC does not make any attempt to determine how
individual loans would fall under the PAG criteria described below, but only
associates the existing credit grades of the Originator to the various PAG
categories.
SELLER'S PAG I
The maximum loan-to-value ratio for all eligible properties, owner or
non-owner occupied, purchase money or refinance, should be 90% or less. The
maximum back-end debt ratio should not exceed 50%. The prospective mortgagor
should have approximately five years of established credit with five trade
lines. In the last 12 months, mortgage credit should show no delinquencies in
excess of 30 days, and in the last 24 months, should show delinquencies only
for 30 days or less. The credit history should reveal no foreclosures. In the
last 12 months, installment and revolving accounts should indicate no
delinquencies for major credit, and a maximum of 30 days for minor credit. In
the last 24 months, both major and minor credit should be a maximum of 30 days
delinquent. There should be no evidence of judgments, charge offs, collections
or bankruptcies affecting the mortgagor. In last 36 months, the prospective
mortgagor should have had only minor collection actions totaling less than $500.
SELLER'S PAG II
The maximum loan-to-value ratio for all eligible properties, owner or
non-owner occupied, purchase money or refinance, should be 85% or less. The
maximum back end debt ratio should not exceed 50%. The prospective mortgagor
should have approximately three years of established credit with three trade
lines. In the last 12 months, mortgage credit should show no more than two
30-day delinquencies and no 60-day delinquencies, and all credits should be
current at the time of origination; in the last 24 months, the credit history
should show a maximum of 30 day delinquencies. In the last 12 months,
installment and revolving accounts should include no more than two 30-day
delinquencies for major credit and a maximum of 60 day delinquency for minor
credit. In the last 24 months, the maximum delinquency should be 60 days for
both major and minor credit. In the last 12 months, there should be no
collection action taken against the prospective mortgagor. In the last 24
months, there should be no judgments or charge offs against the prospective
mortgagor, and discharged bankruptcies should have reestablished credit with no
delinquencies. In the last 36 months, mortgagor should be subject to only minor
collection actions totaling less than $1,000.
SELLER'S PAG III
The maximum loan-to-value ratio for all eligible properties, owner or
non-owner occupied, purchase money or refinance, should be 80% or less. The
maximum back end debt ratio should not exceed 50%. The prospective mortgagor
should have approximately two years of established credit with two trade lines.
In the last 12 months, mortgage credit should show no more than three 30-day
delinquencies and one 60-day delinquency. Mortgage credit should be a maximum
30 days delinquent at the time of origination, and in the last 24 months, a
maximum of 60 days delinquent. In the last 12 months, installment and revolving
accounts should show no more than two 60-day delinquencies for major credit and
a maximum delinquency of 90 days for minor credit. In the last 24 months,
installment and revolving accounts should be a maximum 90 days delinquent for
both major and minor credit. In the last 12 months, there should be no
judgments or charge offs, and only minor collection actions totaling less than
$500 against the prospective mortgagor. In the last 24 months, the prospective
mortgagor is permitted to have judgments or charge offs totaling less than
$500, and discharged bankruptcies with a maximum 30-day delinquency on
reestablished credit. In the last 36 months, collection actions totaling less
than $2,500 are permitted.
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SELLER'S PAG IV
The maximum loan-to-value ratio for all eligible properties, owner or
non-owner occupied, purchase money or refinance, should be 75% or less. The
maximum back-end debt ratio should not exceed 55%. There is no requirement for
an established credit history. In the last 12 months, mortgage credit should
include no more than four 30-day delinquencies and two 60-day delinquencies,
and mortgage credit should be a maximum of 90 days delinquent at the time of
origination. In the last 12 months, installment and revolving accounts should
show no more than two 90-day delinquencies for major credit and a maximum
delinquency of 90 days for minor credit. In the last 24 months, installment and
revolving accounts should be a maximum 90 days delinquent for both major and
minor credit. In the last 12 months, mortgagor may have discharged bankruptcies
with maximum 30 day delinquency on reestablished credit, and collection actions
totaling less than $2,500 are permitted. In the last 24 months, total judgments
and charge offs should be less than $2,500.
SELLER'S PAG V
The maximum loan-to-value ratio for all eligible properties, owner or
non-owner occupied, purchase money or refinance, should be 65% or less. The
maximum back-end debt ratio should not exceed 55%. There is no requirement for
an established credit history. In the last 12 months, mortgage credit should be
a maximum of 120 days delinquent, and no foreclosure may be pending at the time
of origination. In the last 24 months, mortgage credit should be a maximum of
120 days delinquent. There are no stipulations regarding other derogatory
information other than that bankruptcies should have been discharged.
Approximately 8.03%, 59.25%, 18.61%, 4.75% and 9.35% of the Initial
Fixed Rate Group Mortgage Loans and 1.87%, 57.79%, 22.46%, 3.34% and 14.55% of
the Initial Adjustable Rate Group Mortgage Loans are in the Seller's PAG I, PAG
II, PAG III, PAG IV, and PAG V, categories, respectively.
Approximately 63.00%, 4.62% and 32.38% of the Initial Fixed Rate Group
Mortgage Loans and 60.64%, 2.56% and 36.80% of the Initial Adjustable Rate
Group 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 74.45% of the Initial Mortgage Loans in the Fixed Rate
Group and 63.72% of the Initial Mortgage Loans in the Adjustable Rate Group
provide for the payment by the Mortgagor of a prepayment charge in limited
circumstances on certain full or partial prepayments made generally during the
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. Approximately 70% of mortgage
loans originated by Option One provide that a prepayment charge will apply if,
in any twelve-month period during the first two years from the date of
origination, the Mortgagor prepays an aggregate amount exceeding 20% of the
original principal balance of such Mortgage Loan, and approximately 25% of
mortgage loans originated by Option One provide that a prepayment charge will
apply if, in any twelve-month period during the first year from the date of
origination, the Mortgagor prepays an aggregate amount exceeding 20% of the
original principal balance of such mortgage loan. The amount of the prepayment
charge will generally be equal to six months' advance interest calculated on
the basis of the rate in effect at the time of such prepayment on the amount
prepaid in excess of 20% of the original balance of such Mortgage Loan.
The Seller may initiate a refinance policy with the Originators who
originated Mortgage Loans for the Trust and for other trusts in which the
Seller or an affiliate of the Seller owns a residual interest in an effort to
retain borrowers who the Seller or the Originators believe are likely to
refinance their loans due to interest rate changes or other reasons. Although
the policy is expected to permit the Originators to solicit such borrowers in
accordance with the Seller's policy, the Depositor believes that this practice
will not likely result in a material change in the prepayment experience of the
Trust because the solicited borrowers would have been expected to refinance
through other originators in any event.
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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 (or, if applicable,
second) 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 in such Mortgage Loan within a time period
specified in the Transfer Agreement, such Originator will be obligated under
the related Transfer Agreement to purchase from the Trust such Mortgage Loan at
a price (the "Loan Purchase Price") set forth in the related Transfer Agreement
which Loan Purchase Price will be no less than the principal balance thereof as
of the date of purchase plus one month's interest at the Coupon Rate (net of
the applicable Servicing Fee) (the "Net Coupon Rate").
As to any such Mortgage Loan required to be repurchased by an Originator
as provided above, rather than repurchase the Mortgage Loan, such Originator
may, at its sole option, remove such Mortgage Loan (a "Deleted Mortgage Loan")
from the Trust and cause the substitution in its place of another Mortgage Loan
of like kind (a "Qualified Replacement Mortgage" as such term is defined in the
Pooling and Servicing Agreement); however, such substitution of a defective
Mortgage Loan may not be made if such substitution would cause the REMIC created
by the Pooling and Servicing Agreement not to qualify as a REMIC or result in
a prohibited transaction tax under the Code (generally after two years from the
Closing Date).
Upon receipt of notice by a Servicer or upon a Servicer becoming aware
that a representation and warranty made by an Originator in the Transfer
Agreement has been breached, such Servicer will be required to promptly notify
the related Originator, the Trustee and the Seller of such breach and request
that such Originator cure such breach or honor its repurchase or substitution
obligations for the benefit of the Trust. In the event that any Originator
(other than Long Beach or Option One) fails to cure such breach or honor its
repurchase or substitution obligations, the Seller shall be obligated to cure
such breach or purchase or substitute for the related Mortgage Loan. The
foregoing will constitute the sole remedy available to the Trust for a breach
of representation by an Originator.
THE SERVICERS
The information set forth below concerning the Servicers has been
provided to the Depositor by the related Servicer. Neither the Depositor, the
Seller, the Underwriters nor any of their respective affiliates have made any
independent investigation of such information, nor has any Servicer made any
such investigation with respect to information about the other Servicer.
Advanta
Advanta Mortgage Corp. USA ("Advanta") will act as one of the Servicers
of the Mortgage Loans pursuant to the Pooling and Servicing Agreement. Advanta
is an indirect subsidiary of Advanta Corp., a Delaware corporation ("Advanta
Parent"), a publicly traded company based in Horsham, Pennsylvania with assets
as of June 30, 1997 of approximately $6.5 billion.
Advanta Parent, through its subsidiaries (including Advanta) managed
assets (including mortgage loans) in excess of $20.6 billion as of June 30,
1997.
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On March 17, 1997, Advanta Parent issued a press release (the "Press
Release"), announcing that it expects to report 1997 results well below
previous expectations. The Press Release stated that for the first quarter,
Advanta Parent currently expects to report a loss in the area of $20 million
compared to earnings of $41 million in the first quarter of 1996. On April 16,
1997, Advanta Parent reported a loss of $19.8 million for the first quarter of
1997. The losses are attributed to a number of factors, including increases in
consumer bankruptcies and charge-offs and lower receivables balances than
originally anticipated in its credit card business. On July 16, 1997, Advanta
Parent announced its return to profitability and reported net income of $5.4
million for the second quarter of 1997, compared to net income of $45.1 million
for the second quarter of 1996. Advanta Parent has retained BT Wolfensohn, a
division of the Bankers Trust New York Corporation, to explore all strategic
alternatives that build upon the historic strength and success of the company
as a whole and of its business units, including Advanta, with the aim of
maximizing the company's value for its shareholders and other constituents.
There is no assurance that any such alternative will be pursued. The result of
pursuing such alternatives may positively or adversely affect the financial
ability of Advanta to perform its financial and other obligations or to service
the Mortgage Loans.
As of June 30, 1997, Advanta and its subsidiaries were servicing
approximately 61,000 mortgage loans in the Owned and Managed Servicing Portfolio
representing an aggregate outstanding principal balance of approximately $3.7
billion, and approximately 110,000 mortgage loans in the Third-Party Servicing
Portfolio representing an aggregate outstanding principal balance of
approximately $7.5 billion.
Owned and Managed Servicing Portfolio. The following tables set forth
information relating to the delinquency, loan loss and foreclosure experience
of Advanta for its servicing portfolio, excluding certain loans serviced by
Advanta that were not originated or purchased and reunderwritten by affiliates
of Advanta (the "Owned and Managed Servicing Portfolio"), of fixed and variable
rate mortgage loans as of June 30, 1997, and for each of the four prior years.
In addition to the Owned and Managed Servicing Portfolio, Advanta serviced as
of June 30, 1997, approximately 110,000 mortgage loans with an aggregate
principal balance as of such date of approximately $7.5 billion; such loans
were not originated by Advanta or affiliates of Advanta and are being serviced
for third parties on a contract servicing basis (the "Third Party Servicing
Portfolio"). No loans in the Third Party Servicing Portfolio are included in
the tables set forth below.
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DELINQUENCY AND FORECLOSURE EXPERIENCE OF
ADVANTA'S OWNED AND MANAGED SERVICING PORTFOLIO
OF MORTGAGE LOANS
<TABLE>
<CAPTION>
SIX MONTHS ENDING
YEAR ENDING DECEMBER 31, JUNE 30,
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1993 1994 1995 1996 1997
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BY BY BY BY
BY NO. DOLLAR DOLLAR DOLLAR DOLLAR BY DOLLAR
OF AMOUNT BY NO. AMOUNT BY NO. AMOUNT BY NO. AMOUNT BY NO. AMOUNT
LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio 25,460 $1,149,864 26,446 $1,346,100 32,592 $1,797,582 43,303 $2,595,981 61,010 $3,688,283
Delinquency
percentage(1)
30-59 days 2.43% 2.22% 2.01% 1.57% 2.67% 2.44% 3.07% 2.90% 2.84% 2.69%
60-89 days 0.77 0.63 0.57 0.45 0.72 0.71 0.85 0.90 .82 .88
90 days or more 2.19 2.12 1.85 1.51 1.69 1.23 1.45 1.26 1.33 1.73
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total 5.39% 4.97% 4.43% 3.53% 5.08% 4.38% 5.37% 5.06% 4.99% 5.30%
Foreclosure 1.32% 1.62% 1.35% 1.38% 1.29% 1.53% 1.62% 1.92% 1.33% 1.51%
rate(2)
REO properties(3) 0.42% -- 0.47% -- 0.52% -- 0.42% -- .28% --
</TABLE>
- ------------------------
(1) The period of delinquency is based on the number of days payments are
contractually past due. The delinquency statistics for the period
exclude loans in foreclosure.
(2) "Foreclosure Rate" is the number of mortgage loans or the dollar amount
of mortgage loans in foreclosure as a percentage of the total number of
mortgage loans or the dollar amount of mortgage loans, as the case may
be, as of the date indicated.
(3) REO Properties (i.e., "real estate owned" properties -- properties
relating to mortgages foreclosed or for which deeds in lieu of
foreclosure have been accepted, and held by Advanta pending disposition)
percentages are calculated using the number of loans, not the dollar
amount.
S-36
<PAGE> 41
LOAN LOSS EXPERIENCE
OF ADVANTA'S OWNED AND MANAGED SERVICING PORTFOLIO
OF MORTGAGE LOANS*
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDING DECEMBER 31, ENDING JUNE 30,
--------------------------------------------------------------------
1993 1994 1995 1996 1997
--------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Average amount $1,049,447 $1,225,529 $1,540,238 $2,102,643 $3,078,712
outstanding(1)
Gross losses(2) $14,115 $20,886 $13,978 $15,184 $7,954
Recoveries(3) $123 $179 $148 $117 $21
Net losses(4) $13,992 $20,707 $13,830 $15,067 $7,933
Net losses as a 1.33% 1.69% 0.90% 0.72% 0.52%
percentage of
average amount
outstanding(s)(5)
</TABLE>
- ------------------------
(1) "Average Amount Outstanding" during the period is the arithmetic average
of the principal balances of the mortgage loans outstanding on the last
business day of each month during the period.
(2) "Gross Losses" are amounts which have been determined to be uncollectible
relating to mortgage loans for each respective period.
(3) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
(4) "Net Losses" represents "Gross Losses" minus "Recoveries".
(5) For the six months ending June 30, 1997, "Net Losses as a percentage of
average amount outstanding" was annualized by multiplying Net Losses by
2 before calculating the percentage of "Net Losses as a percentage of
average amount outstanding".
Advanta experienced an increase in the net loss rate on its Owned and
Managed Servicing Portfolio during the period 1990 through 1994. It believes
that such increase was due to four primary factors; the seasoning of its
portfolio, economic conditions, a decline in property values in certain regions
and the acceleration of charge-offs on loans in 1994. In addition, the level
of net losses during such period was negatively impacted by the performance of
the Non-Income Verification ("NIV") loan program. The net loss rates as a
percentage of the average amount outstanding on its Owned and Managed Servicing
Portfolio, excluding NIV loans, are 1.42% and 0.88% for the periods ending
December 31, 1994 and December 31, 1993, respectively.*
- ---------------------
* Owned and managed portfolio statistics restated to exclude interest advances
on serviced portfolio to be consistent with presentation of owned portfolio.
Collection Procedures. Advanta employs a variety of collection techniques
during the various stages of delinquency. The primary purpose of all collection
efforts performed by Advanta is to bring a delinquent mortgage loan current in
as short a time as possible. Phone calls are used as the principal form of
contacting a mortgagor. Advanta utilizes a predictive dialing system for the
effective management of collection calling activity. Prior to initiating
foreclosure proceedings, Advanta makes every reasonable effort to determine the
reason for the default; whether the delinquency is a temporary or permanent
condition; and the mortgagor's attitude toward the obligation. Advanta will take
action to foreclose a mortgage only once every reasonable effort to cure the
default has been made and a projection of the ultimate gain or loss on REO sale
is determined. Foreclosures are processed within individual state guidelines and
in accordance with the provisions of the mortgage and applicable state law.
Long Beach Mortgage Company
Long Beach Mortgage Company, a Delaware corporation ("Long Beach"), is a
specialty finance company engaged in the business of originating, purchasing
and selling sub-prime mortgage loans secured by one-to-four-family residences.
Long Beach began originating sub-prime mortgage loans in 1988 as a division of
Long Beach Bank, F.S.B.
S-37
<PAGE> 42
To gain greater operating flexibility and improve its ability to compete against
other financial services companies, in October 1994, Long Beach Bank, F.S.B.
ceased operations, voluntarily surrendered its federal thrift charter and
transferred its mortgage banking business to a new Delaware corporation called
Long Beach Mortgage Company ("Old Long Beach").
In May 1997, Old Long Beach completed a reorganization (the
"Reorganization") of its business operations by transferring to its wholly-owned
subsidiary, Long Beach Financial Corporation ("LBFC"), the assets and personnel
related to Old Long Beach's broker-sourced mortgage lending and loan sales
operations and approximately $40 million in cash. The assets received from Old
Long Beach by LBFC were then transferred to Long Beach, a wholly-owned
subsidiary of LBFC. Immediately following the Reorganization, Long Beach
continued the activities previously conducted by the broker-sourced and loan
sales divisions of Old Long Beach. LBFC is a publicly-traded company based in
Orange, California. As of June 30, 1997, Long Beach had 61 offices, consisting
of 10 offices located in California and 51 offices located throughout the rest
of the United States.
Substantially all of the loans originated by Long Beach while it operated
as a division of Old Long Beach were serviced by the servicing division of Old
Long Beach. Because Long Beach does not currently have internal servicing
capabilities, the loans originated or purchased by Long Beach will be
sub-serviced by the servicing division of Ameriquest Mortgage Company
("Ameriquest" or the "Subservicer") until Long Beach develops such capabilities.
Ameriquest and Long Beach have entered into a contract (the "Subservicing
Agreement") pursuant to which Ameriquest will sub-service the Mortgage Loans
sold by Long Beach to the Depositor. Notwithstanding the foregoing, Long Beach
will act as master servicer for such Mortgage Loans, and will remain primarily
liable for servicing such Mortgage Loans.
Because of the recent date of the Reorganization, there is currently no
meaningful data regarding originations and sales or loss and delinquency
experience relating to loans originated or purchased by Long Beach following
the Reorganization.
The Subservicer. The information set forth in the following paragraphs
has been provided to Long Beach by Ameriquest. None of the Depositor, the
Originators, Advanta, Option One, the Seller, the Trustee, the Underwriters or
any of their respective affiliates has made or will make any representation as
to the accuracy or completeness of such information.
Ameriquest will act as the subservicer for the Mortgage Loans serviced
by Long Beach (the "Long Beach Mortgage Loans"). The Subservicer is a specialty
finance company engaged in the business of originating, purchasing and selling
sub-prime mortgage loans secured by one-to-four-family residences. Ameriquest's
mortgage business was begun in 1985 by Long Beach Savings and Loan Association
(later known as Long Beach Bank, F.S.B., together, the "Bank"). To gain greater
operating flexibility and to improve its ability to compete against other
financial services companies, in October 1994, the Bank ceased operations,
voluntarily surrendered its federal thrift charter and transferred its mortgage
banking business to Old Long Beach.
In May 1997, Old Long Beach completed the Reorganization of its business
operations by transferring to its wholly-owned subsidiary LBFC the assets and
personnel related to Old Long Beach's broker-sourced mortgage lending and loan
sales operations. The assets received from Old Long Beach by LBFC were
transferred to a wholly-owned subsidiary of LBFC (which was named "Long Beach
Mortgage Company"). The assets transferred included loans in process at the time
of the Reorganization, but did not include loans funded by the broker-sourced
mortgage lending division of Old Long Beach prior to the Reorganization or
servicing rights with respect to loans funded prior to the Reorganization. As
part of the Reorganization, Old Long Beach changed its name to "Ameriquest
Mortgage Company". Immediately following the Reorganization, Ameriquest sold all
of the outstanding shares of common stock of LBFC in an underwritten public
offering (the "Offering"). As a result of the Reorganization and Offering,
Ameriquest commenced operations under its new name and the new Long Beach
Mortgage Company commenced operations as an independent company with the assets
and personnel that were previously operating as the broker-sourced mortgage
lending and loan sales divisions of Old Long Beach.
S-38
<PAGE> 43
Ameriquest is approved as a seller/servicer for Fannie Mae and FHLMC and
as a non-supervised mortgagee by the U.S. Department of Housing and Urban
Development.
Loan Servicing. Generally, Ameriquest services all the mortgage loans
it originates whether those loans are sold or retained in its portfolio.
Servicing includes collecting and remitting loan payments, accounting for
principal and interest, contacting delinquent mortgagors, and supervising
foreclosure in the event of unremedied defaults. Ameriquest's servicing
activities are audited regularly by its internal auditors and examined
periodically by applicable regulatory authorities. Certain financial records
of Ameriquest relating to its loan servicing activities are reviewed annually
as part of the audit of Ameriquest's financial statements conducted by its
independent accountants.
Collection Procedures; Delinquency and Loss Experience. When a mortgagor
fails to make a required payment on a residential mortgage loan, Ameriquest
attempts to cause the deficiency to be cured by corresponding with the
mortgagor. In most cases deficiencies are cured promptly. Pursuant to
Ameriquest's customary procedures for residential mortgage loans serviced by it
for its own account, Ameriquest generally mails a notice of intent to foreclose
to the mortgagor after the loan has become 31 days past due (two payments due
but not received) and, within one month thereafter, if the loan remains
delinquent, typically institutes appropriate legal action to foreclose on the
property securing the loan. If foreclosed, the property is sold at public or
private sale and may be purchased by Ameriquest. In California, real estate
lenders are generally unable as a practical matter to obtain a deficiency
judgment against the mortgagor on a loan secured by single-family real estate.
S-39
<PAGE> 44
Ameriquest Programs -- Servicing Portfolio
The following table sets forth Ameriquest's delinquency and loss experience
(including that of its predecessor-in-interest, the Bank, and excluding that
of Long Beach after the Reorganization) at the dates indicated on its servicing
portfolio of mortgage loans originated under the Ameriquest sub-prime
underwriting programs (the majority of such mortgage loans reflected in the
following table are adjustable rate mortgage loans):
<TABLE>
<CAPTION>
AT
AT DECEMBER 31, JUNE 30,
------------------------------------------------------------------
1993 1994 1995 1996 1997
------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total Outstanding Principal Balance ...... $1,947,949 $2,418,848 $2,397,950 $3,001,542 $3,587,860
Number of Loans .......................... 16,282 21,260 22,700 29,710 36,253
DELINQUENCY
Period of Delinquency:
31-60 Days
Principal Balance ..................... $ 13,079 $ 16,816 $ 32,483 $ 43,421 $ 38,327
Number of Loans ....................... 106 131 286 422 401
Delinquency as a Percentage of Total
Outstanding Principal Balance ....... 0.67% 0.70% 1.35% 1.45% 1.07%
Delinquency as a Percentage of
Number of Loans ..................... 0.65% 0.62% 1.26% 1.42% 1.11%
61-90 Days
Principal Balance ..................... $ 13,144 $ 18,104 $ 21,249 $ 28,064 $ 31,754
Number of Loans ....................... 93 129 188 271 328
Delinquency as a Percentage of Total
Outstanding Principal Balance ....... 0.67% 0.75% 0.89% 0.93% 0.89%
Delinquency as a Percentage of
Number of Loans ..................... 0.57% 0.61% 0.83% 0.91% 0.90%
91 Days or More
Principal Balance ..................... $ 60,621 $ 70,034 $ 94,201 $ 126,502 $ 161,832
Number of Loans ....................... 418 509 765 1,173 1,560
Delinquency as a Percentage of Total
Outstanding Principal Balance ....... 3.11% 2.90% 3.93% 4.21% 4.51%
Delinquency as a Percentage of
Number of Loans ..................... 2.57% 2.39% 3.37% 3.95% 4.30%
Total Delinquencies:
Principal Balance ..................... $ 86,844 $ 104,953 $ 147,933 $ 197,988 $ 231,913
Number of Loans ....................... 617 769 1,239 1,866 2,289
Delinquency as a Percentage of Total
Outstanding Principal Balance ....... 4.46% 4.34% 6.17% 6.60% 6.46%
Delinquency as a Percentage of
Number of Loans ..................... 3.79% 3.62% 5.46% 6.28% 6.31%
FORECLOSURES PENDING(1)
Principal Balance ..................... $ 64,443 $ 77,960 $ 102,962 $ 127,002 $ 143,057
Number of Loans ....................... 449 583 859 1,184 1,393
Foreclosures Pending as a Percentage of
Total Outstanding Principal Balance . 3.31% 3.22% 4.29% 4.23% 3.99%
Foreclosures Pending as a Percentage of
Number of Loans ..................... 2.76% 2.74% 3.78% 3.99% 3.84%
NET LOAN LOSSES for the Period(2) ........ $ 13,449 $ 24,617 $ 24,320 $ 29,674 $ 15,176
NET LOAN LOSSES as a Percentage of Total
Outstanding Principal Balance ............ 0.69% 1.02% 1.01% 0.98% 0.42%
</TABLE>
- ----------
(1) Mortgage loans which are in foreclosure but as to which title to the
mortgaged property has not been acquired, at the end of the period
indicated. Foreclosures pending are included in the delinquencies set
forth above.
(2) Net Loan Losses is calculated for loans conveyed to REMIC trust funds as
the aggregate of the net loan loss for all such loans liquidated during
the period indicated. The net loan loss for any such loan is equal to the
difference between (a) the principal balance plus accrued interest through
the date of liquidation plus all liquidation expenses related to such loan
and (b) all amounts received in connection with the liquidation of such
loan. The majority of loans serviced by Ameriquest have been conveyed to
REMIC trust funds.
As of June 30, 1997, 612 one- to four-family residential properties
relating to loans in Ameriquest's total servicing portfolio had been acquired
through foreclosure or deed-in-lieu of foreclosure and were not liquidated, 530
of which properties relate to Ameriquest's sub-prime underwriting programs.
S-40
<PAGE> 45
There can be no assurance that the delinquency and loss experience of
the Long Beach Mortgage Loans will correspond to the loss experience of
Ameriquest's mortgage portfolio set forth in the foregoing table. The
statistics shown above represent the delinquency and loss experience for
residential mortgages originated under the Ameriquest sub-prime underwriting
programs and serviced by Ameriquest only for the years presented, whereas the
aggregate delinquency and loss experience on the Long Beach Mortgage Loans will
depend on the results obtained over the life of the Trust. Ameriquest's
portfolio includes mortgage loans with payment and other characteristics which
are not representative of the payment and other characteristics of the Long
Beach Mortgage Loans. If the residential real estate market should experience
an overall decline in property values, the actual rates of delinquencies and
foreclosures could be higher than those previously experienced by Ameriquest.
In addition, adverse economic conditions (which may or may not affect real
property values) may affect the timely payment by Mortgagors of scheduled
payments of principal and interest on the Mortgage Loans and, accordingly, the
actual rates of delinquencies, foreclosures and losses with respect to the
Mortgage Loans.
S-41
<PAGE> 46
Residential Loan Servicing Portfolio
The following table sets forth Ameriquest's delinquency and loss
experience (including that of its predecessor- in-interest, the Bank, and
excluding that of Long Beach after the Reorganization) at the dates indicated
on its entire residential (including multifamily) mortgage loan servicing
portfolio (inclusive of loans originated under the Ameriquest sub-prime
underwriting programs):
<TABLE>
<CAPTION>
AT
AT DECEMBER 31, JUNE 30,
---------------------------------------------------------------------------
1993 1994 1995 1996 1997
---------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total Outstanding Principal Balance ........... $2,434,615 $2,721,665 $2,790,704 $3,622,400 $4,237,347
Number of Loans ............................... 21,159 24,669 26,766 36,564 43,721
DELINQUENCY
Period of Delinquency:
31-60 Days
Principal Balance ............................ $ 21,834 $ 20,923 $ 35,503 $ 54,719 $ 43,961
Number of Loans .............................. 224 195 327 557 479
Delinquency as a Percentage of
Total Outstanding Principal Balance ...... 0.90% 0.77% 1.27% 1.51% 1.04%
Delinquency as a Percentage of
Number of Loans .......................... 1.06% 0.79% 1.22% 1.52% 1.10%
61-90 Days
Principal Balance ............................ $ 19,321 $ 24,013 $ 25,237 $ 36,565 $ 36,490
Number of Loans .............................. 177 193 253 382 388
Delinquency as a Percentage of
Total Outstanding Principal Balance ...... 0.79% 0.88% 0.90% 1.01% 0.86%
Delinquency as a Percentage of
Number of Loans .......................... 0.84% 0.78% 0.95% 1.04% 0.89%
91 Days or More
Principal Balance ............................ $ 92,100 $ 97,202 $ 109,703 $ 152,537 $ 185,403
Number of Loans .............................. 765 771 977 1,531 1,858
Delinquency as a Percentage of
Total Outstanding Principal Balance ...... 3.78% 3.57% 3.93% 4.21% 4.38%
Delinquency as a Percentage of
Number of Loans .......................... 3.62% 3.13% 3.65% 4.19% 4.25%
Total Delinquencies:
Principal Balance ............................ $ 133,255 $ 142,138 $ 170,444 $ 243,822 $ 265,854
Number of Loans .............................. 1,166 1,159 1,557 2,470 2,725
Delinquency as a Percentage of
Total Outstanding Principal Balance ...... 5.47% 5.22% 6.11% 6.73% 6.27%
Delinquency as a Percentage of
Number of Loans .......................... 5.51% 4.70% 5.82% 6.76% 6.23%
FORECLOSURES PENDING(1)
Principal Balance ............................ $ 96,810 $ 111,514 $ 132,679 $ 165,525 $ 193,355
Number of Loans .............................. 748 955 1,200 1,591 1,890
Foreclosures Pending as a Percentage
of Total Outstanding Principal Balance ... 3.98% 4.10% 4.75% 4.57% 4.56%
Foreclosures Pending as a
Percentage of Number of Loans ............ 3.54% 3.87% 4.48% 4.35% 4.32%
NET LOAN LOSSES for the Period(2) ............. $ 35,474 $ 51,296 $ 37,914 $ 38,915 $ 19,566
NET LOAN LOSSES as a Percentage of Total
Outstanding Principal Balance ................. 1.46% 1.88% 1.36% 1.07% 0.46%
</TABLE>
- -------------
(1) Mortgage loans which are in foreclosure but as to which title to the
mortgaged property has not been acquired, at the end of the period
indicated. Foreclosures pending are included in the delinquencies set
forth above.
(2) Net Loan Losses is calculated for loans conveyed to REMIC trust funds as
the aggregate of the net loan loss for all such loans liquidated during
the period indicated. The net loan loss for any such loan is equal to the
difference between (a) the principal balance plus accrued interest through
the date of liquidation plus all liquidation expenses related to such loan
and (b) all amounts received in connection with the liquidation of such
loan. The majority of residential loans serviced by Ameriquest have been
conveyed to REMIC trust funds.
S-42
<PAGE> 47
The delinquency and loss experience percentages set forth above in the
immediately preceding table are calculated on the basis of the total mortgage
loans serviced as of the end of the periods indicated. However, because the
total outstanding principal balance of residential loans serviced by Ameriquest
has increased from $ 2,434,615,000 at December 31, 1993 to $ 4,237,347,000 at
June 30, 1997, the total outstanding principal balance of residential loans
serviced as of the end of any indicated period includes many loans that will
not have been outstanding long enough to give rise to some or all of the
indicated periods of delinquency. In the absence of such substantial and
continual additions of newly originated loans to the total amount of loans
serviced, the percentages indicated above would be higher and could be
substantially higher. The actual delinquency percentages with respect to the
Long Beach Mortgage Loans may be expected to be substantially higher than the
delinquency percentages indicated above because the composition of the Long
Beach Mortgage Loans will not change.
If the residential real estate market should experience an overall
decline in property values, the actual rates of delinquencies and foreclosures
could be higher than those previously experienced by Ameriquest.
The Subservicing Agreement. Pursuant to the Subservicing Agreement
between Long Beach and the Subservicer, the Subservicer will subservice the
Long Beach Mortgage Loans serviced by Long Beach. The terms and conditions of
the Subservicing Agreement are consistent with and do not violate the
provisions of the Pooling and Servicing Agreement. The Subservicing Agreement
does not relieve Long Beach from any of its obligations to service the Long
Beach Mortgage Loans subserviced by Ameriquest in accordance with the terms and
conditions of the Agreement. In the event Long Beach is no longer a Servicer
with respect to any or all of the Long Beach Mortgage Loans, the Subservicer
may be terminated without cause or the payment of any fee. The Subservicing
Agreement has a term of three (3) years (which expires on April 28, 2000), but
may be terminated earlier by either party after April 28, 1998 upon six (6)
months written notice given to the other party no earlier than April 28, 1998.
Long Beach may remove the Subservicer if a Subservicer Event of
Default has occurred under the Subservicing Agreement. A "Subservicer Event of
Default" under the Subservicing Agreement includes, but is not limited to (i)
the Subservicer's failure, within one business day after notice, to deliver
funds or make payments when due, failure to perform any other obligation of the
Subservicer under the Subservicing Agreement or failure to cure a breach of a
representation or warranty by the Subservicer which materially and adversely
affects the interests of the Certificateholders, subject to specified cure
periods following notice of any such failure or (ii) the Subservicer's
commencement, or the commencement against it without prompt discharge, of
bankruptcy or similar proceedings jeopardizing or eliminating the ability of
the Subservicer to pay or otherwise discharge its obligations.
Option One Mortgage Corporation
Option One Mortgage Corporation ("Option One") was incorporated in
1992, commenced receiving applications for mortgage loans under its regular
lending program in February 1993 and began funding such mortgage loans
indirectly in the same month. The principal business of Option One is the
origination, sale and servicing of non-conforming mortgage loans.
As of December 31, 1994, Option One was a wholly-owned subsidiary of
Plaza Home Mortgage Bank, which was in turn a wholly-owned subsidiary of Plaza
Home Mortgage Corporation ("PHMC"). On March 3, 1995, Fleet National Bank,
Rhode Island acquired 100% of the outstanding stock of PHMC. Following such
acquisition, Option One became a subsidiary of Fleet National Bank, Rhode
Island, which is in turn a subsidiary of Fleet Financial Group, Inc. ("Fleet").
As of June 30, 1997 Option One had three loan origination centers in
California, and one loan origination center in each of Connecticut, Florida,
Georgia, Illinois, Ohio, Rhode Island, Texas, Virginia and Wisconsin. On June
17, 1997, Fleet Financial Group consummated the sale of Option One to H&R
Block, Inc.
Option One operates as a stand-alone mortgage banking company. Option
One is a Fannie Mae approved servicer. Option One assumed full servicing
responsibilities for the non-conforming credit servicing portfolio of PHMC on
May 4, 1995, all of which portfolio had been originated by Option One. Prior to
such acquisition, Option One acted as subservicer on such portfolio performing
the functions of delinquency advancing, investor reporting, remitting cash
collected, preparing pertinent reports and making collections on delinquent
mortgage loans, foreclosures and real estate owned.
S-43
<PAGE> 48
The following tables set forth, as of December 31, 1994, 1995, 1996
and June 30, 1997, certain information relating to the delinquency experience
(including imminent foreclosures, foreclosures in progress and bankruptcies) of
one- to four-family residential mortgage loans included in Option One's
servicing portfolio of mortgage loans originated by Option One (which portfolio
does not include mortgage loans that are subserviced for others) at the end of
the indicated periods. The indicated periods of delinquency are based on the
number of days past due on a contractual basis. No mortgage loan is considered
delinquent for these purposes until it is one month past due on a contractual
basis. Such tables restate PHMC's performance statistics relating only to the
non-conforming mortgage loans previously subserviced by Option One. Such
servicing was subsequently transferred to Option One.
DELINQUENCIES AND FORECLOSURES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 31, AT DECEMBER 31,
1994 1995
---------------------------------------------------------------------------------------------
PRECENT PRECENT PRECENT PRECENT
BY NO. BY DOLLAR BY NO OF BY DOLLAR BY NO. BY DOLLAR BY NO. BY DOLLAR
OF LOANS AMOUNT LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio .............. 6,115 $ 615,488 N/A N/A 12,686 $1,153,199 N/A N/A
Period of Delinquency:
31 - 59 days .............. 32 3,247 0.52 0.53 126 11,364 0.99 0.99
60 - 89 days .............. 17 1,637 0.28 0.27 87 8,138 0.69 0.71
90 days or more ........... 28 3,556 0.46 0.58 294 28,982 2.32 2.51
----- ---------- ---- ---- ------ ---------- ---- ----
Total Delinquent Loans ....... 77 8,440 1.26 1.38 507 48,484 4.00 4.21
Loans in Foreclosure* ........ 50 5,328 0.82 0.87 301 28,874 2.37 2.50
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30
1996 1997
---------------------------------------------------------------------------------------------
PRECENT PRECENT PRECENT PRECENT
BY NO. BY DOLLAR BY NO OF BY DOLLAR BY NO. BY DOLLAR BY NO. BY DOLLAR
OF LOANS AMOUNT LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio .............. 17,940 $1,599,929 N/A N/A 22,627 $2,028,667 N/A N/A
Period of Delinquency:
31 - 59 days .............. 291 26,000 1.62 1.62 328 28,637 1,45 1.41
60 - 89 days .............. 137 11,919 0.76 0.74 193 17,043 0.85 0.84
90 days or more ........... 662 55,214 3.69 3.45 831 71,313 3.67 3.52
------ ---------- ---- ---- ------ ---------- ---- ----
Total Delinquent Loans ....... 1,090 93,133 6.07 5.81 1352 116,993 5.98 5.77
Loans in Foreclosure* ........ 594 49,881 3.31 3.12 765 66,754 3.38 3.29
</TABLE>
- ------------------------
* Loans in foreclosure are also included under the heading "Total Delinquent
Loans."
REAL ESTATE OWNED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 31, AT DECEMBER 31, AT DECEMBER 31, AT JUNE 30,
1994 1995 1996 1997
-------------------------------------------------------------------------------------------
BY DOLLAR BY DOLLAR BY DOLLAR BY DOLLAR
BY NO. AMOUNT BY NO. AMOUNT BY NO. AMOUNT BY NO. OF AMOUNT OF
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS LOANS LOANS
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio............ 6,115 $615,488 12,686 $1,153,199 17,940 $1,599,929 22,627 $2,028,667
Foreclosed Loans(1)........ 12 1,512 80 7,634 233 19,870 210 18,146
Foreclosed Ratio(2)........ 0.20 0.25 0.63 0.66 1.30 1.24 0.93 0.89
</TABLE>
- ------------------------
(1) For the purposes of these tables, Foreclosed Loans means the principal
balance of mortgage loans secured by mortgaged properties the title to
which has been acquired by Option One, by investors or by an insurer
following foreclosure or delivery of a deed in lieu of foreclosure.
(2) The Foreclosure Ratio is equal to the aggregate principal balance or
number of Foreclosed Loans divided by the aggregate principal balance, or
number, as applicable, of mortgage loans in the Total Portfolio at the end
of the indicated period.
S-44
<PAGE> 49
LOAN LOSS EXPERIENCE ON
OPTION ONE'S SERVICING PORTFOLIO
OF MORTGAGE LOANS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ending December 31, Six Months
---------------------------------------------------- Ending June 30,
1994 1995 1996 1997
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Portfolio (1) $615,488 $1,153,199 $1,599,929 $2,028,667
Gross Losses (2) $ 17 $ 1,291 $ 5,412 $ 7,873
Recoveries (3) $ 0 $ 0 $ 0 $ --
Net Losses (4) $ 17 $ 1,291 $ 5,412 $ 7,873
Net Losses as a Percentage of Total
Portfolio (5) 0.00% 0.11% 0.34% 0.78%
</TABLE>
- ----------
(1) "Total Portfolio" on the date stated above is the principal balances of the
mortgage loans outstanding on the last day of the period.
(2) "Gross Losses" are actual losses incurred on liquidated properties for
each respective period. Losses are calculated after repayment of all
principal, foreclosure costs and accrued interest to the date of
liquidation.
(3) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
(4) "Net Losses" means "Gross Losses" minus "Recoveries."
(5) For the six months ended June 30, 1997, "Net Losses as a Percentage of
Total Portfolio" was annualized by multiplying "Net Losses" by 2
before calculating the percentage of "Net Losses as a Percentage Total
Portfolio".
The following tables set forth, as of December 31, 1994, 1995, 1996
and June 30, 1997 certain information relating to the delinquency experience
(including imminent foreclosures, foreclosures in progress and bankruptcies) of
one- to four-family residential mortgage loans included in Option One's entire
servicing portfolio (which portfolio includes mortgage loans originated by
Option One and mortgage loans that are subserviced for others) at the end of
the indicated periods. The indicated periods of delinquency are based on the
number of days past due on a contractual basis. No mortgage loan is considered
delinquent for these purposes until it is one month past due on a contractual
basis. Option One assumed full servicing responsibilities for the
non-conforming mortgage loan servicing portfolio of PHMC on May 4, 1995, all of
which portfolio had been originated by Option One. Prior to such date, Option
One acted as subservicer on such portfolio performing the functions of
delinquency advancing, investor reporting, remitting cash collected, preparing
pertinent reports and making collections on delinquent mortgage loans,
foreclosures and real estate owned. Such tables restate PHMC's performance
statistics relating only to the non-conforming mortgage loans previously
subserviced by Option One. Such servicing was subsequently transferred to
Option One.
DELINQUENCIES AND FORECLOSURES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 31, AT DECEMBER 31,
1994 1995
---------------------------------------------- -------------------------------------------
PERCENT BY PERCENT BY PERCENT PERCENT BY
BY NO. BY DOLLAR NO. OF DOLLAR BY NO. BY DOLLAR BY NO. DOLLAR
OF LOANS AMOUNT LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT
---------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio . . . . . . . . . 6,115 $615,488 N/A N/A 14,625 $1,367,031 N/A N/A
Period of Delinquency:
31 - 59 days . . . . . . . . 32 3,247 0.52 053 161 16,501 1.10 1.21
60 - 89 days . . . . . . . . 17 1,637 0.28 0.27 104 10,117 0.71 0.74
90 days or more . . . . . . . 28 3,556 0.46 0.58 388 40,275 2.65 2.95
----- -------- ---- ----- ------ ---------- ---- ----
Delinquent Loans . . . . . . . . 77 8,440 1.26 1.38 653 66,893 4.46 4.90
Loans in Foreclosure* . . . . . . 50 5,328 0.82 0.87 388 38,985 2.65 2.85
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
1996 1997
---------------------------------------------- -------------------------------------------
PERCENT BY PERCENT BY PERCENT PERCENT BY
BY NO. BY DOLLAR NO. OF DOLLAR BY NO. BY DOLLAR BY NO. DOLLAR
OF LOANS AMOUNT LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT
-------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio . . . . . . . . . 20,107 $1,865,636 N/A N/A 27,075 2,591,891 N/A N/A
Period of Delinquency:
31 - 59 days . . . . . . . . 329 29,980 1.64 1.61 379 35,211 1.40 1.36
60 - 89 days . . . . . . . . 161 14,972 0.80 0.80 218 20,685 0.81 0.80
90 days or more . . . . . . . 773 70,607 3.84 3.78 964 87,082 3.56 3.36
----- ---------- ---- ---- ------ --------- ---- ----
Delinquent Loans . . . . . . . . 1,263 115,559 6.28 6.19 1561 142,977 5.77 5.52
Loans in Foreclosure* . . . . . . 677 61,555 3.37 3.30 871 79,601 3.22 3.07
</TABLE>
- ----------
* Loans in foreclosure are also included under the heading "Total Delinquent
Loans."
S-45
<PAGE> 50
REAL ESTATE OWNED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 31, AT DECEMBER 31, AT DECEMBER 31, AT JUNE 30,
1994 1995 1996 1997
--------------------------------------------------------------------------------------------------
BY DOLLAR BY DOLLAR BY DOLLAR BY DOLLAR
BY NO. AMOUNT BY NO. AMOUNT BY NO. AMOUNT BY NO. AMOUNT OF
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS LOANS
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio . . . . . . . 6,115 $615,488 14,625 $1,367,031 20,107 $1,865,636 27,075 2,591,891
Foreclosed Loans(1) . . . . . 12 1,512 100 9,632 323 30,677 290 28,075
Foreclosed Ratio(2) . . . . . 0.20 0.25 0.68 0.70 1.61 1.64 1.07 1.08
</TABLE>
- ----------
(1) For the purposes of these tables, Foreclosed Loans means the principal
balance of mortgage loans secured by mortgaged properties the title to
which has been acquired by Option One, by investors or by an insurer
following foreclosure or delivery of a deed in lieu of foreclosure.
(2) The Foreclosure Ratio is equal to the aggregate principal balance or
number of Foreclosed Loans divided by the aggregate principal balance,
or number, as applicable, of mortgage loans in the Total Portfolio at
the end of the indicated period.
LOAN LOSS EXPERIENCE ON
OPTION ONE'S SERVICING PORTFOLIO
OF MORTGAGE LOANS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ending December 31, Six Months ended
------------------------------------------- June 30,
1994 1995 1996 1997
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Portfolio (1) $615,488 $1,367,031 $1,865,636 $2,591,891
Gross Losses (2) $ 17 $ 1,506 $ 8,451 $ 11,937
Recoveries (3) $ 0 $ 0 $ 0 $ 0
Net Losses (4) $ 17 $ 1,506 $ 8,451 $ 11,937
Net Losses as a Percentage of Total Portfolio(5) 0.00% 0.11% 0.45% 0.92%
</TABLE>
- --------------
(1) "Total Portfolio" on the date stated above is the principal balances
of the mortgage loans outstanding on the last day of the period.
(2) "Gross Losses" are actual losses incurred on liquidated properties for
each respective period. Losses are calculated after repayment of all
principal, foreclosure costs and accrued interest to the date of
liquidation.
(3) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
(4) "Net Losses" means "Gross Losses" minus "Recoveries."
(5) For the six months ending June 30, 1997, "Net Losses as a Percentage
of Total Portfolio" was annualized by multiplying "Net Losses" by 2
before calculating the percentage of "Net Losses" as a Percentage of
Total Portfolio.
There can be no assurance that the delinquency experience of the
Mortgage Loans originated by Option One (the "Option One Loans") will
correspond to the delinquency experience of Option One's mortgage portfolio set
forth in the foregoing tables. See "The Portfolio of Mortgage Loans --
General" herein. The statistics shown above represent the delinquency
experience for Option One's residential mortgage servicing portfolio only for
the periods presented, whereas the delinquency experience on the Option One
Loans will depend on the results obtained over the life of such Option One
Loans. Option One's residential mortgage servicing portfolio includes mortgage
loans with a variety of payment, credit and other characteristics (including
geographic location) which may not be representative of the payment, credit and
other characteristics of the Option One Loans. Option One has limited default
information with respect to the mortgage loans originated under the
Underwriting Guidelines and is unable to predict the delinquencies and
foreclosures that might be expected with respect to the Option One Loans. See
"Risk Factors -- Risk of Higher Delinquencies Associated with Underwriting
Guidelines" herein. If the residential real estate market should experience an
overall decline in property values, the actual rates of delinquencies and
foreclosures could be higher than those previously experienced by Option One.
In addition, adverse economic conditions may affect the timely payment by
Mortgagors of scheduled payments of principal and interest on the Option One
Loans and accordingly, the actual rates of
S-46
<PAGE> 51
delinquencies and foreclosures with respect to the Mortgage Loan Pool.
Notwithstanding anything to the contrary herein, Option One makes no
representation as to accuracy of any information contained herein except for
the information provided under the heading "The Servicers -- Option One Mortgage
Corporation."
No industry wide data is available for mortgage loans for mortgagors
with less than Fannie Mae credit quality. See "The Portfolio of Mortgage Loans
- -- Guidelines" herein.
USE OF PROCEEDS
The Depositor will sell the Initial Mortgage Loans to the Trust
concurrently with delivery of the Certificates. Net proceeds from the sale of
the Offered Certificates will be applied by the Depositor to the purchase of
the Initial Mortgage Loans from the Seller, to the deposit of the Original
Pre-Funded Amount in the Pre-Funding Account and to the deposit of certain
amounts to the Capitalized Interest Account. Such net proceeds less the
Original Pre-Funded Amount and the amount deposited in the Capitalized Interest
Account will (together with the Private Certificates) represent the purchase
price to be paid by the Trust to the Depositor for the Initial Mortgage Loans.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware on November 9,
1995 and is a wholly-owned subsidiary of AMRESCO, INC. The Depositor maintains
its principal offices at 700 N. Pearl, Suite 2400, Dallas, Texas 75201.
Neither the Depositor nor any of its affiliates will insure or guarantee
distributions on the Certificates.
THE SELLER
The Seller was incorporated in the State of Delaware on October 13,
1995 and is a wholly-owned subsidiary of AMRESCO, INC. The Seller changed its
name on September 25, 1996. The Seller maintains its principal offices at 700
N. Pearl, Suite 2400, Dallas, Texas 75201. Neither the Seller nor any of its
affiliates will insure or guarantee distributions on the Certificates.
THE MORTGAGE LOAN POOLS
GENERAL
The statistical information presented in this Prospectus Supplement
concerning the pool of Mortgage Loans is based on the pool of Initial Mortgage
Loans as of the 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 October 31, 1997 from funds on deposit in the Pre-Funding
Account. The Initial Mortgage Loans, any Qualified Replacement Mortgages and
the Subsequent Mortgage Loans are referred to herein collectively as the
"Mortgage Loans." The Subsequent Mortgage Loans, if available, to be purchased
by the Trust will be sold by the Originators to the Seller, by the Seller to
the Depositor and then by the Depositor to the Trust.
This subsection describes generally certain characteristics of the
Initial Mortgage Loans. Unless otherwise specified herein, references herein
to percentages of loan principal balances relating to the Initial Mortgage
Loans refer in each case to the approximate percentage of the aggregate
principal balance of the Initial Mortgage Loans as of the 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.
S-47
<PAGE> 52
Each Mortgage Loan in the Trust will be assigned to one of two
mortgage loan groups consisting of Mortgage Loans which bear fixed rates only
(other than the 5/25 Loans which bear fixed rates for five years from
origination and then bear adjustable interest rates), in the case of the Fixed
Rate Group, and Mortgage Loans which bear adjustable interest rates (including
2/28 Loans and 3/27 Loans) only, in the case of the Adjustable Rate Group. The
Fixed Rate Group Certificates represent undivided ownership interests in all
Mortgage Loans contained in the Fixed Rate Group, and distributions on the
Fixed Rate Group Certificates will be based primarily on amounts available for
distribution in respect of Mortgage Loans in the Fixed Rate Group. The
Adjustable Rate Group Certificates represent undivided ownership interests in
all Mortgage Loans contained in the Adjustable Rate Group, and distributions on
the Adjustable Rate Group Certificates will be based primarily on amounts
available for distribution in respect of Mortgage Loans in the Adjustable Rate
Group.
The Loan-to-Value Ratios shown below were calculated based upon the
lower of the sales prices and the appraised values of the Mortgaged Properties
at the time of origination (the "Appraised Values"). No assurance can be given
that values of the Mortgaged Properties have remained or will remain at their
levels on the dates of origination of the related Mortgage Loans. If the
residential real estate market has experienced or should experience an overall
decline in property values such that the outstanding balance of any Mortgage
Loan becomes equal to or greater than the value of the Mortgaged Property, the
actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the mortgage lending industry.
All of the Mortgage Loans are "Actuarial Loans", which provide that
interest is charged to the Mortgagors thereunder, and payments are due from
such Mortgagors, as of a scheduled day of each month which is fixed at the time
of origination. Scheduled monthly payments made by the Mortgagors on the
Actuarial Loans either earlier or later than the scheduled due dates thereof
will not affect the amortization schedule or the relative application of such
payments to principal and interest.
INITIAL MORTGAGE LOANS -- FIXED RATE GROUP
The information set forth with respect to the Fixed Rate Group is
based upon data provided to the Depositor by each of the related Originators
and has been compiled by the Depositor. Neither the Depositor, the Seller, the
Servicers, the Underwriters, the Originators nor any of their respective
affiliates have made or will have made any representation as to the accuracy or
completeness of such compiled information.
As of the Cut-Off Date, the average Loan Balance of the Initial
Mortgage Loans in the Fixed Rate Group was $77,733.00; the weighted average
Combined Loan-to-Value Ratio of the Initial Mortgage Loans in the Fixed Rate
Group was 72.137%; the weighted average remaining term to maturity was 319
months; the weighted average original term to maturity was 322 months. The
remaining terms to maturity as of the Cut-Off Date of the Initial Mortgage
Loans in the Fixed Rate Group ranged from 115 months to 360 months. The
minimum and maximum Loan Balances of Initial Mortgage Loans in the Fixed Rate
Group as of the Cut-Off Date were $11,884.69 and $497,142.69, respectively.
Balloon Mortgage Loans represent not more than 8.95% of the aggregate Loan
Balance of the Initial Mortgage Loans in the Fixed Rate Group. 97.09% of the
Initial Mortgage Loans in the Fixed Rate Group are secured by first lien
mortgages or deeds of trust. No Initial Mortgage Loan in the Fixed Rate Group
will mature later than September 1, 2027.
94.79% of the Initial Mortgage Loans in the Fixed Rate Group bear
interest at a fixed rate for the life of the related Mortgage Loans. The
Initial Mortgage Loans in the Fixed Rate Group consist of Mortgage Loans
aggregating $227,602,216.27. The Coupon Rates of the Initial Mortgage Loans in
the Fixed Rate Group ranged from 7.100% per annum to 16.500% per annum. The
weighted average Coupon Rate of the Initial Mortgage Loans in the Fixed Rate
Group was 10.394% per annum.
5.21% of the Initial Mortgage Loans in the Fixed Rate Group are 5/25
Loans. Substantially all of the 5/25 Loans are subject to a 1.0% periodic
rate adjustment cap and have a lifetime reset cap ranging from 6.5% to 7.0%.
The 5/25 Loans consist of Initial Mortgage Loans aggregating $11,866,768.81.
S-48
<PAGE> 53
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES -- INITIAL
FIXED RATE GROUP MORTGAGE LOANS
The geographic distribution of Initial Mortgage Loans in the Fixed
Rate Group by state, as of the Cut-Off Date, was as follows:
<TABLE>
<CAPTION>
NUMBER OF FIXED RATE AGGREGATE FIXED RATE % OF AGGREGATE
GROUP GROUP FIXED RATE GROUP
GEOGRAPHIC AREA MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
- --------------- -------------------- --------------------- ----------------
<S> <C> <C> <C>
Arizona 90 $ 5,422,161.51 2.38%
Arkansas 19 921,592.57 0.40
California 693 70,016,164.63 30.76
Colorado 61 4,666,094.43 2.05
Connecticut 21 1,707,023.71 0.75
Delaware 5 271,454.56 0.12
District of Columbia 4 317,105.66 0.14
Florida 306 19,713,109.35 8.66
Georgia 40 2,617,188.72 1.15
Hawaii 150 27,103,422.56 11.91
Idaho 16 881,632.34 0.39
Illinois 131 7,437,155.40 3.27
Indiana 114 5,098,396.58 2.24
Iowa 4 249,372.35 0.11
Kansas 8 390,893.96 0.17
Kentucky 19 891,249.04 0.39
Louisiana 29 1,713,286.77 0.75
Maine 11 858,416.66 0.38
Maryland 29 1,577,267.19 0.69
Massachusetts 40 3,226,284.99 1.42
Michigan 59 2,868,666.09 1.26
Minnesota 18 1,435,380.93 0.63
Mississippi 14 507,548.96 0.22
Missouri 53 2,285,349.87 1.00
Montana 3 236,914.64 0.10
Nebraska 5 329,493.18 0.14
Nevada 39 3,830,365.32 1.68
New Hampshire 11 725,210.52 0.32
New Jersey 50 4,178,918.54 1.84
New Mexico 24 1,802,412.30 0.79
New York 70 5,082,013.18 2.23
North Carolina 62 2,905,358.26 1.28
North Dakota 1 119,889.93 0.05
Ohio 131 7,197,724.11 3.16
Oklahoma 9 375,289.80 0.16
Oregon 64 6,127,310.67 2.69
Pennsylvania 106 5,882,054.25 2.58
Rhode Island 15 1,205,069.44 0.53
South Carolina 20 1,203,189.63 0.53
Tennessee 28 1,746,225.13 0.77
Texas 151 8,055,976.57 3.54
Utah 68 5,896,018.24 2.59
Virginia 36 2,091,397.98 0.92
Washington 76 5,303,567.43 2.33
West Virginia 5 235,580.78 0.10
Wisconsin 17 740,464.41 0.33
Wyoming 3 155,553.13 0.07
----- --------------- ------
Total 2,928 $227,602,216.27 100.00%
===== =============== ======
</TABLE>
S-49
<PAGE> 54
ORIGINAL COMBINED LOAN-TO-VALUE RATIOS -- INITIAL FIXED
RATE GROUP MORTGAGE LOANS
The original Combined Loan-to-Value Ratios of the Initial Mortgage
Loans in the Fixed Rate Group as of the Cut-Off Date were distributed as
follows:
<TABLE>
<CAPTION>
NUMBER OF FIXED RATE AGGREGATE FIXED RATE % OF AGGREGATE
GROUP GROUP FIXED RATE GROUP
RANGE OF LTVS (%) MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
- ----------------- -------------------- -------------------- ----------------
<S> <C> <C> <C>
10.01 to 15.00 4 $ 159,469 .66 0.07%
15.01 to 20.00 8 204,990.01 0.09
20.01 to 25.00 25 928,181.30 0.41
25.01 to 30.00 32 1,316,758.76 0.58
30.01 to 35.00 34 1,742,382.66 0.77
35.01 to 40.00 67 4,023,401.38 1.77
40.01 to 45.00 58 3,578,553.50 1.57
45.01 to 50.00 92 4,572,928.06 2.01
50.01 to 55.00 100 6,151,281.14 2.70
55.01 to 60.00 172 11,107,642.46 4.88
60.01 to 65.00 333 21,028,313.49 9.24
65.01 to 70.00 433 29,238,977.27 12.85
70.01 to 75.00 591 47,877,532.43 21.04
75.01 to 80.00 647 60,785,737.13 26.71
80.01 to 85.00 167 17,404,423.38 7.65
85.01 to 90.00 165 17,481,643.64 7.68
----- ------------------ ------
Total 2,928 $227,602,216.27 100.00%
===== ================== ======
</TABLE>
S-50
<PAGE> 55
CUT-OFF DATE COUPON RATES -- INITIAL FIXED RATE GROUP MORTGAGE LOANS
The Coupon Rates of the Notes relating to the Initial Mortgage Loans
in the Fixed Rate Group were distributed as follows as of the Cut-Off Date:
<TABLE>
<CAPTION>
NUMBER OF FIXED RATE AGGREGATE FIXED RATE % OF AGGREGATE
RANGE OF GROUP GROUP FIXED RATE GROUP
COUPON RATES (%) MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
- ---------------- -------------------- -------------------- ----------------
<S> <C> <C> <C>
7.001 to 7.500 11 $ 1,340,942.67 0.59%
7.501 to 8.000 60 7,094,592.30 3.12
8.001 to 8.250 30 2,838,199.41 1.25
8.251 to 8.500 72 8,018,239.92 3.52
8.501 to 8.750 81 8,762,814.47 3.85
8.751 to 9.000 160 20,312,498.61 8.92
9.001 to 9.250 82 9,257,083.14 4.07
9.251 to 9.500 121 12,611,919.43 5.54
9.501 to 9.750 149 14,008,445.93 6.15
9.751 to 10.000 234 21,944,292.99 9.64
10.001 to 10.250 127 11,358,494.45 4.99
10.251 to 10.500 179 13,393,757.03 5.88
10.501 to 10.750 206 14,423,925.97 6.34
10.751 to 11.000 231 16,518,721.41 7.26
11.001 to 11.250 131 8,525,149.89 3.75
11.251 to 11.500 180 10,843,686.25 4.76
11.501 to 11.750 154 8,933,357.36 3.92
11.751 to 12.000 146 9,122,854.00 4.01
12.001 to 12.250 93 5,207,954.23 2.29
12.251 to 12.500 106 5,012,427.48 2.20
12.501 to 12.750 71 3,541,418.61 1.56
12.751 to 13.000 77 4,090,505.45 1.80
13.001 to 13.250 41 1,775,889.90 0.78
13.251 to 13.500 39 1,714,073.67 0.75
13.501 to 13.750 30 1,167,038.42 0.51
13.751 to 14.000 24 1,102,883.49 0.48
14.001 to 14.250 15 902,009.34 0.40
14.251 to 14.500 14 872,937.45 0.38
14.501 to 14.750 35 1,570,942.46 0.69
14.751 to 15.000 8 391,193.99 0.17
15.001 to 15.250 6 302,384.70 0.13
15.251 to 15.500 2 88,293.26 0.04
15.501 to 15.750 3 170,946.60 0.08
15.751 to 16.000 4 126,890.88 0.06
16.001 to 16.250 2 127,371.59 0.06
16.251 to 16.500 4 128,079.52 0.06
----- --------------- -------
Total 2,928 $227,602,216.27 100.00%
===== =============== ======
</TABLE>
S-51
<PAGE> 56
CUT-OFF DATE LOAN BALANCES -- INITIAL FIXED RATE GROUP MORTGAGE LOANS
The distribution of the outstanding principal balances of the Initial
Mortgage Loans in the Fixed Rate Group as of the CutOff Date was as follows:
<TABLE>
<CAPTION>
NUMBER OF FIXED RATE AGGREGATE FIXED RATE % OF AGGREGATE
GROUP GROUP FIXED RATE GROUP
RANGE OF LOAN BALANCES ($) MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
------------------------------- --------------------- -------------------- -----------------
<S> <C> <C> <C>
10,000.01 to 15,000.00 16 $ 219,572.82 0.10%
15,000.01 to 20,000.00 64 1,188,954.62 0.52
20,000.01 to 25,000.00 159 3,668,344.19 1.61
25,000.01 to 30,000.00 160 4,445,526.60 1.95
30,000.01 to 35,000.00 199 6,455,322.64 2.84
35,000.01 to 40,000.00 210 7,971,133.20 3.50
40,000.01 to 45,000.00 183 7,832,515.58 3.44
45,000.01 to 50,000.00 192 9,222,967.52 4.05
50,000.01 to 55,000.00 138 7,259,669.16 3.19
55,000.01 to 60,000.00 161 9,289,550.85 4.08
60,000.01 to 65,000.00 137 8,631,667.37 3.79
65,000.01 to 70,000.00 119 8,063,131.82 3.54
70,000.01 to 75,000.00 96 6,990,297.40 3.07
75,000.01 to 80,000.00 109 8,463,310.48 3.72
80,000.01 to 85,000.00 106 8,772,240.08 3.85
85,000.01 to 90,000.00 74 6,508,400.05 2.86
90,000.01 to 95,000.00 50 4,628,557.02 2.03
95,000.01 to 100,000.00 69 6,773,985.30 2.98
100,000.01 to 105,000.00 66 6,800,177.42 2.99
105,000.01 to 110,000.00 53 5,697,682.94 2.50
110,000.01 to 115,000.00 54 6,065,917.99 2.67
115,000.01 to 120,000.00 47 5,537,337.74 2.43
120,000.01 to 125,000.00 35 4,298,446.63 1.89
125,000.01 to 130,000.00 41 5,218,352.00 2.29
130,000.01 to 135,000.00 34 4,502,715.36 1.98
135,000.01 to 140,000.00 42 5,794,923.18 2.55
140,000.01 to 145,000.00 18 2,564,778.03 1.13
145,000.01 to 150,000.00 19 2,806,558.51 1.23
150,000.01 to 200,000.00 145 24,933,446.21 10.95
200,000.01 to 250,000.00 54 12,292,846.31 5.40
250,000.01 to 300,000.00 45 12,407,221.50 5.45
300,000.01 to 350,000.00 16 5,202,811.66 2.29
350,000.01 to 400,000.00 7 2,617,105.11 1.15
400,000.01 to 450,000.00 6 2,535,670.04 1.11
450,000.01 to 500,000.00 4 1,941,078.94 0.85
----- --------------- ------
Total 2,928 $227,602,216.27 100.00%
===== =============== ======
</TABLE>
S-52
<PAGE> 57
TYPES OF MORTGAGED PROPERTIES -- INITIAL FIXED RATE GROUP MORTGAGE LOANS
The Mortgaged Properties securing the Initial Mortgage Loans in the
Fixed Rate Group as of the Cut-Off Date had the following property types:
<TABLE>
<CAPTION>
NUMBER OF FIXED RATE AGGREGATE FIXED RATE % OF AGGREGATE
GROUP GROUP FIXED RATE GROUP
PROPERTY TYPES MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
- ------------------------ -------------------- -------------------- ----------------
<S> <C> <C> <C>
Single Family Residence 2,560 $198,135,849.84 87.05%
Two to Four Family 194 16,113,132.62 7.08
Condominium 108 7,649,815.23 3.36
PUD 36 3,572,227.64 1.57
Manufactured Housing 22 1,454,766.61 0.64
Townhouse 8 676,424.33 0.30
----- --------------- ------
Total 2,928 $227,602,216.27 100.00%
===== =============== ======
</TABLE>
MONTHS ELAPSED SINCE ORIGINATION -- INITIAL FIXED RATE GROUP MORTGAGE LOANS
The distribution of the number of months since the date of origination
of the Initial Mortgage Loans in the Fixed Rate Group as of the Cut-Off Date
was as follows:
<TABLE>
<CAPTION>
NUMBER OF FIXED RATE AGGREGATE FIXED RATE % OF AGGREGATE
MONTHS ELAPSED GROUP GROUP FIXED RATE GROUP
SINCE ORIGINATION MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
- ----------------- -------------------- -------------------- ----------------
<S> <C> <C> <C>
0 43 $ 3,199,530.00 1.41%
1 to 12 2,878 224,032,414.07 98.43
13 to 24 7 370,272.20 0.16
----- --------------- ------
Total 2,928 $227,602,216.27 100.00%
===== =============== ======
</TABLE>
REMAINING TERM TO MATURITY -- INITIAL FIXED RATE GROUP MORTGAGE LOANS
The distribution of the number of months remaining to maturity of the
Initial Mortgage Loans in the Fixed Rate Group as of the Cut-Off Date was as
follows:
<TABLE>
<CAPTION>
NUMBER OF FIXED RATE AGGREGATE FIXED RATE % OF AGGREGATE
MONTHS REMAINING GROUP GROUP FIXED RATE GROUP
TO MATURITY MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
- ---------------------- ------------------- -------------------- ----------------
<S> <C> <C> <C>
109 to 120 4 $ 149,602.77 0.07%
157 to 168 6 395,959.50 0.17
169 to 180 801 45,135,696.81 19.83
229 to 240 64 3,330,298.49 1.46
337 to 348 2 71,629.40 0.03
349 to 360 2,051 178,519,029.30 78.43
----- --------------- ------
Total 2,928 $227,602,216.27 100.00%
===== =============== ======
</TABLE>
S-53
<PAGE> 58
OCCUPANCY STATUS -- INITIAL FIXED RATE GROUP MORTGAGE LOANS
The occupancy status of the Mortgaged Properties securing the Initial
Mortgage Loans in the Fixed Rate Group as of the Cut-Off Date was as follows
based on representations by the Mortgagors at the time of origination of such
Mortgage Loans:
<TABLE>
<CAPTION>
NUMBER OF FIXED RATE AGGREGATE FIXED RATE % OF AGGREGATE
GROUP GROUP FIXED RATE GROUP
OCCUPANCY STATUS MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
- ---------------- -------------------- -------------------- ----------------
<S> <C> <C> <C>
Owner-Occupied 2,554 $205,540,425.52 90.31%
Non-Owner Occupied 374 22,061,790.75 9.69
----- --------------- ------
Total 2,928 $227,602,216.27 100.00%
===== =============== ======
</TABLE>
INITIAL MORTGAGE LOANS -- ADJUSTABLE RATE GROUP
The information set forth with respect to the Adjustable Rate Group is
based upon data provided to the Depositor by each of the related Originators
and has been compiled by the Depositor. Neither the Depositor, the Seller, the
Servicers, the Underwriters, the Originators nor any of their respective
affiliates have made or will have made any representation as to the accuracy or
completeness of such compiled information.
As of the Cut-Off Date, the average Loan Balance of the Initial
Mortgage Loans in the Adjustable Rate Group was $103,147.33; the Coupon Rates
of the Initial Mortgage Loans in the Adjustable Rate Group ranged from 7.020%
per annum to 16.775% per annum; the weighted average original Loan-to-Value
Ratio of the Initial Mortgage Loans in the Adjustable Rate Group determined as
of the date of origination was 74.926%; the weighted average Coupon Rate of the
Initial Mortgage Loans in the Adjustable Rate Group was 10.053% per annum; the
weighted average remaining term to maturity was 355 months; and the weighted
average original term to maturity was 359 months. The remaining terms to
maturity as of the Cut-Off Date of the Initial Mortgage Loans in the Adjustable
Rate Group ranged from 167 months to 360 months. The minimum and maximum Loan
Balances of Initial Mortgage Loans in the Adjustable Rate Group as of the
Cut-Off Date were $11,911.23 and $500,000.00, respectively. No Initial Mortgage
Loan in the Adjustable Rate Group will mature later than September 1, 2027.
All of the Initial Mortgage Loans in the Adjustable Rate Group have
maximum Coupon Rates. The weighted average maximum Coupon Rate of the Initial
Mortgage Loans in the Adjustable Rate Group was 16.410% per annum, with maximum
Coupon Rates that range from 10.250% per annum to 23.755% per annum. The
weighted average minimum Coupon Rate of the Initial Mortgage Loans in the
Adjustable Rate Group was 10.040% per annum, with minimum Coupon Rates that
range from 5.500% per annum to 16.755% per annum. The Initial Mortgage Loans in
the Adjustable Rate Group have a weighted average gross margin as of the
Cut-Off Date of 5.870%. The gross margin for the Initial Mortgage Loans in the
Adjustable Rate Group range from 4.000% to 11.250%.
16.27% of the Initial Mortgage Loans in the Adjustable Rate Group are
Six-Month LIBOR Loans that bear interest at rates that adjust, along with the
related monthly payments, semiannually based on Six-Month LIBOR. 96.52% of the
Six-Month LIBOR Loans have a semiannual reset cap of 1.0%, substantially all of
which have a lifetime reset cap ranging from 6.0% to 7.0%. 3.48% of the
Six-Month LIBOR Loans have a semiannual reset cap of 1.5%, substantially all of
which have a lifetime reset cap of 7.0%. The Six-Month LIBOR Loans consist of
Initial Mortgage Loans aggregating $95,216.117.34
78.14% of the Initial Mortgage Loans in the Adjustable Rate Group are
2/28 Loans that bear interest at a fixed rate of interest for a period of
approximately two years after origination and thereafter have semiannual
interest rate and payment adjustments at frequencies and in the same manner as
the Six-Month LIBOR Loans. 85.07% of the 2/28 Loans have a periodic rate
adjustment cap of 1.0% and substantially all of which have a lifetime reset cap
ranging from 6.0% to 7.0. 13.32% of the 2/28 Loans have a periodic rate
adjustment cap of 1.5% and generally have a lifetime reset cap of 7.0%. 1.61%
of the 2/28 Loans have a periodic rate adjustment cap of 3.0% and have a
lifetime reset cap ranging from 5.0% to 7.0%. The 2/28 Loans consist of Initial
Mortgage Loans aggregating $457,163,280.44.
5.54% of the Initial Mortgage Loans in the Adjustable Rate Group are
3/27 Loans that bear interest at a fixed rate of interest for a period of
approximately three years after origination and thereafter have semiannual
interest rate and payment adjustments at frequencies and in the same manner as
the Six-Month LIBOR Loans with 51.60% of such Initial Mortgage Loans being
subject to a 1.0% periodic rate adjustment cap and 48.40% of such Initial
Mortgage Loans being subject to a 1.5% periodic rate adjustment cap.
Substantially all of the 3/27 Loans have a lifetime reset cap ranging from 6.0%
to 7.0%. The 3/27 Loans consist of Initial Mortgage Loans aggregating
$32,432,621.32.
0.05% of the Initial Mortgage Loans in the Adjustable Rate Group are
CMT Loans.
S-54
<PAGE> 59
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES -- INITIAL ADJUSTABLE RATE
GROUP MORTGAGE LOANS
The geographic distribution of Initial Mortgage Loans in the
Adjustable Rate Group by state, as of the Cut-Off Date, was as follows:
<TABLE>
<CAPTION>
NUMBER OF ADJUSTABLE RATE AGGREGATE ADJUSTABLE % OF AGGREGATE
GROUP RATE GROUP ADJUSTABLE RATE GROUP
GEOGRAPHIC AREA MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
- --------------- ------------------------- -------------------- ---------------------
<S> <C> <C> <C>
Arizona 208 $ 21,284,519.17 3.64%
Arkansas 5 621,965.27 0.11
California 769 115,497,648.90 19.74
Colorado 223 23,050,704.49 3.94
Connecticut 152 17,274,456.16 2.95
Delaware 16 2,120,124.72 0.36
District of Columbia 15 1,626,999.06 0.28
Florida 386 31,758,624.07 5.43
Georgia 109 10,156,047.17 1.74
Hawaii 76 14,968,158.54 2.56
Idaho 24 1,980,207.29 0.34
Illinois 391 37,465,793.30 6.40
Indiana 105 6,733,222.09 1.15
Iowa 13 619,039.02 0.11
Kansas 28 1,842,576.77 0.31
Kentucky 63 4,167,774.68 0.71
Louisiana 9 932,997.26 0.16
Maine 53 4,631,558.53 0.79
Maryland 109 12,726,617.95 2.18
Massachusetts 293 33,327,264.63 5.70
Michigan 183 17,262,921.82 2.95
Minnesota 98 7,419,066.15 1.27
Mississippi 5 566,967.93 0.10
Missouri 168 9,407,520.66 1.61
Montana 7 878,251.10 0.15
Nebraska 7 266,585.00 0.05
Nevada 141 16,872,551.38 2.88
New Hampshire 73 7,418,502.51 1.27
New Jersey 59 7,554,562.92 1.29
New Mexico 65 6,272,017.32 1.07
New York 97 11,673,721.01 2.00
North Carolina 133 8,770,527.09 1.50
North Dakota 1 71,946.72 0.01
Ohio 251 16,949,735.96 2.90
Oklahoma 6 294,688.36 0.05
Oregon 194 22,257,838.01 3.80
Pennsylvania 170 12,745,900.42 2.18
Rhode Island 126 11,922,279.08 2.04
South Carolina 34 1,919,197.68 0.33
South Dakota 2 140,020.11 0.02
Tennessee 11 809,825.11 0.14
Texas 149 13,131,389.98 2.24
Utah 179 21,415,132.70 3.66
Vermont 2 330,071.22 0.06
Virginia 104 11,824,813.15 2.02
Washington 209 23,577,380.59 4.03
West Virginia 22 1,730,539.38 0.30
Wisconsin 128 8,648,041.97 1.48
Wyoming 1 133,348.97 0.02
----- --------------- ------
Total 5,672 $585,051,643.37 100.00%
===== =============== ======
</TABLE>
S-55
<PAGE> 60
ORIGINAL LOAN-TO-VALUE RATIOS -- INITIAL ADJUSTABLE RATE GROUP MORTGAGE LOANS
The original Loan-to-Value Ratios of the Initial Mortgage Loans in the
Adjustable Rate Group were distributed as follows:
<TABLE>
<CAPTION>
NUMBER OF ADJUSTABLE RATE AGGREGATE ADJUSTABLE RATE % OF AGGREGATE
RANGE OF GROUP GROUP ADJUSTABLE RATE GROUP
ORIGINAL LTVS (%) MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
----------------- -------------- ------------ ------------
<S> <C> <C> <C>
5.01 to 10.00 2 $ 50,882.76 0.01%
10.01 to 15.00 1 31,423.00 0.01
15.01 to 20.00 1 54,953.92 0.01
20.01 to 25.00 16 905,658.87 0.15
25.01 to 30.00 17 1,376,272.78 0.24
30.01 to 35.00 23 1,461,529.25 0.25
35.01 to 40.00 41 3,248,711.70 0.56
40.01 to 45.00 47 3,669,069.98 0.63
45.01 to 50.00 100 7,860,135.72 1.34
50.01 to 55.00 122 9,960,369.40 1.70
55.01 to 60.00 254 21,839,661.85 3.73
60.01 to 65.00 514 43,271,146.03 7.40
65.01 to 70.00 869 77,305,633.27 13.21
70.01 to 75.00 1,101 113,070,303.28 19.33
75.01 to 80.00 1,874 210,813,161.19 36.03
80.01 to 85.00 290 36,167,644.86 6.18
85.01 to 90.00 400 53,965,085.51 9.22
----- --------------- ------
Total 5,672 $585,051,643.37 100.00%
===== =============== ======
</TABLE>
S-56
<PAGE> 61
CUT-OFF DATE COUPON RATES -- INITIAL ADJUSTABLE RATE GROUP MORTGAGE LOANS
The Coupon Rates of the Notes relating to the Initial Mortgage Loans in
the Adjustable Rate Group were distributed as follows as of the Cut-Off Date:
<TABLE>
<CAPTION>
NUMBER OF ADJUSTABLE RATE AGGREGATE ADJUSTABLE RATE % OF AGGREGATE
RANGE OF GROUP GROUP ADJUSTABLE RATE GROUP
COUPON RATES (%) MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
------------------ ------------------------- ------------------------- ---------------------
<S> <C> <C> <C>
7.001 to 7.500 37 $ 5,003,207.42 0.86%
7.501 to 8.000 77 10,902,751.48 1.86
8.001 to 8.250 92 11,623,011.71 1.99
8.251 to 8.500 184 24,776,027.85 4.23
8.501 to 8.750 199 26,710,057.67 4.57
8.751 to 9.000 347 45,803,686.75 7.83
9.001 to 9.250 271 33,292,233.74 5.69
9.251 to 9.500 393 45,248,998.93 7.73
9.501 to 9.750 451 51,618,616.32 8.82
9.751 to 10.000 605 70,140,277.63 11.99
10.001 to 10.250 381 39,628,166.85 6.77
10.251 to 10.500 447 45,269,535.38 7.74
10.501 to 10.750 437 41,104,347.02 7.03
10.751 to 11.000 405 35,265,605.42 6.03
11.001 to 11.250 256 22,262,214.82 3.81
11.251 to 11.500 216 17,963,919.84 3.07
11.501 to 11.750 190 13,899,734.21 2.38
11.751 to 12.000 145 9,585,027.09 1.64
12.001 to 12.250 102 7,141,451.98 1.22
12.251 to 12.500 86 5,369,268.75 0.92
12.501 to 12.750 67 4,439,425.07 0.76
12.751 to 13.000 48 3,013,561.35 0.52
13.001 to 13.250 45 2,957,598.86 0.51
13.251 to 13.500 38 2,075,590.02 0.35
13.501 to 13.750 22 1,543,941.46 0.26
13.751 to 14.000 14 668,842.36 0.11
14.001 to 14.250 25 2,066,375.74 0.35
14.251 to 14.500 19 1,312,670.22 0.22
14.501 to 14.750 36 2,209,051.16 0.38
14.751 to 15.000 8 498,438.41 0.09
15.001 to 15.250 19 1,059,560.64 0.18
15.251 to 15.500 3 170,862.91 0.03
15.501 to 15.750 3 109,176.42 0.02
15.751 to 16.000 2 118,949.08 0.02
16.001 to 16.250 1 115,474.96 0.02
16.751 to 17.000 1 83,983.85 0.01
----- --------------- ------
Total 5,672 $585,051,643.37 100.00%
===== =============== ======
</TABLE>
S-57
<PAGE> 62
CUT-OFF DATE LOAN BALANCES -- INITIAL ADJUSTABLE RATE GROUP MORTGAGE LOANS
The distribution of the outstanding principal balances of the Initial
Mortgage Loans in the Adjustable Rate Group as of the Cut-Off Date was as
follows:
<TABLE>
<CAPTION>
NUMBER OF ADJUSTABLE AGGREGATE ADJUSTABLE % OF AGGREGATE
RATE GROUP RATE GROUP ADJUSTABLE RATE GROUP
RANGE OF LOAN BALANCES ($) MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
- -------------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C>
10,000.01 to 15,000.00 6 $ 86,187.89 0.01%
15,000.01 to 20,000.00 37 693,681.53 0.12
20,000.01 to 25,000.00 96 2,190,643.49 0.37
25,000.01 to 30,000.00 108 2,993,142.94 0.51
30,000.01 to 35,000.00 167 5,466,963.02 0.93
35,000.01 to 40,000.00 223 8,464,519.75 1.45
40,000.01 to 45,000.00 216 9,305,151.93 1.59
45,000.01 to 50,000.00 260 12,490,889.26 2.14
50,000.01 to 55,000.00 239 12,562,995.24 2.15
55,000.01 to 60,000.00 306 17,642,162.33 3.02
60,000.01 to 65,000.00 241 15,143,079.05 2.59
65,000.01 to 70,000.00 251 17,045,949.84 2.91
70,000.01 to 75,000.00 247 17,997,482.08 3.08
75,000.01 to 80,000.00 235 18,302,050.28 3.13
80,000.01 to 85,000.00 233 19,290,561.63 3.30
85,000.01 to 90,000.00 204 17,938,342.05 3.07
90,000.01 to 95,000.00 198 18,376,488.42 3.14
95,000.01 to 100,000.00 232 22,700,261.87 3.88
100,000.01 to 105,000.00 189 19,442,501.28 3.32
105,000.01 to 110,000.00 132 14,206,309.94 2.43
110,000.01 to 115,000.00 136 15,293,781.63 2.61
115,000.01 to 120,000.00 151 17,834,241.36 3.05
120,000.01 to 125,000.00 107 13,181,042.20 2.25
125,000.01 to 130,000.00 102 13,010,790.52 2.22
130,000.01 to 135,000.00 122 16,166,458.84 2.76
135,000.01 to 140,000.00 88 12,150,629.99 2.08
140,000.01 to 145,000.00 82 11,706,693.41 2.00
145,000.01 to 150,000.00 80 11,841,338.70 2.02
150,000.01 to 200,000.00 511 88,743,036.56 15.17
200,000.01 to 250,000.00 211 47,182,021.09 8.06
250,000.01 to 300,000.00 115 31,715,185.25 5.42
300,000.01 to 350,000.00 74 23,983,759.90 4.10
350,000.01 to 400,000.00 34 12,556,975.48 2.15
400,000.01 to 450,000.00 23 9,766,186.85 1.67
450,000.01 to 500,000.00 16 7,580,137.77 1.30
----- --------------- ------
Total 5,672 $585,051,643.37 100.00%
===== =============== ======
</TABLE>
S-58
<PAGE> 63
TYPES OF MORTGAGED PROPERTIES -- INITIAL ADJUSTABLE RATE GROUP MORTGAGE LOANS
The Mortgaged Properties securing the Initial Mortgage Loans in the
Adjustable Rate Group as of the Cut-Off Date had the following property types:
<TABLE>
<CAPTION>
NUMBER OF ADJUSTABLE AGGREGATE ADJUSTABLE RATE % OF AGGREGATE
RATE GROUP GROUP ADJUSTABLE RATE GROUP
PROPERTY TYPES MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
- -------------- -------------------- ------------------------- ---------------------
<S> <C> <C> <C>
Single Family Residence 4,766 $500,406,555.83 85.53%
Two to Four Family 354 31,067,594.05 5.31
PUD 186 23,629,579.23 4.04
Condominium 286 23,518,148.08 4.02
Manufactured Housing 74 5,873,813.91 1.00
Townhouse 6 555,952.27 0.10
----- --------------- ------
Total 5,672 $585,051,643.37 100.00%
===== =============== ======
</TABLE>
MONTHS SINCE ORIGINATION -- INITIAL ADJUSTABLE RATE GROUP MORTGAGE LOANS
The distribution of the number of months since the date of origination
of the Initial Mortgage Loans in the Adjustable Rate Group as of the Cut-Off
Date was as follows:
<TABLE>
<CAPTION>
NUMBER OF ADJUSTABLE AGGREGATE ADJUSTABLE RATE % OF AGGREGATE
MONTHS ELAPSED RATE GROUP GROUP ADJUSTABLE RATE GROUP
SINCE ORIGINATION MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
- ----------------- -------------------- ------------------------- ---------------------
<S> <C> <C> <C>
0 61 $ 6,225,308.00 1.06%
1 to 12 5,600 577,688,492.61 98.74
13 to 24 11 1,137,842.76 0.19
----- --------------- ------
Total 5,672 $585,051,643.37 100.00%
===== =============== ======
</TABLE>
REMAINING TERM TO MATURITY -- INITIAL ADJUSTABLE RATE GROUP MORTGAGE LOANS
The distribution of the number of months remaining to maturity of the
Initial Mortgage Loans in the Adjustable Rate Group as of the Cut-Off Date was
as follows:
<TABLE>
<CAPTION>
NUMBER OF ADJUSTABLE AGGREGATE ADJUSTABLE RATE % OF AGGREGATE
MONTHS REMAINING RATE GROUP GROUP ADJUSTABLE RATE GROUP
TO MATURITY MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
- ---------------- -------------------- ------------------------- ---------------------
<S> <C> <C> <C>
157 to 168 1 $ 30,617.07 0.01%
169 to 180 78 4,344,516.03 0.74
229 to 240 1 168,605.19 0.03
337 to 348 13 1,590,972.73 0.27
349 to 360 5,579 578,916,932.35 98.95
----- --------------- ------
Total 5,672 $585,051,643.37 100.00%
===== =============== ======
</TABLE>
S-59
<PAGE> 64
OCCUPANCY STATUS -- INITIAL ADJUSTABLE RATE GROUP MORTGAGE LOANS
The occupancy status of the Mortgaged Properties securing the Initial
Mortgage Loans in the Adjustable Rate Group as of the Cut-Off Date was as
follows based on representations by the mortgagors at the time of origination
of such Mortgage Loans:
<TABLE>
<CAPTION>
NUMBER OF ADJUSTABLE AGGREGATE ADJUSTABLE RATE % OF AGGREGATE
RATE GROUP GROUP ADJUSTABLE RATE GROUP
OCCUPANCY STATUS MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
---------------- -------------------- ------------------------- ----------------------
<S> <C> <C> <C>
Owner-Occupied 5,070 $540,332,095.49 92.36%
Non-Owner Occupied 602 44,719,547.88 7.64
----- --------------- ------
Total 5,672 $585,051,643.37 100.00%
===== =============== ======
</TABLE>
MARGINS -- INITIAL ADJUSTABLE RATE GROUP MORTGAGE LOANS
The margins borne by the Notes relating to the Initial Mortgage Loans in
the Adjustable Rate Group as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
NUMBER OF ADJUSTABLE RATE AGGREGATE ADJUSTABLE RATE % OF AGGREGATE
GROUP GROUP ADJUSTABLE RATE GROUP
MARGINS (%) MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
----------- -------------------------- -------------------------- ---------------------
<S> <C> <C> <C>
3.501 to 4.000 1 $ 139,231.29 0.02%
4.001 to 4.500 142 13,784,697.66 2.36
4.501 to 5.000 883 97,375,317.10 16.64
5.001 to 5.500 1,695 190,558,756.71 32.57
5.501 to 6.000 911 93,247,576.98 15.94
6.001 to 6.500 698 65,963,082.01 11.27
6.501 to 7.000 504 46,172,179.10 7.89
7.001 to 7.500 345 30,165,681.71 5.16
7.501 to 8.000 431 42,249,782.38 7.22
8.001 to 8.500 40 3,258,279.60 0.56
8.501 to 9.000 17 1,342,727.43 0.23
9.001 to 9.500 1 157,016.10 0.03
9.501 to 10.000 1 54,878.21 0.01
10.001 to 10.500 1 259,653.50 0.04
10.501 to 11.000 1 126,885.86 0.02
11.001 to 11.500 1 195,897.73 0.03
----- --------------- ------
Total 5,672 $585,051,643.37 100.00%
===== =============== ======
</TABLE>
S-60
<PAGE> 65
MAXIMUM COUPON RATES -- INITIAL ADJUSTABLE RATE GROUP MORTGAGE LOANS
The maximum Coupon Rates borne by the Notes relating to the Initial
Mortgage Loans in the Adjustable Rate Group as of the Cut-Off Date was as
follows:
<TABLE>
<CAPTION>
NUMBER OF ADJUSTABLE RATE AGGREGATE ADJUSTABLE RATE % OF AGGREGATE
MAXIMUM GROUP GROUP ADJUSTABLE RATE GROUP
COUPON RATES (%) MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
---------------- -------------------------- ----------------------- ----------------------
<S> <C> <C> <C>
10.001 to 10.500 3 $ 387,598.82 0.07%
10.501 to 11.000 2 252,574.58 0.04
11.001 to 11.500 1 123,422.90 0.02
11.501 to 12.000 1 77,506.67 0.01
13.001 to 13.500 25 3,612,725.23 0.62
13.501 to 14.000 54 7,348,050.83 1.26
14.001 to 14.500 191 24,403,519.76 4.17
14.501 to 15.000 360 47,021,207.02 8.04
15.001 to 15.500 524 61,560,213.22 10.52
15.501 to 16.000 939 112,497,812.82 19.23
16.001 to 16.500 802 87,303,784.21 14.92
16.501 to 17.000 873 88,839,547.86 15.18
17.001 to 17.500 584 54,562,646.67 9.33
17.501 to 18.000 496 40,178,355.14 6.87
18.001 to 18.500 245 19,378,396.51 3.31
18.501 to 19.000 176 12,126,692.14 2.07
19.001 to 19.500 123 7,442,216.06 1.27
19.501 to 20.000 81 5,244,635.06 0.90
20.001 to 20.500 62 4,206,327.55 0.72
20.501 to 21.000 29 1,599,784.91 0.27
21.001 to 21.500 34 2,700,070.82 0.46
21.501 to 22.000 41 2,620,895.08 0.45
22.001 to 22.500 20 1,181,058.62 0.20
22.501 to 23.000 4 183,142.08 0.03
23.001 to 23.500 1 115,474.96 0.02
23.501 to 24.000 1 83,983.85 0.01
----- --------------- ------
Total 5,672 $585,051,643.37 100.00%
===== =============== ======
</TABLE>
S-61
<PAGE> 66
NEXT RATE ADJUSTMENT DATE -- INITIAL ADJUSTABLE RATE GROUP MORTGAGE LOANS
Next rate adjustment date for each of the Notes relating to the Initial
Mortgage Loans in the Adjustable Rate Group as of the Cut-Off Date was as
follows:
<TABLE>
<CAPTION>
NUMBER OF ADJUSTABLE AGGREGATE ADJUSTABLE RATE % OF AGGREGATE
DATE OF NEXT RATE GROUP GROUP ADJUSTABLE RATE GROUP
RATE ADJUSTMENT DATE MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
- -------------------- -------------- ------------ ------------
<S> <C> <C> <C>
September 1997 2 $ 128,603.40 0.02
October 1997 165 19,633,095.24 3.36
November 1997 192 22,879,192.20 3.91
December 1997 172 21,267,717.30 3.64
January 1998 130 13,055,711.11 2.23
February 1998 127 13,400,869.92 2.29
March 1998 42 4,600,952.87 0.79
June 1998 1 90,049.53 0.02
November 1998 1 203,931.68 0.03
December 1998 6 811,268.83 0.14
January 1999 10 1,152,538.86 0.20
February 1999 21 2,098,423.05 0.36
March 1999 73 8,118,396.21 1.39
April 1999 742 77,781,296.00 13.29
May 1999 1,120 112,096,926.15 19.16
June 1999 1,022 108,426,360.51 18.53
July 1999 1,028 103,249,819.41 17.65
August 1999 446 38,997,471.15 6.67
September 1999 42 4,499,833.00 0.77
October 1999 2 238,011.75 0.04
November 1999 5 643,338.65 0.11
December 1999 6 390,370.22 0.07
January 2000 3 269,759.28 0.05
February 2000 3 182,011.76 0.03
March 2000 10 728,424.33 0.12
April 2000 52 3,742,151.14 0.64
May 2000 54 5,421,844.03 0.93
June 2000 40 3,363,782.53 0.57
July 2000 125 15,245,584.82 2.61
August 2000 24 1,969,768.45 0.34
September 2000 5 336,965.00 0.06
May 2011 1 27,174.99 0.00
----- --------------- ------
Total 5,672 $585,051,643.37 100.00%
===== =============== ======
</TABLE>
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS
The Pooling and Servicing Agreement permits the Trust to acquire
approximately $37,500,000 and $99,800,000 in aggregate principal balance of
Subsequent Mortgage Loans for addition to the Fixed Rate Group and the
Adjustable Rate Group, respectively. Accordingly, the statistical
characteristics of the Mortgage Loan Pool and each Mortgage Loan Group will
vary as of any Subsequent Cut-Off Date upon the acquisition of Subsequent
Mortgage Loans.
The obligation of the Trust to purchase Subsequent Mortgage Loans on a
Subsequent Transfer Date is subject to the following requirements, among others:
(i) the ratings on the Offered 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
S-62
<PAGE> 67
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 73% for the Fixed Rate Group and 75% for the Adjustable Rate Group; (b)
will have a weighted average gross margin for each Mortgage Loan Group that is
not more than 25 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 16%
in the case of the Fixed Rate Group and 16% in the case of the Adjustable Rate
Group of such Subsequent Mortgage Loans with Combined Loan-to-Value Ratios in
excess of 80%; (d) will have no more than 49% in the case of the Fixed Rate
Group and 44% 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 84% 2/28 Loans and 3/27 Loans; (f) will have weighted
average PAG codes of less than 2.5 in the case of the Fixed Rate Group and less
than 2.8 in the case of the Adjustable Rate Group; (g) will have Mortgage Loans
that are not more than 15%, in the case of the Fixed Rate Group, and 18% in the
case of the Adjustable Rate Group, that are in PAG IV and PAG V; and (h) will
have no more than 10.0% of the Fixed Rate Group and 8% 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 Fixed Rate Group Certificates"),
the yield to maturity on the Offered 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. Approximately 66.73% of the Initial Mortgage Loans (by Loan Balance)
require the payment of a fee in connection with certain prepayments which may
affect the rate of principal payment. In addition, the actual rate of principal
prepayments on pools of mortgage loans is influenced by a variety of economic,
tax, geographic, demographic, social, legal and other factors and has fluctuated
considerably in recent years. In addition, the rate of principal prepayments
may differ among pools of mortgage loans at any time because of specific factors
relating to the mortgage loans in the particular pool, including, among other
things, the age of the mortgage loans, the geographic locations of the
properties securing the loans and the extent of the mortgagors' equity in such
properties, changes in the mortgagors' housing needs, job transfers and
unemployment.
As with fixed rate obligations generally, the rate of prepayment on a
pool of mortgage loans with fixed rates such as the Mortgage Loans in the Fixed
Rate Group (other than the 5/25 Loans) are affected by prevailing market rates
for mortgage loans of a comparable term and risk level. When the market
interest rate is below the mortgage coupon, mortgagors may have an increased
incentive to refinance their mortgage loans. Depending on prevailing market
rates, the future outlook for market rates and economic conditions generally,
some mortgagors may sell or refinance mortgaged properties in order to realize
their equity in the mortgaged properties, to meet cash flow needs or to make
other investments.
The Mortgage Loans in the Adjustable Rate Group are adjustable rate
mortgage loans. As is the case with conventional fixed rate mortgage loans,
adjustable rate mortgage loans may be subject to a greater rate of principal
prepayments in a declining interest rate environment. For example, if
prevailing interest rates fall significantly, adjustable rate mortgage loans
could be subject to higher prepayment rates than if prevailing interest rates
remain constant because the availability of fixed rate mortgage loans at
competitive interest rates may encourage mortgagors to refinance their
adjustable rate mortgage loan to "lock in" a lower fixed interest rate. However,
no assurance can be given as to the level of prepayments that the Mortgage Loans
will experience.
The prepayment behavior of the 2/28 Loans and 3/27 Loans may differ from
that of the other Mortgage Loans in the Adjustable Rate Group and the prepayment
behavior of the 5/25 Loans may differ from that of the other Mortgage Loans in
the Fixed Rate Group. 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 the Adjustable Rate Group may differ from that on the Mortgage Loans
in the Fixed Rate Group because the amount of the monthly payments on the
Mortgage Loans in the Adjustable Rate Group are subject to adjustment on each
adjustment date.
S-63
<PAGE> 68
The prepayment experience on non-conventional mortgage loans may differ
from that on conventional first mortgage loans, primarily due to the credit
quality of the typical borrower. Because the credit histories of many
non-conventional borrowers may preclude them from other traditional sources of
financing, such borrowers may be less likely to refinance due to a decline in
market interest rates. Non-conventional mortgage loans may experience more
prepayments in a rising interest rate environment as the borrowers' finances
are stressed to the point of default. Prepayments may also affect the yield to
the Owners of the Adjustable Rate Group Certificates, if the weighted average
margins are reduced.
A majority of the Mortgage Loans contain prepayment penalty provisions.
For a discussion of such provisions, see "The Portfolio of Mortgage
Loans -- Prepayment Penalties" herein.
In addition to the foregoing factors affecting the weighted average life
of each Class of the Offered Certificates, the overcollateralization provisions
of the Trust result in an additional reduction of the Certificate Principal
Balances of the related Class A Certificates relative to the amortization of
the related Mortgage Loans in the early months of the transaction. The
accelerated amortization is achieved by the application of the related Monthly
Excess Interest Amount to the payment of the Certificate Principal Balance of
the related Classes of the Offered Certificates. This creates
overcollateralization which results from the excess of the aggregate Loan
Balances of the Mortgage Loans over the Aggregate Certificate Principal Balance.
Once the Targeted Overcollateralization Amount is reached, the application of
the Monthly Excess Interest Amount to pay down principal will cease, unless
necessary to maintain the Overcollateralization Amount at the Targeted
Overcollateralization Amount.
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
Certificates. Although a low interest rate environment may facilitate the
refinancing of a Balloon Loan, the receipt and reinvestment by Owners of the
proceeds in such an environment may produce a lower return than that previously
received in respect of the related Balloon Loan. Conversely, a high interest
rate environment may make it more difficult for the mortgagor to accomplish a
refinancing and may result in delinquencies or defaults.
MANDATORY PREPAYMENT
In the event that at the end of the Funding Period, not all of the
Original Pre-Funded Amount has been used to acquire Subsequent Mortgage Loans
for either the Fixed Rate Group or the Adjustable Rate Group then the related
Class(es) of Certificates then entitled to receive payments of principal will
receive a partial prepayment in an amount equal to the portion of the Original
Pre-Funded Amount remaining and allocable to each such Class.
Although no assurances can be given, the Depositor expects that the
principal amount of Subsequent Mortgage Loans sold to the Trust will require
the application of substantially all the amount on deposit in the Pre-Funding
Account and that there should be no material principal prepaid to the Owners of
the Certificates in respect of the Original Pre-Funded Amount.
PREPAYMENT AND YIELD SCENARIOS FOR OFFERED CERTIFICATES
As indicated above, if purchased at other than par, the yield to maturity
on an Offered 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 an
Offered 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 an Offered 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 Offered
Certificates is set forth in the Summary of Terms hereof. For the Class A-1
through Class A-10 Certificates such dates are the dates on which the Original
Certificate Principal Balance set forth in the Summary of Terms hereof for the
related Class of Offered Certificates would be reduced to zero assuming, among
other things, that no Prepayments are received on the Mortgage Loans, that no
Monthly Excess Interest Amount will be used to make accelerated payments of
principal to holders of the
S-64
<PAGE> 69
related Class A Certificates, that scheduled monthly payments of principal and
interest on the Mortgage Loans are timely received and that the Auction Sale
with respect to the related Mortgage Loan Group is not completed. The Final
Scheduled Payment Date for each Class of Subordinate Certificates is the Payment
Date in September 2027. The weighted average life of each Class of the Offered
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 each Class of the Offered Certificates could occur
significantly earlier than the related Final Scheduled Payment Date because (i)
Prepayments are likely to occur, (ii) Monthly Excess Interest Amounts are likely
to be used to make accelerated payments of principal to holders of the related
Class A Certificates, (iii) the Owners of the Class R Certificates may cause a
termination of the Classes of Certificates relates to a Mortgage Loan Group when
the outstanding Certificate Principal Balance of the Certificates related to
such Mortgage Loan Group is less than 10% of the Original Certificate Principal
Balance of the Certificates related to such Mortgage Loan Group and (iv) the
Servicers may each purchase all Mortgage Loans serviced by them and either one
or more of the Servicers may purchase all of the Mortgage Loans, thereby causing
a termination of the Trust, when the outstanding Aggregate Certificate Principal
Balance is less than 5% of the original Aggregate Certificate Principal Balance.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal
of such security will be repaid to the investor. The weighted average life of
any Class of the Offered 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 which are
Offered 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 each Class 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 each Class 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 each Class 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 a lower level of prevailing interest rates, which would be expected to
result in faster prepayments, thereby reducing the weighted average life of the
Adjustable Rate Group Certificates.
Certain of the Mortgage Loans in the Adjustable Rate Group, including
the 2/28 Loans and the 3/27 Loans, were originated with initial Coupon Rates
that were based on competitive conditions. As a result, the Coupon Rates on
such Mortgage Loans in the Adjustable Rate Group are more likely to adjust on
their first, and possibly subsequent adjustment dates subject to the effects of
the applicable periodic rate cap and lifetime cap. Because the Pass-Through
Rate of each Class of the Adjustable Rate Group Certificates is limited by the
Adjustable Rate Group Available Funds Cap on each Payment Date, limits on
changes in the Coupon Rates of the Mortgage Loans in the Adjustable Rate Group
may limit changes in the Pass-Through Rate of each Class 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 36th scheduled monthly payment is due.
The Adjustable Rate Group Available Funds Cap on a Payment Date will
depend, in part, on the weighted average of the then-current Coupon Rates of
the outstanding Mortgage Loans in the Adjustable Rate Group. If the Mortgage
Loans in the Adjustable Rate Group bearing higher Coupon Rates were to prepay,
the weighted average Coupon Rate of the Mortgage Loans in the Adjustable Rate
Group, and consequently the Adjustable Rate Group Available Funds Cap, would be
lower than otherwise would be the case.
Prepayments on mortgage loans are commonly measured relative to a
prepayment model or standard. The model used in this Prospectus Supplement with
respect to the Fixed Rate Group is the prepayment assumption (the "Prepayment
Assumption") which represents an assumed rate of prepayment each month relating
to the then
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<PAGE> 70
outstanding principal balance of a pool of mortgage loans for the life of such
mortgage loans. A 100% Prepayment Assumption assumes conditional prepayment
rates of 4% per annum of the then outstanding principal balance of the Mortgage
Loans in the Fixed Rate Group in the first month of the life of the mortgage
loans and an additional 1.454% per annum each month thereafter until the
twelfth month. Beginning in the twelfth month and in each month thereafter
during the life of the mortgage loans, 100% Prepayment Assumption assumes a
conditional prepayment rate of 20% per annum each month. As used in the table
below, 0% Prepayment Assumption assumes prepayment rates equal to 0% of the
Prepayment Assumption i.e., no prepayments. Correspondingly, 100% Prepayment
Assumption assumes prepayment rates equal to 100% of the Prepayment Assumption,
and so forth. The model used in this Prospectus Supplement with respect to the
Adjustable Rate Group 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 Offered 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 assumptions made in this Prospectus Supplement 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 Offered
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 Offered 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 tables below, (ii) the Closing Date for the Certificates occurs on
September 17, 1997, (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 October 1997 in accordance with the priorities described
herein, (iv) prepayments include 30 day's interest thereon, (v) the Targeted
Overcollateralization Amount for each Mortgage Loan Group is set initially as
specified herein and thereafter decreases in accordance with the provisions of
the Pooling and Servicing Agreement, without regard to any delinquency and loss
triggers, (vi) no Auction Sale or Servicer Clean-Up Call occurs for the Fixed
Rate Group and an Auction Sale occurs on the Auction Sale Bid Date for the
Adjustable Rate Group, (vii) the Pre-Funded Amount is used to acquire Subsequent
Mortgage Loans on October 31, 1997 and prior to such dates, the Pre-Funded
Amount accrues interest at a rate equal to the Net Coupon Rate set forth in the
tables below, (viii) the Coupon Rate for each Mortgage Loan in the Adjustable
Rate Group and the Fixed Rate Group, if applicable, is adjusted on its next rate
adjustment date (and on subsequent rate adjustment dates, if necessary) to equal
the sum of (a) an assumed final constant level of the applicable index of
5.84375% per annum, with respect to Six-Month LIBOR and (b) the respective gross
margin (such sum being subject to the applicable periodic adjustment cap,
maximum interest rate and minimum interest rate (which minimum interest rate
will generally equal the initial coupon)), (ix) One-Month LIBOR remains constant
at a rate of 5.65625% per annum, (x) all Mortgage Loans pay on their respective
due dates in accordance with their respective terms and (xi) the Initial
Certificate Principal Balance and Pass-Through Rate of each Class of
Certificates is as set forth and under "Summary of Terms -- Certificates
Offered" herein.
S-66
<PAGE> 71
INITIAL FIXED RATE GROUP MORTGAGE LOANS
<TABLE>
<CAPTION>
Gross Coupon
Principal Balance Rate Net Coupon Rate Gross Margin Periodic Rate Cap Months to Next Reset
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$20,564,574.43 11.207% 10.707% n/a n/a n/a
24,618,775.65 10.662 10.162 n/a n/a n/a
3,720,598.49 11.238 10.738 n/a n/a n/a
167,721,934.83 10.295 9.795 n/a n/a n/a
12,288,879.02 9.612 9.112 6.557% 3.217% 57
<CAPTION>
Rate Change Remaining Original Term to Remaining Term to
Frequency Authorization Term Maturity Maturity
Principal Balance (in months) (in months) (in months) (in months)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$20,564,574.43 n/a 355 358 177
24,618,775.65 n/a 176 178 176
3,720,598.49 n/a 230 233 230
167,721,934.83 n/a 356 358 356
12,288,879.02 6 354 356 354
</TABLE>
SUBSEQUENT FIXED RATE GROUP MORTGAGE LOANS
<TABLE>
<CAPTION>
Gross Coupon Net Coupon Months to
Principal Balance Rate Rate Gross Margin Periodic Rate Cap Next Reset
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3,331,555.03 11.207% 10.707% n/a n/a n/a
3,988,354.15 10.662 10.162 n/a n/a n/a
27,774,473.84 10.315 9.815 n/a n/a n/a
1,990,854.56 9.612 9.112 6.557% 3.217% 57
<CAPTION>
Rate Change Remaining Original Term to Remaining Term to
Frequency Authorization Term Maturity Maturity Assumed Delivery
Principal Balance (in months) (in months) (in months) (in months) Date
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3,331,555.03 n/a 355 358 177 October 31, 1997
3,988,354.15 n/a 176 178 176 October 31, 1997
27,774,473.84 n/a 353 355 353 October 31, 1997
1,990,854.56 6 354 356 354 October 31, 1997
</TABLE>
S-67
<PAGE> 72
INITIAL ADJUSTABLE RATE GROUP MORTGAGE LOANS
<TABLE>
<CAPTION> Initial Subsequent
Periodic Rate Periodic Rate
Principal Balance Gross Coupon Rate Net Coupon Rate Gross Margin Cap Cap
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3,345,750.04 9.741% 9.241% 5.860% 1.037% 1.006%
19,633,095.24 9.363 8.863 5.748 1.012 1.012
23,065,897.41 9.674 9.174 5.813 1.009 1.009
21,267,717.30 9.428 8.928 5.652 1.019 1.016
13,055,711.11 10.100 9.600 6.010 1.060 1.025
13,442,039.55 10.193 9.693 6.025 1.073 1.047
454,710,251.99 10.129 9.629 5.842 3.384 1.101
36,694,879.96 10.044 9.544 6.359 4.287 1.216
</TABLE>
<TABLE>
<CAPTION>
Rate Change Original Term to Remaining Term to
Months to Frequency Maturity Maturity
Next Reset (in months) (in months) (in months)
- -------------------------------------------------------------------------
<C> <C> <C> <C>
1 6 360 355
2 6 357 353
3 6 357 354
4 6 358 356
5 6 359 358
6 6 357 356
22 6 359 357
33 6 359 357
</TABLE>
SUBSEQUENT ADJUSTABLE RATE GROUP MORTGAGE LOANS
<TABLE>
<CAPTION>
Subsequent
Initial Periodic Periodic Rate
Principal Balance Gross Coupon Rate Net Coupon Rate Gross Margin Rate Cap Cap
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$15,835,212.86 9.689% 9.189% 5.822% 1.029% 1.019%
82,949,444.54 10.123 9.623 5.881 3.451 1.110%
</TABLE>
<TABLE>
<CAPTION>
Rate Change Original Term to Remaining Term to
Months to Frequency Maturity Maturity
Next Reset (in months) (in months) (in months) Assumed Delivery Date
- ---------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
4 6 357 355 October 31, 1997
23 6 359 357 October 31, 1997
</TABLE>
S-68
<PAGE> 73
The following tables set forth the percentages of the initial principal balance
of the Offered Certificates that would be outstanding after each of the dates
shown, assuming (1) for the Fixed Rate Group Certificates, the Fixed Rate Group
Mortgage Loans prepay according to the indicated percentages of the Prepayment
Assumption under each Fixed Rate Group Certificate below and the Adjustable
Rate Group Mortgage Loans prepay at 25% CPR and (2) for the Adjustable Rate
Group Certificates, the Fixed Rate Group Mortgage Loans prepay at 100% of the
Prepayment Assumption and the Adjustable Rate Group Mortgage Loans prepay
according to the indicated percentages of CPR under each Adjustable Rate Group
Certificate below except that under the 0% Prepayment Assumption for all
Certificates, the Mortgage Loans in both Mortgage Loan Groups prepay at 0% of
the Prepayment Assumption.
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2
Payment Date 0% 25% 50% 75% 100% 125% 200% 0% 25% 50% 75% 100% 125% 200%
-- --- --- --- ---- ---- ---- -- --- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Balance 100 100 100 100 100 100 100 100 100 100 100 100 100 100
September 25, 1998 86 56 26 0 0 0 0 100 100 100 96 69 42 0
September 25, 1999 79 9 0 0 0 0 0 100 100 49 0 0 0 0
September 25, 2000 70 0 0 0 0 0 0 100 68 0 0 0 0 0
September 25, 2001 61 0 0 0 0 0 0 100 32 0 0 0 0 0
September 25, 2002 51 0 0 0 0 0 0 100 0 0 0 0 0 0
September 25, 2003 41 0 0 0 0 0 0 100 0 0 0 0 0 0
September 25, 2004 29 0 0 0 0 0 0 100 0 0 0 0 0 0
September 25, 2005 20 0 0 0 0 0 0 100 0 0 0 0 0 0
September 25, 2006 9 0 0 0 0 0 0 100 0 0 0 0 0 0
September 25, 2007 0 0 0 0 0 0 0 97 0 0 0 0 0 0
September 25, 2008 0 0 0 0 0 0 0 84 0 0 0 0 0 0
September 25, 2009 0 0 0 0 0 0 0 70 0 0 0 0 0 0
September 25, 2010 0 0 0 0 0 0 0 54 0 0 0 0 0 0
September 25, 2011 0 0 0 0 0 0 0 35 0 0 0 0 0 0
September 25, 2012 0 0 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2013 0 0 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2014 0 0 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2015 0 0 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2016 0 0 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2017 0 0 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2018 0 0 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2019 0 0 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2020 0 0 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2021 0 0 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2022 0 0 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2023 0 0 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2024 0 0 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2025 0 0 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2026 0 0 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2027 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Avg Life(1) 5.0 1.2 0.8 0.6 0.5 0.5 0.3 13.0 3.6 2.1 1.5 1.2 1.0 0.7
</TABLE>
<TABLE>
<CAPTION>
CLASS A-3 CLASS A-4
Payment Date 0& 25% 50% 75% 100% 125% 200% 0% 25% 50% 75% 100% 125% 200%
-- --- --- --- ---- ---- ---- -- --- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Balance 100 100 100 100 100 100 100 100 100 100 100 100 100 100
September 25, 1998 100 100 100 100 100 100 65 100 100 100 100 100 100 100
September 25, 1999 100 100 100 94 48 4 0 100 100 100 100 100 100 0
September 25, 2000 100 100 85 19 0 0 0 100 100 100 100 40 0 0
September 25, 2001 100 100 37 0 0 0 0 100 100 100 43 0 0 0
September 25, 2002 100 98 0 0 0 0 0 100 100 92 0 0 0 0
September 25, 2003 100 71 0 0 0 0 0 100 100 41 0 0 0 0
September 25, 2004 100 46 0 0 0 0 0 100 100 9 0 0 0 0
September 25, 2005 100 29 0 0 0 0 0 100 100 0 0 0 0 0
September 25, 2006 100 10 0 0 0 0 0 100 100 0 0 0 0 0
September 25, 2007 100 0 0 0 0 0 0 100 87 0 0 0 0 0
September 25, 2008 100 0 0 0 0 0 0 100 61 0 0 0 0 0
September 25, 2009 100 0 0 0 0 0 0 100 42 0 0 0 0 0
September 25, 2010 100 0 0 0 0 0 0 100 22 0 0 0 0 0
September 25, 2011 100 0 0 0 0 0 0 100 3 0 0 0 0 0
September 25, 2012 75 0 0 0 0 0 0 100 0 0 0 0 0 0
September 25, 2013 64 0 0 0 0 0 0 100 0 0 0 0 0 0
September 25, 2014 50 0 0 0 0 0 0 100 0 0 0 0 0 0
September 25, 2015 36 0 0 0 0 0 0 100 0 0 0 0 0 0
September 25, 2016 19 0 0 0 0 0 0 100 0 0 0 0 0 0
September 25, 2017 1 0 0 0 0 0 0 100 0 0 0 0 0 0
September 25, 2018 0 0 0 0 0 0 0 76 0 0 0 0 0 0
September 25, 2019 0 0 0 0 0 0 0 55 0 0 0 0 0 0
September 25, 2020 0 0 0 0 0 0 0 30 0 0 0 0 0 0
September 25, 2021 0 0 0 0 0 0 0 4 0 0 0 0 0 0
September 25, 2022 0 0 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2023 0 0 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2024 0 0 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2025 0 0 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2026 0 0 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2027 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Avg Life(1) 17.1 7.1 3.8 2.6 2.0 1.7 1.1 22.2 11.7 6.0 4.0 3.0 2.4 1.6
</TABLE>
- -----------------------------
(1) The weighted average life of the Offered 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 Offered
Certificate Principal Balance for such Class of Offered Certificate. The
weighted average life of (i) the Fixed Rate Group Certificates is to the
maturity of the related Certificates, and (ii) the Adjustable Rate Group
Certificates is to the Auction Sale Bid Date, which is the date upon
which the Outstanding Certificate Principal Balance related to such
Mortgage Loan Group has declined to 10% or less of the Original
Certificate Principal Balance related to such Mortgage Loan Group.
S-69
<PAGE> 74
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
CLASS A-5 CLASS A-6
Payment Date 0% 25% 50% 75% 100% 125% 200% 0% 25% 50% 75% 100% 125% 200%
-- --- --- --- ---- ---- ---- -- --- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Balance 100 100 100 100 100 100 100 100 100 100 100 100 100 100
September 25, 1998 100 100 100 100 100 100 100 100 100 100 100 100 100 100
September 25, 1999 100 100 100 100 100 100 0 100 100 100 100 100 100 69
September 25, 2000 100 100 100 100 100 27 0 100 100 100 100 100 100 0
September 25, 2001 100 100 100 100 42 0 0 100 100 100 100 100 30 0
September 25, 2002 100 100 100 78 0 0 0 100 100 100 100 46 0 0
September 25, 2003 100 100 100 7 0 0 0 100 100 100 100 0 0 0
September 25, 2004 100 100 100 0 0 0 0 100 100 100 49 0 0 0
September 25, 2005 100 100 85 0 0 0 0 100 100 100 25 0 0 0
September 25, 2006 100 100 49 0 0 0 0 100 100 100 0 0 0 0
September 25, 2007 100 100 12 0 0 0 0 100 100 100 0 0 0 0
September 25, 2008 100 100 0 0 0 0 0 100 100 74 0 0 0 0
September 25, 2009 100 100 0 0 0 0 0 100 100 38 0 0 0 0
September 25, 2010 100 100 0 0 0 0 0 100 100 4 0 0 0 0
September 25, 2011 100 100 0 0 0 0 0 100 100 0 0 0 0 0
September 25, 2012 100 30 0 0 0 0 0 100 100 0 0 0 0 0
September 25, 2013 100 1 0 0 0 0 0 100 100 0 0 0 0 0
September 25, 2014 100 0 0 0 0 0 0 100 73 0 0 0 0 0
September 25, 2015 100 0 0 0 0 0 0 100 45 0 0 0 0 0
September 25, 2016 100 0 0 0 0 0 0 100 17 0 0 0 0 0
September 25, 2017 100 0 0 0 0 0 0 100 0 0 0 0 0 0
September 25, 2018 100 0 0 0 0 0 0 100 0 0 0 0 0 0
September 25, 2019 100 0 0 0 0 0 0 100 0 0 0 0 0 0
September 25, 2020 100 0 0 0 0 0 0 100 0 0 0 0 0 0
September 25, 2021 100 0 0 0 0 0 0 100 0 0 0 0 0 0
September 25, 2022 47 0 0 0 0 0 0 100 0 0 0 0 0 0
September 25, 2023 0 0 0 0 0 0 0 79 0 0 0 0 0 0
September 25, 2024 0 0 0 0 0 0 0 2 0 0 0 0 0 0
September 25, 2025 0 0 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2026 0 0 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2027 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Avg Life(1) 25.0 15.0 9.0 5.5 4.0 3.0 1.9 26.4 17.9 11.7 7.3 5.0 3.9 2.1
</TABLE>
<TABLE>
<CAPTION>
CLASS A-7 CLASS A-8
Payment Date 0% 25% 50% 75% 100% 125% 200% 0% 25% 50% 75% 100% 125% 200%
-- --- --- --- ---- ---- ---- -- --- --- --- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Balance 100 100 100 100 100 100 100 100 100 100 100 100 100 100
September 25, 1998 100 100 100 100 100 100 100 100 100 100 100 100 100 100
September 25, 1999 100 100 100 100 100 100 100 100 100 100 100 100 100 100
September 25, 2000 100 100 100 100 100 100 0 100 100 100 100 100 100 0
September 25, 2001 100 100 100 100 100 100 0 100 100 100 100 100 100 0
September 25, 2002 100 100 100 100 100 43 0 100 100 100 100 100 100 0
September 25, 2003 100 100 100 100 80 0 0 100 100 100 100 100 94 0
September 25, 2004 100 100 100 100 36 0 0 100 100 100 100 100 70 0
September 25, 2005 100 100 100 100 24 0 0 100 100 100 100 100 68 0
September 25, 2006 100 100 100 94 2 0 0 100 100 100 100 100 57 0
September 25, 2007 100 100 100 63 0 0 0 100 100 100 100 84 45 0
September 25, 2008 100 100 100 34 0 0 0 100 100 100 100 67 34 0
September 25, 2009 100 100 100 8 0 0 0 100 100 100 100 53 25 0
September 25, 2010 100 100 100 0 0 0 0 100 100 100 88 41 18 0
September 25, 2011 100 100 74 0 0 0 0 100 100 100 73 32 13 0
September 25, 2012 100 100 30 0 0 0 0 100 100 100 54 22 6 0
September 25, 2013 100 100 10 0 0 0 0 100 100 100 44 17 3 0
September 25, 2014 100 100 0 0 0 0 0 100 100 94 36 13 0 0
September 25, 2015 100 100 0 0 0 0 0 100 100 81 30 8 0 0
September 25, 2016 100 100 0 0 0 0 0 100 100 69 24 5 0 0
September 25, 2017 100 91 0 0 0 0 0 100 100 59 19 2 0 0
September 25, 2018 100 67 0 0 0 0 0 100 100 50 15 0 0 0
September 25, 2019 100 44 0 0 0 0 0 100 100 42 11 0 0 0
September 25, 2020 100 20 0 0 0 0 0 100 100 34 7 0 0 0
September 25, 2021 100 0 0 0 0 0 0 100 98 27 4 0 0 0
September 25, 2022 100 0 0 0 0 0 0 100 80 21 1 0 0 0
September 25, 2023 100 0 0 0 0 0 0 100 63 16 0 0 0 0
September 25, 2024 100 0 0 0 0 0 0 100 45 9 0 0 0 0
September 25, 2025 22 0 0 0 0 0 0 100 28 3 0 0 0 0
September 25, 2026 0 0 0 0 0 0 0 48 9 0 0 0 0 0
September 25, 2027 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Avg Life(1) 27.7 21.8 14.7 10.6 7.0 5.0 2.4 29.0 26.8 21.6 16.6 13.0 9.9 2.8
</TABLE>
- -----------------------------
(1) The weighted average life of the Offered 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 Offered
Certificate Principal Balance for such Class of Offered Certificate. The
weighted average life of (i) the Fixed Rate Group Certificates is to the
maturity of the related Certificates, and (ii) the Adjustable Rate Group
Certificates is to the Auction Sale Bid Date, which is the date upon
which the Outstanding Certificate Principal Balance related to such
Mortgage Loan Group has declined to 10% or less of the Original
Certificate Principal Balance related to such Mortgage Loan Group.
S-70
<PAGE> 75
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
CLASS A-9 CLASS A-10
Payment Date 0% 25% 50% 75% 100% 125% 200% 0% 10% 15% 20% 25% 30% 40%
-- --- --- --- ---- ---- ---- -- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Balance 100 100 100 100 100 100 100 100 100 100 100 100 100 100
September 25, 1998 100 100 100 100 100 100 100 96 84 78 72 66 60 48
September 25, 1999 100 100 100 100 100 100 100 96 73 62 52 42 34 18
September 25, 2000 100 100 100 100 100 100 99 95 62 48 36 25 15 0
September 25, 2001 99 97 93 90 89 90 99 94 53 37 28 22 15 0
September 25, 2002 99 93 87 82 80 79 69 94 45 31 23 16 12 0
September 25, 2003 97 87 76 71 66 62 41 93 37 26 18 12 8 0
September 25, 2004 95 80 66 60 52 46 24 92 32 22 14 9 0 0
September 25, 2005 89 60 46 34 25 19 14 91 29 18 11 0 0 0
September 25, 2006 83 44 31 20 12 7 6 89 26 15 9 0 0 0
September 25, 2007 76 32 21 11 6 3 1 88 23 13 0 0 0 0
September 25, 2008 69 24 14 6 3 1 0 86 20 11 0 0 0 0
September 25, 2009 61 18 9 3 1 0 0 85 18 9 0 0 0 0
September 25, 2010 53 14 6 2 1 0 0 83 16 8 0 0 0 0
September 25, 2011 46 11 4 1 0 0 0 80 14 0 0 0 0 0
September 25, 2012 24 6 2 0 0 0 0 78 12 0 0 0 0 0
September 25, 2013 21 4 1 0 0 0 0 75 11 0 0 0 0 0
September 25, 2014 18 3 1 0 0 0 0 72 9 0 0 0 0 0
September 25, 2015 15 3 0 0 0 0 0 68 8 0 0 0 0 0
September 25, 2016 12 2 0 0 0 0 0 64 0 0 0 0 0 0
September 25, 2017 9 1 0 0 0 0 0 60 0 0 0 0 0 0
September 25, 2018 7 1 0 0 0 0 0 55 0 0 0 0 0 0
September 25, 2019 6 1 0 0 0 0 0 49 0 0 0 0 0 0
September 25, 2020 4 0 0 0 0 0 0 43 0 0 0 0 0 0
September 25, 2021 3 0 0 0 0 0 0 36 0 0 0 0 0 0
September 25, 2022 2 0 0 0 0 0 0 31 0 0 0 0 0 0
September 25, 2023 1 0 0 0 0 0 0 26 0 0 0 0 0 0
September 25, 2024 0 0 0 0 0 0 0 20 0 0 0 0 0 0
September 25, 2025 0 0 0 0 0 0 0 13 0 0 0 0 0 0
September 25, 2026 0 0 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2027 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Avg Life(1) 13.5 9.4 8.1 7.3 6.9 6.6 6.1 20.1 6.3 4.3 3.2 2.5 2.0 1.2
</TABLE>
<TABLE>
<CAPTION>
CLASS M-1F CLASS M-1A
Payment Date 0% 25% 50% 75% 100% 125% 200% 0% 10% 15% 20% 25% 30% 40%
-- --- --- --- ---- ---- ---- -- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Balance 100 100 100 100 100 100 100 100 100 100 100 100 100 100
September 25, 1998 100 100 100 100 100 100 100 100 100 100 100 100 100 100
September 25, 1999 100 100 100 100 100 100 100 100 100 100 100 100 100 100
September 25, 2000 100 100 100 100 100 100 100 100 100 100 100 100 100 100
September 25, 2001 100 100 100 100 84 66 56 100 100 100 80 62 60 100
September 25, 2002 100 100 100 88 66 49 17 100 100 86 64 46 33 0
September 25, 2003 100 100 100 74 52 36 10 100 100 73 51 34 23 0
September 25, 2004 100 100 91 62 41 27 6 100 92 61 40 26 0 0
September 25, 2005 100 100 80 52 32 20 1 100 82 52 32 0 0 0
September 25, 2006 100 100 71 43 25 14 0 100 73 44 25 0 0 0
September 25, 2007 100 100 62 36 20 11 0 100 65 37 0 0 0 0
September 25, 2008 100 97 54 30 15 8 0 100 57 31 0 0 0 0
September 25, 2009 100 89 48 24 12 6 0 100 51 26 0 0 0 0
September 25, 2010 100 82 41 20 9 3 0 100 45 21 0 0 0 0
September 25, 2011 100 75 36 16 7 0 0 100 40 0 0 0 0 0
September 25, 2012 100 61 28 12 5 0 0 100 35 0 0 0 0 0
September 25, 2013 100 56 24 10 2 0 0 100 30 0 0 0 0 0
September 25, 2014 100 52 21 8 0 0 0 100 27 0 0 0 0 0
September 25, 2015 100 47 18 7 0 0 0 100 23 0 0 0 0 0
September 25, 2016 100 42 15 5 0 0 0 100 0 0 0 0 0 0
September 25, 2017 100 38 13 3 0 0 0 100 0 0 0 0 0 0
September 25, 2018 98 34 11 1 0 0 0 100 0 0 0 0 0 0
September 25, 2019 90 30 9 0 0 0 0 100 0 0 0 0 0 0
September 25, 2020 82 26 8 0 0 0 0 100 0 0 0 0 0 0
September 25, 2021 73 22 6 0 0 0 0 100 0 0 0 0 0 0
September 25, 2022 63 18 5 0 0 0 0 87 0 0 0 0 0 0
September 25, 2023 52 14 1 0 0 0 0 73 0 0 0 0 0 0
September 25, 2024 40 10 0 0 0 0 0 56 0 0 0 0 0 0
September 25, 2025 26 6 0 0 0 0 0 38 0 0 0 0 0 0
September 25, 2026 11 0 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2027 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Avg Life(1) 25.9 18.6 13.0 9.5 7.3 5.9 4.5 27.2 12.8 8.8 6.5 5.3 4.7 4.4
</TABLE>
- -----------------------------
(1) The weighted average life of the Offered 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 Offered
Certificate Principal Balance for such Class of Offered Certificate. The
weighted average life of (i) the Fixed Rate Group Certificates is to the
maturity of the related Certificates, and (ii) the Adjustable Rate Group
Certificates is to the Auction Sale Bid Date, which is the date upon
which the Outstanding Certificate Principal Balance related to such
Mortgage Loan Group has declined to 10% or less of the Original
Certificate Principal Balance related to such Mortgage Loan Group.
S-71
<PAGE> 76
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
<TABLE>
<CAPTION>
CLASS M-2F CLASS M-2A
Payment Date 0% 25% 50% 75% 100% 125% 200% 0% 10% 15% 20 25% 30% 40%
-- --- --- --- ---- ---- ---- -- --- --- -- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Balance 100 100 100 100 100 100 100 100 100 100 100 100 100 100
September 25, 1998 100 100 100 100 100 100 100 100 100 100 100 100 100 100
September 25, 1999 100 100 100 100 100 100 100 100 100 100 100 100 100 100
September 25, 2000 100 100 100 100 100 100 100 100 100 100 100 100 100 100
September 25, 2001 100 100 100 100 84 66 29 100 100 100 80 62 47 48
September 25, 2002 100 100 100 88 66 49 17 100 100 86 64 46 33 0
September 25, 2003 100 100 100 74 52 36 10 100 100 73 51 34 23 0
September 25, 2004 100 100 91 62 41 27 3 100 92 61 40 26 0 0
September 25, 2005 100 100 80 52 32 20 0 100 82 52 32 0 0 0
September 25, 2006 100 100 71 43 25 14 0 100 73 44 25 0 0 0
September 25, 2007 100 100 62 36 20 11 0 100 65 37 0 0 0 0
September 25, 2008 100 97 54 30 15 7 0 100 57 31 0 0 0 0
September 25, 2009 100 89 48 24 12 2 0 100 51 26 0 0 0 0
September 25, 2010 100 82 41 20 9 0 0 100 45 21 0 0 0 0
September 25, 2011 100 75 36 16 6 0 0 100 40 0 0 0 0 0
September 25, 2012 100 61 28 12 1 0 0 100 35 0 0 0 0 0
September 25, 2013 100 56 24 10 0 0 0 100 30 0 0 0 0 0
September 25, 2014 100 52 21 8 0 0 0 100 27 0 0 0 0 0
September 25, 2015 100 47 18 5 0 0 0 100 23 0 0 0 0 0
September 25, 2016 100 42 15 2 0 0 0 100 0 0 0 0 0 0
September 25, 2017 100 38 13 0 0 0 0 100 0 0 0 0 0 0
September 25, 2018 98 34 11 0 0 0 0 100 0 0 0 0 0 0
September 25, 2019 90 30 9 0 0 0 0 100 0 0 0 0 0 0
September 25, 2020 82 26 7 0 0 0 0 100 0 0 0 0 0 0
September 25, 2021 73 22 3 0 0 0 0 100 0 0 0 0 0 0
September 25, 2022 63 18 0 0 0 0 0 87 0 0 0 0 0 0
September 25, 2023 52 14 0 0 0 0 0 73 0 0 0 0 0 0
September 25, 2024 40 10 0 0 0 0 0 56 0 0 0 0 0 0
September 25, 2025 26 4 0 0 0 0 0 38 0 0 0 0 0 0
September 25, 2026 11 0 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2027 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Avg Life(1) 25.9 18.5 12.9 9.4 7.2 5.8 4.2 27.2 12.8 8.8 6.5 5.2 4.5 4.1
</TABLE>
<TABLE>
<CAPTION>
CLASS B-1F CLASS B-1A
Payment Date 0% 25% 50% 75% 100% 125% 200% 0% 10% 15% 20% 25% 30% 40%
-- --- --- --- ---- ---- ---- -- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Balance 100 100 100 100 100 100 100 100 100 100 100 100 100 100
September 25, 1998 100 100 100 100 100 100 100 100 100 100 100 100 100 100
September 25, 1999 100 100 100 100 100 100 100 100 100 100 100 100 100 100
September 25, 2000 100 100 100 100 100 100 100 100 100 100 100 100 100 100
September 25, 2001 100 100 100 100 84 66 29 100 100 100 80 62 47 26
September 25, 2002 100 100 100 88 66 49 15 100 100 86 64 46 33 0
September 25, 2003 100 100 100 74 52 36 4 100 100 73 51 34 23 0
September 25, 2004 100 100 91 62 41 27 0 100 92 61 40 26 0 0
September 25, 2005 100 100 80 52 32 19 0 100 82 52 32 0 0 0
September 25, 2006 100 100 71 43 25 10 0 100 73 44 25 0 0 0
September 25, 2007 100 100 62 36 19 4 0 100 65 37 0 0 0 0
September 25, 2008 100 97 54 30 12 0 0 100 57 31 0 0 0 0
September 25, 2009 100 89 48 24 6 0 0 100 51 26 0 0 0 0
September 25, 2010 100 82 41 19 2 0 0 100 45 21 0 0 0 0
September 25, 2011 100 75 36 13 0 0 0 100 40 0 0 0 0 0
September 25, 2012 100 61 28 6 0 0 0 100 35 0 0 0 0 0
September 25, 2013 100 56 24 3 0 0 0 100 30 0 0 0 0 0
September 25, 2014 100 52 20 0 0 0 0 100 27 0 0 0 0 0
September 25, 2015 100 47 16 0 0 0 0 100 23 0 0 0 0 0
September 25, 2016 100 42 12 0 0 0 0 100 0 0 0 0 0 0
September 25, 2017 100 38 8 0 0 0 0 100 0 0 0 0 0 0
September 25, 2018 98 34 5 0 0 0 0 100 0 0 0 0 0 0
September 25, 2019 90 30 2 0 0 0 0 100 0 0 0 0 0 0
September 25, 2020 82 26 0 0 0 0 0 100 0 0 0 0 0 0
September 25, 2021 73 22 0 0 0 0 0 100 0 0 0 0 0 0
September 25, 2022 63 15 0 0 0 0 0 87 0 0 0 0 0 0
September 25, 2023 52 9 0 0 0 0 0 73 0 0 0 0 0 0
September 25, 2024 40 3 0 0 0 0 0 56 0 0 0 0 0 0
September 25, 2025 26 0 0 0 0 0 0 38 0 0 0 0 0 0
September 25, 2026 4 0 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2027 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Avg Life(1) 25.9 18.6 12.5 9.1 7.0 5.6 3.9 27.2 12.8 8.8 6.5 5.2 4.4 3.7
</TABLE>
- -----------------------------
(1) The weighted average life of the Offered 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 Offered
Certificate Principal Balance for such Class of Offered Certificate. The
weighted average life of (i) the Fixed Rate Group Certificates is to the
maturity of the related Certificates, and (ii) the Adjustable Rate Group
Certificates is to the Auction Sale Bid Date, which is the date upon
which the Outstanding Certificate Principal Balance related to such
Mortgage Loan Group has declined to 10% or less of the Original
Certificate Principal Balance related to such Mortgage Loan Group.
S-72
<PAGE> 77
PAYMENT LAG FEATURE OF FIXED RATE GROUP CERTIFICATES
Pursuant to the Pooling and Servicing Agreement, an amount equal to
Mortgagor payments with respect to each Mortgage Loan in the Fixed Rate Group
(net of the Servicing Fee) received by the Servicer during each Remittance
Period is to be remitted to the Trustee on or prior to the related Monthly
Remittance Date, which does not occur until the month following the month of
receipt. As a result, the monthly distributions to the Owners of the Fixed
Rate Group Certificates generally reflect an Accrual Period reflecting Mortgagor
payments during the prior calendar month, and the first Payment Date will not
occur until October 27, 1997. Thus, the effective yield to the Owners of the
Fixed Rate Group Certificates will be below that otherwise produced by the
related Pass-Through Rate and purchase price because distributions to Owners of
the Fixed Rate Group Certificates in respect of any given month will not be made
until on or after the 25th day of the following month.
THE ORIGINATORS
The Mortgage Loan Pool consists of Initial Mortgage Loans purchased or
originated by sixty-seven (67) originators (the "Originators") with aggregate
outstanding Loan Balances of $812,653,859.64. Option One has originated 56.55%
of the Initial Mortgage Loans in the Adjustable Rate Group and 19.47% of the
Initial Mortgage Loans in the Fixed Rate Group. ARMC has originated 16.32% of
the Initial Mortgage Loans in the Adjustable Rate Group and 29.03% of the
Initial Mortgage Loans in the Fixed Rate Group. New Century has originated
12.91% of the Initial Mortgage Loans in the Adjustable Rate Group and 21.00% of
the Initial Mortgage Loans in the Fixed Rate Group. BNC has originated 12.44%
of the Initial Mortgage Loans in the Fixed Rate Group. It is the Depositor's
intent to purchase all of the Subsequent Mortgage Loans from the Originators
from whom the Initial Mortgage Loans were purchased although the Pooling and
Servicing Agreement does not prohibit the Depositor from purchasing Subsequent
Mortgage Loans from other mortgage loan originators.
ARMC is a wholly-owned subsidiary of the Seller.
FORMATION OF THE TRUST AND TRUST PROPERTY
AMRESCO Residential Securities Corporation Mortgage Loan Trust 1997-3
(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 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 the Initial Mortgage Loans and on or prior to the related Subsequent Cut-Off
Date with respect to the Subsequent Mortgage Loans) 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 , the Upper-Tier Distribution Accounts (as defined
in the Pooling and Servicing Agreement) 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) 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 (d) certain rights of
the Seller under the Transfer Agreements (collectively, the "Trust Estate").
The Offered 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
S-73
<PAGE> 78
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.
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
Offered 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
Offered 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 Offered Certificates. In the event Initial Mortgage Loans are
removed from or added to the pool as set forth in the preceding paragraph, such
removal or addition will be noted in the current report on Form 8-K. A
description of the pool of Mortgage Loans, as of the Closing Date will be filed
in a current report on Form 8-K within fifteen days after the initial issuance
of the Offered Certificates. A current report on Form 8-K will also be filed
within fifteen days of the end of the Funding Period reflecting the additions
to the Trust.
DESCRIPTION OF THE OFFERED CERTIFICATES
GENERAL
Each Certificate will represent certain undivided, fractional ownership
interests in the Trust Estate created and held pursuant to the Pooling and
Servicing Agreement, subject to the limits and the priority of distribution
described therein.
As described in "The Mortgage Loan Pool" herein, the Mortgage Loan Pool
is divided into two Mortgage Loan Groups (each a "Mortgage Loan Group"), the
Fixed Rate Group, which contains fixed rate Mortgage Loans and 5/25 Loans, and
the Adjustable Rate Group, which contains only adjustable rate Mortgage Loans
(including the 2/28 Loans and the 3/27 Loans).
PAYMENT DATES
On each Payment Date, the Owners of each Class of the Offered
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 Offered Certificates is
reduced to zero, and to the extent funds are available therefor, the related
Current Interest and Interest Carry Forward Amount and the portion of the
Principal Distribution Amount, if any, allocated therefor as of such Payment
Date, allocated among the Classes of Certificates as described below.
Distributions will be made in immediately available funds to Owners of Offered
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 Offered Certificates--Book Entry Registration of the Offered
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.
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Each Owner of record of the related Class of the Offered 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 an Offered
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 Closing
Date by the Certificate Principal Balance for the related Class of the Offered
Certificates as of the Closing 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 Amount, (ii) the related Capitalized Interest Requirement and
any Pre-Funding Account Earnings 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 on
the Pre-Funding Payment Date.
The Pooling and Servicing Agreement establishes a pass-through rate on
each Class of the Certificates (each, a "Pass-Through Rate") as set forth in
the Summary of Terms herein.
Interest: On each Payment Date the Interest Remittance Amount with
respect to each Mortgage Loan Group will be distributed in the following order
of priority:
First, to the Trustee, the Trustee Fee;
Second, to the Owners of the Class A Certificates related to such
Mortgage Loan Group, the related Current Interest plus the Interest
Carry Forward Amount with respect to each Class of Class A Certificates
without any priority among such Class A Certificates; provided, that if
the Interest Amount Available is not sufficient to make a full
distribution of interest with respect to all Classes of the related
Class A Certificates, the Interest Amount Available will be distributed
among the outstanding related Classes of Class A Certificates pro rata
based on the aggregate amount of interest due on each such Class, and
the amount of the shortfall will be carried forward with accrued
interest;
Third, to the extent of the Interest Amount Available with respect to
such Mortgage Loan Group then remaining, to the Owners of the Class M-1
Certificates related to such Mortgage Loan Group, the related Current
Interest;
Fourth, to the extent of the Interest Amount Available with respect to
such Mortgage Loan Group then remaining, to the Owners of the Class M-2
Certificates related to such Mortgage Loan Group, the related Current
Interest;
Fifth, to the extent of the Interest Amount Available with respect to
such Mortgage Loan Group then remaining, to the Owners of the Class B-1
Certificates related to such Mortgage Loan Group, the related Current
Interest;
Sixth, only with respect to the Fixed Rate Group, to the extent of the
Interest Amount Available then remaining, to the Owners of the Class B-2F
Certificates, the related Current Interest;
Seventh, to the extent of the Interest Amount Available with respect to
such Mortgage Loan Group then remaining, to the Owners of the Class C-IO
Certificates related to such Mortgage Loan Group, the related Current
Interest; and
Eighth, the Monthly Excess Interest Amount with respect to such Mortgage
Loan Group shall be applied as described below under "Credit
Enhancement -- Application of Monthly Excess Cashflow Amounts."
Principal: With respect to each Mortgage Loan Group and on each Payment
Date (a) before the Stepdown Date or (b) with respect to which a Trigger Event
is in effect, Owners of the Class A Certificates will be entitled to receive
payment of 100% of the Principal Distribution Amount with respect to such
Mortgage Loan Group for such Payment Date as follows: in the case of the Fixed
Rate Group, first, to the Owners of the Class A-9 Certificates, the
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Class A-9 Lockout Distribution Amount and then sequentially to the Owners of
each Class of the Class A Certificates related to the Fixed Rate Group in the
order of their numerical Class designation beginning with the Class A-1
Certificates until the Certificate Principal Balance of each Class of Class A
Certificates related to the Fixed Rate Group has been reduced to zero and in
the case of the Adjustable Rate Group to the Owners of the Class A-10
Certificates until the Class A-10 Certificate Principal Balance has been
reduced to zero.
With respect to each Mortgage Loan Group and on each Payment Date (a) on
or after the related Stepdown Date and (b) as long as a Trigger Event is not in
effect, the Owners of the Class A Certificates and the Subordinate Certificates
(other than the Class C-IO Certificates) will be entitled to receive payments
of principal, in the order of priority, in the amounts set forth below and to
the extent of the Principal Distribution Amount with respect to such Mortgage
Loan Group as follows:
First, in the case of the Fixed Rate Group, the lesser of (x) the
Principal Distribution Amount with respect to such Mortgage Loan Group
and (y) the Class A Principal Distribution Amount with respect to such
Mortgage Loan Group shall be distributed to the Owners of the Class A-9
Certificates, in an amount equal to the Class A-9 Lockout Distribution
Amount, with the remainder paid sequentially to the Owners of each Class
of the Class A Certificates related to the Fixed Rate Group in the order
of their numerical Class designation beginning with the Class A-1
Certificates until the Certificate Principal Balance of each Class of
Class A Certificates related to the Fixed Rate Group has been reduced to
zero; and in the case of the Adjustable Rate Group, the lesser of (x)
the Principal Distribution Amount with respect to such Mortgage Loan
Group and (y) the Class A Principal Distribution Amount with respect to
such Mortgage Loan Group shall be distributed to the Owners of the Class
A-10 Certificates until the Class A-10 Certificate Principal Balance has
been reduced to zero;
Second, the lesser of (x) the excess of (i) the Principal Distribution
Amount with respect to such Mortgage Loan Group over (ii) the amount
distributed to the Owners of the related Class A Certificates in clause
First above and (y) the Class M-1 Principal Distribution Amount with
respect to such Mortgage Loan Group shall be distributed to the Owners
of the related Class M-1 Certificates, until the related Class M-1
Certificate Principal Balance has been reduced to zero;
Third, the lesser of (x) the excess of (i) the Principal Distribution
Amount with respect to such Mortgage Loan Group over (ii) the sum of the
amount distributed to the Owners of the related Class A Certificates in
clause First above and the amount distributed to the Owners of the
related Class M-1 Certificates in clause Second above and (y) the Class
M-2 Principal Distribution Amount with respect to such Mortgage Loan
Group, shall be distributed to the Owners of the related Class M-2
Certificates, until the related Class M-2 Certificate Principal Balance
has been reduced to zero;
Fourth, the lesser of (x) the excess of (i) the Principal Distribution
Amount with respect to such Mortgage Loan Group over (ii) the sum of the
amount distributed to the Owners of the related Class A Certificates
pursuant to clause First above, the amount distributed to the Owners of
the related Class M-1 Certificates pursuant to clause Second above and
the amount distributed to the Owners of the related Class M-2
Certificates pursuant to clause Third above and (y) the Class B-1
Principal Distribution Amount with respect to such Mortgage Loan Group,
shall be distributed to the Owners of the related Class B-1 Certificates,
until the related Class B-1 Certificate Principal Balance has been
reduced to zero;
Fifth, the lesser of (x) the excess of (i) the Principal Distribution
Amount with respect to the Fixed Rate Group over (ii) the sum of the
amount distributed to the Owners of the related Class A Certificates
pursuant to clause First above, the amount distributed to the Owners of
the Class M-1F Certificates pursuant to clause Second above, the amount
distributed to the Owners of the Class M-2F Certificates pursuant to
clause Third above, the amount distributed to the Owners of the Class
B-1F Certificates pursuant to clause Fourth above and (y) the Class B-2F
Principal Distribution Amount shall be distributed to the Owners of the
Class B-2F Certificates, until the Class B-2F Certificates Principal
Balance has been reduced to zero; and
Sixth, any amount of the Principal Remittance Amount with respect to
such Mortgage Loan Group remaining after making all of the distributions
in clauses First, Second, Third, Fourth and Fifth above shall be included
as part of the Monthly Excess Cashflow Amount with respect to such
Mortgage Loan Group and shall be applied as described below under "Credit
Enhancement -- Application of Monthly Excess Cashflow Amounts."
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Notwithstanding the foregoing, in the event that the Certificate
Principal Balance of all of the Class A Certificates relating to a Group have
been reduced to zero, all amounts of principal that would have been distributed
to such Class A Certificates will be distributed to the related Subordinate
Certificates of such Group sequentially in the following order: Class M-1,
Class M-2, Class B-1 and, in respect of the Fixed Rate Group, the Class B-2F
Certificates. Similarly, if the Certificate Principal Balance of the Class M-1
Certificates has been reduced to zero, all amounts of principal that would have
been distributed to such Class M-1 Certificates will be distributed to the
related Class M-2, Class B-1 and, in respect of the Fixed Rate Group, the Class
B-2F Certificates in that order. If the Certificate Principal Balance of the
Class M-2 Certificates has been reduced to zero, all amounts of principal that
would have been distributed on such Class M-2 Certificates will be distributed
to the related Class B-1 Certificates and, in respect of the Fixed Rate Group,
the Class B-2F Certificates in that order. Finally, if the Class B-1F
Certificate Principal Balance has been reduced to zero, all amounts of principal
that would have been distributed on the Class B-1F Certificates will be
distributed to the Class B-2F Certificates.
The Class A Certificates in the Fixed Rate Group (other than the Class
A-9 Certificates) are "sequential pay" classes such that the Owners of the Class
A-8 Certificates will receive no payments of principal until the Class A-7
Certificate Principal Balance is reduced to zero, the Owners of the Class A-7
Certificates will receive no payments of principal until the Class A-6
Certificate Principal Balance is 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; provided, however,
that on any Payment Date on which the sum of the Certificate Principal Balance
of the Subordinate Certificates in the Fixed Rate Group and the
Overcollateralization Amount is zero, any amounts of principal payable to the
Owners of the Class A Certificates in the Fixed Rate Group on such Payment Date
shall be distributed pro rata and not sequentially.
The Class C-IO Certificates are interest-only Certificates and are not
entitled to receive distributions of principal.
The Owners of the Class A-9 Certificates are entitled to receive payments
of the Class A-9 Lockout Distribution Amount specified herein; provided, that if
on any Payment Date the Class A-8 Certificate Principal Balance is zero, the
Owners of the Class A-9 Certificates will be entitled to receive the entire
Class A Principal Distribution Amount for such Payment Date.
Each Owner of Class A Certificates and Subordinated Certificates 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.
PRE-FUNDING ACCOUNT
On the Closing Date, the Original Pre-Funded Amount will be deposited in
the Pre-Funding Account, which account shall be in the name of and maintained
by the Trustee and shall be part of the Trust Estate. During the Funding
Period, the Pre-Funded Amount will be maintained in the Pre-Funding Account.
The Original Pre-Funded Amount will be reduced during the Funding Period by the
amount thereof used to purchase Subsequent Mortgage Loans in accordance with
the Pooling and Servicing Agreement. Any Pre-Funded Amount remaining at the
end of the Funding Period for the related Mortgage Loan Group will be
distributed to the Owners of the related Class or Classes of Class A
Certificates then entitled to receive payments of principal on the Payment Date
after the expiration of the Funding Period in reduction of the Class A
Certificate Principal Balance of such Owner's Certificates, thus resulting in a
principal prepayment of such Class of Class A Certificates.
Amounts on deposit in the Pre-Funding Account will be invested in the
investments permitted by the Pooling and Servicing Agreement (the "Eligible
Investments"). All interest and any other investment earnings on amounts on
deposit in the Pre-Funding Account will be deposited in the Capitalized
Interest Account prior to each Payment Date during the related Funding Period.
The Pre-Funding Account will not be an asset of the REMIC.
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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 Estate. The amount on deposit in the
Capitalized Interest Account, including reinvestment income thereon and amounts
deposited thereto from the Pre-Funding Account, will be used by the Trustee to
fund the excess, if any, of (i) the sum of the amount of interest accruing at
the weighted average Pass-Through Rate in the case of the Fixed Rate Group
Certificates and the applicable Pass-Through Rate on the Adjustable Rate Group
Certificates on the amount by which the aggregate Certificate Principal Balance
of the related Class(es) of Offered Certificates exceeds the aggregate Loan
Balance of the Mortgage Loans in the related Mortgage Loan Group plus the
Trustee Fee accruing on such excess balance over (ii) the amount of any
reinvestment income on monies on deposit in the Pre-Funding Account; such
amounts on deposit will be so applied by the Trustee on the October and
November 1997 Payment Date to fund such excess, if any. Any amounts remaining
in the Capitalized Interest Account at the end of the applicable Funding Period
and not needed for such purpose will be paid to the Depositor and will not
thereafter be available for distribution to the Owners of the Class A
Certificates.
Amounts on deposit in the Capitalized Interest Account will be invested
in Eligible Investments. The Capitalized Interest Account will not be an asset
of either the Upper-Tier REMIC or the Lower-Tier REMIC.
CALCULATION OF ONE-MONTH LIBOR
For the October 1997 Payment Date, the Trustee will determine One-Month
LIBOR on the second Business Day prior to the Closing Date. Thereafter,
beginning with the Payment Date in November 1997, on the second Business Day
prior to each Payment Date (each a "One-Month LIBOR Determination Date"), the
Trustee will determine One-Month LIBOR for the next Accrual Period for each
Class of the Adjustable Rate Group Certificates.
"One-Month LIBOR" means, as of any One-Month LIBOR Determination Date,
the rate for deposits in United States dollars for a period equal to the
relevant Accrual Period (commencing on the first day of such Accrual Period)
which 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 OFFERED CERTIFICATES
The Offered 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 Offered
Certificates which in the aggregate equal the principal balance of such Offered
Certificates and will initially be registered in the name of Cede & Co., the
nominee of DTC. Cedel and Euroclear will hold omnibus positions on behalf of
their Participants through customers' securities accounts in Cedel's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank will act as depositary for Cedel and The
Chase Manhattan Bank will act as depositary for Euroclear (in such capacities,
individually the "Relevant Depositary" and collectively the "European
Depositaries"). Investors may hold
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such beneficial interests in the Book-Entry Certificates in minimum
denominations representing principal amounts of $1,000 and in integral
multiples in excess thereof. Except as described below, no Beneficial Owner
will be entitled to receive a physical certificate representing such
Certificate (a "Definitive Certificate"). Unless and until Definitive
Certificates are issued, it is anticipated that the only "Owner" of such
Book-Entry Certificates will be Cede & Co., as nominee of DTC. Beneficial
Owners will not be Owners as that term is used in the Pooling and Servicing
Agreement. Beneficial Owners are only permitted to exercise their rights
indirectly through Participants and DTC.
The Beneficial Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary (each, a "Financial Intermediary") that maintains
the Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a DTC Participant and on
the records of Cedel or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Book-Entry Certificates from the Trustee through DTC and DTC
Participants. While such Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to such Certificates and is required to receive and transmit
distributions of principal of, and interest on, such Certificates.
Participants and indirect Participants with whom Beneficial Owners have
accounts with respect to Book-Entry Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Beneficial Owners. Accordingly, although Beneficial Owners
will not possess certificates, the Rules provide a mechanism by which
Beneficial Owners will receive distributions and will be able to transfer their
interest.
Beneficial Owners will not receive or be entitled to receive
certificates representing their respective interests in the Offered
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 Offered Certificates only through
Participants and indirect Participants by instructing such Participants and
indirect Participants to transfer such Offered Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Offered
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 Offered 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
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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
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 Bank, S.A. was incorporated in 1970 as a limited company under
Luxembourg law. Cedel is owned by banks, securities dealers and financial
institutions, and currently has about 100 shareholders, including United States
financial institutions or their subsidiaries. No single entity may own more
than five percent of Cedel's stock.
Cedel is registered as a bank in Luxembourg, and as such is subject to
regulation by the Institute Monetaire Luxembourgeois, "IML," the Luxembourg
Monetary Authority, which supervises Luxembourg banks.
Cedel holds securities for its participant organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes
in accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 28
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to Cedel is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Cedel Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for Participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including
United States dollars. Euroclear includes various other services, including
securities lending and borrowing and interfaces with domestic markets in
several countries generally similar to the arrangements for cross-market
transfers with DTC described above. Euroclear is operated by the Brussels,
Belgium office of Morgan Guaranty Trust Company of New York (the "Euroclear
Operator"), under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the "Cooperative"). All operations are conducted by
the Euroclear Operator, and all Euroclear Securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within Euroclear,
withdrawals of securities and cash from Euroclear, and receipts of payments
with respect to securities in Euroclear. All securities in Euroclear are held
on a fungible basis without attribution of specific
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certificates to specific securities clearance accounts. The Euroclear Operator
acts under the Terms and Conditions only on behalf of Euroclear Participants,
and has no record of or relationship with persons holding through Euroclear
Participants.
Distributions on the Book-Entry Certificates will be made on each
Payment Date by the Trustee to DTC. DTC will be responsible for crediting the
amount of such payments to the accounts of the applicable DTC Participants in
accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing such payment to the Beneficial Owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be
responsible for disbursing funds to the Beneficial Owners of the Book-Entry
Certificates that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Trustee to Cede. Distributions with respect
to Certificates held through Cedel or Euroclear will be credited to the cash
accounts of Cedel Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. Because DTC can only act
on behalf of Financial Intermediaries, the ability of a Beneficial Owner to
pledge Book-Entry Certificates to persons or entities that do not participate
in the Depository system, or otherwise take actions in respect of such
Book-Entry Certificates, may be limited due to the lack of physical certificates
for such Book-Entry Certificates. In addition, issuance of the Book-Entry
Certificates in book-entry form may reduce the liquidity of such Certificates
in the secondary market since certain potential investors may be unwilling to
purchase Certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust provided by the Trustee to Cede,
as nominee of DTC, may be made available to Beneficial Owners upon request, in
accordance with the rules, regulations and procedures creating and affecting
the Depository, and to the Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates of such Beneficial Owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Certificates are issued, DTC will take any action permitted to be taken by the
Owners of the Book-Entry Certificates under the Pooling and Servicing Agreement
only at the direction of one or more Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates are credited, to the extent that such
actions are taken on behalf of Financial Intermediaries whose holdings include
such Book-Entry Certificates. Cedel or the Euroclear Operator, as the case may
be, will take any action permitted to be taken by an Owner under the Pooling
and Servicing Agreement on behalf of a Cedel Participant or Euroclear
Participant only in accordance with its relevant rules and procedures and
subject to the ability of the Relevant Depositary to effect such actions on its
behalf through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Offered Certificates which conflict with
actions taken with respect to other Offered 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 Offered 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.
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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.
OTHER CERTIFICATES
The Class B-2F Certificates, the Class C-IO Certificates, the Class D
Certificates, the Class S Certificates and the Class R Certificates are not
offered hereby. The Pass-Through Rate on the Class B-2F Certificates will on
any Payment Date equal the lesser of (i) 9.25% and (ii) the weighted average
Coupon Rate of the Mortgage Loans in the Fixed Rate Group less approximately
0.50% per annum. The Class B-2F Certificate Principal Balance will be
$3,990,000. The Pass-Through Rate of the Class C-FIO Certificates is 15% per
annum. Interest will be calculated on the Class C-FIO Certificates on each
Payment Date on the basis of a fixed Notional Principal Amount equal to (i) for
the period from the Closing Date through the Payment Date in September 1999,
the sum of the original Class M-1F Certificate Principal Balance and the
original Class M-2F Certificate Principal Balance ($26,600,000) and (ii)
thereafter, zero, with the result that the Owners of the Class C-FIO
Certificates will receive no distributions after the Payment Date in September
1999. The Pass-Through Rate of the Class C-AIO Certificates is 6.82% per
annum. Interest will be calculated on the Class C-AIO Certificates on each
Payment Date on the basis of a fixed Notional Principal Amount equal to (i) for
the period from the Closing Date through the Payment Date in September 1999,
the sum of the original Class M-2A Certificate Principal Balance and the
original Class B-1A Certificate Principal Balance ($75,240,000) and (ii)
thereafter, zero, with the result that the Owners of the Class C-AIO
Certificates will receive no distribution after the Payment Date in September
1999. The Class C-IO Certificates will not be entitled to distributions of
principal. The Class D Certificates, the Class S Certificates and the Class R
Certificates will not have Certificate Principal Balances or Pass-Through
Rates.
CREDIT ENHANCEMENT
The Credit Enhancement provided for the benefit of the Owners of the
Class A Certificates consists of the subordination of the related Subordinate
Certificates and the Private Certificates (other than the Class S
Certificates), the priority of application of Realized Losses, the application
of Monthly Excess Cashflow Amounts and the crosscollateralization feature of
the Trust.
SUBORDINATION OF SUBORDINATE CERTIFICATES AND CERTAIN OF THE PRIVATE
CERTIFICATES
The rights of the Owners of the Subordinate Certificates and certain of
the Private Certificates to receive distributions with respect to the Mortgage
Loans in a particular Mortgage Loan Group will be subordinated, to the extent
described herein, to such rights of the Owners of the Class A Certificates
related to such Mortgage Loan Group. This subordination is intended to enhance
the likelihood of regular receipt by the Owners of the Class A Certificates of
the full amount of their scheduled monthly payment of interest and principal
and to afford such Owners protection against Realized Losses allocated against
such Mortgage Loan Group.
The protection afforded to the Owners of the Class A Certificates by
means of the subordination of the related Subordinate Certificates and the
Private Certificates (other than the Class S Certificates) will be accomplished
by the preferential right of the Owners of the Class A Certificates to receive,
prior to any distribution being made on a Payment Date in respect of such
Subordinate Certificates and such Private Certificates (other than the Class S
Certificates), the amounts of interest due them and principal available for
distribution on such Payment Date, and, if necessary, by the right of the
Owners of the Class A Certificates to receive future distributions of amounts
that would otherwise be payable to the Owners of such Subordinate Certificates
and such Private Certificates.
In addition, the rights of the Owners of the Class M-2, Class B-1 and
Private Certificates (other than the Class S Certificates) issued with respect
to a Mortgage Loan Group to receive distributions will be subordinated, to the
extent described herein, to such rights of the Owners of the related Class A
and Class M-1 Certificates. This subordination is intended to enhance the
likelihood of regular receipt by the Owners of the related Class A and Class
M-1 Certificates of the amount of interest due them and principal available for
distribution and to afford such Owners with protection against Realized Losses.
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The rights of the Owners of the Class B-1 and Private Certificates
(other than the Class S Certificates) to issued with respect to a Mortgage Loan
Group to receive distributions will be subordinated in the same manner to such
rights of the Owners of the related Class A, Class M-1 and Class M-2
Certificates and the rights of Owners of the Private Certificates (other than
the Class S Certificates) to receive distributions will be subordinated in the
same manner to such rights of the Owners of the Offered Certificates.
APPLICATION OF REALIZED LOSSES
The Pooling and Servicing Agreement provides that if a Mortgage Loan
becomes a Liquidated Loan during a Remittance Period, the Net Liquidation
Proceeds relating thereto and allocated to principal may be less than the Loan
Balance of such Mortgage Loan. The amount of such insufficiency is a "Realized
Loss". Realized Losses which occur in a Mortgage Loan Group will, in effect,
be absorbed first, by the related Private Certificates (other than the Class
B-2F Certificates, the Class C-IO Certificates and the Class S Certificates)
as a result of the application of the Monthly Excess Interest Amount to fund
such deficiency and through a reduction in the related Overcollateralization
Amount, second, in respect of the Fixed Rate Group, by the Owners of the Class
B-2F Certificates, third, by the Owners of the related Class B-1 Certificates,
fourth, by the Owners of the related Class M-2 Certificates, and, fifth, by the
Owners of the related Class M-1 Certificates.
To the extent that a Mortgage Loan Group experiences Realized Losses,
such Realized Losses will reduce the aggregate outstanding Loan Balance of the
Mortgage Loans in such Mortgage Loan Group (i.e, a reduction in the collateral
balance will occur). Since the Overcollateralization Amount with respect to a
Mortgage Loan Group is the excess, if any, of the related collateral balance
over the related Aggregate Certificate Principal Balance, Realized Losses, to
the extent experienced, will in the first instance reduce the related
Overcollateralization Amount.
The Pooling and Servicing Agreement requires that the
Overcollateralization Amount with respect to a Mortgage Loan Group be initially
increased to, and thereafter maintained at, the related Targeted
Overcollateralization Amount. This increase and subsequent maintenance is
intended to be accomplished by the application of related Monthly Excess
Interest Amounts to the funding of the related Extra Principal Distribution
Amount. Such Extra Principal Distribution Amounts, since they are funded from
interest collections on the collateral but are distributed as principal on the
related Class A Certificates and Subordinate Certificates (other than the Class
C-IO Certificates), will increase the related Overcollateralization Amount.
If, on any Payment Date after taking into account all Realized Losses
experienced during the prior Remittance Period and after taking into account
the distribution of principal (including the Extra Principal Distribution
Amount) with respect to the related Class A Certificates and Subordinate
Certificates on such Payment Date, the Aggregate Certificate Principal Balance
with respect to a Mortgage Loan Group exceeds the aggregate Loan Balance of the
Mortgage Loans in such Mortgage Loan Group as of the end of the related
Remittance Period (i.e., if the level of overcollateralization is negative),
then the Certificate Principal Balance of the related Subordinate Certificates
(other than Class C-IO Certificates) will be reduced (in effect, "written
down") such that the level of overcollateralization is zero, rather than
negative. Such a negative level of overcollateralization is an "Applied
Realized Loss Amount", which will be applied as a reduction in the Certificate
Principal Balance of the related Subordinate Certificates (other than the Class
C-IO Certificates) in reverse order of seniority (i.e., first, in respect of
the Fixed Rate Group, against the Class B-2F Certificate Principal Balance
until it is reduced to zero, then against the related Class B-1 Certificate
Principal Balance until it is reduced to zero, then against the related Class
M-2 Certificate Principal Balance until it is reduced to zero and then against
the related Class M-1 Certificate Principal Balance until it is reduced to
zero). The Pooling and Servicing Agreement does not permit the "write down" of
the Certificate Principal Balance of any Class A Certificate.
Once the Certificate Principal Balance of a Class of Subordinate
Certificates (other than the Class C-IO Certificates) has been "written down,"
the amount of such write down will no longer bear interest, nor will such
amount thereafter be "reinstated" or "written up," although the amount of such
write down may, on future Payment Dates, be paid to Owners of the Subordinate
Certificates (other than Class C-IO Certificates) which experienced the write
down, in direct order of seniority (i.e., first, the related Class M-1
Certificates, second, the related Class M-2 Certificates, third, the related
Class B-1 Certificates and, fourth, in respect of the Fixed Rate Group, the
Class B-2F Certificates). The source of funding of such payments will be the
amount, if any, of the Monthly Excess Cashflow Amount remaining on such future
Payment Dates after the funding of the Extra Principal Distribution Amount and
after the payment of Interest Carry Forward Amounts with respect to the related
Subordinate Certificates on such Payment Date.
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APPLICATION OF MONTHLY EXCESS CASHFLOW AMOUNTS
The weighted average net Coupon Rate for the Mortgage Loans in each
Mortgage Loan Group is generally expected to be higher than the weighted
average of the Pass-Through Rates on the Class A Certificates and Subordinate
Certificates related to such Mortgage Loan Group, thus generating certain
excess interest collections which, in the absence of losses will not be
necessary to fund interest distributions on the Class A Certificates and
Subordinate Certificates. The Pooling and Servicing Agreement provides that
this excess interest be applied to the extent available, to make accelerated
payments of principal (i.e., the Extra Principal Distribution Amount) to the
Class or Classes then entitled to receive distributions of principal; such
application will cause the Aggregate Certificate Principal Balance with respect
to a Mortgage Loan Group to amortize more rapidly than the Mortgage Loans in
such Mortgage Loan Group, resulting in overcollateralization. This excess
interest for a Remittance Period and with respect to a Mortgage Loan Group on
the related Payment Date is the Monthly Excess Interest Amount for such Payment
Date and Mortgage Loan Group.
The required level of overcollateralization for any Mortgage Loan Group
and Payment Date is the Targeted Overcollateralization Amount for such Mortgage
Loan Group and Payment Date. The Targeted Overcollateralization Amount is
initially (i.e., prior to the related Stepdown Date) 0.80% of the Original
Certificate Principal Balance with respect to the Fixed Rate Group and 2.40% of
the Original Certificate Principal Balance with respect to the Adjustable Rate
Group. Since the actual level of the Overcollateralization Amount with respect
to each Mortgage Loan Group is essentially zero as of the Closing Date, in the
early months of the transaction, subject to the availability of Monthly Excess
Interest Amounts, Extra Principal Distribution Amounts will be paid, with the
result that the Overcollateralization Amount with respect to each Mortgage Loan
Group will increase to the level of the related Targeted Overcollateralization
Amount.
If, once the Targeted Overcollateralization Amount with respect to each
Mortgage Loan Group has been reached, Realized Losses occur in such Mortgage
Loan Group, such Realized Losses will result in an Overcollateralization
Deficiency (since such Realized Losses reduce the Loan Balance of the related
Mortgage Loans without giving rise to a corresponding reduction of the related
Aggregate Certificate Principal Balance). The cashflow priorities of the Trust
require that, in this situation, an Extra Principal Distribution Amount be paid
(subject to the availability of any Monthly Excess Interest Amount) for the
purpose of re-establishing the Overcollateralization Amount at the
then-required Targeted Overcollateralization Amount.
On and after the Stepdown Date, the Targeted Overcollateralization
Amount with respect to the Fixed Rate Group and the Adjustable Rate Group,
respectively, is permitted to decrease or "step-down" below the 0.80% and 2.40%
levels equal to 1.60% and 4.80% of the then current aggregate outstanding Loan
Balance of the related Mortgage Loan Group (subject to a floor of $1,330,000
and $3,420,000). If the Targeted Overcollateralization Amount with respect to
each Mortgage Loan Group is permitted to "step-down" on a Payment Date, the
Pooling and Servicing Agreement permits a portion of the related Principal
Remittance Amount for such Payment Date not to be passed through as a
distribution of principal on such Payment Date. This has the effect of
decelerating the amortization of the Offered Certificates with respect to each
Mortgage Loan Group relative to the aggregate outstanding Loan Balance of the
Mortgage Loans, thereby reducing the actual level of the related
Overcollateralization Amount to the new, lower Targeted Overcollateralization
Amount. This portion of the Principal Remittance Amount not distributed as
principal on the related Certificates therefore releases overcollateralization
from the Trust with respect to the related Mortgage Loan Group. The amount of
such releases are the Overcollateralization Release Amounts. Notwithstanding
the foregoing, any reduction in the Targeted Overcollateralization Amount from
prior periods will be subject to a collateral performance test that is
described in the Pooling and Servicing Agreement.
On any Payment Date, the sum of the Monthly Excess Interest Amount (plus
any interest on the Overcollateralization Amount) and the Overcollateralization
Release Amount, if any, with respect to a Mortgage Loan Group is the Monthly
Excess Cashflow Amount, which is required to be applied in the following order
of priority on such Payment Date:
(1) to fund the Class A Interest Carry Forward Amount, if any, with
respect to the related Mortgage Loan Group;
(2) to fund the Extra Principal Distribution Amount for such Payment
Date with respect to the related Mortgage Loan Group;
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(3) to fund the Class M-1 Interest Carry Forward Amount, if any, with
respect to the related Mortgage Loan Group;
(4) to fund the Class M-1 Realized Loss Amortization Amount for such
Payment Date, with respect to the related Mortgage Loan Group;
(5) to fund the Class M-2 Interest Carry Forward Amount, if any, with
respect to the related Mortgage Loan Group;
(6) to fund the Class M-2 Realized Loss Amortization Amount for such
Payment Date, with respect to the related Mortgage Loan Group;
(7) to fund the Class B-1 Interest Carry Forward Amount, if any, with
respect to the related Mortgage Loan Group;
(8) to fund the Class B-1 Realized Loss Amortization Amount for such
Payment Date, with respect to the related Mortgage Loan Group;
(9) to fund the Class B-2F Interest Carry Forward Amount, if any,
with respect to the Fixed Rate Group;
(10) to fund the Class B-2F Realized Loss Amortization Amount for such
Payment Date, with respect to the Fixed Rate Group;
(11) to fund the Class C-IO Interest Carry Forward Amount, if any,
with respect to the related Mortgage Loan Group;
(12) in respect of Monthly Excess Cashflow Amount for the Fixed Rate
Group, to fund any amounts listed in clauses (1) through (8) and
(11) above for such Payment Date with respect to the Adjustable
Rate Group to the extent that such amounts have not been funded
in full through the application of such Mortgage Loan Group's
Monthly Excess Cashflow Amount on such Payment Date;
(13) to the Servicer to the extent of any unreimbursed Delinquency
Advances or Servicing Advances;
(14) to pay an Available Funds Cap Shortfall Amount, if any, to the
Owners of the Adjustable Rate Group Certificates on a pro rata
basis among such Owners;
(15) to fund a distribution to Owners of the Class D Certificates; and
(16) to fund a distribution to Owners of the Class R Certificates.
The "Certificate Principal Balance" of any Class of the Class A
Certificates is the Original Certificate Principal Balance of such Class as
reduced by all amounts actually distributed as principal to the Owners of such
Class of Class A Certificates on all prior Payment Dates.
"Class B-1 Applied Realized Loss Amount" means, (1) as to the Class B-1A
Certificates and as to any Payment Date, the lesser of (x) the Class B-1A
Certificate Principal Balance (after taking into account the distribution of
the related Principal Distribution Amount on such Payment Date, but prior to
the application of the related Class B-1A Applied Realized Loss Amount, if any,
on such Payment Date) and (y) the related Applied Realized Loss Amount, and (2)
as to the Class B-1F Certificates and as to any Payment Date, the lesser of (x)
the Class B-1F Certificate Principal Balance (after taking into account the
distribution of the related Principal Distribution Amount on such Payment Date,
but prior to the application of the related Class B-1F Applied Realized Loss
Amount, if any on such Payment Date) and (y) the excess of (i) the related
Applied Realized Loss Amount as of such Payment Date over (ii) the related
Class B-2F Realized Loss Amortization Amount as of such Payment Date.
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"Class B-1 Certificate Principal Balance" means, as to either Class of
Class B-1 Certificates and as of any date of determination, the related
Original Class B-1 Certificate Principal Balance as reduced by the sum of (x)
all amounts actually distributed to the Owners of the related Class B-1
Certificates on all prior Payment Dates on account of principal and (y) the
aggregate, cumulative amount of related Class B-1 Applied Realized Loss Amounts
on all prior Payment Dates.
"Class B-1 Realized Loss Amortization Amount" means, as to either Class
of Class B-1 Certificates and as of any Payment Date, the lesser of (x) the
related Class B-1 Unpaid Realized Loss Amount as of such Payment Date and (y)
the excess of (i) the related Monthly Excess Cashflow Amount over (ii) the sum
of the related Extra Principal Distribution Amount, the related Class M-1
Realized Loss Amortization Amount, the related Class M-2 Realized Loss
Amortization Amount, the related Class M-1 Interest Carry Forward Amount, the
related Class M-2 Interest Carry Forward Amount and the related Class B-1
Interest Carry Forward Amount in each case for such Payment Date.
"Class B-2F Applied Realized Loss Amount" means, as to the Class B-2F
Certificates and as to any Payment Date, the lesser of (x) the Class B-2F
Certificate Principal Balance (after taking into account the distribution of
the related Principal Distribution Amount on such Payment Date, but prior to
the application of the related Class B-2F Applied Realized Loss Amount, if any,
on such Payment Date) and (y) the Applied Realized Loss Amount for the Fixed
Rate Group as of such Payment Date.
"Class B-2F Certificate Principal Balance" means, as to the Class B-2F
Certificates and as of any date of determination, the related Original Class
B-2F Certificate Principal Balance as reduced by the sum of (x) all amounts
actually distributed to the Owners of the Class B-2F Certificates on all prior
Payment Dates on account of principal and (y) the aggregate, cumulative amount
of Class B-2F Applied Realized Loss Amounts on all prior Payment Dates.
"Class B-2F Realized Loss Amortization Amount" means, as to the Class
B-2F Certificates and as of any Payment Date, the lesser of (x) the Class B-2F
Unpaid Realized Loss Amount as of such Payment Date and (y) the excess of (i)
the Monthly Excess Cashflow Amount in respect of the Fixed Rate Group over (ii)
the sum of the Extra Principal Distribution Amount in respect of the Fixed Rate
Group, the related Class M-1 Realized Loss Amortization Amount, the related
Class M-2 Realized Loss Amortization Amount, the related Class B-1 Realized
Loss Amortization Amount, the related Class M-1 Interest Carry Forward Amount,
the related Class M-2 Interest Carry Forward Amount, the related Class B-1
Interest Carry Forward Amount and the Class B-2F Interest Carry Forward Amount
in each case for such Payment Date.
"Class M-1 Applied Realized Loss Amount" means, as to either Class of
Class M-1 Certificates and as to any Payment Date, the lesser of (x) the
related Class M-1 Certificate Principal Balance (after taking into account the
distribution of the related Principal Distribution Amount on such Payment Date,
but prior to the application of the related Class M-1 Applied Realized Loss
Amount, if any, on such Payment Date) and (y) the excess of (i) the related
Applied Realized Loss Amount as of such Payment Date over (ii) the sum of the
related Class M-2 Applied Realized Loss Amount, the related Class B-1 Applied
Realized Loss Amount, and, in respect of the Fixed Rate Group, the Class B-2F
Applied Realized Loss Amount, in each case as of such Payment Date.
"Class M-1 Certificate Principal Balance" means, as to either Class of
Class M-1 Certificates and as of any date of determination, the related
Original Class M-1 Certificate Principal Balance as reduced by the sum of (x)
all amounts actually distributed to the Owners of the related Class M-1
Certificates on all prior Payment Dates on account of principal and (y) the
aggregate, cumulative amount of related Class M-1 Applied Realized Loss Amounts
on all prior Payment Dates.
"Class M-1 Realized Loss Amortization Amount" means, as to either Class
of Class M-1 Certificates and as of any Payment Date, the lesser of (x) the
related Class M-1 Unpaid Realized Loss Amount as of such Payment Date and (y)
the excess of (i) the related Monthly Excess Cashflow Amount over (ii) the sum
of the related Extra Principal Distribution Amount and the related Class M-1
Interest Carry Forward Amount, in each case for such Payment Date.
"Class M-2 Applied Realized Loss Amount" means, as to either Class of
Class M-2 Certificates and as to any Payment Date, the lesser of (x) the
related Class M-2 Certificate Principal Balance (after taking into account the
distribution of the related Principal Distribution Amount on such Payment Date,
but prior to the application of the
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related Class M-2 Applied Realized Loss Amount, if any, on such Payment Date)
and (y) the excess of (i) the related Applied Realized Loss Amount as of such
Payment Date over (ii) the sum of the related Class B-1 Applied Realized Loss
Amount , and, in respect of the Fixed Rate Group, the Class B-2F Applied
Realized Loss Amount, in each case as of such Payment Date.
"Class M-2 Certificate Principal Balance" means, as to either Class of
Class M-2 Certificates and as of any date of determination, the related
Original Class M-2 Certificate Principal Balance as reduced by the sum of (x)
all amounts actually distributed to the Owners of the related Class M-2
Certificates on all prior Payment Dates on account of principal and (y) the
aggregate, cumulative amount of related Class M-2 Applied Realized Loss Amounts
on all prior Payment Dates.
"Class M-2 Realized Loss Amortization Amount" means, as to either Class
of Class M-2 Certificates and as of any Payment Date, the lesser of (x) the
related Class M-2 Unpaid Realized Loss Amount as of such Payment Date and (y)
the excess of (i) the related Monthly Excess Cashflow Amount over (ii) the sum
of the related Extra Principal Distribution Amount, the related Class M-1
Realized Loss Amortization Amount, the related Class M-1 Interest Carry Forward
Amount and the related Class M-2 Interest Carry Forward Amount, in each case
for such Payment Date.
"Unpaid Realized Loss Amount" means for any Class of the Subordinate
Certificates (other than the Class C-IO Certificates) and as to any Payment
Date, the excess of (x) the aggregate cumulative amount of related Applied
Realized Loss Amounts with respect to such Class for all prior Payment Dates
over (y) the aggregate, cumulative amount of related Realized Loss Amortization
Amounts with respect to such Class for all prior Payment Dates.
THE POOLING AND SERVICING AGREEMENT
In addition to the provisions of the Pooling and Servicing Agreement
summarized elsewhere in the Prospectus and this Prospectus Supplement, there is
set forth below a summary of certain other provisions of the Pooling and
Servicing Agreement.
COVENANT OF THE SELLER TO TAKE CERTAIN ACTIONS WITH RESPECT TO THE MORTGAGE
LOANS IN CERTAIN SITUATIONS
Pursuant to the Pooling and Servicing Agreement, upon the discovery by
the Depositor, the Seller, a Servicer, the 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 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 (ii) within the
time period specified in the related Transfer Agreement, (a) 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 (b)
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 an opinion of counsel experienced in federal income tax matters and
acceptable to the Trustee 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 Upper-Tier
REMIC or the Lower-Tier REMIC as a REMIC (a "REMIC Opinion"), addressed and
acceptable to the Trustee. 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 of a REMIC Opinion. In connection with any breach of a
representation, warranty or covenant or defect in documentation giving rise to
such repurchase or substitution obligation, the Seller, if it believes such
opinion may be necessary, may
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request the Originator, to cause to be delivered to the Trustee a REMIC
Opinion, if a favorable opinion can be rendered, as a result of any such
repurchase or substitution. The obligation of the Originator so to cure,
substitute or purchase any such Mortgage Loan in respect of a breach that has
not been remedied constitutes the sole remedy available to the Owners, the
Seller and the Trustee.
"Loan Purchase Price" means generally the outstanding principal balance
of the related Mortgage Loan on the Cut-Off Date, less any principal amounts
previously distributed to the Owners relating to such Mortgage Loan (such
amount, the "Loan Balance" of such Mortgage Loan) as of the date of purchase
(assuming that the Monthly Remittance remitted by the Servicer on such Monthly
Remittance Date has already been remitted), plus one month's interest at the
Net Coupon Rate.
ASSIGNMENT OF MORTGAGE LOANS
Pursuant to the Pooling and Servicing Agreement, the Seller on the
Closing Date with respect to the initial Mortgage Loans and the Subsequent
Transfer Date with respect to the Subsequent Mortgage Loans 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
related 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 related
Cut-Off Date (except with respect to Mortgage Loans that were delinquent on the
related Cut-Off Date, which payments are not being retained by the Depositor).
Purely as a protective measure and not to be construed as contrary to the
parties' intent that the transfer on the Closing Date is a sale, the Seller has
also been deemed to have granted to the Depositor and the Depositor has also
been deemed to have granted to the Trustee a security interest in the Trust
Estate in the event that the transfer of the Trust Estate is deemed to be a
loan and not a sale.
In connection with the transfer and assignment of the Initial Mortgage
Loans on the Closing Date and the Subsequent Mortgage Loans on each Subsequent
Transfer Date, the Depositor will be required to:
(i) deliver without recourse to the Custodian, on behalf of the
Trustee, on the Closing Date with respect to each Initial Mortgage Loan
or on each Subsequent Transfer Date with respect to each Subsequent
Mortgage Loan identified in the related Schedule of Mortgage Loans (A)
the original Notes, endorsed in blank or to the order of the Trustee,
(B) the original title insurance policy or any one of an original title
binder, an original preliminary title report, or an original title
commitment, or a copy certified by the issuer of any of the foregoing,
or the attorney's opinion of title, (C) originals or certified copies of
all intervening recorded assignments, showing a complete chain of title
from origination to the Trustee, if any, including warehousing
assignments, with evidence of recording thereon, (D) originals of all
assumption, modification, written assurance or substitution agreements,
if any and (E) either: (1) the original Mortgage, with evidence of
recording thereon, (2) a certified copy if such original Mortgage has
not been received from the applicable recording office by the Seller and
returned to the custodian or (3) a copy of the Mortgage certified by the
public recording office in those instances where the original recorded
Mortgage has been lost;
(ii) cause the Seller (or Long Beach or Option One if the
related Mortgage Loan was originated by Long Beach or Option One) within
60 days following the Closing Date with respect to the Initial Mortgage
Loans, or the Subsequent Transfer Date with respect to the Subsequent
Mortgage Loans, to submit for recording in the appropriate
jurisdictions, assignments of the Mortgages to "The Bank of New York, as
Trustee of AMRESCO Residential Securities Corporation Mortgage Loan
Trust 1997-3 under the Pooling and Servicing Agreement dated as of
September 1, 1997" provided, however, that the Depositor shall not be
required to cause to be recorded any assignment of Mortgage for a
Mortgage with respect to which the Mortgaged Property is located in
California or the original recording information is lacking;
(iii) if not delivered on the Closing Date, deliver the title
insurance policy or title searches, the original Mortgages and such
recorded assignments, together with originals or duly certified copies
of any and all prior assignments, to the Custodian on behalf of the
Trustee within 15 days of receipt thereof by the
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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, 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.
The Trustee will agree, for the benefit of the Owners, to cause the
Custodian to review the documents contained in each Mortgage Loan File held by
the Custodian (each, a "File") within 45 days after the Closing Date or
Subsequent Transfer Date (or the date of receipt of any documents delivered to
the Custodian after such date) to ascertain that all required documents (or
certified copies of documents) have been executed and received.
If the Custodian on behalf of the Trustee during such 45-day period
finds any document constituting a part of a File which is not properly
executed, has not been received, or is unrelated to the Mortgage Loans, or that
any Mortgage Loan does not conform in a material respect to the description
thereof as set forth in the Schedule of Mortgage Loans, the Custodian on behalf
of the Trustee will be required to promptly notify the Depositor, the Seller
and the Owners. The Seller will agree in the Pooling and Servicing Agreement
to request that the related Originator use reasonable efforts to remedy a
material defect in a document constituting part of a File of which it is so
notified by the Custodian on behalf of the Trustee. If, however, within the
time period set forth in the related Transfer Agreement after such notice to it
respecting such defect the related Originator or other party to a Transfer
Agreement shall not have remedied the defect and the defect materially and
adversely affects the interest in the related Mortgage Loan of the Owners, the
Seller will request the related Originator within the time period specified in
the related Transfer Agreement to (i) substitute in lieu of such Mortgage Loan
another Mortgage Loan of like kind (a "Qualified Replacement Mortgage," as such
term is defined in the Pooling and Servicing Agreement) and deliver any
"Substitution Amount" (the excess, if any, of the Loan Balance of a Mortgage
Loan being replaced over the outstanding principal balance of a replacement
Mortgage Loan plus accrued and unpaid interest) to the related Servicer for
deposit into its Principal and Interest Account on behalf of the Trust as part
of the Monthly Remittance to be remitted by the Servicer on the related Monthly
Remittance Date or (ii) purchase such Mortgage Loan at a purchase price equal
to the Loan Purchase Price thereof, which purchase price shall be delivered to
the related Servicer for deposit in the related Principal and Interest Account
as part of the Monthly Remittance to be remitted by such Servicer on the
related Monthly Remittance Date.
In addition to the foregoing, the Custodian on behalf of the Trustee has
agreed to provide an updated exception report during the 12th month after the
Closing Date indicating the current status of the exceptions previously noted
by the Custodian on behalf of the Trustee (the "Final Certification"). After
delivery of the Final Certification, the Custodian on behalf of the Trustee
shall provide to the 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
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Rate (such product, the "Servicing Fee"). The "Servicing Fee Rate" for each
Mortgage Loan will be the rate provided in the Pooling and Servicing Agreement,
not to exceed 0.50% per annum. The amount of the monthly Servicing Fee is
subject to adjustment with respect to prepaid Mortgage Loans, as described
below. Each Servicer is also entitled to receive, as additional servicing
compensation, 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 of such institution (each, a
"Principal and Interest Account"). All funds in the Principal and Interest
Accounts are required to be held (i) uninvested or (ii) invested in Eligible
Investments (as defined in the Pooling and Servicing Agreement). Any
investment of funds in the Principal and Interest Accounts must mature on or
prior to the immediately succeeding Monthly Remittance Date. Any investment
earnings on funds held in the Principal and Interest Accounts are for the
account of, and any losses therein are also for the account of and must be
promptly replenished by, the respective Servicer.
Each Servicer is required to deposit in the related Principal and
Interest Account, on a daily basis (but in no event later than the second
Business Day following receipt) all scheduled principal and interest due on the
related Mortgage Loans, other than "Balloon Payments" (i.e., the final payment
of principal due with respect to a Balloon Mortgage Loan), after the Cut-Off
Date or Subsequent Cut-Off Date, as the case may be, and past due interest and
principal on any Mortgage Loan, other than Balloon Payments, that were
delinquent as of the Cut-Off Date or Subsequent Cut-Off Date, as the case may
be, including any Prepayments, the proceeds of any liquidation of a Mortgage
Loan (including any insurance proceeds) net of expenses and unreimbursed
Delinquency Advances and Servicing Advances ("Net Liquidation Proceeds"), any
income from REO Properties received thereafter (net of unreimbursed Servicing
Advances and Delinquency Advances), but net of (i) the Servicing Fee with
respect to each Mortgage Loan and other servicing compensation, (ii) principal
collected and interest accrued on any Mortgage Loan on or prior to the Cut-Off
Date or Subsequent Cut-Off Date, as the case may be, if such Mortgage Loan was
current as of the Cut-Off Date or Subsequent Cut-Off Date, as the case may be,
which amounts shall be delivered to the Seller, (iii) late payments received on
any Mortgage Loan in respect of unreimbursed Servicing Advances and Delinquency
Advances and (iv) reimbursements for past Delinquency Advances which the
Servicer has determined in its good faith business judgment are not recoverable
from the related Mortgage Loan proceeds (all such net amounts being referred to
herein as the "Daily Collections").
Each Servicer may make withdrawals for its own account (or for the
account of the Seller in the case of clause (i) below) from the amounts on
deposit in the related Principal and Interest Account with respect to the
related Mortgage Loan Group, only for the following purposes:
(i) to withdraw interest paid with respect to any Mortgage Loans
that had accrued for periods on or prior to the Cut-Off Date or
Subsequent Cut-Off Date, as the case may be, and principal due on all
current Mortgage Loans on or prior to the Cut-Off Date or Subsequent
Cut-Off Date, as the case may be, which shall be paid to the Seller;
(ii) to withdraw investment earnings on amounts on deposit in
its respective Principal and Interest Account;
(iii) to reimburse itself for unreimbursed Delinquency Advances
and Servicing Advances and unrecovered Delinquency Advances and
Servicing Advances determined by it to be nonrecoverable to the extent
permitted in the Pooling and Servicing Agreement;
(iv) to withdraw amounts that have been deposited to its
respective Principal and Interest Account in error; and
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(v) to clear and terminate its respective Principal and Interest
Account following the termination of the Trust Estate.
Each Servicer will remit to the Trustee for deposit in the Certificate
Account the Monthly Remittance Amount not later than the related Monthly
Remittance Date.
Subject to the following limitations, each Servicer will be required to
advance on any Mortgage Loan serviced by it prior to each Payment Date its own
funds or other funds made available to it under the Pooling and Servicing
Agreement as set forth in the next paragraph, for such Payment Date, in an
amount equal to the aggregate of payments of principal and interest on the
Mortgage Loans serviced by it in the related Mortgage Loan Group (adjusted to
the applicable Net Coupon Rate) that became due during the related Remittance
Period and were delinquent on the related Determination Date, together with an
amount equivalent to interest on the principal balance of the Mortgage Loan
related to each Mortgaged Property (each, an "REO Property") acquired by the
Trust through liquidation (any such advance, a "Delinquency Advance"). The Net
Coupon Rate is the rate equal to the excess of the Coupon Rate over the
applicable Servicing Fee Rate.
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 any Mortgage Loan deposited to the related Principal
and Interest Account subsequent to the related Remittance Period (including
"Prepaid Installments" (i.e., early payments of scheduled principal and
interest intended by the borrower to be treated as such)) and shall deposit
into the related Principal and Interest Account with respect thereto (i)
collections from the Mortgagor whose delinquency gave rise to the shortfall
which resulted in such Delinquency Advance net of any such Delinquency Advance
and (ii) Net Liquidation Proceeds recovered on account of the related Mortgage
Loan to the extent of the amount of aggregate Delinquency Advances related
thereto. Previously unreimbursed Delinquency Advances that the Servicer
determines to be nonrecoverable may be reimbursed to the Servicer out of any
Mortgagor payments prior to their deposit to the related Principal and Interest
Account or from funds on deposit in the related Principal and Interest Account.
All Delinquency Advances will be included with the distribution to Owners of
the Certificates of the related Group of Certificates on the related Payment
Date. Any failure by a Servicer to make a Delinquency Advance as required
under the Pooling and Servicing Agreement with respect to the Certificates will
constitute an event of default thereunder for such Servicer, in which case the
Trustee, as successor servicer, or the successor servicer will be obligated to
make any such Delinquency Advance, in accordance with the terms of the Pooling
and Servicing Agreement.
Each Servicer will be required to pay all customary, reasonable and
necessary "out of pocket" costs and expenses incurred in the performance of its
servicing obligations, including, but not limited to, (i) expenditures in
connection with a foreclosed Mortgage Loan prior to the liquidation thereof,
including, without limitation, expenditures for real estate property taxes,
hazard insurance premiums, property restoration or preservation ("Preservation
Expenses"), (ii) the cost of any enforcement or judicial proceedings, including
foreclosures and (iii) the cost of the management and liquidation of Property
acquired in satisfaction of the related Mortgage, to the extent such expenses
are, in its good faith business judgment, recoverable. Such costs will
constitute "Servicing Advances." Each Servicer may recover a Servicing Advance
(x) to the extent permitted by the Mortgage Loans or, if not
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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 the Monthly Excess Cashflow Amount 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 during
the prior Remittance Period are included in the distribution to Owners on the
current Payment Date thereby causing a shortfall in interest. In order to
mitigate the effect of any such shortfall in interest distributions to the
Owners of the Certificates on any Payment Date, the amount of the Servicing Fee
otherwise payable to the related Servicer for such month shall, to the extent
of such shortfall, be deposited by such Servicer in the Certificate Account for
distribution to the Owners of the Certificates 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 a 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.
Each Servicer will have the right, but not the obligation, to purchase
for its own account any Mortgage Loan serviced by it which becomes delinquent,
in whole or in part, as to four consecutive monthly installments or any
Mortgage Loan as to which enforcement proceedings have been brought by such
Servicer. The purchase price for any such Mortgage Loan is equal to the Loan
Purchase Price thereof, which purchase price shall be deposited in the related
Principal and Interest Account.
Each Servicer, with respect to Mortgage Loans serviced by it, shall
foreclose upon or otherwise comparably convert the ownership on behalf of the
Trust of Mortgaged Properties relating to defaulted Mortgage Loans as to which
no satisfactory arrangements can be made for collection of delinquent payments
and which the related Servicer has not purchased from the Trust. Each Servicer
will be required to sell any REO Property managed by it within 23 months of its
acquisition by the Trust, unless an appropriate extension is obtained, or an
opinion of counsel is obtained to the effect that the holding by the Trust of
such REO Property for any greater period will not result in the imposition of
taxes on "Prohibited Transactions" of the Trust as defined in Section 860F of
the Code or cause the Trust to fail to qualify as a REMIC under the REMIC
Provisions at any time that any Certificates are outstanding, in which case
such Servicer shall sell any REO Property by the end of any extended period
specified in any such opinion or such extension as applicable.
Notwithstanding the generality of the foregoing provisions, each
Servicer will be required to manage, conserve, protect and operate each REO
Property managed by it for the Owners solely for the purpose of its prompt
disposition and sale in a manner which does not cause such REO Property to fail
to qualify as "foreclosure property" within the meaning of Section 860G(a)(8)
of the Code or result in the receipt by the Trust of any "income from
non-permitted assets" within the meaning of Section 860F(a)(2)(B) of the Code or
any "net income from foreclosure property" which is subject to taxation under
the REMIC Provisions. Pursuant to its efforts to sell such REO Property, the
related Servicer will be required to either itself or through an agent selected
by such Servicer protect and conserve such REO Property in the same manner and
to such extent as is customary in the locality where such REO Property is
located and may, incident to its conservation and protection of the interests
of the Owners and after consultation with the holder of a majority in interest
of the Class R Certificates, rent the same, or any part thereof, as such
Servicer deems to be in the best interest of the Owners for the period prior to
the sale of such REO Property.
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If so required by the terms of any Mortgage Loan, the related Servicer
will be required to cause hazard insurance to be maintained with respect to the
related Mortgaged Property and to advance sums (such Advances to be treated as
Servicing Advances) on account of the premiums therefor if not paid by the
Mortgagor if permitted by the terms of such Mortgage Loan.
Each Servicer will have the right under the Pooling and Servicing
Agreement to accept applications of Mortgagors for consent to (i) partial
releases of Mortgages, (ii) alterations and (iii) removal, demolition or
division of Mortgaged Properties. No application for approval may be
considered by such Servicer unless: (i) the provisions of the related Note and
Mortgage have been complied with; (ii) the loan-to-value ratio and
debt-to-income ratio after any release does not exceed the maximum loan-to-value
ratio and debt-to-income ratio established in accordance with the Underwriting
Guidelines set forth herein to be applicable to such Mortgage Loan; and (iii)
the lien priority of the related Mortgage is not affected.
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 reasonably
acceptable to the Owners of a majority of the Percentage Interests of the Class
R 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
subject to such subservicing agreement. Each Servicer shall be entitled to
enter into any agreement with a subservicer for indemnification of such
Servicer by such subservicer and nothing contained in such subservicing
agreement shall be deemed to limit or modify the Pooling and Servicing
Agreement.
Each Servicer (except the Trustee if it is required to succeed any
Servicer under the Pooling and Servicing Agreement) will agree to indemnify and
hold the Trustee, the 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 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 Seller or the Depositor in respect of
such claim.
Each Servicer will be required to deliver to the Trustee, the Seller,
the Depositor and the Rating Agencies: (1) on or before April 15 of each year,
commencing in 1998, an officers' certificate stating, as to each signer
thereof, that (i) a review of the activities of such Servicer during such
preceding calendar year and of performance under the Pooling and Servicing
Agreement has been made under such officers' supervision, and (ii) to the best
of such officers' knowledge, based on such review, such Servicer has fulfilled
all its obligations under the Pooling and Servicing Agreement for such year,
or, if there has been a default in the fulfillment of all such obligation,
specifying each such default known to such officers and the nature and status
thereof including the steps being taken by such Servicer to remedy such
default; and (2) on or before April 15 of any year commencing in or after 1998,
a letter or letters of a firm of independent, nationally recognized certified
public accountants dated as of the date of the Servicer's fiscal year end audit
for each subsequent letter stating that such firm has examined the Servicer's
overall servicing operations in accordance with the requirements of the Uniform
Single Attestation Program for Mortgage Bankers, and stating such firm's
conclusions relating thereto.
REMOVAL AND RESIGNATION OF A SERVICER
The Owners, the Trustee or the Seller will have the right pursuant to
the Pooling and Servicing Agreement, to remove any Servicer upon the occurrence
of, and in certain cases after notice and expiration of the related cure
period: (a) certain acts of bankruptcy or insolvency on the part of such
Servicer; (b) certain failures on the part of such Servicer to perform its
obligations under the Pooling and Servicing Agreement (including the
requirement that certain
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of the Servicers maintain their net worth at levels specified in the Pooling
and Servicing Agreement); (c) the failure to cure material breaches of such
Servicer's obligations in the Pooling and Servicing Agreement; or (d) if the
loss and/or delinquency levels of the related Mortgage Loans are at certain
specified levels.
No Servicer is permitted to resign from the obligations and duties
imposed on it under the Pooling and Servicing Agreement except (i) upon
determination that its duties thereunder are no longer permissible under
applicable law or are in material conflict by reason of applicable law with any
other activities carried on by it, the other activities of such Servicer so
causing such conflict being of a type and nature carried on by such Servicer on
the date of the Pooling and Servicing Agreement or (ii) upon written consent of
the Seller and the Trustee and confirmation from the Rating Agencies that the
ratings of the Offered Certificates 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.
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 Owners of the Class R Certificates 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.
SUBSERVICER
Pursuant to the Subservicing Agreement, Ameriquest will subservice the
Long Beach Mortgage Loans. See "The Portfolio of Mortgage Loans -- The
Servicers".
REPORTING REQUIREMENTS
On each Payment Date the Trustee is required to report in writing to
each Owner:
(i) the amount of the distribution with respect to the related
Class of the Certificates (based on a Certificate in the original
principal amount of $1,000);
(ii) the amount of such distribution allocable to scheduled
principal on the Mortgage Loans in each Mortgage Loan Group, separately
identifying the aggregate amount of any Prepayments of principal,
curtailments, repurchases, Liquidation Proceeds 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 $1,000) and any Subordination Increase
Amount with respect to each such Mortgage Loan Group and in total;
(iii) the amount of such distribution allocable to interest on
the related Mortgage Loans in each Mortgage Loan Group (based on a
Certificate in the original principal amount of $1,000);
(iv) the Interest Carry Forward Amount for each Class;
(v) the principal amount of each Class of the Offered
Certificate (based on a Certificate in the original principal amount of
$1,000) which will be outstanding and the aggregate Loan Balance of each
Mortgage Loan Group and in total, in each case after giving effect to
any payment of principal on such Payment Date;
(vi) the number of Mortgage Loans, the aggregate Loan Balance
of the Mortgage Loans in each Mortgage Loan Group and in total, in each
case after giving effect to any payment of principal on such Payment
Date;
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(vii) based upon information furnished by the Depositor such
information as may be required by Section 6049(d)(7)(C) of the Code and
the regulations promulgated thereunder to assist the Owners in computing
their market discount (this information need not be provided on each
Payment Date but only upon the request of an Owner);
(viii) the total of any Substitution Amounts or Loan Purchase
Price amounts included in such distribution with respect to each
Mortgage Loan Group and in total;
(ix) the weighted average Coupon Rate and weighted average
remaining term to maturity of the Mortgage Loans with respect to each
Mortgage Loan Group and in total;
(x) one-month LIBOR for such Payment Date;
(xi) for Payment Dates during the Funding Period, the remaining
Pre-Funded Amount allocable to each Mortgage Loan Group and in total;
(xii) the Servicing Fees and Trustee Fees allocable to each
Mortgage Loan Group and in total;
(xiii) the applicable Pass-Through Rate of each of the Adjustable
Rate Group Certificates for the next Accrual Period;
(xiv) whether a Trigger Event has occurred with respect to each
Mortgage Loan Group as shown by percentage of 60+ Day Delinquent Loans;
(xv) the Senior Enhancement Percentage for each Mortgage Loan
Group;
(xvi) the Overcollateralization Amount for each Mortgage Loan
Group and the Certificate Principal Balance of each Class of the Offered
Certificates then outstanding after giving effect to any payment of
principal on such Payment Date; and
(xvii) the amount of any Applied Realized Loss Amount, Realized
Loss Amortization Amount and Unpaid Realized Loss Amount for each Class
as of the close of such Payment Date.
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 and each
Owner, 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 (iii) 90
or more days delinquent (exclusive of foreclosures), as of the close of
business on the last day of the related Remittance Period 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 last day of the
prior Remittance Period;
(c) the number of Mortgagors and the Loan Balances of the
related Mortgages involved in bankruptcy proceedings as of the last day
of the prior Remittance Period;
(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 last day of the prior Remittance Period;
(e) the book value of any real estate acquired through
foreclosure or grant of a deed-in-lieu of foreclosure as of the last day
of the prior Remittance Period;
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(f) the amount of cumulative Realized Losses; and
(g) The aggregate Loan Balance of 60+ Day Delinquent Loans in
each Mortgage Loan Group and in the aggregate.
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
(x) the Depositor or (y) the Owners of a majority of the Percentage Interests
represented by the Offered Certificates or, if there are no Offered
Certificates then outstanding, by a majority of the Percentage Interests
represented by the Retained 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 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), such amendment shall not adversely affect in any material respect
any Owner. Any such amendment shall be deemed not to adversely affect in any
material respect any Owner if there is delivered to the Trustee written
notification from each Rating Agency that such amendment will not cause such
Rating Agency to reduce its then current rating assigned to any Class of the
Offered Certificates. 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 or (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.
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 of all amounts
required to be paid to such Owners 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 Lower-Tier REMIC and the Upper-Tier 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 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 September 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 either the
Upper-Tier REMIC or the Lower-Tier 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 Owners of a majority in Percentage Interests represented by
the Offered Certificates then outstanding 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
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 Trust Estate (other than the Pre-Funding Account and the Capitalized
Interest Account) created by the Pooling and Servicing Agreement, will consist
of two segregated asset pools with respect to which elections will be made to
treat each as a separate REMIC for federal income tax purposes. The Lower-Tier
REMIC will issue several uncertificated subclasses of non-voting interests (the
"Lower-Tier REMIC Regular Interests") which will be designated as the "regular
interests" in the Lower-Tier REMIC and the uncertificated "Lower-Tier REMIC
Residual Interest" which will be designated as the "residual interest" in the
Lower-Tier REMIC. The assets of the Lower-Tier REMIC
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will consist of the Mortgage Loans and all other assets comprising the Trust
Estate (other than the Pre-Funding Account and the Capitalized Interest
Account) except for the property allocated to the Upper-Tier REMIC. The
Upper-Tier REMIC will issue the Offered Certificates, the Class B-2F
Certificates, the Class C-IO Certificates, the Class D Certificates and the
Class S Certificates which will be designated as the "regular interests" in the
Upper-Tier REMIC and the Class R Certificates will be designated as the
"residual interest" in the Upper-Tier REMIC. The assets of the Upper-Tier
REMIC consist of the Lower-Tier REMIC Regular Interests and the Upper-Tier
Distribution Accounts. 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 elections are
made and (ii) compliance with the Pooling and Servicing Agreement, each REMIC
will be treated as a REMIC, the Lower-Tier REMIC Regular Interest will be
treated as the "regular interests" in the Lower-Tier REMIC, the Offered
Certificates, the Class B-2F Certificates, the Class C-IO Certificates, the
Class D Certificates and the Class S Certificates will be treated as "regular
interests" in the Upper-Tier REMIC, the Lower-Tier REMIC Residual Interest
will be treated as the sole "residual interest" in the Lower-Tier REMIC and the
Class R Certificates will be the sole "residual interest" in the Upper-Tier
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 such REMIC on the date on which those interests are created, and not as
ownership interests in such REMIC or its assets. Owners of the 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 prepayment assumption for each Class of the Offered Certificates for
calculating original issue discount is 100% Prepayment Assumption for the Fixed
Rate Group Certificates and 25% CPR for the Adjustable Rate Group Certificates.
See "Prepayment and Yield Considerations -- Projected Prepayment and Yield for
Offered Certificates" herein.
As a result of the qualification of the Lower-Tier REMIC and the
Upper-Tier REMIC, as REMICs, 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 Offered 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 (the "DOL") 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;
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(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 Rating Services,
Moody's, DCR or Fitch;
(4) the Trustee must not be an affiliate of any other member of
the Restricted Group (as defined below);
(5) the sum of all payments made to and retained by any
Underwriter in connection with the distribution of the Class A
Certificates represents not more than reasonable compensation for
underwriting such Class A Certificates; the sum of all payments made to
and retained by the Seller pursuant to the assignment of the Mortgage
Loans to the Trust Estate represents not more than the fair market value
of such loans; the sum of all payments made to and retained by any
Servicer represents not more than reasonable compensation for such
person's services under the Agreement and reimbursement of such person's
reasonable expenses in connection therewith; and
(6) the Plan investing in the Class A Certificates is an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of
the Securities and Exchange Commission under the Securities Act of 1933.
The Trust Estate must also meet the following requirements:
(i) the corpus of the Trust Estate must consist solely of a fixed
pool of assets of the type that have been included in other investment
pools;
(ii) certificates in such other investment pools must have been
rated in one of the three highest rating categories of Standard & Poor's
Ratings Services, Moody's, Fitch or DCR 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 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").
On July 21, 1997, the DOL published in the Federal Register amendments
to the Exemptions ("PTE 97-34"), which extend exemptive relief to certain
mortgage-backed and asset-backed securities transactions using pre-funding
accounts for trusts issuing pass-through certificates. With respect to the
Class A Certificates, PTE 97-34 generally allows Mortgage Loans supporting
payments to Owners of Class A Certificates, and having a value equal to no more
than 25% of the total principal amount of the Certificates being offered by the
Trust, to be transferred to the Trust within a funding period no longer than 90
days or three months following the Closing Date instead of requiring that all
such Mortgage Loans be either identified or transferred on or before the
Closing Date. The relief will apply to the purchase, sale and holding of the
Class A Certificates, provided that the following general conditions are met:
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(1) the ratio of the amount allocated to the Pre-Funding Account to the
total principal amount of the Certificates being offered ("Pre-Funding
Limit") does not exceed 25%;
(2) all Subsequent Mortgage Loans meet the same terms and conditions for
eligibility as the original Mortgage Loans used to create the Trust,
which terms and conditions have been approved by the Rating Agencies;
(3) the transfer of such Subsequent Mortgage Loans to the Trust during the
Funding Period does not result in the Class A Certificates to be covered
by the Exemptions receiving a lower credit rating from a Rating Agency
upon termination of the Funding Period than the rating that was obtained
at the time of the initial issuance of the Class A Certificates by the
Trust;
(4) solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate (the "Average Interest Rate") for all of
the Mortgage Loans and Subsequent Mortgage Loans in the Trust at the end
of the Funding Period is not more than 100 basis points lower than the
Average Interest Rate for the Mortgage Loans which were transferred to
the Trust on the Closing Date;
(5) either;
(i) the characteristics of the Subsequent Mortgage Loans are
monitored by an insurer or other credit support provider which is
independent of the Depositor; or
(ii) an independent accountant retained by the Depositor provides the
Depositor with a letter (with copies provided to the Rating
Agencies, the Underwriters and the Trustee) stating whether or
not the characteristics of the Subsequent Mortgage Loans conform
to the characteristics described in the Prospectus Supplement
and/or Pooling and Servicing Agreement. In preparing such
letter, the independent accountant must use the same type of
procedures as were applicable to the Mortgage Loans which were
transferred to the Trust as of the Closing Date;
(6) the Funding Period ends no later than three months or 90 days after the
Closing Date or earlier in certain circumstances if the Pre-Funding
Account falls below the minimum level specified in the Pooling and
Servicing Agreement or an event of default occurs;
(7) amounts transferred to any Pre-Funding Account and/or Capitalized
Interest Account used in connection with the pre-funding may be invested
only in investments which are permitted by the Rating Agencies and:
(i) are direct obligations of, or obligations fully guaranteed as to
timely payment of principal and interest by, the United States or
any agency or instrumentality thereof (provided that such
obligations are backed by the full faith and credit of the United
States); or
(ii) have been rated (or the obligor has been rated) in one of the
three highest generic rating categories by such Rating Agency;
(8) the Prospectus or Prospectus Supplement describes;
(i) any Pre-Funding Account and/or Capitalized Interest Account;
(ii) the duration of the Funding Period;
(iii) the percentage and/or dollar amount of the Pre-Funding Limit for
the Funding Period that will be remitted to Owners of Class A
Certificates as repayments of principal; and
(iv) that the amounts remaining in the Pre-Funding Account at the end
of the Funding Period will be remitted to owners of Class A
Certificates as repayments of principal; and
(9) the Pooling and Servicing Agreement describes the permitted investments
for the Pre-Funding Account and/or Capitalized Interest Account and, if
not disclosed in the Prospectus or Prospectus Supplement, the terms and
conditions for eligibility of Subsequent Mortgage Loans.
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Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the possible applicability of the
Exemption (as amended by PTE 97-34), or other exemptive relief, and all of the
potential consequences in their specific circumstances, prior to making an
investment in a Class A Certificate. Each Plan fiduciary should determine
whether under the general fiduciary standards of investment procedure and
diversification an investment in the Class A Certificates is appropriate for
the Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio. In particular, purchasers that
are insurance companies should consult with their counsel with respect to the
United States Supreme Court case, John Hancock Mutual Life Insurance Co. v.
Harris Trust and Savings Bank (decided December 13, 1993). In John Hancock,
the Supreme Court ruled that assets held in an insurance company's general
account may be deemed to be "plan assets" under certain circumstances.
Purchasers should analyze whether the decision may have an impact with respect
to purchases of the Class A Certificates.
The exemptions do not apply to the initial purchase, the holding or the
subsequent resale of the Mezzanine Certificates and Class B-1 Certificates
because such Certificates are subordinate to certain other Classes of
Certificates. Accordingly, PLANS MAY NOT PURCHASE THE MEZZANINE CERTIFICATES
OR CLASS B-1 CERTIFICATES, except that any insurance company may purchase such
Certificates with assets of its general account if the exemptive relief granted
by the DOL for transactions involving insurance company general accounts in
Prohibited Transaction Exemption 95-60, 60 Fed. Reg. 35925 (July 12, 1995)
("PTE 95-60") is available with respect to such investment. Any insurance
company proposing to purchase such Certificates for its general account should
consider whether such relief would be available. Pursuant to PTE 95-60 certain
representations or opinions must be made to qualify. Such representations as
described in PTE 95-60 shall be deemed to have been made to the Trustee by the
transferee's acceptance of the Mezzanine Certificates or Class B-1
Certificates. In the event that such representations are violated, the
transferee must provide the opinions provided for in PTE 95-60 or any attempted
transfers or acquisitions shall be void and of no effect.
RATINGS
It is a condition of the issuance of each Class of the Offered
Certificates that the Offered Certificates receive the ratings set out below:
<TABLE>
<CAPTION>
CLASS MOODY'S FITCH STANDARD & POOR'S DCR
----- ------- ----- ----------------- ---
<S> <C> <C> <C> <C>
A Aaa AAA AAA AAA
M-1F Aa2 AA AA AA+
M-1A Aa2 AA AA AA
M-2F A2 A A A+
M-2A A2 A A A
B-1F Baa3 BBB- BBB BBB
B-1A Baa3 BBB- BBB- BBB-
</TABLE>
Explanations of the significance of such ratings may be obtained from Moody's,
99 Church Street, New York, New York 10007; Fitch, One State Street Plaza, 33rd
Floor, New York, New York 10004; Standard & Poor's, 25 Broadway, New York, New
York 10006; and DCR, 17 State Street, 12th 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 Offered
Certificates. A security rating is not a recommendation to buy, sell or hold
securities.
The ratings assigned by Fitch to pass-through certificates address the
likelihood of the receipt by the Owners of all distributions to which such
Owners are entitled. Fitch's ratings address the structural and legal aspects
associated with the Certificates, including the nature of the underlying loans
and the credit quality of the credit support provider. Fitch's ratings on home
equity pass-through Certificates do not represent any assessment of the
likelihood or rate of principal prepayments.
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The ratings of Moody's on home equity pass-through certificates address
the likelihood of the receipt by the Owners of all distributions to which such
Owners are entitled. Moody's rating opinions address the structural and legal
issues and tax-related aspects associated with the Certificates, including the
nature of the underlying home equity loans and the credit quality of the credit
support provider, if any. Moody's ratings on pass-through certificates do not
represent any assessment of the likelihood that principal prepayments may
differ from those originally anticipated.
The ratings assigned by DCR to mortgage pass-through certificates
address the likelihood of the receipt by certificateholders of all
distributions to which they are entitled under the transaction structure.
DCR's ratings reflect its analysis of the riskiness of the mortgage loans and
its analysis of the structure of the transaction as set forth in the operative
documents. DCR's ratings do not address the effect on the certificates' yield
attributable to prepayments or recoveries on the underlying mortgage loans.
Further the ratings do not address the possibility that certificateholders
might suffer a lower than anticipated yield resulting from funds remaining in
the prefunding account at the end of the funding period.
The ratings of each Rating Agency do not address the possibility that,
as a result of principal prepayments, Owners may receive a lower than
anticipated yield.
The ratings of the Certificates should be evaluated independently from
similar ratings on other types of securities. 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.
The Depositor has not requested a rating of the Certificates offered
hereby by any rating agency other than the Rating Agencies and the Depositor
has not provided information relating to the Certificates offered hereby or the
Mortgage Loans to any rating agency other than the Rating Agencies. However,
there can be no assurance as to whether any other rating agency will rate the
Certificates offered hereby or, if another rating agency rates such
Certificates, what rating would be assigned to such Certificates by such rating
agency. Any such unsolicited rating assigned by another rating agency to the
Certificates offered hereby may be lower than the rating assigned to such
Certificates by any of the Rating Agencies.
LEGAL INVESTMENT MATTERS
The Offered Certificates (other than the Class A-10 Certificates and the
Class M-1A Certificates) will not constitute "mortgage related securities" for
purposes of SMMEA. The appropriate characterization of the Offered
Certificates (other than the Class A-10 Certificates and the Class M-1A
Certificates) under various legal investment restrictions applicable to the
investment activities of certain institutions, and thus the ability of
investors subject to these restrictions to purchase the Offered Certificates
(other than the Class A-10 Certificates and the Class M-1A Certificates), may
be subject to significant interpretive uncertainties.
The Class A-10 Certificates and the Class M-1A 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, the Class
A-10 Certificates and the Class M-1A 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 Percentage Interest of each Class of the Offered
Certificates as follows:
S-102
<PAGE> 107
CLASS A-1 CERTIFICATES
<TABLE>
<CAPTION>
Underwriters Principal Amount
------------ ----------------
<S> <C>
Morgan Stanley & Co. Incorporated 40%
Prudential Securities Incorporated 25%
Credit Suisse First Boston 25%
Lehman Brothers, Inc. 10%
</TABLE>
CLASS A-2 CERTIFICATES
<TABLE>
<CAPTION>
Underwriters Principal Amount
------------ ----------------
<S> <C>
Morgan Stanley & Co. Incorporated 40%
Prudential Securities Incorporated 25%
Credit Suisse First Boston 25%
Lehman Brothers, Inc. 10%
</TABLE>
CLASS A-3 CERTIFICATES
<TABLE>
<CAPTION>
Underwriters Principal Amount
------------ ----------------
<S> <C>
Morgan Stanley & Co. Incorporated 40%
Prudential Securities Incorporated 25%
Credit Suisse First Boston 25%
Lehman Brothers, Inc. 10%
</TABLE>
CLASS A-4 CERTIFICATES
<TABLE>
<CAPTION>
Underwriters Principal Amount
------------ ----------------
<S> <C>
Morgan Stanley & Co. Incorporated 40%
Prudential Securities Incorporated 25%
Credit Suisse First Boston 25%
Lehman Brothers, Inc. 10%
</TABLE>
CLASS A-5 CERTIFICATES
<TABLE>
<CAPTION>
Underwriters Principal Amount
------------ ----------------
<S> <C>
Morgan Stanley & Co. Incorporated 40%
Prudential Securities Incorporated 25%
Credit Suisse First Boston 25%
Lehman Brothers, Inc. 10%
</TABLE>
CLASS A-6 CERTIFICATES
<TABLE>
<CAPTION>
Underwriters Principal Amount
------------ ----------------
<S> <C>
Morgan Stanley & Co. Incorporated 40%
Prudential Securities Incorporated 25%
Credit Suisse First Boston 25%
Lehman Brothers, Inc. 10%
</TABLE>
CLASS A-7 CERTIFICATES
<TABLE>
<CAPTION>
Underwriters Principal Amount
------------ ----------------
<S> <C>
Morgan Stanley & Co. Incorporated 40%
Prudential Securities Incorporated 25%
Credit Suisse First Boston 25%
Lehman Brothers, Inc. 10%
</TABLE>
S-103
<PAGE> 108
CLASS A-8 CERTIFICATES
<TABLE>
<CAPTION>
Underwriters Principal Amount
------------ ----------------
<S> <C>
Morgan Stanley & Co. Incorporated 40%
Prudential Securities Incorporated 25%
Credit Suisse First Boston 25%
Lehman Brothers, Inc. 10%
</TABLE>
CLASS A-9 CERTIFICATES
<TABLE>
<CAPTION>
Underwriters Principal Amount
------------ ----------------
<S> <C>
Morgan Stanley & Co. Incorporated 40%
Prudential Securities Incorporated 25%
Credit Suisse First Boston 25%
Lehman Brothers, Inc. 10%
</TABLE>
CLASS A-10 CERTIFICATES
<TABLE>
<CAPTION>
Underwriters Principal Amount
------------ ----------------
<S> <C>
Morgan Stanley & Co. Incorporated 40%
Prudential Securities Incorporated 25%
Credit Suisse First Boston 25%
Lehman Brothers, Inc. 10%
</TABLE>
CLASS M-1F CERTIFICATES
<TABLE>
<CAPTION>
Underwriters Principal Amount
------------ ----------------
<S> <C>
Morgan Stanley & Co. Incorporated 40%
Prudential Securities Incorporated 25%
Credit Suisse First Boston 25%
Lehman Brothers, Inc. 10%
</TABLE>
CLASS M-1A CERTIFICATES
<TABLE>
<CAPTION>
Underwriters Principal Amount
------------ ----------------
<S> <C>
Morgan Stanley & Co. Incorporated 40%
Prudential Securities Incorporated 25%
Credit Suisse First Boston 25%
Lehman Brothers, Inc. 10%
</TABLE>
CLASS M-2F CERTIFICATES
<TABLE>
<CAPTION>
Underwriters Principal Amount
------------ ----------------
<S> <C>
Morgan Stanley & Co. Incorporated 40%
Prudential Securities Incorporated 25%
Credit Suisse First Boston 25%
Lehman Brothers, Inc. 10%
</TABLE>
S-104
<PAGE> 109
CLASS M-2A CERTIFICATES
<TABLE>
<CAPTION>
Underwriters Principal Amount
------------ ----------------
<S> <C>
Morgan Stanley & Co. Incorporated 40%
Prudential Securities Incorporated 25%
Credit Suisse First Boston 25%
Lehman Brothers, Inc. 10%
</TABLE>
CLASS B-1F CERTIFICATES
<TABLE>
<CAPTION>
Underwriters Principal Amount
------------ ----------------
<S> <C>
Morgan Stanley & Co. Incorporated 40%
Prudential Securities Incorporated 25%
Credit Suisse First Boston 25%
Lehman Brothers, Inc. 10%
</TABLE>
CLASS B-1A CERTIFICATES
<TABLE>
<CAPTION>
Underwriters Principal Amount
------------ ----------------
<S> <C>
Morgan Stanley & Co. Incorporated 40%
Prudential Securities Incorporated 25%
Credit Suisse First Boston 25%
Lehman Brothers, Inc. 10%
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all of the Certificates
offered hereby, if any are purchased. The Depositor has been advised by the
Underwriters that they propose initially to offer the Offered Certificates to
the public at the respective offering prices set forth on the cover page hereof
and to certain dealers at such price less a concession not in excess of the
respective amounts set forth in the table below (expressed as a percentage of
the relative Certificate Principal Balance). The Underwriters may allow and
such dealers may reallow a discount not in excess of the respective amounts set
forth in the table below to certain other dealers.
<TABLE>
<CAPTION>
Class Selling Concession Reallowance Discount
----- ------------------ --------------------
<S> <C> <C>
A-1 0.060% 0.030%
A-2 0.075% 0.038%
A-3 0.090% 0.045%
A-4 0.120% 0.060%
A-5 0.135% 0.068%
A-6 0.150% 0.075%
A-7 0.180% 0.090%
A-8 0.195% 0.098%
A-9 0.180% 0.090%
A-10 0.150% 0.075%
M-1F 0.180% 0.090%
M-1A 0.180% 0.090%
M-2F 0.195% 0.098%
M-2A 0.195% 0.098%
B-1F 0.240% 0.120%
B-1A 0.240% 0.120%
</TABLE>
In connection with this offering and in compliance with applicable law
and industry practice, the Underwriters may over-allot or effect transactions
which stabilize, maintain or otherwise affect the market price of the Offered
Certificates at a level above that which might otherwise prevail in the open
market, including stabilizing bids, effecting syndicate covering transactions
or imposting penalty bids. A stabilizing bid means the placing of any bid, or
the effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of a security. A
S-105
<PAGE> 110
syndicate covering transaction means the placing of any bid on behalf of the
underwriting syndicate or the effecting of any purchase to reduce a short
position created in connection with the offering. A penalty bid means an
arrangement that permits Morgan Stanley & Co. Incorporated, as managing
underwriter, to reclaim a selling concession from a syndicate member in
connection with the offering when Offered Certificates originally sold by the
syndicate member are purchased in syndicate covering transactions. The
Underwriters are not required to engage in any of these activities. Any such
activities, if commended, may be discontinued at any time.
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.
CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Seller and the Depositor by Arter &
Hadden, Washington, D.C. and by Michael B. Cline, Esquire, Deputy General
Counsel for AMRESCO, INC., the parent of the Depositor. Certain legal matters
relating to insolvency issues and certain federal income tax matters concerning
the Certificates will be passed upon for the Depositor by Arter & Hadden.
Certain legal matters relating to the Certificates will be passed upon for the
Underwriters by Dewey Ballantine, New York, New York.
S-106
<PAGE> 111
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered AMRESCO
Residential Securities Corporation Mortgage Loan Trust 1997-3 Mortgage Loan
Pass-Through Certificates, Class A, Class M-1, Class M-2 and Class B-1 (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,
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<PAGE> 112
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 Accrual
Period for the related Class. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. Payment will then be made by the Relevant Depositary to
the DTC Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Cedel Participant's or Euroclear Participant's
account. The securities credit will appear the next day (European time) and
the cash debt will be back-valued to, and the interest on the Global Securities
will accrue from, the value date (which would be the preceding day when
settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Cedel or Euroclear cash debt
will be valued instead as of the actual settlement date.
Cedel Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedel or Euroclear. Under this
approach, they may take on credit exposure to Cedel or Euroclear until the
Global Securities are credited to their account one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit
to them, Cedel Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, Cedel Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day,
assuming they cleared the overdraft when the Global Securities were credited to
their accounts. However, interest on the Global Securities would accrue from
the value date. Therefore, in many cases the investment income on the Global
Securities earned during that one-day period may substantially reduce or offset
the amount of such overdraft charges, although the result will depend on each
Cedel Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for crediting Global Securities
to the respective European Depositary for the benefit of Cedel Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller
on the settlement date. Thus, to the DTC Participants a cross-market
transaction will settle no differently than a trade between two DTC
Participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Cedel Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. In these cases
Cedel or Euroclear will instruct the respective Depositary, as appropriate, to
credit the Global Securities to the DTC Participant's account against payment.
Payment will include interest accrued on the Global Securities from and
including the last coupon payment to and excluding the settlement date on the
basis of the Accrual Period for the related Class. For transactions settling
on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. The payment will then be
reflected in the account of Cedel Participant or Euroclear Participant the
following day, and receipt of the cash proceeds in the Cedel Participant's or
Euroclear Participant's account would be back-valued to the value date (which
would be the preceding day, when settlement occurred in New York). Should the
Cedel Participant or Euroclear Participant have a line of credit with its
respective clearing system and elect to be in debt in anticipation of receipt
of the sale proceeds in its account, the back-valuation will extinguish any
overdraft incurred over that one-day period. If settlement is not completed on
the intended value date (i.e., the trade fails), receipt of the cash proceeds
in the Cedel Participant's or Euroclear Participant's account would instead be
valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedel Participants or
Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential problem:
I-2
<PAGE> 113
(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, (iii) an
estate the income of which is includible in gross income for United States tax
purposes, regardless of its source or a trust if a court within the United
States is able to exercise primary supervision of the administration of the
trust and one or more United States fiduciaries have the authority to control
all substantial decisions of the trust. 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> 114
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Page
<TABLE>
<S> <C>
2/28 Loans S-38
3/27 Loans S-6
5/25 Loans S-6
Accrual Period S-5
Actuarial Loans S-7
Adjustable Rate Group Available Funds Cap S-48
Adjustable Rate Group Certificates S-2
Advances S-2
Advanta S-15
Advanta Parent S-3
Aggregate Certificate Principal Balance S-34
Ameriquest S-3
Applied Realized Loss Amount S-3
Appraised Values S-17
ARCC S-48
ARM WAC S-31
ARMC S-2
Auction Sale S-5
Auction Sale Bid Date S-21
Available Funds Cap Shortfall Amount S-21
Average Interest Rate S-19
Balloon Mortgage Loans S-100
Balloon Payments S-91
Bank S-90
Beneficial Owners S-38
BNC S-21
Book-Entry Certificates S-5
Business Day S-78
Capitalized Interest Account S-7
Cede S-20
Cedel S-21
Cedel Participants S-21
Certificate Account S-80
Certificate Principal Balance S-74
Certificates S-85
Chase S-3
Citibank S-21
Class S-21
Class A Certificates S-1
Class A Principal Distribution Amount S-2
Class A-1 Certificates S-12
Class A-10 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 A-9 Certificates S-1
Class A-9 Lockout Distribution Amount S-1
Class A-9 Lockout Percentage S-11
Class A-9 Lockout Pro Rata Distribution Amount S-11
Class B-1 Applied Realized Loss Amount S-11
Class B-1 Certificate Principal Balance S-85
Class B-1 Principal Distribution Amount S-86
Class B-1 Realized Loss Amortization Amount S-13
Class B-1A Certificates S-86
Class B-1F Certificates S-1
Class B-2F Applied Realized Loss Amount S-1
Class B-2F Certificate Principal Balance S-86
Class B-2F Certificates S-86
Class B-2F Principal Distribution Amount S-2
Class B-2F Realized Loss Amortization Amount S-13
Class C-IO Certificates S-86
Class Distribution Amount S-2
Class M-1 Realized Loss Amortization Amount S-7
Class M-1 Applied Realized Loss Amount S-86
Class M-1 Certificate Principal Balance S-86
Class M-1 Certificates S-86
Class M-1 Principal Distribution Amount S-2
Class M-1A Certificates S-12
Class M-1F Certificates S-1
Class M-2 Applied Realized Loss Amount S-1
Class M-2 Certificate Principal Balance S-86
Class M-2 Certificates S-87
Class M-2 Principal Distribution Amount S-2
Class M-2 Realized Loss Amortization Amount S-12
Class M-2A Certificates S-87
Class M-2F Certificates S-1
Class R Certificates S-1
Class S Certificates S-3
Closing Date S-3
CMT Loans S-3
Code S-23
Combined Loan-to-Value Ratios S-4
Compensating Interest S-92
Cooperative S-80
Coupon Rates S-4
CPR S-66
Current Interest S-8
Custodian S-3
Cut-Off Date S-3
Daily Collections S-90
DCR S-22
Definitive Certificate S-79
Deleted Mortgage Loan S-34
Delinquency Advance S-91
Depositor S-3
DOL S-98
DTC S-21
DTC Participants S-80
Due Dates S-92
Eligible Investments S-77
ERISA S-98
Euroclear S-21
Euroclear Operator S-80
Euroclear Participants S-80
European Depositaries S-21
Exemptions S-98
Extra Principal Distribution Amount S-14
File S-89
Final Certification S-89
Final Determination S-97
Final Scheduled Payment Dates S-64
Financial Intermediary S-79
Fitch S-22
Fixed Rate Group Certificates S-2
Fixed Rate Loans S-5
Fleet S-43
Formula Pass-Through Rate(s) S-2
Funding Period S-19
IML S-80
Initial Mortgage Loans S-4
Interest Amount Available S-7
Interest Carry Forward Amount S-8
Interest Remittance Amount S-8
LBFC S-38
Liquidated Mortgage Loan S-11
Liquidation Proceeds S-89
Loan Balance S-88
Loan Purchase Price S-34
Long Beach Mortgage Loans S-38
Lower-Tier REMIC S-22
Lower-Tier REMIC Regular Interests S-97
Lower-Tier REMIC Residual Interest S-97
Mezzanine Certificates S-2
Monthly Excess Cashflow Amount S-18
Monthly Excess Interest Amount S-8
Monthly Remittance Date S-11
Moody's S-22
Mortgage Loan Group S-74
Mortgage Loans S-47
Mortgaged Properties S-4
Mortgages S-4
Net Coupon Rate S-34
Net Liquidation Proceeds S-90
New Century S-5
NIV S-37
Notes S-4
Notional Principal Amount S-15
Offered Certificates S-2
Offering S-38
Old Long Beach S-38
One-Month LIBOR S-78
One-Month LIBOR Determination Date S-78
Option One S-3
Option One Loans S-46
Original Aggregate Loan Balance S-4
Original Certificate Principal Balance S-1
Original Pre-Funded Amount S-3
Originators S-73
Overcollateralization Amount S-13
Overcollateralization Deficiency S-14
Overcollateralization Release Amount S-14
Owner S-79
PAGs S-32
Participants S-78
Pass-Through Rate S-75
</TABLE>
A-1
<PAGE> 115
<TABLE>
<S> <C>
Payment Date S-7
Percentage Interest S-75
PHMC S-43
Plan S-98
Pooling and Servicing Agreement S-3
Preference Amount S-14
Prepaid Installments S-91
Prepayment Assumption S-65
Prepayments S-25
Preservation Expenses S-91
Press Release S-35
Pre-Funded Amount S-20
Pre-Funding Account S-3
Pre-Funding Limit S-100
Principal and Interest Account S-90
Principal Distribution Amount S-10
Principal Remittance Amount S-11
Private Certificates S-3
PTE 95-60 S-101
PTE 97-34 S-99
Qualified Replacement Mortgage S-34
Rating Agencies S-22
REMIC S-22
REMIC Opinion S-87
REO Property S-91
Realized Loss S-16
Record Date S-7
Reference Banks S-78
Register S-74
Registrar S-74
Relevant Depositary S-78
Remittance Period S-11
Reorganization S-38
Restricted Group S-99
Retained Certificates S-3
Riegle Act S-28
Rules S-79
Seller S-3
Senior Enhancement Percentage S-13
Senior Specified Enhancement Percentage S-14
Servicer S-3
Servicers S-3
Servicing Advances S-91
Servicing Fee Rate S-90
Six-Month LIBOR S-27
Six-Month LIBOR Loans S-5
SMMEA S-23
Standard & Poor's S-22
Step Up Date S-21
Stepdown Date S-12
Subordinate Certificates S-2
Subsequent Cut-Off Date S-26
Subsequent Mortgage Loans S-3
Subsequent Transfer Agreement S-26
Subsequent Transfer Date S-20
Subservicer S-38
Subservicer Event of Default S-43
Subservicing Agreement S-38
Substitution Amount S-89
Targeted Overcollateralization Amount S-14
Telerate Page 3750 S-78
Terms and Conditions S-80
Transfer Agreement S-34
Trigger Event S-11
Trust S-73
Trust Estate S-73
Trustee S-3
Underwriters S-102
Underwriting Agreement S-102
Underwriting Guidelines S-29
Unpaid Realized Loss Amount S-87
Upper-Tier REMIC S-22
Weighted Average Life S-65
</TABLE>
A-2
<PAGE> 116
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 117
================================================================================
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 September 5, 1997.
<PAGE> 118
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> 119
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
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 . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Sale or Exchange of a Residual Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Taxes That May Be Imposed on the REMIC Pool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Liquidation of the REMIC Pool . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Administrative Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Limitations on Deduction of Certain Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Taxation of Certain Foreign Investors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Backup Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Reporting Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Federal Income Tax Consequences for Securities as to Which No REMIC Election Is Made . . . . . . . . . . . . . . 61
Premium and Discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
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
</TABLE>
<PAGE> 120
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.
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
1
<PAGE> 121
(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
Regulations describe the constant yield method for amortizing premium and
provide 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 action 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 regulations which, if
adopted in final form, could have an affect on the United States taxation of
foreign investors owning Regular Securities or Residual Securities. 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
Regulations 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
68
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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.
69
<PAGE> 189
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
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
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
DEPOSITOR OR BY THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY ANY OF
THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION HEREIN
(INCLUDING INFORMATION INCORPORATED BY REFERENCE HEREIN) OR THEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS.
----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Summary of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-25
The Portfolio of Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-29
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-47
The Depositor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-47
The Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-47
The Mortgage Loan Pools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-47
Prepayment and Yield Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-63
The Originators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-73
Formation of the Trust and Trust Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-73
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-74
Description of the Offered Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-74
Other Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-82
Credit Enhancement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-82
The Pooling and Servicing Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-87
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-97
ERISA Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-98
Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-101
Legal Investment Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-102
Underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-102
Certain Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-106
Global Clearance, Settlement and Tax
Documentation Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annex I
Index to Location of Principal Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
PROSPECTUS
Summary of Prospectus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Description of the Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
The Trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Credit Enhancement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Servicing of the Mortgage Loans and Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
The Depositor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Certain Legal Aspects of the Mortgage Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Legal Investment Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
ERISA Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Index to Location of Principal Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1
</TABLE>
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AMRESCO RESIDENTIAL
SECURITIES CORPORATION
MORTGAGE LOAN TRUST 1997-3
$950,000,000
MORTGAGE LOAN PASS-THROUGH CERTIFICATES, SERIES 1997-3
----------
$31,500,000 6.75% CLASS A-1 CERTIFICATES
$36,000,000 6.61% CLASS A-2 CERTIFICATES
$41,800,000 6.60% CLASS A-3 CERTIFICATES
$29,100,000 6.68% CLASS A-4 CERTIFICATES
$14,600,000 6.88% CLASS A-5 CERTIFICATES
$14,200,000 6.98% CLASS A-6 CERTIFICATES
$15,300,000 7.14% CLASS A-7 CERTIFICATES
$19,790,000 7.68% CLASS A-8 CERTIFICATES
$22,480,000 6.96% CLASS A-9 CERTIFICATES
$554,040,000 CLASS A-10 CERTIFICATES
$14,630,000 7.24% CLASS M-1F CERTIFICATES
$54,720,000 CLASS M-1A CERTIFICATES
$11,970,000 7.47% CLASS M-2F CERTIFICATES
$41,040,000 CLASS M-2A CERTIFICATES
$10,640,000 7.77% CLASS B-1F CERTIFICATES
$34,200,000 CLASS B-1A CERTIFICATES
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PROSPECTUS SUPPLEMENT
--------------
Morgan Stanley Dean Witter
Credit Suisse First Boston
Lehman Brothers
Prudential Securities Incorporated
September 5, 1997
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