PROSPECTUS SUPPLEMENT
(To Prospectus Dated October 18, 1999)
$208,740,000
AMRESCO RESIDENTIAL SECURITIES CORPORATION
MORTGAGE LOAN TRUST 1999-1
AMRESCO RESIDENTIAL SECURITIES CORPORATION
DEPOSITOR
AMRESCO RESIDENTIAL MORTGAGE CORPORATION
ORIGINATOR
OCWEN FEDERAL BANK FSB
SERVICER
-------------------------
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CONSIDER CAREFULLY THE RISK The trust fund will issue certificates including the following:
FACTORS BEGINNING ON PAGE S-10 OF INITIAL CERTIFICATE PASS-THROUGH
THIS PROSPECTUS SUPPLEMENT AND ON CLASS PRINCIPAL BALANCE RATE(1)
PAGE 6 OF THE PROSPECTUS. ----- ----------------- --------
A................................ $176,863,000 LIBOR + 0.47%
<S> <C> <C> <C>
For a list of capitalized M1............................... 13,690,000 LIBOR + 0.75%
terms used in this prospectus M2............................... 8,572,000 LIBOR + 1.35%
supplement and the prospectus, see B................................ 9,615,000 LIBOR + 3.50%
the index of defined terms ___________________
beginning on page S-90 of this (1) Interest will accrue on the Class A, M1, M2 and B Certificates at the variable
prospectus supplement and on page rates set forth above, subject, in each case, to the available funds cap described
A-1 of the prospectus. in this prospectus supplement. The pass-through rates are subject to increase as
described in this prospectus supplement. See "Description of the Certificates --
The certificates will Distributions of Interest" and "-- Optional Purchase of Mortgage Loans;
represent interests in the Termination of the Trust Fund" in this prospectus supplement.
trust fund only and will not
represent interests in or This prospectus supplement and the accompanying prospectus relate only to the
obligations of any other offering of the certificates listed in the table above and not to the other
entity. classes of certificates that will be issued by the trust fund as described in
this prospectus supplement.
This prospectus supplement
may be used to offer and sell the The assets of the trust fund primarily consist of mortgage loans that were
certificates only if accompanied by originated in accordance with underwriting guidelines that are not as strict as Fannie
the prospectus. Mae and Freddie Mac guidelines. As a result, these mortgage loans may experience
higher rates of delinquency, foreclosure and bankruptcy than if they had been
underwritten in accordance with higher standards.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE CERTIFICATES OR DETERMINED THAT THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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The certificates offered by this prospectus supplement will be purchased by
Lehman Brothers Inc. from the depositor and are being offered by Lehman Brothers
from time to time for sale to the public in negotiated transactions or otherwise
at varying prices to be determined at the time of sale. Proceeds to the
depositor from the sale of these certificates will be approximately 99.4% of
their total initial certificate principal balance before deducting expenses. See
"Underwriting" in this prospectus supplement for additional information on the
offering of the certificates. On or about October 20, 1999, delivery of the
certificates offered by this prospectus supplement will be made through the
book-entry facilities of The Depository Trust Company, Cedelbank and the
Euroclear System.
Underwriter:
LEHMAN BROTHERS
The date of this prospectus supplement is October 18, 1999
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS:
We provide information to you about the certificates offered by this
prospectus supplement in two separate documents that progressively provide more
detail: (1) the accompanying prospectus, which provides general information,
some of which may not apply to your certificates, and (2) this prospectus
supplement, which describes the specific terms of your certificates.
IF INFORMATION VARIES BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS
SUPPLEMENT.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the certificates in any state where the offer is
not permitted. We do not claim that the information in this prospectus
supplement and prospectus is accurate as of any date other than the dates stated
on their respective covers.
------------------------------
Dealers will deliver a prospectus supplement and prospectus when acting
as underwriters of the certificates and with respect to their unsold allotments
or subscriptions. In addition, all dealers selling the certificates will be
required to deliver a prospectus supplement and prospectus for ninety days
following the date of this prospectus supplement.
------------------------------
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following tables of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
<PAGE>
TABLES OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
Summary of Terms............................................................S-5
The Offered Certificates.................................................S-5
The Mortgage Loans.......................................................S-7
The Pre-Funding Account..................................................S-8
Servicing of the Mortgage Loans..........................................S-8
Optional Purchase of Mortgage Loans......................................S-8
Tax Status...............................................................S-9
ERISA Considerations.....................................................S-9
Legal Investment Considerations..........................................S-9
Ratings of the Certificates..............................................S-9
Risk Factors...............................................................S-10
Higher Expected Delinquencies of the Mortgage Loans.....................S-10
Variations in Characteristics of Subsequent Mortgage Loans..............S-10
Adverse Selection of Mortgage Loans.....................................S-11
Mortgage Loan Interest Rates May Limit Pass-Through Rates
on the Certificates....................................................S-11
Potential Inadequacy of Credit Enhancement..............................S-12
Effect of Lack of Primary Mortgage Insurance............................S-15
Some Mortgage Loans are Secured Only by Junior Liens....................S-15
Unpredictability and Effect of Prepayments..............................S-15
Early Principal Payment From Cash Remaining in Pre-Funding
Account................................................................S-16
Geographic Concentration of Mortgage Loans..............................S-16
Servicing Transfer Could Cause Higher Delinquencies.....................S-17
Potential Disruption of Computer Systems................................S-17
Limited Ability to Resell Certificates..................................S-17
Other Legal Considerations..............................................S-17
Description of the Certificates............................................S-19
General.................................................................S-19
Pre-Funding Account.....................................................S-20
Book-Entry Registration.................................................S-21
Distributions of Interest...............................................S-25
Determination of LIBOR..................................................S-29
Distributions of Principal..............................................S-31
Credit Enhancement......................................................S-36
Final Scheduled Payment Date............................................S-39
Reports to Certificateholders...........................................S-39
Optional Purchase of Mortgage Loans; Termination of the
Trust Fund.............................................................S-40
The Trustee.............................................................S-41
Description of the Mortgage Pool...........................................S-41
General.................................................................S-41
Adjustable Rate Mortgage Loans..........................................S-43
The Index...............................................................S-44
The Initial Mortgage Loans..............................................S-44
Subsequent Mortgage Loans...............................................S-55
Additional Information.....................................................S-55
The Originator.............................................................S-56
General.................................................................S-56
Underwriting Guidelines.................................................S-56
Prepayment Penalties....................................................S-60
Representations Relating to the Mortgage Loans..........................S-61
ARCMI...................................................................S-61
Recent Developments.....................................................S-62
The Servicer...............................................................S-62
General.................................................................S-62
Delinquency, Loan Loss and Foreclosure Information......................S-63
The Pooling and Servicing Agreement........................................S-64
General.................................................................S-64
Assignment of Mortgage Loans............................................S-64
Covenants of the Originator with Respect to the Mortgage Loans..........S-66
Servicing...............................................................S-67
Removal and Resignation of a Servicer...................................S-72
Removal of Trustee for Cause............................................S-73
Amendments..............................................................S-73
Yield Considerations.......................................................S-74
General.................................................................S-74
Overcollateralization...................................................S-76
Subordination of the Offered Subordinate Certificates...................S-76
Weighted Average Life...................................................S-76
Certain Federal Income Tax Consequences....................................S-84
General.................................................................S-84
Taxation of Regular Interests...........................................S-84
Status of the Offered Certificates......................................S-85
The Basis Risk Reserve Fund.............................................S-85
State Income Tax Considerations............................................S-86
ERISA Considerations.......................................................S-86
Legal Investment Matters...................................................S-89
Use of Proceeds............................................................S-89
Underwriting...............................................................S-89
Legal Matters..............................................................S-90
Ratings....................................................................S-90
Glossary of Defined Terms..................................................S-92
Annex I....................................................................S-94
<PAGE>
PROSPECTUS
Page
SUMMARY OF PROSPECTUS ........................................................1
RISK FACTORS .................................................................6
DESCRIPTION OF THE SECURITIES.................................................9
General .................................................................9
Classes of Securities ..................................................10
Distributions of Principal and Interest ................................11
Book Entry Registration ................................................13
List of Owners of Securities ...........................................13
THE TRUSTS ..................................................................13
Mortgage Loans .........................................................14
Contracts ..............................................................15
Mortgage-Backed Securities .............................................16
Other Mortgage Securities ..............................................16
CREDIT ENHANCEMENT ..........................................................16
SERVICING OF MORTGAGE LOANS AND CONTRACTS ...................................20
Payments on Mortgage Loans .............................................21
Advances ...............................................................21
Collection and Other Servicing Procedures ..............................21
Primary Mortgage Insurance .............................................23
Standard Hazard Insurance ..............................................23
Title Insurance Policies ...............................................24
Claims Under Primary Mortgage Insurance Policies and Standard
Hazard Insurance Policies; Other Realization Upon Defaulted Loan ......25
Servicing Compensation and Payment of Expenses..........................25
Master Servicer ........................................................25
ADMINISTRATION ..............................................................26
Assignment of Mortgage Assets ..........................................26
Evidence as to Compliance ..............................................28
The Trustee ............................................................28
Administration of the Security Account .................................29
Reports ................................................................29
Forward Commitments; Pre-Funding........................................30
Servicer Events of Default .............................................30
Rights Upon Servicer Event of Default ..................................31
Amendment ..............................................................31
Termination ............................................................31
USE OF PROCEEDS .............................................................32
THE DEPOSITOR ...............................................................32
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS ................................32
General ................................................................32
Foreclosure ............................................................33
Soldiers' and Sailors' Civil Relief Act.................................38
The Contracts ..........................................................38
The Title I Program ....................................................40
LEGAL INVESTMENT MATTERS ....................................................41
ERISA CONSIDERATIONS ........................................................41
CERTAIN FEDERAL INCOME TAX CONSEQUENCES .....................................43
Federal Income Tax Consequences For REMIC Securities....................43
Taxation of Regular Securities .........................................44
Taxation of Residual Securities ........................................49
Treatment of Certain Items of REMIC Income and Expense..................51
Tax-Related Restrictions on Transfer of Residual Securities.............52
Sale or Exchange of a Residual Security ................................54
Taxes That May Be Imposed on the REMIC Pool........................... .54
Liquidation of the REMIC Pool ..........................................55
Administrative Matters .................................................55
Limitations on Deduction of Certain Expenses............................55
Taxation of Certain Foreign Investors ..................................56
Backup Withholding .....................................................56
Reporting Requirements .................................................56
Federal Income Tax Consequences for Securities as to Which No
REMIC Election Is Made.................................................57
Standard Securities ....................................................57
Premium and Discount ...................................................58
Stripped Securities ....................................................60
Reporting Requirements and Backup Withholding...........................62
Taxation of Certain Foreign Investors ..................................62
Debt Securities ........................................................63
Taxation of Securities Classified as Partnership Interests..............64
PLAN OF DISTRIBUTION ........................................................64
RATINGS .....................................................................64
LEGAL MATTERS ...............................................................64
FINANCIAL INFORMATION .......................................................64
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS ...............................A-1
<PAGE>
SUMMARY OF TERMS
o THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROSPECTUS
SUPPLEMENT AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO
CONSIDER IN MAKING YOUR INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS
OF THE OFFERING OF THE CERTIFICATES, IT IS NECESSARY THAT YOU READ
CAREFULLY THIS ENTIRE PROSPECTUS SUPPLEMENT AND ACCOMPANYING PROSPECTUS.
o WHILE THIS SUMMARY CONTAINS AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOW
PRIORITIES, AND OTHER INFORMATION TO AID YOUR UNDERSTANDING, YOU SHOULD
READ CAREFULLY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH FLOW
PRIORITIES AND OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS BEFORE MAKING ANY INVESTMENT DECISION.
o WHENEVER WE REFER TO A PERCENTAGE OF SOME OR ALL OF THE MORTGAGE LOANS IN
THE TRUST FUND, THAT PERCENTAGE HAS BEEN CALCULATED ON THE BASIS OF THE
TOTAL PRINCIPAL BALANCE OF THOSE MORTGAGE LOANS AS OF SEPTEMBER 1, 1999,
UNLESS WE SPECIFY OTHERWISE. WE EXPLAIN IN THIS PROSPECTUS SUPPLEMENT UNDER
"DESCRIPTION OF THE CERTIFICATES -- DISTRIBUTIONS OF PRINCIPAL" HOW THE
PRINCIPAL BALANCE OF A MORTGAGE LOAN IS DETERMINED. WHENEVER WE REFER IN
THIS SUMMARY OF TERMS OR IN THE RISK FACTORS SECTION OF THIS PROSPECTUS
SUPPLEMENT TO THE TOTAL PRINCIPAL BALANCE OF ANY MORTGAGE LOANS, WE MEAN
THE TOTAL OF THEIR PRINCIPAL BALANCES DETERMINED BY THAT METHOD, UNLESS WE
SPECIFY OTHERWISE.
<PAGE>
THE OFFERED CERTIFICATES
AMRESCO Residential Securities Corporation Mortgage Loan Pass-Through
Certificates consist of the following classes: A, M1, M2, B, X and R. Only the
Class A, M1, M2 and B Certificates are being offered by this prospectus
supplement. These certificates will be issued in book-entry form.
See "Description of the Certificates -- General" in this prospectus
supplement for a discussion of the minimum denominations and the incremental
denominations of each class of certificates.
The certificates will represent ownership interests in a trust fund, the
assets of which consist primarily of a pool of fixed and adjustable rate
mortgage loans.
The rights of holders of the Class M1, M2 and B Certificates to payments
will be subordinate to the rights of the holders of certificates having a higher
priority of payment, as described in this Summary of Terms under "-- Enhancement
of Likelihood of Payment on the Certificates -- Subordination of Payments"
below. We refer to the Class A Certificates as senior certificates, and to the
Class M1, M2 and B Certificates as subordinate certificates.
The certificates will have an approximate total initial certificate
principal balance of $208,740,000.
PAYMENTS ON THE CERTIFICATES
The initial payment of principal and interest on the certificates will
occur on October 27, 1999. Thereafter, principal and interest on the
certificates will be payable on the 25th day of each month. However, if the 25th
day is not a business day, distributions will be made on the next business day
after the 25th day of the month.
INTEREST PAYMENTS
Interest will accrue on each class of certificates, other than the Class X
and R Certificates, at the applicable annual rates described in this prospectus
supplement.
See "Description of the Certificates -- Distributions of Interest" in this
prospectus supplement.
PRINCIPAL PAYMENTS
The amount of principal payable on the certificates, other than the Class X
and R Certificates, will be determined by (1) funds actually received on the
mortgage loans that are available to make payments on the certificates, (2) the
amount of interest received or advanced on the mortgage loans that is used to
pay principal on the certificates, calculated as described in this prospectus
supplement, (3) formulas that allocate a portion of principal payments received
on the mortgage loans to each class of certificates, as described in this
prospectus supplement, and (4) the amount of principal received or advanced on
the mortgage loans that is released to the Class X Certificate, calculated as
described in this prospectus supplement. Funds actually received on the mortgage
loans may consist of expected, scheduled payments, and unexpected payments
resulting from prepayments or defaults by borrowers, liquidation of defaulted
mortgage loans, or repurchases of mortgage loans under the circumstances
described in this prospectus supplement.
The manner of allocating payments of principal on the Class A, M1, M2 and B
Certificates will differ, as described in this prospectus supplement, depending
upon whether a payment date occurs before the payment date referred to in this
prospectus supplement as the stepdown date or on or after that date, and
depending upon whether the delinquency and loss performance of the mortgage
loans is worse than certain levels set by the rating agencies.
We explain how principal is paid on the certificates under "Description of
the Certificates -- Distributions of Principal" in this prospectus supplement.
LIMITED RECOURSE
The only source of cash available to make interest and principal payments
on the certificates will be the assets of the trust fund. The trust fund will
have no other source of cash and no entity other than the trust fund will be
required or expected to make any payments on the certificates.
ENHANCEMENT OF LIKELIHOOD OF PAYMENT ON THE CERTIFICATES
The payment structure includes overcollateralization, the credit reserve
fund, subordination and loss allocation features to enhance the likelihood that
certificateholders of more senior classes will receive regular distributions of
interest and principal. The Class B Certificates are more likely to experience
losses than the Class M2, M1 and A Certificates. The Class M2 Certificates are
more likely to experience losses than the Class M1 and A Certificates; and the
Class M1 Certificates are more likely to experience losses than the Class A
Certificates.
See "Risk Factors -- Potential Inadequacy of Credit Enhancement" and
"Description of the Certificates -- Credit Enhancement" in this prospectus
supplement for a more detailed description of overcollateralization, the credit
reserve fund, subordination, and loss allocation.
Subordination of Payments
The Class A Certificates will have a payment priority over the other
certificates both for payments of interest and payments of principal. The Class
M1 Certificates will have a payment priority over the Class M2 and B
Certificates, and the Class M2 Certificates will have a payment priority over
the Class B Certificates. No amounts will be paid to the holder of the Class X
Certificate on any payment date until all amounts due to the Class A, M1, M2 and
B Certificates on that date have been paid and overcollateralization has reached
the required level.
Overcollateralization
On the closing date, the total principal balance of the mortgage loans and
the amount to be deposited in the pre-funding account for the purchase of
additional mortgage loans will exceed the total principal balance of the offered
certificates by approximately 2.00%. This condition is referred to as
"overcollateralization." Any interest received on the mortgage loans in excess
of the amount needed to pay interest on the certificates and certain expenses
and fees of the trust fund and other amounts that are described in this
prospectus supplement will be used to further reduce the total principal balance
of the certificates until the total principal balance of the mortgage loans and
amounts in the pre-funding account, if any, exceed the total outstanding
principal balance of the certificates by the amount required by the rating
agencies. We cannot assure you that sufficient interest will be generated by the
mortgage loans to increase or maintain overcollateralization to the level
required by the rating agencies.
See "Risk Factors -- Potential Inadequacy of Credit Enhancement" and
"Description of the Certificates -- Credit Enhancement -- Subordination" and "--
Overcollateralization" in this prospectus supplement.
Credit Reserve Fund
On the first six payment dates any excess interest that would otherwise be
paid to the holder of the Class X Certificate will instead be deposited into a
credit reserve fund. These funds will be used to increase overcollateralization,
if necessary, and to cover losses on the mortgage loans after
overcollateralization is eliminated before losses are allocated as described
under "-- Allocation of Losses" below. Any amounts remaining on deposit in the
credit reserve fund on the payment date in April 2000 will be paid to the holder
of the Class X Certificate.
See "Risk Factors -- Potential Inadequacy of Credit Enhancement" and
"Description of the Certificates -- Credit Enhancement -- Credit Reserve Fund"
in this prospectus supplement.
Allocation of Losses
As described in this prospectus supplement, amounts representing losses on
the mortgage loans in excess of overcollateralization will be applied, after
there are no funds remaining in the credit reserve fund, to reduce the principal
balance of the class of subordinate certificates still outstanding that has the
lowest payment priority, until the principal balance of that class of
certificates has been reduced to zero. For example, losses in excess of
overcollateralization will first be allocated in reduction of the principal
balance of the Class B Certificates until it is reduced to zero, then in
reduction of the principal balance of the Class M2 Certificates until it is
reduced to zero, and finally in reduction of the principal balance of the Class
M1 Certificates until it is reduced to zero. If the applicable subordination is
insufficient to absorb losses, then holders of certificates having higher
priority of payment will incur losses and may never receive all of their
principal payments.
o If a loss has been allocated to reduce the principal balance of your
certificate, you will receive no payment in respect of that reduction
at that time.
o After overcollateralization has been increased to the required level,
you will receive the amount of that loss if there are sufficient funds
to pay you, as described in this prospectus supplement, but you will
not receive any interest on that amount.
Losses on the mortgage loans will not be applied to reduce the principal
balance of the Class A Certificates.
See "Risk Factors -- Potential Inadequacy of Credit Enhancement" and
"Description of the Certificates -- Credit Enhancement -- Allocation of Losses"
in this prospectus supplement.
THE MORTGAGE LOANS
On the closing date, which is expected to be on or about October 20, 1999,
the assets of the trust fund will consist primarily of a pool of mortgage loans
with a total principal balance of approximately $208,964,821. The assets of the
trust fund will also include approximately $4,035,179 in cash, which will be
deposited into a pre-funding account and used to purchase additional mortgage
loans within two months after the closing date. The mortgage loans will be
secured by mortgages, deeds of trust, or other security instruments, all of
which are referred to in this prospectus supplement as mortgages.
The mortgage loans are adjustable and fixed rate, fully amortizing and
balloon, conventional, first and second lien residential home equity mortgage
loans that have original terms to stated maturity ranging from 10 to 30 years.
The mortgage loans were originated or acquired by AMRESCO Residential
Mortgage Corporation in accordance with underwriting guidelines that are less
strict than Fannie Mae and Freddie Mac guidelines. As a result, the mortgage
loans are likely to experience higher rates of delinquency, foreclosure and
bankruptcy than mortgage loans underwritten in accordance with such higher
standards.
The mortgage loans in the trust fund will not be insured or guaranteed by
any government agency.
See "Description of the Mortgage Pool" in this prospectus supplement for a
general description of the mortgage loans and "The Originator -- Underwriting
Guidelines" in this prospectus supplement for a description of the underwriting
guidelines applied in originating the mortgage loans.
THE PRE-FUNDING ACCOUNT
On the closing date, approximately $4,035,179 will be deposited in a
pre-funding account maintained by the Trustee. It is intended that additional
mortgage loans will be sold to the trust fund by the depositor from time to
time, from the closing date until or prior to December 10, 1999, paid for with
the funds on deposit in the pre-funding account. It is anticipated that all of
the additional loans to be purchased by the trust fund will be one payment
delinquent as of the last day of the calendar month preceding the month when
they are sold to the trust fund. As new mortgage loans are purchased and added
to the mortgage pool, the total principal balance of the mortgage loans will
increase and the funds in the pre-funding account will decrease by the same
amount. If some or all of the money in the pre-funding account has not been used
to purchase additional mortgage loans by December 10, 1999 or if the amount in
the pre-funding account is reduced to less than $100,000, then the unused
portion will be paid as principal on the certificates on the next payment date.
See "Description of the Certificates - Pre-Funding Account" and
"Description of the Mortgage Pool Subsequent Mortgage Loans" in this prospectus
supplement.
SERVICING OF THE MORTGAGE LOANS
The servicer of the mortgage loans will be Ocwen Federal Bank FSB.
Substantially all of the mortgage loans are currently being serviced by AMRESCO
Residential Mortgage Corporation with the remainder being serviced by other
third party servicers. The servicing function is expected to be fully
transferred to Ocwen Federal Bank FSB on or before November 2, 1999 for the
mortgage loans expected to be transferred to the trust fund on the closing date.
Servicing for any additional mortgage loans purchased with amounts in the
pre-funding account will be transferred to Ocwen Federal Bank FSB as soon as
practicable following transfer to the trust fund.
See "The Servicer" and "The Pooling and Servicing Agreement -- Servicing"
in this prospectus supplement.
OPTIONAL PURCHASE OF MORTGAGE LOANS
The holder of the Class X Certificate will have the option to purchase all
of the mortgage loans and the other property of the trust fund after the total
principal balance of the Class A Certificates declines to less than 35% of the
initial total principal balance of the Class A Certificates on the closing date.
If the mortgage loans and other assets are purchased, the
certificateholders will be paid accrued interest and principal equal to the
outstanding principal balance of the certificates.
See "Description of the Certificates -- Optional Purchase of Mortgage
Loans; Termination of the Trust Fund" in this prospectus supplement for a
description of the purchase price to be paid for the mortgage loans.
TAX STATUS
The trustee will elect to treat all or a portion of the trust fund (other
than the basis risk reserve fund and the credit reserve fund) as multiple REMICs
for federal income tax purposes. Each of the certificates, other than the Class
R Certificate, will represent ownership of "regular interests" in a REMIC and
the Class R Certificate will be designated as the sole class of "residual
interest" in each REMIC.
The Certificates may be issued with original issue discount for federal
income tax purposes.
See "Certain Federal Income Tax Consequences" in this prospectus supplement
and in the accompanying prospectus for additional information concerning the
application of federal income tax laws to the certificates.
ERISA CONSIDERATIONS
Generally, the Class A Certificates may, but the Class M1, M2 and B
Certificates may not, be purchased by employee benefit plans or individual
retirement accounts subject to the Employee Retirement Income Security Act of
1974 or Section 4975 of the Internal Revenue Code of 1986. A fiduciary of an
employee benefit plan or an individual retirement account must determine that
the purchase of a certificate is consistent with its fiduciary duties under
applicable law and does not result in a nonexempt prohibited transaction under
applicable law.
See "ERISA Considerations" in this prospectus supplement and in the
prospectus for a more complete discussion of these issues.
LEGAL INVESTMENT CONSIDERATIONS
The certificates will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984.
There are other restrictions on the ability of certain types of investors
to purchase the certificates that prospective investors should consider.
See "Legal Investment Matters" in this prospectus supplement and in the
prospectus.
RATINGS OF THE CERTIFICATES
The certificates will initially have the following ratings from Standard &
Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. and Duff
& Phelps Credit Rating Co.:
Standard
& Poor's DCR
Class Rating Rating
A AAA AAA
M1 AA AA
M2 A A
B N/A BBB
These ratings are not recommendations to buy, sell or hold these
certificates. A rating may be changed or withdrawn at any time by the assigning
rating agency.
o The ratings do not address the possibility that, as a result of
principal prepayments, the yield on your certificates may be lower than
anticipated.
See "Ratings" in this prospectus supplement for a more complete discussion
of the certificate ratings.
<PAGE>
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER,
IDENTIFIES CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN
THE CERTIFICATES. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH
UNDER "RISK FACTORS" IN THE PROSPECTUS.
HIGHER EXPECTED DELINQUENCIES The mortgage loans were originated or
OF THE AMRESCO MORTGAGE LOANS acquired by Residential Mortgage Corporation
in accordance with underwriting guidelines
described in this prospectus supplement,
which are not as strict as Fannie Mae or
Freddie Mac guidelines. For this reason, 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 in accordance
with higher standards.
Changes in the values of mortgaged properties
related to the mortgage loans may have a
greater effect on the delinquency,
foreclosure, bankruptcy and loss experience
of the mortgage loans in the trust fund than
on mortgage loans originated under stricter
guidelines. We cannot assure you that the
values of the mortgaged properties have
remained or will remain at levels in effect
on the dates of origination of the related
mortgage loans.
Approximately 0.60% of the mortgage loans
expected to be in the trust fund on the
closing date will be one payment delinquent
as of August 31, 1999. As of the cut-off
date, with respect to 0.72% of the mortgage
loans expected to be in the trust fund on the
closing date, the borrowers have failed to
make the first payment after origination of
the mortgage loan.
See "Description of the Mortgage Pool --
General" in this prospectus supplement for a
description of the characteristics of the
mortgage pool and "The Originator --
Underwriting Guidelines" for a general
description of the underwriting guidelines
used in originating the mortgage loans.
VARIATIONS IN CHARACTERISTICS OF Mortgage loans acquired by the trust fund
SUBSEQUENT MORTGAGE LOANS after the closing date may differ from those
acquired on the closing date. The
after-acquired loans may be of lower credit
quality and may have different loan
characteristics. It is anticipated that all
of the additional mortgage loans will be one
payment delinquent as of the last day of the
calendar month preceding the month when they
are purchased by the trust fund. As to a
substantial portion of these mortgage loans,
the borrowers will have failed to make the
first payment after origination of the
mortgage loan. As a result, the overall
statistical characteristics of the mortgage
loans following the acquisition of additional
mortgage loans may vary from those of the
mortgage loans acquired on the closing date.
See "The Description of the Mortgage Pool --
Subsequent Mortgage Loans" in this prospectus
supplement for information on the additional
mortgage loans.
ADVERSE SELECTION OF MORTGAGE Approximately 92% of mortgage loans expected
LOANS expected to be included in the trust fund on
the closing date have been previously offered
for sale to purchasers and were excluded from
purchase, or purchased and subsequently
repurchased by the originator for a variety
of reasons. A significant portion of the
mortgage loans were not previously purchased
because of what the purchasers believed to be
potential deviations from the originator's
underwriting guidelines or potential
valuation and appraisal discrepancies.
Approximately 32% of the mortgage loans
expected to be included in the trust fund on
the closing date were repurchased or rejected
because of what purchasers believed to be
potential disclosure or documentation
deficiencies under federal and state law.
However, the originator will represent and
warrant in the pooling and servicing
agreement that each mortgage loan was
originated in compliance with applicable
federal and state laws or, if there was a
deficiency in compliance, that such
deficiency is not material to the interests
of the trust fund or certificateholders. The
originator, in the above cases, did not
always agree with the purchasers' conclusions
or believed there may have been compensating
factors which cured the potential
deficiencies.
These mortgage loans may
present a greater risk of delinquency or loss
during a foreclosure or bankruptcy than other
mortgage loans originated by the originator.
See "--Other Legal Considerations" below and
"The Pooling and Servicing Agreement" in this
prospectus supplement for more information on
federal and state law compliance issues and
"The Originator-- Underwriting Guidelines" in
this prospectus supplement for a description
of the originator's underwriting guidelines.
MORTGAGE LOAN INTEREST LIBOR may increase or decrease at different
RATES MAY LIMIT PASS-THROUGH times and in different amounts than the six
RATES ON THE CERTIFICATES month LIBOR index applicable to the
adjustable rate mortgage loans.
In addition, because the interest rates on
the adjustable rate mortgage loans adjust at
different times, because the interest rates
on approximately 95.16% of the adjustable
rate mortgage loans expected to be included
in the trust fund on the closing date do not
adjust for two or five years from their
origination dates, and because the interest
rates on approximately 37.23% of the mortgage
loans expected to be included in the trust
fund on the closing date are fixed, if the
interest rates of the Class A, M1, M2 and B
Certificates were not capped as described in
this prospectus supplement under "Description
of the Certificates -- Distributions of
Interest," there may be times when those
rates would exceed the weighted average of
the interest rates on the mortgage loans
(after deduction of fees and other amounts).
If that happens, the caps will have the
effect of reducing the interest rates on your
certificates, at least temporarily. The
difference, limited as described in this
prospectus supplement, will be paid to you on
future payment dates only if there is enough
excess cashflow to pay it.
See "Description of the Certificates --
Distributions of Interest" and "-- Credit
Enhancement -- Overcollateralization" in this
prospectus supplement. For detailed
information on the interest rates of the
mortgage loans, see "Description of the
Mortgage Pool" in this prospectus supplement.
POTENTIAL INADEQUACY The certificates are not insured by any
OF CREDIT ENHANCEMENT financial guaranty insurance policy. The
overcollateralization, the credit reserve
fund, subordination and loss allocation
features described in this prospectus
supplement are intended to enhance the
likelihood that certificateholders of more
senior classes will receive regular payments
of interest and principal, but are limited in
nature and may be insufficient to cover all
losses on the mortgage loans or shortfalls in
interest payments on the mortgage loans.
OVERCOLLATERALIZATION. On the closing date,
the total principal balance of the mortgage
loans and the amounts in the pre-funding
account will exceed the total principal
balance of the certificates by approximately
2.00%. If the mortgage loans suffer any
losses, in order to increase or maintain
overcollateralization to the required levels,
it will be necessary that the mortgage loans
generate more interest than is needed to pay
interest on the certificates as well as fees
and expenses of the trust fund and other
amounts that are described in this prospectus
supplement. We expect that the mortgage loans
will generate more interest than is needed to
pay those amounts, at least during certain
periods, because the weighted average of the
interest rates on the mortgage loans will be
higher, at the time the certificates are
issued, than the weighted average of the
interest rates on the certificates. We cannot
assure you, however, that enough excess
interest will be generated to reach the
overcollateralization levels required by the
rating agencies. The following factors will
affect the amount of excess interest that the
mortgage loans will generate:
o Prepayments. Every time a mortgage loan
with an interest rate higher than the
weighted average of the interest rates on
the certificates is prepaid, total excess
interest after the date of prepayment will
be reduced because that mortgage loan will
no longer be outstanding and generating
interest. The effect on your certificates
of this reduction will be influenced by the
amount of prepaid loans and the
characteristics of the prepaid loans.
Prepayment of a disproportionately high
number of high interest rate mortgage loans
would have a greater negative effect on
future excess interest.
o Defaults. The rate of defaults on the
mortgage loans may turn out to be higher
than expected. Defaulted mortgage loans may
be liquidated, and liquidated mortgage
loans will no longer be outstanding and
generating interest.
o Level of LIBOR. If LIBOR increases, more
money will be needed to pay interest to
certificateholders, so less money will be
available as excess interest.
See "Description of the Certificates --
Credit Enhancement -- Overcollateralization"
in this prospectus supplement.
CREDIT RESERVE FUND. The amounts on deposit
in the credit reserve fund will be any
interest collections on the mortgage loans in
excess of amounts needed to pay interest on
the certificates and certain expenses and
fees of the trust fund and other amounts
described in this prospectus supplement,
which would otherwise have been paid to the
holder of the Class X Certificate, on the
first six payment dates. Funds in the credit
reserve fund will be available to increase
overcollateralization, if necessary, and to
cover losses on the mortgage loans only after
overcollateralization has been eliminated.
Any amount on deposit in the credit reserve
fund on the payment date in April 2000 will
be paid to the holder of the Class X
Certificate. The credit reserve fund will
only provide a source of short term credit
support for the certificates through the
sixth payment date.
See "Description of the Certificates --
Credit Reserve Fund" in this prospectus
supplement.
LOSS ALLOCATION. If applicable subordination
is insufficient to absorb losses, then more
senior certificateholders will likely incur
losses and may never receive all of their
principal payments.
o If you buy a Class B Certificate and losses
on the mortgage loans exceed excess
interest and any overcollateralization that
has been created, the principal balance of
your certificate will be reduced
proportionately with the principal balances
of the other Class B Certificates by the
amount of that excess.
o If you buy a Class M2 Certificate and
losses on the mortgage loans exceed excess
interest and any overcollateralization that
has been created plus the total principal
balance of the Class B Certificates, the
principal balance of your certificate will
be reduced proportionately with the
principal balances of the other Class M2
Certificates by the amount of that excess.
o If you buy a Class M1 Certificate and
losses on the mortgage loans exceed excess
interest and any overcollateralization that
has been created plus the total principal
balance of the Class B and M2 Certificates,
the principal balance of your certificate
will be reduced proportionately with the
principal balances of the other Class M1
Certificates by the amount of that excess.
o Losses on the mortgage loans will not
reduce the principal balance of the Class A
Certificates.
Following an allocation of losses as
described above, if overcollateralization is
reinstated to the required amount and if the
mortgage loans subsequently generate interest
in excess of the amount needed to pay
interest and principal on the certificates
and fees and expenses of the trust fund, the
excess interest will be used to pay you and
other certificateholders the amount of any
reduction in the principal balances of the
certificates caused by application of losses,
as described in this prospectus supplement.
o We cannot assure you, however, that any
excess interest will be generated and, in
any event, no interest will be paid to you
on the amount by which your principal
balance was reduced because of the
application of losses.
See "Description of the Certificates --
Credit Enhancement -- Subordination" and "--
Allocation of Losses" in this prospectus
supplement.
EFFECT OF LACK OF PRIMARY Approximately 34.65% of the mortgage
MORTGAGE INSURANCE loans expected to be included in the trust
fund on the closing date have loan-to-value
ratios greater than 80%. None of the mortgage
loans are covered by a primary mortgage
insurance policy. If borrowers default on
their mortgage loans, there is a greater
likelihood of losses than if the loans were
insured. We cannot assure you that the
applicable credit enhancement will be
adequate to cover those losses.
See "Description of the Certificates --
Credit Enhancement -- Subordination" and "--
Allocation of Losses" in this prospectus
supplement.
SOME MORTGAGE LOANS ARE SECURED Approximately 0.57% of the mortgage loans
ONLY BY JUNIOR LIENS expected to be included in the trust fund on
the closing date are secured by junior
mortgages that are subordinate to senior
mortgages. If the property securing a junior
mortgage loan is sold, you will not receive
any distributions from the proceeds until the
senior mortgage loan has been paid in full.
If a borrower defaults on a junior mortgage
loan and the related property is sold, there
may not be enough proceeds to pay both the
senior mortgage loan and the junior mortgage
loan. If that happens, holders of the lowest
priority certificates outstanding may suffer
losses.
See "Description of the Mortgage Pool" in
this prospectus supplement for a description
of the mortgage loan characteristics.
UNPREDICTABILITY AND EFFECT Borrowers may prepay their mortgage loans in
OF PREPAYMENTS whole or in part at any time; however,
approximately 76.45% of the mortgage loans
expected to be included in the trust fund on
the closing date require the payment of a
prepayment penalty in connection with some
voluntary prepayments, which may discourage
these borrowers from prepaying their mortgage
loans. Prepayments of principal may also be
caused by liquidations of or insurance
payments on the mortgage loans. A prepayment
of a mortgage loan will usually result in a
payment of principal on the certificates.
o If you purchase your certificates at a
discount and principal is repaid more
slowly than you anticipate, then your yield
may be lower than you anticipate.
o If you purchase your certificates at a
premium and principal is repaid faster than
you anticipate, then your yield may be
lower than you anticipate.
See "Yield Considerations" in this prospectus
supplement for a description of factors that
may influence the rate and timing of
prepayments on the mortgage loans.
EARLY PRINCIPAL PAYMENT FROM If all of the cash in the pre-funding account
CASH REMAINING IN PRE-FUNDING on the closing date is not used to acquire
ACCOUNT additional mortgage loans on or before
December 10, 1999 or if the amount in the
pre-funding account is reduced to less than
$100,000, the remaining cash will be applied
as a payment of principal on the certificates
then entitled to principal payments. If the
amount of the cash is substantial, the
certificates receiving the principal payments
will experience a significant unexpected
early prepayment of principal. We cannot
assure affected certificateholders that they
will be able to reinvest that money in
another investment with a comparable yield.
GEOGRAPHIC CONCENTRATION OF Approximately 14.47% of the mortgage loans
MORTGAGE LOANS expected to be included in the trust fund on
the closing date are secured by properties in
California. The rate of delinquencies,
defaults and losses on the mortgage loans may
be higher than if fewer of the mortgage loans
were concentrated in one state because the
following conditions in California will have
a disproportionate impact on the mortgage
loans in general:
o Declines in the California residential real
estate market may reduce the values of
properties located in that state, which
would result in an increase in the
loan-to-value ratios.
o Properties in California may be more
susceptible than homes located in other
parts of the country to certain types of
uninsured hazards, such as earthquakes, as
well as floods, wildfires, mudslides and
other natural disasters.
Natural disasters affect regions of the
United States from time to time, and may
result in increased losses on mortgage loans
in those regions, or in insurance payments
that will constitute prepayments of those
mortgage loans.
For additional information regarding the
geographic distribution of the mortgage
loans in the mortgage pool, see the
applicable table under "Description of the
Mortgage Pool" in this prospectus
supplement.
SERVICING TRANSFER COULD CAUSE Substantially all of the mortgage loans are
HIGHER DELINQUENCIES currently being serviced by AMRESCO
Residential Mortgage Corporation with the
remainder being serviced by other third party
servicers. It is expected that on or before
November 2, 1999, the servicing function will
be fully transferred to Ocwen Federal Bank
FSB for the mortgage loans expected to be
transferred to the trust fund on the closing
date. Servicing for any additional mortgage
loans purchased with amounts in the
pre-funding account will be transferred to
Ocwen Federal Bank FSB as soon as practicable
following transfer to the trust fund.
Servicing transfers can result in a temporary
increase in delinquencies on the transferred
loans.
See "The Servicer" in this prospectus
supplement for information about the
servicer.
POTENTIAL DISRUPTION OF The transition from the year 1999 to
COMPUTER SYSTEMS the year 2000 may interfere with the ability
of computer systems used by the servicer, the
trustee, The Depository Trust Company and
other parties to process information, unless
modifications to those systems are completed
in time. This could disrupt collection of
payments on the mortgage loans and
calculation and distribution of payments on
the certificates.
LIMITED ABILITY TO RESELL The underwriter is not required to assist in
CERTIFICATES resales of the certificates, although it may
do so. A secondary market for any class of
certificates may not develop. If a secondary
market does develop, it might not continue or
it might not be sufficiently liquid to allow
you to resell any of your certificates.
OTHER LEGAL CONSIDERATIONS Federal and state laws and regulations,
public policy and general principles of
equity relating to the protection of
consumers, unfair and deceptive practices and
debt collection practices: o regulate
interest rates and other charges on mortgage
loans;
o require certain disclosures to borrowers;
o require licensing of the originator and
the other originators; and
o regulate generally the origination,
servicing and collection process for the
mortgage loans.
Violations of these requirements may limit
the ability of the trust fund to collect
amounts due on the mortgage loans, may
entitle a borrower to a refund of amounts
previously paid and could result in liability
for damages by and administrative enforcement
against the originator or the servicer.
The originator has represented that all
applicable federal and state laws and
regulations were complied with in connection
with the origination of the mortgage loans
or, if there was a deficiency in compliance,
that such deficiency is not material to the
interests of the trust fund or
certificateholders. If there is a breach of
that representation, and if the breach
materially adversely affects the interests of
certificateholders, the originator (or
AMRESCO Residential Capital Markets, Inc., as
described herein) will be obligated to
repurchase each affected mortgage loan or to
substitute a new mortgage loan.
See "The Pooling and Servicing
Agreement--Covenants of the Originator with
Respect to the Mortgage Loans" in this
prospectus supplement for information on the
originator's repurchase obligations.
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Home Equity Loan Pass-Through Certificates will consist of the
following Classes: Class A, Class M1, Class M2, Class B, Class X and Class R
(together, the "Certificates").
The Class A Certificates are referred to herein as the "Senior
Certificates." The Class M1, Class M2, Class B, Class X and Class R Certificates
are referred to herein as the "Subordinate Certificates," and the Subordinate
Certificates, other than the Class X and Class R Certificates, are referred to
herein as the "Offered Subordinate Certificates." The Class R Certificate is
also referred to as the "Residual Certificate." Only the Class A, Class M1,
Class M2 and Class B Certificates (the "Offered Certificates") are offered
hereby.
Each of the Class X Certificate and Class R Certificate will be issued
as a single Certificate in fully registered, certificated form.
The Certificates represent beneficial ownership interests in a trust
fund (the "Trust Fund"), the assets of which consist primarily of (1) a pool
(the "Mortgage Pool") of conventional, adjustable and fixed rate, fully
amortizing and balloon, first and second lien residential mortgage loans,
including the Initial Mortgage Loans (as defined herein) and the Subsequent
Mortgage Loans (as defined herein) (together, the "Mortgage Loans"), (2) the
assets that from time to time are identified as deposited in respect of the
Mortgage Loans in the Principal and Interest Account and the Certificate Account
(each as defined herein), (3) property acquired by foreclosure of Mortgage Loans
or deed in lieu of foreclosure, (4) any applicable insurance policies and all
proceeds thereof, (5) the Basis Risk Reserve Fund and the Credit Reserve Fund
(each as defined herein), (6) the Pre-Funding Account (as defined herein) and
(7) proceeds of all of the foregoing to pay the Certificates as specified in the
Pooling and Servicing Agreement.
Each Class of Offered Certificates will be issued in the respective
total initial certificate principal balance set forth or described on the cover
page hereof. The total certificate principal balance of each Class of Offered
Certificates is referred to herein as the "Class Principal Balance" for that
Class. The Class R Certificate will be issued without a principal balance or
interest rate, and will be entitled only to the amounts that are described
herein. The Class X Certificate will not have an interest rate and will be
deemed to have a principal balance equal to the initial overcollateralization as
provided for in the Pooling and Servicing Agreement (as defined herein).
The initial distribution on the Certificates will be made on October
27, 1999, and thereafter, distributions on the Certificates will be made on the
25th day of each month or, if the 25th day is not a Business Day, on the next
succeeding Business Day (each, a "Payment Date"), to holders of Certificates
("Certificateholders") of record on the applicable Record Date. The "Record
Date" for each Payment Date will be the day immediately preceding such Payment
Date.
o A "Business Day" is generally any day other than a Saturday or
Sunday or a day on which banks in California, Minnesota,
Florida or Maryland are closed.
Distributions on the Offered Certificates will be made to each
registered holder entitled thereto, either (1) by check mailed to the
Certificateholder's address as it appears on the books of the Trustee (as
defined herein), or (2) at the request, submitted to the Trustee in writing five
Business Days prior to the related Record Date, of any holder of an Offered
Certificate having a principal balance of not less than $1,000,000, by wire
transfer; provided, that the final distribution in respect of any Certificate
will be made only upon presentation and surrender of the Certificate at the
Corporate Trust Office (as defined herein) of the Trustee. See "-- The Trustee"
herein.
The Offered Certificates (the "Book-Entry Certificates") will be
issued, maintained and transferred on the book-entry records of The Depository
Trust Company ("DTC") and its Participants (as defined herein). The Book-Entry
Certificates will be issued in minimum denominations in principal amounts of
$100,000 and integral multiples of $1 in excess thereof.
Each Class of Book-Entry Certificates will be represented by one or
more certificates registered in the name of the nominee of DTC. AMRESCO
Residential Securities Corporation (the "Depositor") has been informed by DTC
that DTC's nominee will be Cede & Co. No person acquiring an interest in a
Book-Entry Certificate (each, a "Beneficial Owner") will be entitled to receive
a certificate representing an interest (a "Definitive Certificate"), except as
set forth below under "-- Book-Entry Registration -- Definitive Certificates."
Unless and until Definitive Certificates are issued for the Book-Entry
Certificates under the limited circumstances described herein, all references to
actions by Certificateholders with respect to the Book-Entry Certificates will
refer to actions taken by DTC upon instructions from its Participants, and all
references herein to distributions, notices, reports and statements to
Certificateholders with respect to the Book-Entry Certificates will refer to
distributions, notices, reports and statements to DTC or Cede & Co., as the
registered holder of the Book-Entry Certificates, for distribution to Beneficial
Certificateholders by DTC in accordance with DTC procedures.
PRE-FUNDING ACCOUNT
On October 20, 1999 (the "Closing Date"), approximately $4,035,179 (the
"Pre-Funded Amount") will be deposited in an account (the "Pre-Funding Account")
maintained by the Trustee, which account will be part of the Trust Fund. During
the period (the "Pre-Funding Period") from the Closing Date until the earlier to
occur of (1) the reduction of the amount in the Pre-Funding Account to less than
$100,000 or (2) December 10, 1999, the Pre-Funded Amount will be reduced during
the Pre-Funding Period by the amount of Subsequent Mortgage Loans (as defined
herein) purchased by the Trust Fund in accordance with the Pooling and Servicing
Agreement. During the Pre-Funding Period, the Pre-Funded Amount will be used
only to purchase Subsequent Mortgage Loans (as defined herein). It is
anticipated that all of the Subsequent Mortgage Loans to be purchased by the
Trust Fund will be one payment delinquent as of the last day of the calendar
month preceding the month when they are sold to the Trust Fund. At the end of
the Pre-Funding Period, any amounts remaining in the Pre-Funding Account will be
distributed to Classes of Certificates then entitled to payments of principal on
the next Payment Date.
Amounts on deposit in the Pre-Funding Account will be invested as
provided in the Pooling and Servicing Agreement and all investment earnings on
amounts on deposit in the Pre-Funding Account will be distributed to the
Depositor following the Pre-Funding Period.
BOOK-ENTRY REGISTRATION
GENERAL. Beneficial Certificateholders will hold their Certificates
through DTC in the United States, or Cedelbank ("Cedel") or the Euroclear System
("Euroclear") in Europe if they are participants of those systems, or indirectly
through organizations that are participants in those systems. Each Class of
Book-Entry Certificates will be issued in one or more certificates that equal
the initial Class Principal Balance of the related Class of 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 positions in
customers' securities accounts in the depositaries names on the books of DTC.
Citibank will act as depositary for Cedel and Chase will act as depositary for
Euroclear (individually the "Relevant Depositary" and collectively, the
"European Depositaries"). Except as described below, no Beneficial Owner will be
entitled to receive a physical certificate representing a Certificate. Unless
and until Definitive Certificates are issued, it is anticipated that the only
"Certificateholder" of the Offered Certificates will be Cede & Co., as nominee
of DTC. Beneficial Certificateholders will not be Certificateholders as that
term is used in the Pooling and Servicing Agreement (as defined herein).
Beneficial Certificateholders 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 that purpose. In turn, the Financial
Intermediary's ownership of a Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm (a "Participant") 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 Certificateholders will receive all distributions of
principal of, and interest on, the Offered Certificates from the Trustee through
DTC and DTC Participants. While the Offered 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 the Offered Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Offered Certificates.
Participants and indirect participants with whom Beneficial Certificateholders
have accounts with respect to Offered Certificates are similarly required to
make book-entry transfers and receive and transmit distributions on behalf of
their respective Beneficial Certificateholders. Accordingly, although Beneficial
Certificateholders will not possess certificates, the Rules provide a mechanism
by which Beneficial Certificateholders will receive distributions and will be
able to transfer their interest.
Beneficial Certificateholders 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 Certificateholders who are
not Participants may transfer ownership of Offered Certificates only through
Participants and indirect participants by instructing the Participants and
indirect participants to transfer Offered Certificates, by book-entry transfer,
through DTC for the account of the purchasers of the Offered Certificates, which
account is maintained with their respective Participants. Under the Rules and in
accordance with DTC's normal procedures, transfer of ownership of Book-Entry
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
Certificateholders.
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. These credits or any transactions in
securities settled during this processing will be reported to the relevant
Euroclear or Cedel Participants (each as defined herein) on that business day.
Cash received in Cedel or Euroclear as a result of sales of securities by or
through a Cedel Participant or Euroclear Participant 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
settlement 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" 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 the DTC Rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, cross-market transactions
will require delivery of instructions to the relevant European international
clearing system by the counterparty in that system in accordance with its rules
and procedures and within its established deadlines (European time). The
relevant European international clearing system will, if the transaction meets
its settlement requirements, deliver instructions to the Relevant Depositary to
take action to effect final settlement on its behalf by delivering or receiving
securities in DTC, and making or receiving payment in accordance with normal
procedures for same day funds settlement applicable to DTC. Cedel Participants
and Euroclear Participants may not deliver instructions directly to the European
Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC participant in the Book-Entry
Certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Certificates will be
subject to the rules, regulations and procedures governing DTC and DTC
Participants as in effect from time to time.
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participating 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 securities. 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 its participants
("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
securities and any risk from lack of simultaneous transfers of securities and
cash. Transactions may 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 that is a member bank of the Federal Reserve System, and 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 securities 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 each distribution to the accounts of the applicable DTC Participants
in accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing the distribution to the Beneficial Certificateholders
of the Book-Entry Certificates that it represents and to each Financial
Intermediary for which it acts as agent. Each Financial Intermediary will be
responsible for disbursing funds to the Beneficial Certificateholders of the
Book-Entry Certificates that it represents.
Under a book-entry format, Beneficial Certificateholders of the
Book-Entry Certificates may experience some delay in their receipt of payments,
because the distributions will be forwarded by the Trustee to Cede & Co.
Distributions on 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. These distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "Certain Federal Income Tax Consequences -- Taxation of Certain Foreign
Investors" in the Prospectus. 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 Book-Entry Certificates, may be
limited due to the lack of physical certificates for the Book-Entry
Certificates. In addition, issuance of the Book-Entry Certificates in book-entry
form may reduce the liquidity of the 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 will be provided to Cede & Co., as nominee
of DTC, and may be made available by Cede & Co. to Beneficial Certificateholders
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 Beneficial Certificateholders 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
holders 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 actions
are taken on behalf of Financial Intermediaries whose holdings include the
Book-Entry Certificates. Cedel or the Euroclear Operator, as the case may be,
will take any other action permitted to be taken by a Certificateholder 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 those actions on
its behalf through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Offered Certificates that conflict with
actions taken with respect to other Offered Certificates.
Although DTC, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Book-Entry Certificates among
participants of DTC, Cedel and Euroclear, they are under no obligation to
perform or continue to perform these procedures and the procedures may be
discontinued at any time.
None of the Depositor, the Originator, ARCMI, the Seller, the Servicer
or the Trustee (as those terms are defined herein) will have any responsibility
for any aspect of the records relating to or payments made on account of
beneficial ownership interests of the Book-Entry Certificates held by Cede &
Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to those beneficial ownership interests.
Certain computer applications and systems that DTC uses for processing
dates ("Systems") based upon calendar dates, including dates before, on, and
after January 1, 2000, may encounter certain problems related to the Systems'
use of only two digits to calculate calendar dates ("Year 2000 Problems"). Year
2000 Problems could cause DTC's Systems, as they relate to the timely payment of
distributions (including principal and interest payments) to securityholders,
book-entry deliveries, and settlement of trades within DTC, to cease functioning
appropriately. DTC has advised the Depositor that it has developed and is
implementing a technical assessment and remediation plan (which includes a
testing phase) to deal with Year 2000 Problems. However, DTC's ability to
perform its services also depends upon other parties including, among others,
issuers and their agents, third party software and hardware vendors, and third
party service and information providers (including telecommunication and
electrical utility service providers). DTC has advised the Depositor that it is
attempting to determine the extent of the efforts of its vendors to deal with
Year 2000 Problems as they relate to the provision of these services. In
addition, DTC is in the process of developing such contingency plans as it deems
appropriate.
DEFINITIVE CERTIFICATES. Definitive Certificates will be issued to
Beneficial Certificateholders or their nominees, respectively, rather than to
DTC or its nominee, 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
Certificateholders 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 Certificateholders.
Upon the occurrence of an event described above, the Trustee is
required to direct DTC to notify Participants who have ownership of Book-Entry
Certificates as indicated on the records of DTC of the availability of
Definitive Certificates for their Book-Entry Certificates. Upon surrender by DTC
of the Definitive Certificates representing the Book-Entry Certificates and upon
receipt of instructions from DTC for re-registration, the Trustee will re-issue
the Book-Entry Certificates as Definitive Certificates in the respective
principal amounts owned by individual Beneficial Certificateholders, and
thereafter the Trustee will recognize the holders of the Definitive Certificates
as Certificateholders under the Pooling and Servicing Agreement.
DISTRIBUTIONS OF INTEREST
The amount of interest distributable on each Payment Date in respect of
each Class of Certificates (other than the Class X and Class R Certificates)
will equal the sum of (1) Current Interest (as defined herein) for that Class
and (2) any Interest Carryforward Amount (as defined herein) for that Class.
Interest will accrue on the Offered Certificates on the basis of a 360-day year
and the actual number of days in each Accrual Period.
o The "Pass-Through Rate" for each Class of Certificates will be
the applicable annual rate described below.
If the Class X Certificateholder does not exercise its option to
purchase the Mortgage Loans when it is first entitled to do so, as described
under "-- Optional Purchase of Mortgage Loans; Termination of the Trust Fund"
herein, then with respect to each succeeding Payment Date, the A Spread will be
increased to 0.94%, the M1 Spread will be increased to 1.25%, the M2 Spread will
be increased to 1.85% and the B Spread will be increased to 4.00%. Subject to
the preceding sentence, the Pass-Through Rates for the Class A, Class M and
Class B Certificates will be the applicable annual rates determined as follows:
o Class A Certificates: the lesser of (1) LIBOR plus 0.47% (the
"A Spread") and (2) the Available Funds Cap (as defined
below).
o Class M1 Certificates: the lesser of (1) LIBOR plus 0.75% (the
"M1 Spread") and (2) the Available Funds Cap.
o Class M2 Certificates: the lesser of (1) LIBOR plus 1.35% (the
"M2 Spread") and (2) the Available Funds Cap.
o Class B Certificates: the lesser of (1) LIBOR plus 3.50% (the
"B Spread") and (2) the Available Funds Cap.
o The "Available Funds Cap" with respect to each
Payment Date will be the annual rate equal to the
product of (1) a fraction, expressed as a percentage,
the numerator of which is twelve times the Optimal
Interest Remittance Amount and the denominator of
which is the Total Loan Balance (as defined below)
for the immediately preceding Payment Date multiplied
by (2) a fraction, the numerator of which is 30 and
the denominator of which is the actual number of days
in the immediately preceding calendar month.
o The "Optimal Interest Remittance Amount"
with respect to each Payment Date will be
equal to the product of (1) one-twelfth of
the weighted average of the Net Mortgage
Rates (as defined below) of the Mortgage
Loans as of the first day of the related
Remittance Period and (2) the Total Loan
Balance for the immediately preceding
Payment Date.
o The "Net Mortgage Rate" for any
Mortgage Loan equals the Mortgage
Rate thereof minus the Total Expense
Rate (as defined below).
o The "Total Expense Rate" for each
Payment Date is the sum of the
Servicing Fee Rate and the Trustee
Fee Rate (each as defined herein).
o The "Total Loan Balance" as of any date of
determination will be the total of the
Principal Balances of the Mortgage Loans as
of that date.
o The "Principal Balance" of any
Mortgage Loan as of any date of
determination will be, generally,
its outstanding principal balance as
of the Cut-off Date or Subsequent
Cut-off Date (as defined herein), as
applicable, after giving effect to
Monthly Payments due on or before
that date, whether or not received,
reduced by (1) the principal portion
of all Monthly Payments due on or
before the due date in the
Remittance Period immediately
preceding the date of determination,
whether or not received, and (2) all
amounts allocable to unscheduled
principal payments received on or
before the last day of the
Remittance Period immediately
preceding the date of determination;
provided, that the Principal Balance
of any Liquidated Mortgage Loan will
be zero.
The "Certificate Principal Balance" of any Offered Certificate for any
date of determination will equal the Certificate Principal Balance of that
Offered Certificate on the Closing Date as reduced by all amounts previously
distributed on that Offered Certificate in respect of principal and, in the case
of an Offered Subordinate Certificate, any Applied Realized Loss Amounts (as
defined herein) previously allocated to that Certificate.
For each Payment Date, the "Accrual Period" applicable to each Class of
Offered Certificates will be the period beginning on the immediately preceding
Payment Date (or on the Closing Date, in the case of the first Accrual Period)
and ending on the day immediately preceding the related Payment Date.
For each Payment Date, to the extent that (a) the amount payable if
clause (1) of the definition of Pass-Through Rate applicable to any Class of the
Offered Certificates is used to calculate interest exceeds (b) the applicable
Available Funds Cap (such excess, a "Basis Risk Shortfall"), that Class will be
entitled to the amount of the Basis Risk Shortfall or Unpaid Basis Risk
Shortfall (as defined below) with interest thereon at the applicable
Pass-Through Rate before the Class X Certificate is entitled to any
distributions. The applicable Class will be entitled to receive the amount of
the Basis Risk Shortfall from Monthly Excess Cashflow Amount (as defined herein)
treated as paid from and to the extent of funds on deposit in a reserve fund
(the "Basis Risk Reserve Fund"). The source of funds on deposit in the Basis
Risk Reserve Fund will be limited to an initial deposit of $1,000 and amounts
that would otherwise be distributed on the Class X Certificate or deposited into
the Credit Reserve Fund on the first six Payment Dates. Notwithstanding the
foregoing, the amount of Basis Risk Shortfall for any Class of the Offered
Certificates for any Payment Date may not exceed the excess of (x) the amount
payable at the applicable Net Maximum Pass-Through Rate (as defined below) over
(y) the amount payable at the applicable Available Funds Cap.
o The "Unpaid Basis Risk Shortfall" for any Class of Offered
Certificates on any Payment Date will equal the total of all
Basis Risk Shortfalls for that Class for all previous Payment
Dates, together with interest thereon at the applicable
Pass-Through Rate, less all payments made with respect to that
Class in respect of Basis Risk Shortfalls or interest thereon
on or prior to that Payment Date.
o The "Net Maximum Pass-Through Rate" for any Class of Offered
Certificates on any Payment Date will be an annual rate equal
to (1) the weighted average of the Maximum Rates (as defined
herein) of the Adjustable Rate Mortgage Loans and the Mortgage
Rates of the Fixed Rate Mortgage Loans minus (2) the Total
Expense Rate.
o "Current Interest" for each Class of Offered Certificates will
equal, for any Payment Date, the total amount of interest
accrued at the applicable Pass-Through Rate during the related
Accrual Period on the Class Principal Balance of that Class.
o "Interest Carryforward Amount" for each Certificate will
equal, for any Payment Date, the sum of (1) the amount, if
any, by which (x) the sum of (A) the Current Interest for that
Class for the immediately preceding Payment Date and (B) any
unpaid Interest Carryforward Amount for that Class for the
immediately preceding Payment Date exceeds (y) the amount
distributed in respect of interest on that Class on that
immediately preceding Payment Date, and (2) interest on that
amount for the related Accrual Period at the applicable
Pass-Through Rate.
o The "Interest Remittance Amount" for any Payment Date will
equal:
(a) the sum of
(1) all interest collected (other than
Payaheads (as defined herein)) or advanced in respect
of Monthly Payments on the Mortgage Loans during the
related Remittance Period, less (x) the Servicing Fee
(as defined herein) and (y) unreimbursed Delinquency
Advances and Servicing Advances (each as defined
herein) due to the Servicer, to the extent allocable
to interest,
(2) all Compensating Interest (as defined
below) paid by the Servicer with respect to the
related Monthly Remittance Date,
(3) any amounts collected as prepayment
penalties on the Mortgage Loans during the related
Remittance Period,
(4) the portion of the price paid for any
Mortgage Loan repurchased from the Trust Fund during
the related Remittance Period and any Substitution
Amount (as defined below) paid during the related
Remittance Period allocable to interest, and
(5) all Net Liquidation Proceeds and any
other recoveries (net of unpaid Servicing Fees), to
the extent allocable to interest, reduced by
(b) any amounts reimbursable to the Trustee or the
Servicer pursuant to the Pooling and Servicing Agreement.
o The "Remittance Period" with respect to any Monthly Remittance
Date is the period from and including the second day of the
calendar month preceding the month in which the Monthly
Remittance Date occurs to and including the first day of the
calendar month in which the Monthly Remittance Date occurs.
o 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 Servicer to the Certificate Account, which
is the 18th day of each month, or if such day is not a
Business Day, the immediately succeeding Business Day or as
otherwise provided in the Pooling and Servicing Agreement.
The Servicer will be entitled to any interest or other income earned on funds on
deposit in the Principal and Interest Account prior to deposit into the
Certificate Account. The Trustee will be entitled to any interest or other
income earned on funds on deposit in the Certificate Account pending
distribution to Certificateholders, as provided in the Pooling and Servicing
Agreement.
o A "Payahead" is generally any Monthly Payment intended by the
related borrower to be applied in a Remittance Period
subsequent to the Remittance Period in which that payment was
received.
o The "Substitution Amount" will be generally equal to the
amount, if any, by which the unpaid principal balance of a
Mortgage Loan required to be removed from a Mortgage Pool due
to a breach of representation or warranty or defective
documentation exceeds the principal balance of the related
substitute Mortgage Loan, plus unpaid interest accrued
thereon.
On each Payment Date, the Interest Remittance Amount will be
distributed in the following order of priority:
(1) to the Trustee, the Trustee Fee (as defined herein);
(2) to the Class A Certificates, Current Interest and
any Interest Carryforward Amount;
(3) to the Class M1 Certificates, Current Interest;
(4) to the Class M2 Certificates, Current Interest;
(5) to the Class B Certificates, Current Interest; and
(6) for application as part of the Monthly Excess Cashflow
Amount, as described under "-- Credit Enhancement --
Overcollateralization" below, any Interest Remittance Amount remaining
after application pursuant to clauses (1) through (5) above (such
amount, the "Monthly Excess Interest Amount").
When a principal prepayment in part or in full is made on a Mortgage
Loan, the borrower is charged interest only to the date of the prepayment,
instead of for a full month, with a resulting reduction in interest payable for
the month during which the prepayment is made. Full or partial prepayments (or
proceeds of other liquidations) received in any Remittance Period will be
distributed to holders of Offered Certificates on the Payment Date following
that Remittance Period. To the extent that, as a result of a partial or full
prepayment, a borrower is not required to pay a full month's interest on the
amount prepaid, a shortfall (a "Prepayment Interest Shortfall") in the amount
available to make distributions of interest on the Certificates could result.
The Servicer is obligated to fund Prepayment Interest Shortfalls, but only in an
amount up to the total of the Servicing Fees for the applicable Remittance
Period. See "The Pooling and Servicing Agreement -- Servicing -- Prepayment
Interest Shortfalls" herein. Any such payment by the Servicer is referred to
herein as "Compensating Interest." Any Prepayment Interest Shortfalls not funded
by the Servicer ("Net Prepayment Interest Shortfalls") will reduce the Interest
Remittance Amount available for distribution on the related Payment Date.
DETERMINATION OF LIBOR
On the second London Business Day preceding the beginning of each
Accrual Period other than the first Accrual Period (each such date, a "LIBOR
Determination Date"), the Trustee will determine the arithmetic mean of the
LIBOR quotation for one-month Eurodollar deposits ("LIBOR") for that Accrual
Period on the basis of the offered LIBOR quotations provided to the Trustee as
of 11:00 a.m., London time, on such date.
o A "London Business Day" is any day on which commercial banks
and foreign exchange markets settle payments in London and New
York City.
On each LIBOR Determination Date, LIBOR for the next succeeding Accrual
Period will be established by the Trustee as follows:
o If on any LIBOR Determination Date two or more of the
Reference Banks provide offered LIBOR quotations on the
Bloomberg Screen LIUS01M Index Page, LIBOR for the next
applicable Accrual Period will be the arithmetic mean of such
offered quotations (rounding such arithmetic mean if necessary
to the nearest five decimal places).
o "Reference Banks" means four leading banks engaged in
transactions in Eurodollar deposits in the
international Eurocurrency market (1) with an
established place of business in London, (2) whose
quotations appear on the Bloomberg Screen LIUS01M
Index Page on the LIBOR Determination Date in
question and (3) which have been designated as such
by the Trustee and are able and willing to provide
such quotations to the Trustee on each LIBOR
Determination Date. If any Reference Bank is removed
from the Bloomberg Screen LIUS01M Index Page or in
any other way fails to meet the qualifications of a
Reference Bank, the Trustee may, in its sole
discretion, designate an alternative Reference Bank.
o "Bloomberg Screen LIUS01M Index Page" means the
display designated as page "LIUS01M" on the Bloomberg
Financial Markets Commodities News (or such other
pages as may replace such page on that service for
the purpose of displaying LIBOR quotations of major
banks).
o If on any LIBOR Determination Date only one or none of the
Reference Banks provides such offered quotations, LIBOR for
the next applicable Accrual Period will be the higher of (x)
LIBOR as determined on the previous LIBOR Determination Date
and (y) the Reserve Interest Rate.
o The "Reserve Interest Rate" will be the annual rate
that the Trustee determines to be either (A) the
arithmetic mean (rounding such arithmetic mean if
necessary to the nearest five decimal places) of the
one-month Eurodollar lending rate that New York City
banks selected by the Depositor are quoting, on the
relevant LIBOR Determination Date, to the principal
London offices of at least two leading banks in the
London interbank market or (B) in the event that the
Trustee can determine no such arithmetic mean, the
lowest one-month Eurodollar lending rate that the New
York City banks selected by the Trustee are quoting
on such LIBOR Determination Date to leading European
banks.
o If on any LIBOR Determination Date the Trustee is required but
is unable to determine the Reserve Interest Rate in the manner
provided above, LIBOR for the next applicable Accrual Period
will be LIBOR as determined on the previous LIBOR
Determination Date.
Notwithstanding the foregoing, LIBOR for the next succeeding Accrual
Period shall not be based on LIBOR for the previous Accrual Period for two
consecutive LIBOR Determination Dates. If, under the priorities described above,
LIBOR for the next succeeding Accrual Period would be based on LIBOR for the
previous LIBOR Determination Date for the second consecutive LIBOR Determination
Date, the Trustee shall select an alternative index (over which the Trustee has
no control) used for determining Eurodollar lending rates that is calculated and
published (or otherwise made available) by an independent third party.
The establishment of LIBOR by the Trustee and the Trustee's subsequent
calculation of the rate of interest applicable to the LIBOR Certificates for the
relevant Accrual Period, in the absence of manifest error, will be final and
binding.
LIBOR for the first Accrual Period will be 5.40625%.
DISTRIBUTIONS OF PRINCIPAL
Distributions of principal on the Class A Certificates will be made
primarily from the Principal Remittance Amount and secondarily from any Monthly
Excess Cashflow Amount, to the extent of available funds, as described below.
Distributions of principal on the Class M1 Certificates will be made primarily
from the Principal Remittance Amount after distributions of principal have been
made on the Class A Certificates and secondarily from the Monthly Excess
Cashflow Amount, to the extent of available funds, as described below.
Distributions of principal on the Class M2 Certificates will be made primarily
from the Principal Remittance Amount after distributions of principal have been
made on the Class A and Class M1 Certificates and secondarily from Monthly
Excess Cashflow Amount, to the extent of available funds, as described below.
Distributions of principal on the Class B Certificates will be made primarily
from the Principal Remittance Amount after distributions of principal have been
made on the Class A, Class M1 and Class M2 Certificates and secondarily from the
Monthly Excess Cashflow Amount, to the extent of available funds, as described
below.
o The "Principal Distribution Amount" for any Payment Date will
be equal to the sum of (1) the Principal Remittance Amount
minus the Overcollateralization Release Amount (as defined
below), if any, and (2) the Extra Principal Distribution
Amount (as defined below), if any.
o The "Principal Remittance Amount" for any Payment Date will be
equal to:
(a) the sum of:
(1) all principal payments collected (other
than Payaheads) or advanced in respect of Monthly
Payments on the Mortgage Loans during the related
Remittance Period less unreimbursed Delinquency
Advances and Servicing Advances due to the Servicer,
to the extent allocable to principal,
(2) all prepayments in full or in part
received during the related Remittance Period,
(3) the outstanding principal balance of
each Mortgage Loan that was purchased from the Trust
Fund and deposited in the Principal and Interest
Account since the Monthly Remittance Date in the
preceding month and on or prior to the related
Monthly Remittance Date,
(4) the portion of any Substitution Amount
paid and deposited in the Principal and Interest
Account since the Monthly Remittance Date in the
preceding month and on or prior to the related
Monthly Remittance Date allocable to principal,
(5) any amounts transferred from the
Pre-Funding Account to the Certificate Account after
the Pre-Funding Period, and
(6) all Net Liquidation Proceeds and any
other recoveries collected during the related
Remittance Period, to the extent allocable to
principal, reduced by
(b) without duplication of amounts paid to the
Trustee and the Servicer from the Interest Remittance Amount,
any amounts reimbursable to the Trustee or the Servicer
pursuant to the Pooling and Servicing Agreement.
On each Payment Date (a) before the Stepdown Date or (b) on which a
Trigger Event (as defined below) has occurred, the Principal Distribution Amount
will be distributed in the following order of priority:
(1) to the Class A Certificates, until their Class
Principal Balance has been reduced to zero;
(2) to the Class M1 Certificates, until their Class
Principal Balance has been reduced to zero;
(3) to the Class M2 Certificates, until their Class
Principal Balance has been reduced to zero;
(4) to the Class B Certificates, until their Class Principal
Balance has been reduced to zero; and
(5) for application as part of the Monthly Excess Cashflow
Amount, as described under "-- Credit Enhancement --
Overcollateralization" below, any Principal Distribution Amount
remaining after application pursuant to clauses (1) through (4) above.
On each Payment Date (a) on or after the Stepdown Date and (b) on which
a Trigger Event has not occurred, the Principal Distribution Amount will be
distributed in the following order of priority:
(1) to the Class A Certificates, an amount equal to the lesser
of (x) the Principal Distribution Amount and (y) the Senior Principal
Distribution Amount, until their Class Principal Balance has been
reduced to zero;
(2) to the Class M1 Certificates, an amount equal to the
lesser of (x) the remaining Principal Distribution Amount and (y) the
Class M1 Principal Distribution Amount, until their Class Principal
Balance has been reduced to zero;
(3) to the Class M2 Certificates, an amount equal to the
lesser of (x) the remaining Principal Distribution Amount and (y) the
Class M2 Principal Distribution Amount, until their Class Principal
Balance has been reduced to zero;
(4) to the Class B Certificates, an amount equal to the lesser
of (x) the remaining Principal Distribution Amount and (y) the Class B
Principal Distribution Amount, until their Class Principal Balance has
been reduced to zero; and
(5) for application as part of the Monthly Excess Cashflow
Amount, as described under "-- Credit Enhancement --
Overcollateralization" below, any Principal Distribution Amount
remaining after application pursuant to clauses (1) through (4) above.
Notwithstanding the foregoing, on any Payment Date on which the Class Principal
Balance of each Class of Certificates having a higher priority of distribution
has been reduced to zero, any remaining Principal Distribution Amount will be
distributed to the remaining Certificates in the order of priority set forth
above until the Class Principal Balance of each such Class has been reduced to
zero.
o A "Trigger Event" has occurred on any Payment Date if the
Three Month Delinquency Rate for that date equals or exceeds
50% of the Senior Enhancement Percentage (as defined below)
for that date.
o As provided in the Pooling and Servicing Agreement,
the "Three Month Delinquency Rate" for any Payment
Date will be the average of the Delinquency Rates for
each of the three (or one and two, in the case of the
first and second Payment Dates) immediately preceding
calendar months.
o The "Delinquency Rate" for any calendar month will be
the fraction, expressed as a percentage, the
numerator of which is the total outstanding principal
balance of all Mortgage Loans 60 or more days
delinquent, all Mortgage Loans in foreclosure and all
Mortgage Loans relating to REO Properties as of the
close of business on the last day of that calendar
month, and the denominator of which is the Total Loan
Balance for the related Payment Date.
o The "Stepdown Date" is the later to occur of (x) the Payment
Date in October 2002 and (y) the first Payment Date on which
the Senior Enhancement Percentage (calculated for this purpose
after giving effect to payments or other recoveries on the
Mortgage Loans during the related Remittance Period but before
giving effect to distributions on any Certificates on that
Payment Date) is greater than or equal to 34.43%.
o The "Senior Principal Distribution Amount" for any Payment
Date will be equal to the amount, if any, by which:
(1) the Class Principal Balance of the Class A
Certificates immediately prior to the Payment Date exceeds
(2) the lesser of (A) the product of (i) 65.57% and
(ii) the Assumed Total Loan Balance for that Payment Date and
(B) the amount by which (i) the Assumed Total Loan Balance for
that Payment Date exceeds (ii) the product of (a) 0.50% and
(b) the Cut-off Date Balance plus the Pre-Funded Amount.
o The "Class M1 Principal Distribution Amount" for any Payment
Date will be equal to the amount, if any, by which:
(1) the sum of (A) the Class Principal Balance of the
Class A Certificates after giving effect to distributions on
that Payment Date and (B) the Class Principal Balance of the
Class M1 Certificates immediately prior to that Payment Date
exceeds
(2) the lesser of (A) the product of (i) 78.42% and
(ii) the Assumed Total Loan Balance for that Payment Date and
(B) the amount, if any, by which (i) the Assumed Total Loan
Balance for that Payment Date exceeds (ii) the product of (a)
0.50% and (b) the Cut-off Date Balance plus the Pre-Funded
Amount.
o The "Class M2 Principal Distribution Amount" for any Payment
Date will be equal to the amount, if any, by which:
(1) the sum of (A) the aggregate Class Principal
Balance of the Class A Certificates and the Class M1
Certificates after giving effect to the distributions on that
Payment Date and (B) the Class Principal Balance of the Class
M2 Certificates immediately prior to that Payment Date exceeds
(2) the lesser of (A) the product of (i) 86.47% and
(ii) the Assumed Total Loan Balance for that Payment Date and
(B) the amount, if any, by which the Assumed Total Loan
Balance for that Payment Date exceeds (ii) the product of (a)
0.50% and (b) the Cut-off Date Balance plus the Pre-Funded
Amount.
o The "Class B Principal Distribution Amount" for any Payment
Date will be equal to the amount, if any, by which:
(1) the sum of (A) the aggregate Class Principal
Balance of the Class A Certificates, the Class M1 Certificates
and the Class M2 Certificates after giving effect to the
distributions on that Payment Date and (B) the Class Principal
Balance of the Class B Certificates immediately prior to that
Payment Date exceeds
(2) the lesser of (A) the product of (i) 95.50% and
(ii) the Assumed Total Loan Balance for that Payment Date and
(B) the amount, if any, by which the Assumed Total Loan
Balance for that Payment Date exceeds (ii) the product of (a)
0.50% and (b) the Cut-off Date Balance plus the Pre-Funded
Amount.
o The "Senior Enhancement Percentage" for any Payment Date will
be the fraction, expressed as a percentage, the numerator of
which is the sum of the total Certificate Principal Balance of
the Offered Subordinate Certificates and the
Overcollateralization Amount (which, for purposes of this
definition only, will not be less than zero), in each case
after giving effect to distributions on that Payment Date, and
the denominator of which is the Assumed Total Loan Balance for
that Payment Date.
o The "Extra Principal Distribution Amount" for any Payment Date
will be the lesser of (1) the sum of (A) the Monthly Excess
Interest Amount and (B) amounts in the Credit Reserve Fund, if
any, and (2) the Overcollateralization Deficiency.
o The "Overcollateralization Amount" for any Payment Date will
be the amount, if any, by which (1) the Assumed Total Loan
Balance for that Payment Date exceeds (2) the total
Certificate Principal Balance of the Offered Certificates
after giving effect to distributions on that Payment Date.
o The "Overcollateralization Deficiency" for any Payment Date
will be equal to the amount, if any, by which (1) the Targeted
Overcollateralization Amount for that Payment Date exceeds (2)
the Overcollateralization Amount for that Payment Date,
calculated for this purpose after giving effect to the
reduction on that Payment Date of the total Certificate
Principal Balances of the Offered Certificates resulting from
the distribution of the Principal Remittance Amount (but not
the Extra Principal Distribution Amount) on that Payment Date,
but before the allocation of any Applied Realized Loss Amount
on that Payment Date.
o The "Overcollateralization Release Amount" for any Payment
Date will be equal to the amount, if any, by which (1) the
Overcollateralization Amount for that Payment Date exceeds (2)
the Targeted Overcollateralization Amount for that Payment
Date.
o The "Targeted Overcollateralization Amount" for any Payment
Date will be
(a) before the Stepdown Date, the product of (i) 2.25%
and (ii) the Cut-off Date Balance plus the Pre-Funded Amount,
(b) on and after the Stepdown Date, if a Trigger Event has not
occurred for that Payment Date, the greater of
(1) the product of 4.50% and the Assumed Total
Loan Balance for the related Payment Date, and
(2) the product of (i) 0.50% and (ii) the Cut-off
Date Balance plus the Pre-Funded Amount; and
(c) on and after the Stepdown Date, if a Trigger Event has
occurred for that Payment Date, the amount calculated in clause (a)
above.
The Targeted Overcollateralization Amount will be subject to
increase from time to time on the basis of the loss and
delinquency performance of the Mortgage Loans, as provided in
the Pooling and Servicing Agreement.
o The "Assumed Total Loan Balance" as of any date of
determination will be equal to the sum of (1) the Total Loan
Balance of the Mortgage Loans as of that date and (2) the
amount, if any, on deposit in the Pre-Funding Account as of
such date (other than investment earnings).
o "Net Liquidation Proceeds" means all amounts, net of
unreimbursed expenses, unreimbursed Delinquency Advances and
unreimbursed Servicing Advances, received and retained in
connection with the liquidation of defaulted Mortgage Loans,
by foreclosure or otherwise, together with any net proceeds
received on a monthly basis with respect to any properties
acquired on behalf of the Trust Fund by foreclosure or deed in
lieu of foreclosure.
CREDIT ENHANCEMENT
Credit enhancement for the Offered Certificates consists of the
subordination of the Subordinate Certificates, the Credit Reserve Fund, the
priority of application of Realized Losses (as defined herein) and
overcollateralization, in each case as described herein.
SUBORDINATION. The rights of holders of the Subordinate Certificates to
receive distributions with respect to the Mortgage Loans will be subordinated,
to the extent described herein, to the rights of holders of each Class of
Offered Certificates having a higher priority of distribution, as described
under "-- Distributions of Interest" and "-- Distributions of Principal." This
subordination is intended to enhance the likelihood of regular receipt by
holders of Offered Certificates having a higher priority of distribution of the
full amount of interest and principal distributable thereon, and to afford these
Certificateholders limited protection against Realized Losses incurred on the
Mortgage Loans.
No amounts will be distributed to the holder of the Class X Certificate
on any Payment Date until all amounts due to the holders of the Class M1, Class
M2 and Class B Certificates have been distributed.
The limited protection afforded to holders of Offered Certificates by
the subordination of the Subordinate Certificates will be accomplished by the
preferential right of holders of Offered Certificates to receive the amounts of
interest due them from the Interest Remittance Amount and principal available
for distribution to them from the Principal Distribution Amount on any Payment
Date before any interest or principal is distributed on that Payment Date to
holders of Certificates having a lower priority of distribution.
CREDIT RESERVE FUND. On the first six Payment Dates, any Monthly Excess
Cashflow Amount remaining after distributing, for each Class of Offered
Certificates, any Interest Carryforward Amounts, Basis Risk Shortfalls and
Realized Loss Amortization Amounts (as defined herein) and funding any Extra
Principal Distribution Amount, will be deposited into a reserve fund (the
"Credit Reserve Fund") instead of being distributed to the Class X Certificate.
Amounts in the Credit Reserve Fund will be available to fund the Extra Principal
Distribution Amount, if any, and to cover, up to the amount on deposit, any
unpaid Interest Carryforward Amounts, Basis Risk Shortfalls and Realized Loss
Amortization Amounts for each Class of Offered Certificates as described in
priorities (1) through (12) under "-- Overcollateralization" below, after the
distribution of the Monthly Excess Cashflow Amount for the second, third,
fourth, fifth and sixth Payment Dates. On the seventh Payment Date, occurring in
April 2000, any amounts remaining on deposit in the Credit Reserve Fund,
together with any earnings thereon, will be paid to the holder of the Class X
Certificate. Thereafter, the Credit Reserve Fund will be dissolved and will not
be available to provide any future credit support for the Certificates.
ALLOCATION OF LOSSES. If a Mortgage Loan becomes a Liquidated Mortgage
Loan during any Remittance Period, the related Net Liquidation Proceeds, to the
extent allocable to principal, may be less than the outstanding principal
balance of the Mortgage Loan. The amount of that insufficiency is a "Realized
Loss." Realized Losses on Mortgage Loans will have the effect of reducing
amounts distributable in respect of, first, the Class X Certificate (both
through the application of Monthly Excess Interest Amount to fund the deficiency
and through a reduction in the Overcollateralization Amount for the related
Payment Date), second, the Class B Certificates, third, the Class M2
Certificates, and fourth, the Class M1 Certificates, before reducing amounts
distributable in respect of the Class A Certificates.
o 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 in respect of that Mortgage
Loan have been recovered (exclusive of any possibility of a
deficiency judgment).
To the extent that Realized Losses occur, those Realized Losses will
reduce the Assumed Total Loan Balance, and thus may reduce the
Overcollateralization Amount. As described herein, the Overcollateralization
Amount is increased and maintained by application of the Monthly Excess Cashflow
Amount to make distributions of principal on the Offered Certificates.
If on any Payment Date after giving effect to all Realized Losses
incurred during the related Remittance Period and distributions on that Payment
Date, the total Certificate Principal Balance of the Offered Certificates
exceeds the Assumed Total Loan Balance for that Payment Date (such excess, an
"Applied Realized Loss Amount"), the Class Principal Balances of the Offered
Subordinate Certificates will be reduced in inverse order of priority of
distribution. Applied Realized Loss Amounts will be allocated in reduction of
the Class Principal Balance of first, the Class B Certificates, until their
Class Principal Balance has been reduced to zero; second, the Class M2
Certificates, until their Class Principal Balance has been reduced to zero; and
third, the Class M1 Certificates, until their Class Principal Balance has been
reduced to zero. The Class Principal Balance of the Class A Certificates will
not be reduced by allocation of Applied Realized Loss Amounts.
Holders of Offered Subordinate Certificates will not receive any
distributions in respect of any Applied Realized Loss Amount, except to the
extent of available Monthly Excess Cashflow Amount as described below.
OVERCOLLATERALIZATION. On the Closing Date, the Overcollateralization
Amount is expected to be approximately $4,260,000. The weighted average Net
Mortgage Rate of the Mortgage Loans is generally expected to be higher than the
weighted average of the interest rates of the Certificates, thus generating
certain excess interest collections. To the extent described herein, Monthly
Excess Interest Amount will be applied on any Payment Date as principal (in the
form of the Extra Principal Distribution Amount) in reduction of the Certificate
Principal Balances of the Offered Certificates. This application of interest
collections as distributions of Extra Principal Distribution Amounts will cause
the total Certificate Principal Balance of the Offered Certificates to amortize
more rapidly than the Assumed Total Loan Balance, increasing and maintaining the
required level of overcollateralization. However, Realized Losses will reduce
overcollateralization, and could create an Overcollateralization Deficiency.
As described herein, on and after the Stepdown Date and if a Trigger
Event has not occurred, to the extent that the Overcollateralization Amount
exceeds the Targeted Overcollateralization Amount, a portion of the Principal
Remittance Amount will not be applied in reduction of the Certificate Principal
Balances of the Certificates, but will instead be applied as described below.
For each Payment Date, the sum of any Monthly Excess Interest Amount
and any Overcollateralization Release Amount will be the "Monthly Excess
Cashflow Amount." The Monthly Excess Cashflow Amount and, to the extent required
to pay amounts due under clauses (1) through (12) below until the Payment Date
in April 2000 after the application of the Monthly Excess Cashflow Amount,
amounts on deposit in the Credit Reserve Fund, will be distributed on each
Payment Date in the following order of priority:
(1) to the extent of Monthly Excess Interest Amount, to fund
the Extra Principal Distribution Amount for that Payment Date;
(2) to the Class A Certificates, any Basis Risk Shortfall
and Unpaid Basis Risk Shortfall;
(3) to the Class M1 Certificates, any Basis Risk
Shortfall and Unpaid Basis Risk Shortfall;
(4) to the Class M2 Certificates, any Basis Risk
Shortfall and Unpaid Basis Risk Shortfall;
(5) to the Class B Certificates, any Basis Risk Shortfall
and Unpaid Basis Risk Shortfall;
(6) to the Class M1 Certificates, any Interest
Carryforward Amount;
(7) to the Class M1 Certificates, any Realized Loss
Amortization Amount (as defined below);
(8) to the Class M2 Certificates, any Interest
Carryforward Amount;
(9) to the Class M2 Certificates, any Realized Loss
Amortization Amount;
(10) to the Class B Certificates, any Interest
Carryforward Amount;
(11) to the Class B Certificates, any Realized Loss
Amortization Amount;
(12) to the Basis Risk Reserve Fund, any amounts required by
the Pooling and Servicing Agreement;
(13) until the Payment Date in April 2000, to the Credit
Reserve Fund, any amounts required by the Pooling and Servicing
Agreement;
(14) to the Class X Certificate, the amount distributable
thereon under the Pooling and Servicing Agreement; and
(15) to the Class R Certificate, any remaining amount.
For each Payment Date, the "Realized Loss Amortization Amount" for the
Offered Subordinate Certificates will be the amount, if any, by which (x) the
total of Applied Realized Loss Amounts previously applied in reduction of the
Class Principal Balance thereof exceeds (y) the total of amounts previously
distributed in reimbursement of Applied Realized Loss Amounts thereof.
The Monthly Excess Interest Amount for the first Payment Date will be
less than it otherwise would have been because the first payment on
approximately 1.54% of the Initial Mortgage Loans is due on November 1, 1999, as
described under "Description of the Mortgage Pool."
FINAL SCHEDULED PAYMENT DATE
It is expected that scheduled distributions on the Mortgage Loans,
assuming no defaults or losses that are not covered by the limited credit
support described herein, will be sufficient to make timely distributions of
interest on the Offered Certificates and to reduce the Class Principal Balance
of each Class of the Offered Certificates to zero not later than the dates set
forth below.
Class Final Scheduled
Class Payment Date
-------------------------------------------
A June 25, 2029
M1 November 25, 2029
M2 November 25, 2029
B November 25, 2029
As to each Class, the actual final Payment Date may be earlier or
later, and could be substantially earlier, than the Final Scheduled Payment
Date.
The Final Scheduled Payment Date for the Class A Certificates has been
determined on the basis of the Modeling Assumptions (as defined herein) and the
additional assumption that there are no principal prepayments. The Final
Scheduled Payment Date for the remaining Classes of Offered Certificates is the
Payment Date thirty years and one month after the Closing Date.
REPORTS TO CERTIFICATEHOLDERS
On each Payment Date, the Trustee will make available to each
Certificateholder a statement containing the following information:
o the amount of principal distributed on that date to holders of
each Class of Offered Certificates;
o the amount of interest distributed on that date to holders of
each Class of Offered Certificates;
o the Pass-Through Rate applicable to each Class of Offered
Certificates;
o the amount of any outstanding Interest Carryforward Amount for
each Class of Offered Certificates after distributions on that
date;
o the amount of any Substitution Amounts or Loan Purchase Price
Amounts in such distributions on that date;
o the amount of Basis Risk Shortfalls and Unpaid Basis Risk
Shortfalls for each Class of Offered Certificates after
distributions on that date;
o the amount of any unreimbursed Realized Loss Amortization
Amount for each Class of Offered Subordinate Certificates
after distributions on that date;
o the amount of Delinquency Advances included in distributions
on that date;
o the Class Principal Balance of each Class of Offered
Certificates after distributions on that date;
o the amount of the Servicing Fees and Trustee Fees paid with
respect to that date;
o whether a Trigger Event has occurred as shown by percentage of
Three Month Delinquency Rate;
o the Total Loan Balance, the Assumed Total Loan Balance and
weighted average interest rate of the Mortgage Loans as of
that date;
o the amount of any Realized Losses on the Mortgage Loans during
the immediately preceding calendar month and total Realized
Losses since the Cut-off Date;
o the number and aggregate Principal Balance of Mortgage Loans
(1) remaining outstanding, (2) delinquent by 30-59 days, 60-89
days and 90 or more days, (3) in foreclosure, (4) in
bankruptcy and (5) with respect to REO Property;
o the amount of any prepayments or amounts from the Pre-Funding
Account distributed as a payment of principal on that date;
o the Target Overcollateralization Amount, the
Overcollateralization Amount, and the Senior Enhancement
Percentage;
o any amounts in the Credit Reserve Fund and Basis Risk Reserve
Fund;
o any amount distributed to the holders of the Class X and Class
R Certificates; and
o certain other information to the extent provided in the
Pooling and Servicing Agreement.
The Trustee will make such reports available each month via its website
and its fax-on-demand service. The Trustee's website can be accessed at
http://www.ctslink.com. Its fax-on-demand service may be accessed by calling
(301) 815-6610.
OPTIONAL PURCHASE OF MORTGAGE LOANS; TERMINATION OF THE TRUST FUND
On any Payment Date on or after the date on which the Class Principal
Balance of the Class A Certificates is less than 35% of the initial Class
Principal Balance of the Class A Certificates, the holder of the Class X
Certificate will (subject to the terms of the Pooling and Servicing Agreement)
have the option to purchase the Mortgage Loans, any REO Property and any other
related property for a price equal to the sum of (1) 100% of the total
outstanding principal balance of the Mortgage Loans plus accrued interest
thereon at the applicable Mortgage Rate, (2) the fair market value of all other
property being purchased and (3) any unreimbursed Servicing Advances and
expenses of the Trustee; provided, that the purchase price will not be less than
the total Certificate Principal Balance of the Offered Certificates, plus
accrued interest thereon. If the purchase option is exercised, the Trust Fund
will be terminated (such event, an "Optional Termination").
If the Class X Certificateholder does not exercise its option as
described above when it is first entitled to do so, the Pass-Through Rates of
the Offered Certificates will be increased as described under "-- Distributions
of Interest" herein.
THE TRUSTEE
Norwest Bank Minnesota, National Association (the "Trustee"), a
national banking association, will be appointed Trustee of the Trust Fund
pursuant to the Pooling and Servicing Agreement. The Trustee will be paid a
monthly fee (the "Trustee Fee") calculated as a fixed percentage equal to
0.0125% per annum on the aggregate of the Principal Balance of the Mortgage
Loans and amounts in the Pre-Funding Account, if any, as of the first day of the
related Remittance Period, and will also be entitled to retain, as additional
compensation, a portion of any interest or other income earned on funds on
deposit in the Certificate Account pending distribution to Certificateholders.
The Trustee will be entitled to reimbursement for its expenses prior to
distribution of any amounts to the Certificateholders.
The "Corporate Trust Office" for purposes of presentment and surrender
of Offered Certificates for final distribution thereon and for all other
purposes is located at Sixth Street and Marquette Avenue, Minneapolis, Minnesota
55479.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of the Mortgage Loans delivered on the
Closing Date (the "Initial Mortgage Loans") and Mortgage Loans purchased by the
Trust Fund during the Pre-Funding Period (the "Subsequent Mortgage Loans"). The
statistical information presented below and elsewhere in this Prospectus
Supplement concerning the Mortgage Pool is based on the pool of Initial Mortgage
Loans unless otherwise specified. The Mortgage Pool will consist of 2,513
conventional, adjustable and fixed rate, fully-amortizing and balloon Initial
Mortgage Loans with original terms to maturity from the first due date of the
scheduled monthly payment (a "Monthly Payment") of not more than 30 years,
having a total Principal Balance as of September 1, 1999 (the "Cut-off Date")
(after giving effect to Monthly Payments due on that date) of approximately
$208,964,821 (the "Cut-off Date Balance"). The Mortgage Loans were originated or
acquired by the Originator generally in accordance with the underwriting
guidelines described herein. Because the underwriting guidelines do not conform
to Fannie Mae or Freddie Mac guidelines, the Mortgage Loans are likely to
experience higher rates of delinquency, foreclosure and bankruptcy than if they
had been underwritten to a higher standard. Interest on the Mortgage Loans
accrues on the basis of a 360-day year consisting of twelve 30-day months.
The Initial Mortgage Loans will consist of adjustable rate Mortgage
Loans ("Adjustable Rate Mortgage Loans") and fixed rate Mortgage Loans ("Fixed
Rate Mortgage Loans").
Wherever reference is made herein to a percentage of some or all of the
Initial Mortgage Loans, the percentage is determined (unless otherwise
specified) on the basis of the Cut-off Date Balance.
Generally, each Adjustable Rate Mortgage Loan Mortgage Rate will adjust
at regular intervals or have an initial period with no adjustments followed by
adjustments at regular intervals. Under the terms of approximately 95.16% of the
Adjustable Rate Mortgage Loans (the "Delayed Adjustment Mortgage Loans"), the
first Mortgage Rate adjustment will occur after an initial period of two or five
years as described herein and then provide for semi-annual adjustment.
Approximately 4.83% of the Adjustable Rate Mortgage Loans provide for regular
semi-annual adjustment of the applicable Mortgage Rate, as specified in the
related Note, based on the Index (as defined herein) and for corresponding
adjustments to the monthly payment amount due thereon, in each case as specified
in the related Note and subject to the limitations described under "--
Adjustable Rate Mortgage Loans" herein.
All of the Initial Mortgage Loans are secured by mortgages or deeds of
trust or other similar security instruments (the "Mortgages") creating first or
second liens on one- to four-family residential properties generally consisting
of one- to four-family dwelling units, individual condominium units,
manufactured housing or individual units in planned unit developments. The
Mortgage Loans to be included in the Mortgage Pool will be acquired from AMRESCO
Residential Mortgage Corporation (the "Originator"). See "The Originator" and
"The Pooling and Servicing Agreement -- Assignment of Mortgage Loans" herein.
Approximately 34.65% of the Initial Mortgage Loans have Combined
Loan-to-Value Ratios in excess of 80%. None of those Initial Mortgage Loans or
any other Initial Mortgage Loans are covered by primary mortgage insurance
policies. The "Combined Loan-to-Value Ratio" of a Mortgage Loan at any time is
the ratio of (a) the principal balance of the Mortgage Loan at the time of
origination plus, in the case of a Mortgage Loan secured by a junior lien, the
principal balance of each mortgage loan senior thereto at the time of
origination, to (b) the lesser of the sale price of the Mortgaged Property and
its appraised value at the time of sale at the time of origination.
Approximately 0.60% of the Initial Mortgage Loans were one payment
delinquent as of August 31, 1999. As of the Cut-off Date, with respect to 0.72%
of the Initial Mortgage Loans, the borrowers have failed to make the first
Monthly Payment after origination of the Mortgage Loan.
Approximately 99.91% of the Initial Mortgage Loans are fully
amortizing. Approximately 0.09% of Initial Mortgage Loans will have original
terms to maturity that are shorter than their amortization schedules, leaving
final payments ("Balloon Payments") due on their maturity dates that are
significantly larger than other monthly payments (such loans, "Balloon Mortgage
Loans"). The Balloon Mortgage Loans are generally expected to have original
terms to maturity of 15 years. The ability of the borrower to repay a Balloon
Mortgage Loan at maturity frequently will depend on the borrower's ability to
refinance the loan. Any loss on a Balloon Mortgage Loan as a result of the
borrower's inability to refinance the loan will be borne by Certificateholders,
to the extent not covered by the applicable credit enhancement. Neither the
Servicer nor the Trustee will make any Delinquency Advances with respect to
delinquent Balloon Payments.
Approximately 76.45% of the Initial Mortgage Loans provide for payment
by the borrower of a prepayment premium in connection with certain full or
partial prepayments of principal. Generally, each of these Initial Mortgage
Loans provides for payment of a prepayment premium in connection with certain
partial prepayments and prepayments in full made within the period of time
specified in the related Note, ranging from one to five years from the date of
origination of the Mortgage Loan, as described herein. The amount of the
applicable prepayment premium, to the extent permitted under applicable state
law, is as provided in the related Note; for a majority of these Initial
Mortgage Loans, the premium amount is equal to six months' interest on any
amounts prepaid in excess of 20% of the original principal balance of the
Initial Mortgage Loan during any 12 month period. Generally, prepayment premium
may not be waived by the Servicer. Such prepayment premiums will be part of
available funds applied to pay interest on the Offered Certificates.
ADJUSTABLE RATE MORTGAGE LOANS
Approximately 95.06% of the Adjustable Rate Mortgage Loans are Delayed
Adjustment Mortgage Loans that first adjust the Mortgage Rate after an initial
period of two years. Approximately 4.83% of the Adjustable Rate Mortgage Loans
provide for semi-annual adjustment of the related Mortgage Rate, as specified in
the related Note, and for corresponding adjustments to the monthly payment
amount due thereon, in each case on each adjustment date applicable thereto
(each such date, an "Adjustment Date.") The remaining Adjustable Mortgage Loans
are Delayed Adjustment Mortgage Loans that have the first Mortgage Rate
adjustment after an initial period of five years. On each Adjustment Date for
each Adjustable Rate Mortgage Loan, the Mortgage Rate thereon will be adjusted
to equal the sum, rounded generally to the nearest multiple of 1/8%, of the
applicable Index (as described below) and a fixed percentage amount (the "Gross
Margin"), provided that in the substantial majority of cases the Mortgage Rate
on each Adjustable Rate Mortgage Loan generally will not increase or decrease by
more than a fixed percentage specified in the related Note (the "Periodic Cap")
on any related Adjustment Date, except in the case of the first Mortgage Rate
adjustment with respect to a Delayed Adjustment Mortgage Loan, and will not
exceed a specified maximum Mortgage Rate over the life of the Mortgage Loan (the
"Maximum Rate") or be less than a specified minimum Mortgage Rate over the life
of the Mortgage Loan (the "Minimum Rate"). The Mortgage Rate on a Delayed
Adjustment Mortgage Loan generally will not increase or decrease on the first
Adjustment Rate by more than a fixed percentage specified in the related Note
(the "Initial Cap"). Effective with the first monthly payment due on each
Adjustable Rate Mortgage Loan after each related Adjustment Date, the monthly
payment amount will be adjusted to an amount that will amortize fully the
outstanding principal balance of the related Mortgage Loan over its remaining
term, and pay interest at the Mortgage Rate as so adjusted. Due to the
application of the Initial Caps, Periodic Caps and Maximum Rates, the Mortgage
Rate on any Adjustable Rate Mortgage Loan, as adjusted on any related Adjustment
Date, may be less than the sum of the Index and the related Gross Margin,
rounded as described herein. See "-- The Index" herein. The Adjustable Rate
Mortgage Loans generally do not permit the related borrower to convert the
adjustable Mortgage Rate thereon to a fixed Mortgage Rate.
THE INDEX
The Index applicable to the determination of the Mortgage Rates for the
Adjustable Rate Mortgage Loans will be the average of the interbank offered
rates for six-month United States dollar deposits in the London market,
calculated as provided in the related Note (the "Index") and available as of 45
days prior to the Adjustment Date.
In the event that the Index becomes unavailable or otherwise
unpublished, the Servicer will select a comparable alternative index over which
it has no direct control and which is readily verifiable.
THE INITIAL MORTGAGE LOANS
The Initial Mortgage Loans are expected to have the following
approximate total characteristics as of the Cut-off Date. Prior to the issuance
of the Certificates, Initial Mortgage Loans may be removed from the Trust Fund
if the Depositor deems removal necessary or appropriate. In addition, a limited
number of other mortgage loans may be included in the Trust Fund prior to the
issuance of the Offered Certificates.
Number of Initial Mortgage Loans...................... 2,513
Initial Pool Balance.................................. $208,964,820.85
Mortgage Rates:
Weighted Average................................. 9.795%
Range............................................ 5.625% to 16.500%
Weighted Average Remaining Term to Maturity (in
months).............................................. 349
The Principal Balances of the Initial Mortgage Loans as of the Cut-off
Date range from approximately $10,447 to approximately $499,690. The Initial
Mortgage Loans have an average Principal Balance of approximately $83,154.
The weighted average Combined Loan-to-Value Ratio at origination of the
Initial Mortgage Loans is approximately 76.18%.
No more than approximately 0.49% of the Initial Mortgage Loans are
secured by Mortgaged Properties located in any one zip code area.
With respect to approximately 1.54% of the Initial Mortgage Loans, the
first Monthly Payment is due on November 1, 1999.
The following tables set forth as of the Cut-off Date the number, total
Principal Balance and percentage of all the Initial Mortgage Loans having the
stated characteristics shown in the tables in each range. (The sum of the
amounts of the total Principal Balances and the percentages in the following
tables may not equal the totals due to rounding.)
<TABLE>
<CAPTION>
CUT-OFF DATE PRINCIPAL BALANCES
PERCENTAGE OF
RANGE OF NUMBER OF TOTAL MORTGAGE LOANS BY
PRINCIPAL BALANCES ($) MORTGAGE LOANS PRINCIPAL BALANCE TOTAL PRINCIPAL BALANCE
- --------------------- -------------- ----------------- -----------------------
<S> <C> <C> <C>
1 to 50,000.......... 996 $ 35,579,785.47 17.03%
50,001 to 100,000.......... 885 61,643,549.98 29.50
100,001 to 150,000.......... 308 37,071,039.20 17.74
150,001 to 200,000.......... 157 27,000,398.92 12.92
200,001 to 250,000.......... 65 14,539,109.06 6.96
250,001 to 300,000.......... 48 13,014,745.00 6.23
300,001 to 350,000.......... 27 8,963,930.68 4.29
350,001 to 400,000.......... 15 5,619,817.15 2.69
400,001 to 450,000.......... 5 2,166,492.82 1.04
450,001 to 500,000.......... 7 3,365,952.56 1.61
----- --------------- ------
Total....................... 2,513 $208,964,820.85 100.00%
===== =============== ======
</TABLE>
The average Cut-off Date Principal Balance is approximately $83,154.
COMBINED LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
PERCENTAGE OF
RANGE OF COMBINED NUMBER OF TOTAL MORTGAGE LOANS BY
LOAN-TO-VALUE RATIOS (%) MORTGAGE LOANS PRINCIPAL BALANCE TOTAL PRINCIPAL BALANCE
----------------------- -------------- ----------------- -----------------------
<S> <C> <C> <C>
0.001 to 10.000.......... 1 $ 19,970.08 0.01%
10.001 to 20.000.......... 3 109,414.87 0.05
20.001 to 30.000.......... 22 989,278.79 0.47
30.001 to 40.000.......... 31 1,434,790.05 0.69
40.001 to 50.000.......... 69 3,843,309.05 1.84
50.001 to 60.000.......... 125 8,123,936.64 3.89
60.001 to 70.000.......... 528 39,723,599.85 19.01
70.001 to 80.000.......... 1,020 82,316,083.65 39.39
80.001 to 90.000.......... 705 71,408,130.97 34.17
90.001 to 100.000.......... 9 996,306.90 0.48
----- --------------- -------
Total....................... 2,513 $208,964,820.85 100.00%
===== =============== =======
</TABLE>
The weighted average original Combined Loan-to-Value Ratio is
approximately 76.18%.
MORTGAGE RATES*
<TABLE>
<CAPTION>
PERCENTAGE OF
RANGE OF NUMBER OF TOTAL MORTGAGE LOANS BY
MORTGAGE RATES(%) MORTGAGE LOANS PRINCIPAL BALANCE TOTAL PRINCIPAL BALANCE
---------------- -------------- ----------------- -----------------------
<S> <C> <C> <C>
5.501 to 6.000............. 1 $ 35,844.96 0.02%
6.001 to 6.500............. 1 82,860.05 0.04
6.501 to 7.000............. 8 1,144,054.72 0.55
7.001 to 7.500............. 25 5,618,940.97 2.69
7.501 to 8.000............. 66 9,772,422.11 4.68
8.001 to 8.500............. 148 17,896,179.52 8.56
8.501 to 9.000............. 254 26,708,437.10 12.78
9.001 to 9.500............. 305 28,245,310.13 13.52
9.501 to 10.000............. 403 35,307,877.96 16.90
10.001 to 10.500............. 361 26,408,263.57 12.64
10.501 to 11.000............. 392 26,862,451.13 12.86
11.001 to 11.500............. 251 15,194,298.84 7.27
11.501 to 12.000............. 136 8,038,183.45 3.85
12.001 to 12.500............. 92 4,498,514.57 2.15
12.501 to 13.000............. 34 1,674,890.07 0.80
13.001 to 13.500............. 8 431,390.73 0.21
13.501 to 14.000............. 13 459,217.40 0.22
14.001 to 14.500............. 3 132,331.93 0.06
14.501 to 15.000............. 9 255,913.34 0.12
15.001 to 15.500............. 1 111,717.13 0.05
15.501 to 16.000............. 1 51,389.46 0.02
16.001 to 16.500............. 1 34,331.71 0.02
----- --------------- -------
Total....................... 2,513 $208,964,820.85 100.00%
===== =============== =======
</TABLE>
__________
* Reflects current Mortgage Rates of Adjustable Mortgage Loans.
The weighted average Mortgage Rate is approximately 9.795% per annum.
LOAN TYPES
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF TOTAL MORTGAGE LOANS BY
LOAN TYPE MORTGAGE LOANS PRINCIPAL BALANCE TOTAL PRINCIPAL BALANCE
---------------- -------------- ------------------ -----------------------
<S> <C> <C> <C>
Balloon............................ 2 $ 184,402.09 0.09%
Fully Amortizing................... 2,511 208,780,418.76 99.91
----- ---------------- -------
Total....................... 2,513 $ 208,964,820.85 100.00%
===== ================ =======
</TABLE>
RATE TYPE
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF TOTAL MORTGAGE LOANS BY
RATE TYPE MORTGAGE LOANS PRINCIPAL BALANCE TOTAL PRINCIPAL BALANCE
---------------- -------------- ----------------- -----------------------
<S> <C> <C> <C>
Adjustable......................... 1,368 $ 131,170,976.21 62.77%
Fixed.............................. 1,145 77,793,844.64 37.23
----- ---------------- -------
Total....................... 2,513 $ 208,964,820.85 100.00%
===== ================ =======
</TABLE>
ORIGINAL TERMS TO MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF TOTAL MORTGAGE LOANS BY
RANGE OF MATURITIES (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE TOTAL PRINCIPAL BALANCE
---------------------------- -------------- ----------------- -----------------------
<S> <C> <C> <C>
97 to 120.................... 2 $ 49,363.47 0.02%
169 to 192.................... 216 9,572,518.56 4.58
217 to 240.................... 13 570,869.24 0.27
337 to 360.................... 2,282 198,772,069.58 95.12
----- ---------------- -------
Total....................... 2,513 $ 208,964,820.85 100.00%
===== ================ =======
</TABLE>
The weighted average original term to maturity is approximately 351
months.
REMAINING TERMS TO STATED MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
RANGE OF STATED MATURITIES NUMBER OF TOTAL MORTGAGE LOANS BY
(MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE TOTAL PRINCIPAL BALANCE
-------------------------- --------------- ----------------- -----------------------
<S> <C> <C> <C>
97 to 120.................... 2 $ 49,363.47 0.02%
145 to 168.................... 2 48,501.69 0.02
169 to 192.................... 214 9,524,016.88 4.56
217 to 240.................... 13 570,869.24 0.27
313 to 336.................... 6 386,595.13 0.19
336 to 360.................... 2,276 198,385,474.45 94.94
----- ---------------- -------
Total....................... 2,513 $ 208,964,820.85 100.00%
===== ================ =======
</TABLE>
The weighted average stated remaining term to maturity of the fully
amortizing Initial Mortgage Loans is approximately 349 months.
LIEN PRIORITY
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF TOTAL MORTGAGE LOANS BY
LIEN PRIORITY MORTGAGE LOANS PRINCIPAL BALANCE TOTAL PRINCIPAL BALANCE
------------- -------------- ----------------- -----------------------
<S> <C> <C> <C>
First Lien......................... 2,478 $ 207,782,281.45 99.43%
Second Lien........................ 35 1,182,539.41 0.57
----- ---------------- -------
Total....................... 2,513 $ 208,964,820.85 100.00%
===== ================ =======
</TABLE>
PREPAYMENT PENALTY YEARS
<TABLE>
<CAPTION>
PERCENTAGE OF
PREPAYMENT PENALTY NUMBER OF TOTAL MORTGAGE LOANS BY
(YEARS) MORTGAGE LOANS PRINCIPAL BALANCE TOTAL PRINCIPAL BALANCE
- ---------------------- -------------- ----------------- -----------------------
<S> <C> <C> <C>
0.00...................... 760 $ 49,216,108.20 23.55%
0.01 to 1.00.............. 13 1,258,922.87 0.60
1.01 to 2.00.............. 870 91,658,867.25 43.86
2.01 to 3.00.............. 64 4,963,422.32 2.38
3.01 to 4.00.............. 3 172,526.28 0.08
4.01 to 5.00.............. 803 61,694,973.93 29.52
----- --------------- ------
Total.............. 2,513 $208,964,820.85 100.00%
===== =============== ======
</TABLE>
CREDIT LEVEL
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF TOTAL MORTGAGE LOANS BY
CREDIT LEVEL MORTGAGE LOANS PRINCIPAL BALANCE TOTAL PRINCIPAL BALANCE
- ---------------- -------------- ----------------- -----------------------
<S> <C> <C> <C>
A..................... 577 $ 57,542,102.70 27.54%
A-.................... 507 49,531,418.03 23.70
B..................... 628 52,874,182.29 25.30
C..................... 618 39,127,785.27 18.72
D..................... 183 9,889,332.56 4.73
----- --------------- ------
Total.......... 2,513 $208,964,820.85 100.00%
===== =============== ======
</TABLE>
<PAGE>
GEOGRAPHIC DISTRIBUTION
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF TOTAL MORTGAGE LOANS BY
STATE MORTGAGE LOANS PRINCIPAL BALANCE TOTAL PRINCIPAL BALANCE
- --------- -------------- ----------------- -----------------------
<S> <C> <C> <C>
Arizona................. 7 $ 713,191.93 0.34%
Arkansas................ 89 4,906,942.96 2.35
California.............. 210 30,233,143.90 14.47
Colorado................ 34 3,978,125.46 1.90
Connecticut............. 13 958,507.63 0.46
Delaware................ 1 41,250.00 0.02
District of Columbia.... 11 957,212.81 0.46
Florida................. 196 18,668,222.42 8.93
Georgia................. 23 1,823,349.77 0.87
Hawaii.................. 58 10,946,988.89 5.24
Idaho................... 3 146,655.11 0.07
Illinois................ 76 6,685,405.10 3.20
Indiana................. 90 5,149,574.99 2.46
Iowa.................... 4 286,731.59 0.14
Kansas.................. 4 287,747.90 0.14
Kentucky................ 30 2,077,873.12 0.99
Louisiana............... 33 2,426,366.37 1.16
Maine................... 2 128,412.59 0.06
Maryland................ 213 10,627,287.36 5.09
Massachusetts........... 26 3,273,305.97 1.57
Michigan................ 64 4,204,255.57 2.01
Minnesota............... 4 238,560.19 0.11
Mississippi............. 22 1,208,000.22 0.58
Missouri................ 92 6,659,901.24 3.19
Montana................. 4 348,018.89 0.17
Nebraska................ 7 358,792.05 0.17
Nevada.................. 1 177,057.57 0.08
New Hampshire........... 10 1,294,162.88 0.62
New Jersey.............. 19 1,781,645.09 0.85
New Mexico.............. 13 1,666,856.20 0.80
New York................ 24 2,850,986.73 1.36
North Carolina.......... 77 4,303,704.67 2.06
Ohio.................... 261 15,796,320.98 7.56
Oklahoma................ 51 3,458,697.63 1.66
Oregon.................. 76 10,949,960.14 5.24
Pennsylvania............ 202 13,076,823.49 6.26
Rhode Island............ 7 817,366.21 0.39
South Carolina.......... 19 1,324,323.25 0.63
Tennessee............... 42 1,935,107.53 0.93
Texas................... 248 17,715,653.96 8.48
Utah.................... 49 5,662,408.75 2.71
Virginia................ 20 1,265,591.33 0.61
Washington.............. 40 5,587,759.53 2.67
West Virginia........... 5 261,301.07 0.13
Wisconsin............... 31 1,546,014.05 0.74
Wyoming................. 2 159,255.78 0.08
----- --------------- ------
Total............ 2,513 $208,964,820.85 100.00%
===== =============== ======
</TABLE>
PROPERTY TYPES
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF TOTAL MORTGAGE LOANS BY
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE TOTAL PRINCIPAL BALANCE
- ---------------- -------------- ----------------- -----------------------
<S> <C> <C> <C>
Single Family............ 2,127 $169,954,822.87 81.33%
Two- to Four-Family...... 173 15,731,468.97 7.53
Planned Unit Development. 100 13,424,497.03 6.42
Condominium.............. 83 8,094,874.06 3.87
Townhouse................ 19 966,590.13 0.46
Manufactured Housing..... 11 792,567.79 0.38
----- --------------- ------
Total............. 2,513 $208,964,820.85 100.00%
===== =============== ======
</TABLE>
LOAN PURPOSES
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF TOTAL MORTGAGE LOANS BY
LOAN PURPOSE MORTGAGE LOANS PRINCIPAL BALANCE TOTAL PRINCIPAL BALANCE
- ---------------- -------------- ----------------- -----------------------
<S> <C> <C> <C>
Cash Out Refinance....... 1,231 $102,463,374.69 49.03%
Purchase................. 720 55,337,561.74 26.48
Rate/Term Refinance...... 557 50,906,122.31 24.36
Home Improvement......... 3 140,881.46 0.07
Construction Permanent... 2 116,880.65 0.06
----- --------------- ------
Total............. 2,513 $208,964,820.85 100.00%
===== =============== ======
</TABLE>
OCCUPANCY STATUS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF TOTAL MORTGAGE LOANS BY
OCCUPANCY STATUS MORTGAGE LOANS PRINCIPAL BALANCE TOTAL PRINCIPAL BALANCE
- ---------------- -------------- ----------------- -----------------------
<S> <C> <C> <C>
Primary Home............ 2,135 $187,087,362.14 89.53%
Investment.............. 358 19,516,022.62 9.34
Second Home............. 20 2,361,436.10 1.13
----- --------------- ------
Total............ 2,513 $208,964,820.85 100.00%
===== =============== ======
</TABLE>
DOCUMENTATION TYPES
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF TOTAL MORTGAGE LOANS BY
DOCUMENTATION TYPE MORTGAGE LOANS PRINCIPAL BALANCE TOTAL PRINCIPAL BALANCE
- ------------------ -------------- ----------------- -----------------------
<S> <C> <C> <C>
Full................... 1,982 $158,051,939.44 75.64%
Limited................ 31 4,660,268.81 2.23
Stated................. 500 46,252,612.60 22.13
----- --------------- ------
Total........... 2,513 $208,964,820.85 100.00%
===== =============== ======
</TABLE>
<PAGE>
The following tables set forth as of the Cut-off Date the number, total
Principal Balance and percentage of the Adjustable Rate Mortgage Loans having
the stated characteristics shown in the tables in each range. (The sum of the
amounts of the total Principal Balances and the percentages in the following
tables may not equal the totals due to rounding.)
MAXIMUM RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
RANGE OF NUMBER OF TOTAL MORTGAGE LOANS BY
MAXIMUM RATES(%) MORTGAGE LOANS PRINCIPAL BALANCE TOTAL PRINCIPAL BALANCE
- ---------------- -------------- ----------------- -----------------------
<S> <C> <C> <C>
9.001 to 9.500...... 5 $ 291,251.44 0.22%
9.501 to 10.000...... 4 380,887.52 0.29
10.001 to 10.500...... 4 386,510.29 0.29
10.501 to 11.000...... 2 136,532.03 0.10
11.001 to 11.500...... 1 37,495.08 0.03
11.501 to 12.000...... 4 165,083.03 0.13
12.001 to 12.500...... 2 56,830.52 0.04
12.501 to 13.000...... 3 141,847.33 0.11
13.001 to 13.500...... 1 82,860.05 0.06
13.501 to 14.000...... 9 1,547,731.51 1.18
14.001 to 14.500...... 29 5,018,472.82 3.83
14.501 to 15.000...... 52 8,144,690.18 6.21
15.001 to 15.500...... 102 11,833,575.49 9.02
15.501 to 16.000...... 170 19,239,531.50 14.67
16.001 to 16.500...... 205 20,519,064.78 15.64
16.501 to 17.000...... 246 22,783,807.55 17.37
17.001 to 17.500...... 178 14,361,269.13 10.95
17.501 to 18.000...... 182 14,558,273.00 11.10
18.001 to 18.500...... 110 7,581,271.62 5.78
18.501 to 19.000...... 36 2,725,075.00 2.08
19.001 to 19.500...... 13 738,767.29 0.56
19.501 to 20.000...... 5 189,748.27 0.14
20.001 to 20.500...... 2 96,989.56 0.07
20.501 to 21.000...... 2 102,021.73 0.08
21.501 to 22.000...... 1 51,389.46 0.04
----- --------------- ------
Total................ 1,368 $131,170,976.21 100.00%
===== =============== ======
</TABLE>
The weighted average Maximum Rate of the Adjustable Rate Mortgage Loans
is approximately 16.433% per annum.
MINIMUM RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
RANGE OF NUMBER OF TOTAL MORTGAGE LOANS BY
MINIMUM RATES(%) MORTGAGE LOANS PRINCIPAL BALANCE TOTAL PRINCIPAL BALANCE
- ---------------- -------------- ----------------- -----------------------
<S> <C> <C> <C>
5.501 to 6.000..... 2 $ 89,063.33 0.07%
6.001 to 6.500..... 1 82,860.05 0.06
6.501 to 7.000..... 7 1,374,305.57 1.05
7.001 to 7.500..... 17 2,973,181.82 2.27
7.501 to 8.000..... 40 6,032,794.26 4.60
8.001 to 8.500..... 87 11,097,400.91 8.46
8.501 to 9.000..... 146 17,387,852.37 13.26
9.001 to 9.500..... 204 19,580,618.31 14.93
9.501 to 10.000..... 258 24,933,698.40 19.01
10.001 to 10.500..... 207 18,058,253.97 13.77
10.501 to 11.000..... 199 16,191,249.92 12.34
11.001 to 11.500..... 118 8,287,304.45 6.32
11.501 to 12.000..... 52 3,592,969.12 2.74
12.001 to 12.500..... 19 955,024.73 0.73
12.501 to 13.000..... 6 283,998.27 0.22
13.001 to 13.500..... 2 96,989.56 0.07
13.501 to 14.000..... 2 102,021.73 0.08
14.501 to 15.000..... 1 51,389.46 0.04
----- --------------- ------
Total............... 1,368 $131,170,976.21 100.00%
===== =============== ======
</TABLE>
The weighted average Minimum Rate of the Adjustable Rate Mortgage Loans
is approximately 9.662% per annum.
GROSS MARGINS OF THE ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
RANGE OF NUMBER OF TOTAL MORTGAGE LOANS BY
GROSS MARGINS(%) MORTGAGE LOANS PRINCIPAL BALANCE TOTAL PRINCIPAL BALANCE
- ---------------- -------------- ----------------- -----------------------
<S> <C> <C> <C>
4.001 to 4.250....... 3 $ 962,011.31 0.73%
4.501 to 4.750....... 1 58,501.65 0.04
4.751 to 5.000....... 11 1,020,037.18 0.78
5.001 to 5.250....... 15 1,382,342.55 1.05
5.251 to 5.500....... 25 2,501,247.18 1.91
5.501 to 5.750....... 154 18,901,891.46 14.41
5.751 to 6.000....... 80 9,078,945.28 6.92
6.001 to 6.250....... 205 20,583,979.55 15.69
6.251 to 6.500....... 224 20,584,004.28 15.69
6.501 to 6.750....... 100 10,880,577.55 8.29
6.751 to 7.000....... 184 15,416,851.17 11.75
7.001 to 7.250....... 111 9,821,802.38 7.49
7.251 to 7.500....... 138 11,464,172.05 8.74
7.501 to 7.750....... 29 2,324,437.39 1.77
7.751 to 8.000....... 44 2,791,048.67 2.13
8.001 to 8.250....... 27 2,384,054.30 1.82
8.251 to 8.500....... 10 720,927.96 0.55
8.501 to 8.750....... 5 233,622.98 0.18
8.751 to 9.000....... 1 41,562.94 0.03
9.251 to 9.500....... 1 18,958.38 0.01
----- --------------- ------
Total.............. 1,368 $131,170,976.21 100.00%
===== =============== ======
</TABLE>
The weighted average Gross Margin of the Adjustable Rate Mortgage Loans
is approximately 6.581% per annum.
NEXT ADJUSTMENT DATE OF THE ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF TOTAL MORTGAGE LOANS BY
NEXT ADJUSTMENT DATE MORTGAGE LOANS PRINCIPAL BALANCE TOTAL PRINCIPAL BALANCE
- -------------------- -------------- ----------------- -----------------------
<S> <C> <C> <C>
October 1999............ 17 $ 1,645,982.01 1.25%
November 1999........... 6 1,238,390.26 0.94
December 1999........... 8 674,577.35 0.51
January 2000............ 8 813,801.67 0.62
February 2000........... 14 1,815,951.70 1.38
March 2000.............. 8 862,781.85 0.66
September 2000.......... 1 67,188.21 0.05
October 2000............ 1 84,276.13 0.06
November 2000........... 1 74,034.04 0.06
December 2000........... 2 202,012.89 0.15
January 2001............ 23 1,838,562.12 1.40
February 2001........... 42 3,376,016.83 2.57
March 2001.............. 54 4,888,032.95 3.73
April 2001.............. 104 10,135,400.81 7.73
May 2001................ 185 16,111,949.25 12.28
June 2001............... 179 14,088,211.20 10.74
July 2001............... 239 20,431,583.03 15.58
August 2001............. 204 23,713,571.78 18.08
September 2001.......... 245 27,339,148.00 20.84
October 2001............ 24 1,632,069.40 1.24
September 2002.......... 1 26,316.91 0.02
February 2004........... 2 111,117.82 0.08
----- --------------- ------
Total............ 1,368 $131,170,976.21 100.00%
===== =============== ======
</TABLE>
INITIAL FIXED TERM/SUBSEQUENT ADJUSTABLE RATE TERM
OF THE ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
INITIAL PERCENTAGE OF
TERM/SUBSEQUENT NUMBER OF TOTAL MORTGAGE LOANS BY
ADJUSTABLE RATE TERM MORTGAGE LOANS PRINCIPAL BALANCE TOTAL PRINCIPAL BALANCE
- -------------------- -------------- ----------------- -----------------------
<S> <C> <C> <C>
Two Years/Twenty-Eight
Years ARM (LIBOR)...... 1,312 $124,693,304.40 95.06%
Five Years/Twenty Five
Years ARM (LIBOR)...... 3 137,434.73 0.10
Six Month LIBOR ARM...... 53 6,340,237.08 4.83
----- --------------- ------
Total.............. 1,368 $131,170,976.21 100.00%
===== =============== ======
</TABLE>
PERIODIC CAPS OF THE ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF TOTAL MORTGAGE LOANS BY
PERIODIC CAP(%) MORTGAGE LOANS PRINCIPAL BALANCE TOTAL PRINCIPAL BALANCE
- --------------- -------------- ----------------- -----------------------
<S> <C> <C> <C>
1.000................. 1,368 $131,170,976.21 100.00%
----- --------------- ------
Total.......... 1,368 $131,170,976.21 100.00%
===== =============== ======
</TABLE>
INITIAL CAPS OF THE ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF TOTAL MORTGAGE LOANS BY
INITIAL CAP(%) MORTGAGE LOANS PRINCIPAL BALANCE TOTAL PRINCIPAL BALANCE
- --------------- -------------- ----------------- -----------------------
<S> <C> <C> <C>
1.000.................. 81 $ 8,259,877.73 6.30%
3.000.................. 180 19,491,866.79 14.86
6.000.................. 1 52,784.00 0.04
7.000.................. 1,106 103,366,447.69 78.80
----- --------------- ------
Total........... 1,368 $131,170,976.21 100.00%
===== =============== ======
</TABLE>
SUBSEQUENT MORTGAGE LOANS
The obligation of the Trust Fund to purchase additional Mortgage Loans
(the "Subsequent Mortgage Loans") on any date prior to December 10, 1999, as
specified in the Pooling and Servicing Agreement (each, a "Subsequent Transfer
Date") will be subject to the Subsequent Mortgage Loans meeting the following
requirements, among others, as of the applicable cut-off date (each, a
"Subsequent Cut-off Date"): (i) the ratings assigned to the Offered
Certificates shall not have been reduced or withdrawn by any Rating Agency;
(ii) the remaining term to maturity of each Subsequent Mortgage Loan may not
exceed 360 months; (iii) each Subsequent Mortgage Loan shall not be 60 or more
days contractually delinquent; (iv) no Subsequent Mortgage Loan shall have a
principal balance greater than $500,000; and (v) following the purchase of all
the Subsequent Mortgage Loans by the Trust Fund, the Mortgage Loans, as a
whole (a) will have a weighted average Combined Loan-to-Value Ratio of not
more than 76.70%, (b) will have a weighted average Mortgage Rate of not less
than 9.695%, and (c) will have a weighted average remaining term to maturity
of not more than 350 months. It is anticipated that all of the Subsequent
Mortgage Loans will be one payment delinquent as of the last day of the
calendar month preceding the month when they are purchased by the Trust Fund.
As to a significant portion of these Subsequent Mortgage Loans, the borrowers
will have failed to make the first Monthly Payment after origination of the
Subsequent Mortgage Loans.
The characteristics of Subsequent Mortgage Loans may vary significantly
from time to time subject to the requirements described above, and may bear no
particular relationship to the characteristics of the Initial Mortgage Loans
at any time.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and
the Mortgaged Properties is based upon the Mortgage Pool as expected to be
constituted at the close of business on the Cut-off Date, as adjusted for
Monthly Payments due on or before that date. A Current Report on Form 8-K will
be available to purchasers of the Offered Certificates and will be filed,
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 that Mortgage Loans are removed from or
added to the Mortgage Pool as set forth herein under "Description of the
Mortgage Pool," the removal or addition, to the extent material, will be noted
in the Current Report on Form 8-K. A Current Report on Form 8-K will also be
filed within fifteen days after each Subsequent Transfer Date reflecting
additional Subsequent Mortgage Loans included in the Trust Fund.
THE ORIGINATOR
GENERAL
The Originator, AMRESCO Residential Mortgage Corporation, was
incorporated in the State of Delaware on September 5, 1996, and is an indirect
wholly owned subsidiary of AMRESCO, INC. Its principal executive offices are
located at 16802 Aston Street, Irvine, California 92606. Neither the
Originator nor any of its affiliates will insure or guarantee payments on the
Certificates.
The Originator is engaged in the origination of mortgage loans secured
primarily by first liens on one- to four-family residential dwellings and the
subsequent disposition of such mortgage loans, through whole loan sales and
securitization. The Originator focuses on originating nonconforming mortgage
loans with borrowers who have substantial equity in their residences. Once the
Originator has aggregated pools of such mortgage loans of sufficient size, the
Originator sells such pools, usually through whole loan sales to third
parties.
The Mortgage Pool primarily includes loans originated by the Originator.
The Originator has made certain representations and warranties with
respect to Mortgage Loans, as specified below, and, upon a breach of such
representations and warranties may be required to repurchase such Mortgage
Loan from the Trust Fund.
UNDERWRITING GUIDELINES
The Mortgage Loans originated by the Originator have been originated
generally in accordance with its underwriting guidelines (the "Underwriting
Guidelines") except as discussed in "Risk Factors -- Adverse Selection of
Mortgage Loans" herein. 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 borrower's credit standing and repayment
ability. On a case-by-case basis, the Originator may determine that, based
upon compensating factors, a prospective borrower not strictly qualifying
under the Underwriting Guidelines warrants an underwriting exception.
Compensating factors may include, but are not limited to, low loan-to-value
ratio, low debt-to-income ratio, good credit history, stable employment, pride
of ownership and time in residence at the applicant's current address. It is
expected that a substantial number of the Mortgage Loans to be included in the
Mortgage Pools will represent such underwriting exceptions.
Under the Underwriting Guidelines, during the underwriting process the
Originator reviews and verifies the loan applicant's sources of income (except
under the stated income programs), calculates the amount of income from all
such sources indicated on the loan application, reviews the credit history of
the applicant and calculates the debt-to-income ratio to determine the
applicant's ability to repay the loan, and reviews the mortgaged property for
compliance with the Underwriting Guidelines. The Underwriting Guidelines are
applied in accordance with a procedure which complies with applicable federal
and state laws and regulations and requires (1) an appraisal of the mortgaged
property which conforms to Freddie Mac and Fannie Mae standards and (2) 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 borrower 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. The Underwriting Guidelines generally allow for up
to an additional 3% in excess of credit level maximum loan-to-value ratio
(except where the maximum loan-to-value ratio would exceed 90%) for the
financing of the Originator's lender's fees.
All of the Mortgage Loans are based on loan application packages
submitted through mortgage brokerage companies or at the Originator's retail
branches or are purchased from AMRESCO Residential Capital Markets, Inc. under
a previously active bulk purchase program. 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 borrower at the time the loan is made.
Each prospective borrower 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.
The Originator requires a credit report on each applicant from a credit
reporting company. The applicant must generally provide a letter explaining
all late payments on mortgage debt and, generally, consumer (i.e.,
non-mortgage) debt. The report typically contains information relating to
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 system, the 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, the Originator generally reverifies the income of each
borrower or, for a self-employed individual, reviews the income documentation
obtained pursuant to the Underwriting Guidelines (except under stated income
programs). The Originator generally verifies funds for the down payment. The
source of down payment funds is generally disclosed by the borrower on the
1003 Application, by verification of deposit or certified funds evidencing
sufficient funds to close.
Mortgaged properties that are to secure mortgage loans are generally
appraised by qualified independent appraisers who are approved by the
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
Originator 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. 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 Freddie Mac and Fannie Mae with regard to the
borrower's credit standing and repayment ability. Borrowers who qualify under
the Underwriting Guidelines generally have payment histories and debt ratios
which would not satisfy Freddie Mac and Fannie Mae 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
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 borrower'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
borrower 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 be 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 borrower 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 borrower'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.
Credit Levels
The Originator grades all mortgage loans originated by it, including the
Mortgage Loans included in the Trust Fund, pursuant to a credit grading
matrix. A summary of the criteria in the Originator's credit grading matrix is
provided below.
Credit Level "A"
----------------
The maximum loan-to-value ratio for all eligible properties, owner
occupied, purchase money or refinance, should be 90% or less. Non-owner
occupied properties should have a maximum loan-to-value ratio of 75% or less.
The maximum back-end debt ratio should not exceed 45%. The prospective
borrower should have no less than one year of established credit with three
open, active trade lines. In the last 12 months, mortgage credit should show
no more than one 30-day delinquency and no 60-day delinquencies. The credit
history should reveal no foreclosures in the last 36 months. In the last 12
months, installment and revolving accounts should indicate no more than four
30-day delinquencies and no 60-day delinquencies. In the last 36 months, there
should be no evidence of judgments or charge offs against the prospective
borrower, and discharged bankruptcies should have been reestablished with no
delinquencies. In last 12 months, the prospective borrower should have had
only minor collection actions totaling less than $200.
Credit Level "A-"
-----------------
The maximum loan-to-value ratio for all eligible properties, owner
occupied, purchase money or refinance, should be 90% or less. Non-owner
occupied properties should have a maximum loan-to-value ratio of 75% or less.
The maximum back-end debt ratio should not exceed 55% for a loan-to-value
ratio of 75% or less, 50% for a loan-to-value ratio of 75% to 80% and 45% for
a loan-to-value ratio of greater than 80%. The prospective borrower should
have no less than one year 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. The credit history should reveal no
foreclosures in the last 24 months. In the last 12 months, installment and
revolving accounts should include no more than two 60-day delinquencies. In
the last 12 months, there should be only minor collection actions taken
against the prospective borrower totaling less than $1,000. In the last 24
months, there should be no judgments or charge offs against the prospective
borrower, and discharged bankruptcies should have reestablished credit with no
delinquencies.
Credit Level "B"
----------------
The maximum loan-to-value ratio for all eligible properties, owner
occupied, purchase money or refinance, should be 85% or less. Non-owner
occupied properties should have a loan-to-value ratio of 75% for single family
residences and condominiums and 70% for two- to four-family units. The maximum
back-end debt ratio should not exceed 55% for a loan-to-value ratio of 75% or
less, 50% for a loan-to-value ratio of 75% to 80% and 45% for a loan-to-value
ratio of greater than 80%. The prospective borrower should have no less than
one year of established credit with three trade lines. In the last 12 months,
mortgage credit should show no more than four 30-day delinquencies or two
30-day delinquencies and one 60-day delinquency. The credit history should
reveal no foreclosures in the past 18 months. In the last 12 months,
installment and revolving accounts should show no more than two 90-day
delinquencies. In the last 12 months, there should be no judgments or charge
offs, and only minor collection actions totaling less than $2,500 against the
prospective borrower. In the last 18 months, the prospective borrower is
permitted to have discharged bankruptcies with no delinquencies on
reestablished credit.
Credit Level "C"
----------------
The maximum loan-to-value ratio for all eligible properties, owner
occupied, purchase money or refinance, should be 75% or less. Certain C grade
loans with a minimum FICO score of 550 may allow a loan-to-value ratio of 80%.
Non-owner occupied properties should have a maximum loan-to-value ratio of
70%. The maximum back-end debt ratio should not exceed 55% for a loan-to-value
ratio of 75% or less and 50% for a loan-to-value ratio greater than 75%. There
is no requirement for an established credit history. The credit history should
reveal no foreclosures in the past 12 months. In the last 12 months, mortgage
credit should include no more than six 30-day delinquencies or one 30-day
delinquency and one 90-day delinquency. In the last 12 months, installment and
revolving accounts should show only isolated 120-day delinquencies and no
account currently over 120-days delinquent. In the last 12 months, borrower
may have discharged bankruptcies with no delinquencies on reestablished
credit, and collection actions totaling less than $5,000 are permitted.
Credit Level "D"
----------------
The maximum loan-to-value ratio for all eligible properties, owner
occupied, purchase money or refinance, should be 65% or less. Non-owner
occupied loans do not qualify for D credit loans. 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
one 120-day delinquency, be a maximum of 120 days delinquent at funding, and
no foreclosure may be pending at the time of origination. There are no
stipulations regarding other derogatory information other than that Chapter 7
bankruptcies should have been discharged. Open Chapter 11 and 13 bankruptcies
must be paid with part of the loan proceeds with court approval.
Approximately 27.54%, 23.70%, 25.30%, 18.72% and 4.73% of the Mortgage
Loans as of the Cut-off Date are in the Originator's Credit Level A, Credit
Level A-, Credit Level B, Credit Level C and Credit Level D categories,
respectively.
Approximately 75.64%, 2.23% and 22.13% of the Mortgage Loans as of the
Cut-off Date 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 76.45% of the Mortgage Loans as of the Cut-off Date provide for
the payment by the borrower of a prepayment charge in limited circumstances on
certain full or partial prepayments made generally anywhere from one to five
years from the date of execution of the related Note. The amount of the
prepayment charge is as provided in the related Note. In general, the Note
provides that a prepayment charge will apply if, in any twelve-month period
generally up to the first five years from the date of origination of such
Mortgage Loan, the borrower prepays an aggregate amount exceeding 20% of the
original principal balance of such Mortgage Loan. For a majority of the
Mortgage Loans, 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. Such prepayment premiums will be part
of the Interest Remittance Amount applied to pay interest on the Offered
Certificates.
REPRESENTATIONS RELATING TO THE MORTGAGE LOANS
In the Pooling and Servicing Agreement, the Originator will make
representations and warranties in respect of the Mortgage Loans that generally
include, among other things, that:
(1) the information with respect to each Mortgage Loan set forth in
the schedule of Mortgage Loans is true and correct as of the specified
date;
(2) 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;
(3) each Mortgage Loan had, at the time of origination, either an
attorney's certification of title or a title search or title policy;
(4) as of the Cut-off Date or Subsequent Cut-off Date, as
applicable, 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;
(5) as of the Closing Date or Subsequent Transfer Date, as
applicable, the Originator held good and indefeasible title to, and was
the sole owner of, each Mortgage Loan; and
(6) each Mortgage Loan was originated in accordance with applicable
law and is the valid, legal and binding obligation of the related
borrower.
If the 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 Certificateholders within the time period specified in
the Pooling and Servicing Agreement, the Originator will be obligated under
the Pooling and Servicing Agreement to purchase from the Trust Fund the
Mortgage Loan at the Loan Purchase Price (as defined herein). If the
Originator fails to purchase a Mortgage Loan pursuant to its obligation under
the Pooling and Servicing Agreement, notice will be given to AMRESCO
Residential Capital Markets, Inc. ("ARCMI"), which will then be obligated to
purchase such Mortgage Loan. See "Pooling and Servicing Agreement -- Covenants
of the Originator".
ARCMI
ARCMI was incorporated in Delaware on October 13, 1995, and is a direct
subsidiary of AMRESCO, INC. and the parent company of the Originator. Its
principal executive offices are located at 700 North Pearl Street, Suite 2400,
Dallas, Texas 75201. From its inception, ARCMI was a bulk purchaser of
sub-prime residential mortgage loans, serving as a securitization conduit, and
retaining the residual interests in securitization transactions. ARCMI's bulk
purchasing activities ceased during the fourth quarter of 1998, and its
primary assets as of June 30, 1999 consisted of residual interests in
securitization transactions.
RECENT DEVELOPMENTS
In July, 1999, the Originator entered into a joint venture with Lehman
ALI, Inc., a subsidiary of the Underwriter to form a limited liability
company, Finance America, LLC (the "Seller"). It is anticipated that over the
next six months, substantially all of the origination operations of the
Originator will migrate to the Seller and it is further anticipated that the
Originator will cease all origination activities not later than June, 2000.
Lehman Commercial Paper Inc., an affiliate of the Underwriter, is providing
warehouse financing for loan originations both for the Originator and for the
Seller.
THE SERVICER
GENERAL
Substantially all of the Initial Mortgage Loans are currently being
serviced by the Originator with the remainder being serviced by other third
party servicers. It is expected that on or before November 2, 1999, the
servicing function will be fully transferred to Ocwen Federal Bank FSB (the
"Servicer") for the Initial Mortgage Loans. Servicing for any Subsequent
Mortgage Loans will be transferred to the Servicer as soon as practicable
following their transfer to the Trust Fund.
The information set forth below concerning the Servicer has been provided
to the Depositor by the Servicer. Neither the Depositor, the Originator, the
Seller, the Trustee, the Underwriter, nor any of their respective affiliates
have made any independent investigation of such information.
The Servicer is a federally-chartered savings bank, with its home office
in Fort Lee, New Jersey and its servicing operations and corporate offices in
West Palm Beach, Florida. The Servicer is a wholly-owned subsidiary of Ocwen
Financial Corporation, a public financial services holding company. At June
30, 1999, the Servicer had approximately $2.41 billion in assets,
approximately $2.16 billion in liabilities and approximately $253.08 million
in equity. At June 30, 1999, the Servicer's tangible and leveraged capital
ratio was approximately 9.50% and its total risk-based capital ratio was
approximately 17.92%. For the quarter ended June 30, 1999, the Servicer's net
income was approximately $15.36 million.
The major business of the Servicer has been the acquisition and servicing
of nonperforming and subperforming single-family, multi-family and commercial
mortgage loan portfolios acquired from the Resolution Trust Corporation, from
private investors, from the United States Department of Housing and Urban
Development ("HUD") through HUD's auction of defaulted FHA Loans and mortgage
loan servicing for third parties.
The Servicer is in the process of completing its compliance procedures in
connection with the year 2000 issue. The year 2000 issue is the result of
prior computer programs being written using two digits, rather than four
digits, to define the applicable year. Any of the Servicer's computer programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. Any such occurrence could result in major
computer system failure or miscalculations. The Servicer is presently engaged
in various procedures to ensure that its computer systems and software will be
year 2000 compliant. However, in the event that the Servicer, or any of its
suppliers, customers, brokers or agents do not successfully and timely achieve
year 2000 compliance, the performance of the obligations of the Servicer under
the Pooling and Servicing Agreement could be materially adversely affected.
DELINQUENCY, LOAN LOSS AND FORECLOSURE INFORMATION
The following table sets forth, for the subprime mortgage loan servicing
portfolio serviced by the Servicer as of December 31, 1998 and as of June 30,
1999, certain information relating to the delinquency experience (including
loans in foreclosure (which portfolio does not include mortgage loans that are
subserviced by 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. The
information contained in the monthly remittance reports which will be sent to
investors will be compiled using the same methodology as that used to compile
the information contained in the tables below.
<TABLE>
<CAPTION>
DELINQUENCIES AND FORECLOSURES
(DOLLARS IN THOUSANDS)
As of As of As of
December 31, 1997 December 31, 1998 December 31, 1999
----------------------------------- ----------------------------------- ------------------------------------
Percent Percent Percent Percent Percent Percent
By No. By By By By No. By By By By By By
of Dollar Number Dollar of Dollar Number Dollar By No. Dollar Number Dollar
Loans Amount of Loans Amount Loans Amount of Loans Amount of Loans Amount of Loans Amount
------ ---------- -------- ------- ------ ------ -------- ------- -------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio 21,827 $2,318,261 100.00% 100.00% 68,274 $6,099,336 100.00% 100.00% 67,256 $6,167,705 100.00% 100.00%
Period of
Delinquency(1)
30-59 Days....... 437 41,429 2.00% 1.79% 3,325 $265,396 4.87% 4.35% 2,582 $218,509 3.84% 3.54%
60-89 Days....... 171 17,803 0.78% 0.77% 1,555 $129,439 2.28% 2.12% 1,226 $103,590 1.82% 1.68%
90 Days or more.. 302 36,878 1.38% 1.59% 6,322 $561,709 9.26% 9.21% 8,249 $736,030 12.27% 11.93%
Total Delinquent
Loans 910 96,110 4.17% 4.15% 11,202 $956,545 16.41% 15.68% 12,057 $1,058,129 17.93% 17.15%
Loans in
Foreclosure (2) 281 34,663 1.29% 1.50% 3,158 $297,859 4.63% 4.88% 4,218 $384,380 6.27% 6.23%
- -------------
(1) Includes 8,404 loans totaling $688,648,936 for June 30, 1999, which were delinquent at the time of transfer to the Servicer.
(2) Loans in foreclosure are also included under the subheading "90 Days or more" and the heading "Total Delinquent Loans."
</TABLE>
REAL ESTATE OWNED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
As of As of As of
December 31, 1997 December 31, 1998 December 31, 1999
--------------------- ---------------------- -----------------------
By By By
By No. Dollar By No. Dollar By No. Dollar
of Loans Amount of Loans Amount of Loans Amount
-------- ---------- -------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio 21,827 $2,318,261 68,274 $6,099,336 67,256 $6,167,705
Foreclosed Loans (1) 66 $7,387 808 $70,592 1,365 $117,001
Foreclosure Ratio (2) 0.30% 0.32% 1.18% 1.16% 2.03% 1.90%
- --------------
(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 the Servicer.
(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.
</TABLE>
LOAN LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
As of As of As of
December 31, 1997 December 31, 1998 June 30, 1999
----------------- ----------------- -------------
<S> <C> <C> <C>
Total Portfolio (1) $2,318,261 $6,099,336 $6,167,705
Net Losses (2, 3) ($1,209) ($26,068) ($88,294)
Net Losses as a Percentage of
Total Portfolio -0.05% -0.43% -1.43%
- -------------
(1) "Total Portfolio" on the date stated above is the principal balance of the mortgage loans outstanding on the last day of the
period.
(2) "Net Losses" are actual losses incurred on liquidated properties and shortfall payoffs for each respective period. Losses on
liquidated properties are calculated as net sales proceeds less book value (exclusive of loan purchase premium or discount).
Shortfall payoffs are calculated as the difference between principal payoff amount and unpaid principal at the time of payoff.
(3) As of June 30, 1999, includes $44,459,011 of losses attributable to loans which were delinquent at the time of transfer to the
Servicer.
</TABLE>
It is unlikely that the delinquency experience of the Mortgage Loans
included in the Mortgage Pool will correspond to the delinquency experience of
the Servicer's mortgage portfolio set forth in the foregoing tables. The
statistics shown above represent the delinquency experience for the Servicer's
mortgage servicing portfolio only for the periods presented, whereas the
aggregate delinquency experience on the Mortgage Loans included in the
Mortgage Pool will depend on the results obtained over the life of the
Mortgage Pool. There can be no assurance that such Mortgage Loans will perform
consistent with the delinquency or foreclosure experience described herein. In
particular, 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 the Servicer. In
addition, adverse economic conditions may affect the timely payment by
borrowers of scheduled payments of principal and interest on such Mortgage
Loans and, accordingly, the actual rates of delinquencies and foreclosures
with respect to the Mortgage Pool.
THE POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement (the "Pooling and Servicing Agreement") dated as of the Cut-off Date
among the Depositor, the Originator, the Seller, ARCMI, the Servicer and the
Trustee. Reference is made to the Prospectus for important information in
addition to that set forth in this Prospectus Supplement regarding the terms
and conditions of the Pooling and Servicing Agreement and the Offered
Certificates.
ASSIGNMENT OF MORTGAGE LOANS
On the Closing Date, the Originator will transfer, assign, set over and
otherwise convey without recourse to the Seller, the Seller will subsequently
transfer, assign, set over and otherwise convey without recourse to the
Depositor and the Depositor will subsequently transfer, assign, set over and
otherwise convey without recourse to the Trustee, for the benefit of the
Certificateholders, all of their respective right, title and interest in and
to each Mortgage Loan and all its respective right, title and interest in
principal and interest due on each Mortgage Loan after the Cut-off Date.
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, (1) the
Originator has also been deemed to have granted a security interest in the
Trust Fund to the Seller, (2) the Seller has also been deemed to have granted
a security interest in the Trust Fund to the Depositor, and (3) the Depositor
has also been deemed to have granted a security interest in the Trust Fund to
the Trustee in the event that any such transfer of the Trust Fund is deemed to
be a loan and not a sale. Pursuant to the Pooling and Servicing Agreement, the
Seller will purchase the Mortgage Loans from the Originator and sell the
Mortgage Loans to the Depositor and will otherwise make no representations or
warranties on the Mortgage Loans or have any other repurchase obligations.
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:
(1) deliver to Bankers Trust Company of California, N.A., as the
Custodian (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
(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, 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 the original Mortgage has
not been received from the applicable recording office by the
Originator and returned to the Trustee or (3) a copy of the Mortgage
certified by the public recording office in those instances where
the original recorded Mortgage has been lost;
(2) cause the Custodian, on behalf of the Trustee, within 90 days
following the Closing Date or the Subsequent Transfer Date, as
applicable, to submit to the Originator for recording in the appropriate
jurisdictions, assignments of the Mortgages to "Norwest Bank Minnesota,
National Association, as Trustee of AMRESCO Residential Securities
Corporation Mortgage Loan Trust 1999-1 under the Pooling and Servicing
Agreement dated as of September 1, 1999" provided, however, that the
Depositor shall not be required to cause the Originator to record any
assignment of Mortgage for a Mortgage with respect to which the original
recording information has not yet been received; and
(3) if not delivered on the Closing Date or the Subsequent Transfer
Date, as applicable, 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 but
in no event later than one year after the Closing Date or the Subsequent
Transfer Date, as applicable.
The Custodian, on behalf of the Trustee, will agree, for the benefit of
the Certificateholders, to review the documents contained in each Mortgage
Loan file held by the Trustee (each, a "File") within 45 days after the
Closing Date (or the date of receipt of any documents delivered to the Trustee
after such date) to ascertain that all required documents (or certified copies
of documents) have been executed and received.
If the Custodian 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 attached to the Pooling and Servicing
Agreement, the Custodian will be required to promptly notify the Trustee, the
Depositor, the Originator, the Seller and the Certificateholders. The
Originator agrees to 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. If, however, the Originator shall not have remedied the defect
within the time period set forth in the Pooling and Servicing Agreement and
the defect materially and adversely affects the Certificateholders interest in
the related Mortgage Loan, the Originator shall (a) substitute in lieu of the
Mortgage Loan a Qualified Replacement Mortgage and deliver any Substitution
Amount to the Servicer for deposit into the Principal and Interest Account on
behalf of the Trust Fund as part of the amount to be remitted by the Servicer
on the related Monthly Remittance Date or (b) purchase the Mortgage Loan at a
purchase price equal to the Loan Purchase Price, which purchase price shall be
delivered to the Servicer for deposit in the Principal and Interest Account as
part of the amount to be remitted by the Servicer on the related Monthly
Remittance Date. If the Originator does not meet its obligations under the
Pooling and Servicing Agreement to substitute in lieu of a Mortgage Loan a
Qualified Replacement Loan or purchase a Mortgage Loan from the Trust Fund
which has a material defect in a document constituting part of the File, ARCMI
will, upon receipt of notice, be required to purchase such Mortgage Loan from
the Trust Fund.
In addition to the foregoing, the Custodian, on behalf of the Trustee,
will 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 (the "Final Certification"). After delivery of the Final
Certification, the Custodian shall provide to the Servicer no less frequently
than monthly updated certifications indicating the then current status of
exceptions, until all such exceptions have been eliminated.
COVENANTS OF THE ORIGINATOR WITH RESPECT TO THE MORTGAGE LOANS
Pursuant to the Pooling and Servicing Agreement, upon the discovery by
the Depositor, the Originator, the Seller, the Servicer or the Trustee that
any representations and warranties with respect to the Mortgage Loans set out
in the Pooling and Servicing Agreement were untrue in any material respect as
of the Closing Date with the result that the interests of the
Certificateholders are materially and adversely affected, or the value of the
related Mortgage Loan is materially and adversely affected, the party
discovering the breach is required to give prompt written notice to the other
parties listed above.
Upon the earliest to occur of the Originator's discovery of or its
receipt of notice of a breach described above from any of the other parties,
the Originator will be required in accordance with the Pooling and Servicing
Agreement:
(1) to promptly cure the breach in all material respects; or
(2) within the time period specified in the Pooling and Servicing
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 Servicer for deposit into the Principal and Interest Account
on behalf of the Trust Fund as part of the amount remitted by the
Servicer on the related Monthly Remittance Date or
(b) purchase the affected Mortgage Loan from the Trust Fund at
a purchase price equal to the Loan Purchase Price (as defined
below).
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" under the Code or otherwise subject the Trust Fund to
tax and would not jeopardize the status of any REMIC as a REMIC (a "REMIC
Opinion"). The REMIC Opinion must be addressed to and be acceptable to the
Servicer and the Trustee. Any Mortgage Loan as to which repurchase or
substitution was delayed by delivery of the REMIC Opinion 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, covenant or defect in documentation giving rise to such repurchase
or substitution obligation, the Originator, if it believes such opinion may be
necessary, may cause to be delivered to the Trustee a REMIC Opinion. If the
Originator does not meet its obligation under the Pooling and Servicing
Agreement to cure any such breach or to substitute or repurchase any such
Mortgage Loan, ARCMI will, upon receipt of notice, purchase such Mortgage Loan
from the Trust Fund. The obligation of the Originator to cure, substitute or
repurchase any such Mortgage Loan in respect of a breach that has not been
remedied (and the obligation of ARCMI to repurchase any such Mortgage Loan,
upon the Originator's failure to meet its obligations under the Pooling and
Servicing Agreement) constitute the sole remedy available to the
Certificateholders, the Depositor and the Trustee.
o "Loan Purchase Price" means the sum of (i) the unpaid principal
balance of the related Mortgage Loan plus one month's interest at
the Mortgage Rate and (ii) all unreimbursed Servicing Advances made
on the related Mortgage Loan.
SERVICING
General. The Servicer will be obligated under the Pooling and Servicing
Agreement to service and administer the Mortgage Loans with reasonable care
and using that degree of skill and attention that the Servicer exercise with
respect to comparable mortgage loans that it services for itself or others.
The Servicer 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, the Servicer will be permitted to, in its discretion,
o 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, but
generally not prepayment penalties,
o if a borrower is in default or about to be in default because of a
borrower's financial condition, arrange with the borrower a schedule
for the payment of delinquent payments due on the related Mortgage
Loan, or
o 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 the
Servicer's general policies with respect to comparable mortgage
loans subject to such Act.
The Servicer will be paid a monthly fee (the "Servicing Fee") from
interest collected with respect to each Mortgage Loan serviced by it equal to
the outstanding principal balance of each Mortgage Loan multiplied by the
applicable Servicing Fee Rate. The "Servicing Fee Rate" will be 0.50% per
annum. The amount of the monthly Servicing Fee is subject to adjustment with
respect to prepaid Mortgage Loans, as described below. The Servicer is also
entitled to receive, as additional servicing compensation, all late payment
fees, assumption fees or other similar charges, other than prepayment
penalties, and all reinvestment income earned on amounts on deposit in the
Principal and Interest Account.
The Servicer is required to establish, or cause to be established, in the
name of the Trustee at a depository institution, a principal and interest
account maintained as a trust account of such institution (the "Principal and
Interest Account"). All funds in the Principal and Interest Account 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 Account must mature on or prior to the
immediately succeeding Monthly Remittance Date. Any investment earnings on
funds held in the Principal and Interest Account are for the account of, and
any losses therein are also for the account of and must be promptly
replenished by, the Servicer.
The Servicer is required to deposit in the Principal and Interest
Account, on a daily basis (but in no event later than the second Business Day
following receipt) the following:
(1) all scheduled principal and interest due on the related Mortgage
Loans, after the Cut-off Date or Subsequent Cut-off Date, as the case may
be (including any required Delinquency Advances), and
(2) all unscheduled principal and interest collections received
after the Cut-off Date or Subsequent Cut-off Date, as the case may be,
including any prepayments and the Net Liquidation Proceeds of a Mortgage
Loan (including any insurance proceeds), all Loan Purchase Prices and
Substitution Amounts received by the Servicer.
Amounts deposited in the Principal and Interest Account shall be net of
the following:
(1) the Servicing Fee with respect to each Mortgage Loan and other
servicing compensation,
(2) 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, which amounts shall be delivered to the Originator, and
(3) reimbursements for past Delinquency Advances and Servicing
Advances which the Servicer has determined in its good faith business
judgment are not recoverable from the related Mortgage Loan proceeds.
The Servicer may make withdrawals for its own account from the amounts on
deposit in the Principal and Interest Account only for the following purposes:
(1) to withdraw investment earnings on amounts on deposit in the
Principal and Interest Account;
(2) to reimburse itself for unreimbursed and unrecovered Delinquency
Advances and Servicing Advances to the extent permitted in the Pooling
and Servicing Agreement;
(3) to withdraw amounts that have been deposited to Principal and
Interest Account in error; and
(4) to clear and terminate the Principal and Interest Account
following the termination of the Trust Fund.
The Servicer will remit to the Trustee for deposit in the Certificate
Account the Interest Remittance Amount and the Principal Remittance Amount not
later than the related Monthly Remittance Date.
In the event the Servicer is terminated or resigns and pending the
appointment of a successor, the Trustee will act as successor servicer until
another successor servicer is appointed pursuant to the Pooling and Servicing
Agreement.
Advances. The Servicer will be required to advance on any Mortgage Loan
serviced by it prior to each Payment Date delinquent payments of principal and
interest (other than Balloon Payments), adjusted to the applicable Net
Mortgage Rate, that became due during the related Remittance Period (any such
advance, a "Delinquency Advance").
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. The Servicer is obligated to make Delinquency
Advances with respect to delinquent payments of principal of or interest on
each Mortgage Loan serviced by it, 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. The Servicer shall be permitted to fund its payment
of Delinquency Advances from amounts in the Principal and Interest Account not
required to be distributed on the related Payment Date. The Servicer shall be
entitled to reimburse itself for any Delinquency Advances paid from the
Servicer's own funds from late collections, liquidation proceeds or other
collections related to the Mortgage Loan for which the Delinquency Advance was
made. Previously unreimbursed Delinquency Advances that the Servicer certifies
in writing to be nonrecoverable may be reimbursed to the Servicer out of any
borrower payments prior to their deposit to the Principal and Interest Account
or from funds on deposit in the Principal and Interest Account. All
Delinquency Advances will be included with the distribution to
Certificateholders on the related Payment Date. Any failure by the Servicer to
make a Delinquency Advance as required under the Pooling and Servicing
Agreement will constitute an event of default thereunder for the Servicer, in
which case the Trustee, as successor servicer, will be obligated to make any
such Delinquency Advance, subject to its determination as to recoverability.
The 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, the following:
(1) 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"),
(2) the cost of any enforcement or judicial proceedings, including
foreclosures, and
(3) 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.
The costs described above will constitute "Servicing Advances." The Servicer may
recover a Servicing Advance (a) from the borrower to the extent permitted by the
Mortgage Loans, (b) from Liquidation Proceeds realized upon the liquidation of
the related Mortgage Loan or (c) to the extent that such Servicing Advance is
determined and certified by the Servicer in its good faith business judgment to
be nonrecoverable, from funds on deposit in the Principal and Interest Account.
If so required by the terms of any Mortgage Loan, the 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
borrower.
Prepayment Interest Shortfalls. A full month's interest at the related
Net Mortgage Rate will be due to the Trust Fund on the outstanding Loan
Balance of each Mortgage Loan as of the beginning of each Remittance Period.
If a prepayment in part or in full of a Mortgage Loan occurs during any
calendar month, any Compensating Interest required to offset Prepayment
Interest Shortfalls will be required to be deposited to the Principal and
Interest Account on the Monthly Remittance Date by the Servicer and shall be
included in the amount to be made available to the Trustee on the related
Monthly Remittance Date. Compensating Interest for each Monthly Remittance
Date shall be limited to the Servicing Fee for the related Remittance Period.
Repurchase Option. The 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 three consecutive monthly
installments or any Mortgage Loan as to which enforcement proceedings have
been brought by the Servicer. The purchase price for any such Mortgage Loan is
equal to the Loan Purchase Price, which purchase price shall be deposited in
the Principal and Interest Account.
Foreclosure. The Servicer, with respect to Mortgage Loans serviced by it,
shall foreclose upon or otherwise comparably convert the ownership on behalf
of the Trust Fund 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 Servicer has not purchased from the Trust
Fund ("REO Property"). The Servicer will be required to sell any REO Property
managed by it within 35 months of its acquisition by the Trust Fund, unless an
appropriate extension is obtained, or an opinion of counsel is obtained by the
Servicer to the effect that the holding by the Trust Fund of such REO Property
for any greater period will not result in the imposition of taxes on
"Prohibited Transactions" of the Trust Fund as defined in Section 860F of the
Code or cause the Trust Fund to fail to qualify as a REMIC under the REMIC
provisions at any time that any Certificates are outstanding, in which case
the Servicer shall sell any REO Property by the end of any extended period
specified in any such opinion or such extension, as applicable.
Adjustments to Mortgage Loans. The Servicer will have the right under the
Pooling and Servicing Agreement to accept applications of borrowers for
consent to (1) partial releases of Mortgages, (2) alterations and (3) removal,
demolition or division of Mortgaged Properties. No application for approval
may be considered by the Servicer unless:
(1) the provisions of the related Note and Mortgage have been
complied with;
(2) 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
(3) the lien priority of the related Mortgage is not affected.
Modifications. The Servicer will be prohibited under the Pooling and
Servicing Agreement from making any material modification to the terms of a
Mortgage Loan, including a change in the Mortgage Rate other than as provided
in the Mortgage Note, deferral or forgiveness of a Monthly Payment or
extension of the maturity date, unless the Mortgage Loan is in default or
default, in the judgment of the Servicer, is imminent.
The Servicer will also be prohibited from waiving any prepayment premium
except in the case of a default or imminent default, and then may waive the
prepayment premium only if the waiver would maximize amounts collected under
the Mortgage Loan.
Subservicing Agreements. The 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 meeting
the requirements of the Pooling and Servicing Agreement.
Notwithstanding any subservicing agreement, the Servicer will not be
relieved of its obligations under the Pooling and Servicing Agreement and the
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. The Servicer shall be entitled to
enter into any agreement with a subservicer for indemnification by such
subservicer.
Reporting. The Servicer will be required to deliver to the Trustee, the
Depositor and the Rating Agencies:
(1) on or before March 31 of each year, commencing in 2000, an
officers' certificate stating, as to each signer thereof, that (a) a
review of the activities of the Servicer during such preceding calendar
year and of performance under the Pooling and Servicing Agreement has
been made under such officers' supervision, and (b) to the best of such
officers' knowledge, based on such review, the 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 the Servicer
to remedy such default; and
(2) on or before March 31 of each year, commencing in 2000, 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 Trustee, if directed by a majority of the Certificateholders, will
have the right pursuant to the Pooling and Servicing Agreement, to remove the
Servicer upon the occurrence of, and in certain cases after notice and
expiration of the related cure period of the following:
o certain acts of bankruptcy or insolvency on the part of such
Servicer;
o certain failures on the part of the Servicer to perform its
obligations under the Pooling and Servicing Agreement; or
o the failure to cure material breaches of the Servicer's obligations
in the Pooling and Servicing Agreement.
The Servicer is not permitted to resign from the obligations and duties
imposed on it under the Pooling and Servicing Agreement except (1) 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, or (2) upon written consent of the
holder of the Class X Certificate and the Trustee, which consent shall not be
unreasonably withheld, and confirmation from the Rating Agencies that the
ratings of the Offered Certificates are not reduced. Any such determination
permitting the resignation of the Servicer pursuant to clause (1) 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 the Servicer under clause (1) of the
preceding paragraph, the Trustee (x) shall appoint a successor Servicer and
(y) pending the appointment of a successor Servicer, shall serve as Servicer.
The Trustee, if it is unable to appoint a successor Servicer and is prevented
by law from acting as servicer, will be required to appoint, or petition a
court of competent jurisdiction to appoint, an approved servicer meeting the
requirements of the Pooling and Servicing Agreement and acceptable to the
holder of the Class X Certificate as the successor to the Servicer in the
assumption of all or any part of the responsibilities, duties or liabilities
of the Servicer.
No removal or resignation of the Servicer will become effective until the
Trustee or a successor Servicer shall have assumed the Servicer's
responsibilities and obligations in accordance with the Pooling and Servicing
Agreement.
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 Certificateholders of a majority of the
Percentage Interests represented by the Offered Certificates or, if there are
no Offered Certificates then outstanding, by the holder of the Class X
Certificate, may appoint a successor trustee.
AMENDMENTS
The Trustee, the Depositor, the Originator, the Seller, ARCMI and the
Servicer may, at any time and from time to time and without notice to or the
consent of the Certificateholders, amend the Pooling and Servicing Agreement,
and the Trustee will be required to consent to such amendment, for the
following purposes:
(1) 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),
(2) complying with the requirements of the Code including any
amendments necessary to maintain the status of any REMIC as a "REMIC",
(3) curing any ambiguity,
(4) correcting or supplementing any provisions therein which are
inconsistent with any other provisions therein or in this prospectus
supplement, or
(5) for any other purpose, provided, that, such amendment shall not
adversely affect any Certificateholder in any material respect. Any
amendment shall be deemed not to adversely affect any Certificateholder
in any material respect 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 amendment shall (a) change in any
manner the amount of, or delay the timing of, payments which are required to be
distributed to any Certificateholder without the consent of the
Certificateholder of such Certificate or (b) reduce the percentages which are
required to consent to any such amendments, without the consent of all the
Certificateholders of the affected Class or Classes then outstanding.
The Trustee will be required to furnish written notification of the
substance of any such amendment to each Certificateholder in the manner set
forth in the Pooling and Servicing Agreement.
YIELD CONSIDERATIONS
GENERAL
The yields to maturity (or to early termination) on the Offered
Certificates will be affected by the rate of principal payments on the
Mortgage Loans (including prepayments, which may include amounts received by
virtue of purchase, condemnation, insurance or foreclosure) on the Mortgage
Loans. Yields will also be affected by the extent to which Mortgage Loans
bearing higher Mortgage Rates prepay at a more rapid rate than Mortgage Loans
with lower Mortgage Rates, the amount and timing of borrower delinquencies and
defaults resulting in Realized Losses, the application of the Monthly Excess
Cashflow Amount, the purchase price paid for the Offered Certificates and
other factors.
Principal prepayments may be influenced by a variety of economic,
geographic, demographic, social, tax, legal and other factors. In general, if
prevailing interest rates fall below the interest rates on the Mortgage Loans,
the Mortgage Loans are likely to be subject to higher prepayments than if
prevailing rates remain at or above the interest rates on the Mortgage Loans.
Conversely, if prevailing interest rates rise above the interest rates on the
Mortgage Loans, the rate of prepayment would be expected to decrease. Other
factors affecting prepayment of the Mortgage Loans include such factors as
changes in borrowers' housing needs, job transfers, unemployment, borrowers'
net equity in the mortgaged properties, changes in the value of the mortgaged
properties, mortgage market interest rates and servicing decisions. The
Mortgage Loans generally have due-on-sale clauses.
Approximately 76.45% of the Initial Mortgage Loans are subject to
prepayment premiums during intervals ranging from one to five years following
origination, as described under "Description of the Mortgage Pool" herein. The
prepayment premiums may have the effect of reducing the amount or the
likelihood of prepayment of these Mortgage Loans during intervals when a
prepayment premium would be payable.
The rate of principal payments on the Offered Certificates will also be
affected by the amortization schedules of the Mortgage Loans, the rate and
timing of prepayments by the borrowers, liquidations of defaulted Mortgage
Loans, repurchases of Mortgage Loans due to certain breaches of
representations and warranties or defective documentation and exercise by the
holder of the Class X Certificate of its right to purchase all of the Mortgage
Loans as described herein. The timing of changes in the rate of prepayments,
liquidations and purchases of the related Mortgage Loans may significantly
affect the yield to an investor, even if the average rate of principal
payments experienced over time is consistent with an investor's expectation.
Because the rate and timing of principal payments on the Offered Certificates
will depend on future events and on a variety of factors no assurance can be
given as to the rate or the timing of principal payments on the Offered
Certificates. In general, the earlier a prepayment of principal of the related
Mortgage Loans, the greater the effect on an investor's yield. The effect on
an investor's yield of principal payments occurring at a rate higher (or
lower) than the rate anticipated by the investor during the period immediately
following the issuance of the Certificates may not be offset by a subsequent
like decrease (or increase) in the rate of principal payments.
From time to time, areas of the United States may be affected by
flooding, severe storms, landslides, wildfires or other natural disasters. The
Originator will represent and warrant that as of the Closing Date each
Mortgaged Property was free of material damage. In the event of an uncured
breach of this representation and warranty that materially and adversely
affects the value of a Mortgage Loan, the Originator will be required to
repurchase the affected Mortgage Loan or, under certain circumstances,
substitute another mortgage loan. If any damage caused by earthquakes,
flooding, storms, wildfires, or landslides (or other cause) occurs after the
Closing Date, the Originator will not have any repurchase obligation. In
addition, the standard hazard policies covering the Mortgaged Properties
generally do not cover damage caused by earthquakes, flooding and landslides,
and earthquake, flood or landslide insurance may not have been obtained with
respect to the affected Mortgaged Properties. As a consequence, Realized
Losses could result. To the extent that the insurance proceeds received with
respect to any damaged Mortgage Properties are not applied to the restoration
thereof, the proceeds will be used to prepay the related Mortgage Loans in
whole or in part. Any repurchases or repayments of the Mortgage Loans may
reduce the weighted average lives of the Offered Certificates and will reduce
the yields on the Offered Certificates to the extent they are purchased at a
premium.
Prepayments, liquidations and purchases of the Mortgage Loans will result
in distributions to holders of the related Certificates of principal amounts
that would otherwise be distributed over the remaining terms of those Mortgage
Loans. The rate of defaults on the Mortgage Loans will also affect the rate
and timing of principal payments on the Mortgage Loans. In general, defaults
on mortgage loans are expected to occur with greater frequency in their early
years.
The yields on the Offered Certificates may be adversely affected by Net
Prepayment Interest Shortfalls on the Mortgage Loans.
The yields to investors in the Offered Certificates may be affected by
the purchase of defaulted Mortgage Loans by the Servicer and by the exercise
by the holder of the Class X Certificate of its right to purchase the Mortgage
Loans, as described under "Description of the Certificates -- Optional
Purchase of Mortgage Loans; Termination of the Trust Fund" herein, or the
failure of the holder of the Class X Certificate to exercise that right.
If the purchaser of an Offered Certificate offered at a discount from its
initial principal balance calculates its anticipated yield to maturity (or
early termination) based on an assumed rate of payment of principal that is
faster than that actually experienced on the related Mortgage Loans, the
actual yield may be lower than that so calculated. Conversely, if the
purchaser of a Certificate offered at a premium calculates its anticipated
yield based on an assumed rate of payment of principal that is slower than
that actually experienced on the related Mortgage Loans, the actual yield may
be lower than that so calculated.
The Pass-Through Rates applicable to the Offered Certificates will be
affected by the level of LIBOR from time to time, and by the Mortgage Rates of
the Mortgage Loans from time to time as described under "Risk Factors --
Mortgage Loan Pass-Through Rates May Limit Pass-Through Rates on the
Certificates" herein.
OVERCOLLATERALIZATION
The yields on the Offered Certificates will be affected by the
application of Monthly Excess Cashflow Amount as described herein and by the
amount of overcollateralization. The amount of Monthly Excess Cashflow Amount
will be affected by the delinquency, default and prepayment experience of the
Mortgage Loans. There can be no assurance as to the rate at which
overcollateralization will be created, or whether overcollateralization will
be maintained at the levels described herein.
SUBORDINATION OF THE OFFERED SUBORDINATE CERTIFICATES
As described herein, the Class A Certificates are senior to the Offered
Subordinate Certificates, and the Class A Certificates will have a
preferential right to receive amounts in respect of interest to the extent of
the Interest Remittance Amount and amounts in respect of principal to the
extent of the Principal and Distribution Amount. In addition, Applied Realized
Loss Amount will be allocated among the Class B, Class M2 and Class M1
Certificates in inverse order of priority of distribution. As a result, the
yields of the Offered Subordinate Certificates will be more sensitive, in
varying degrees, to delinquencies and losses on the Mortgage Loans than the
yields of the Class A Certificates and Classes of Offered Subordinate
Certificates that have a relatively higher priority of distribution.
WEIGHTED AVERAGE LIFE
Weighted average life refers to the average amount of time that will
elapse from the date of issuance of a security to the date of distribution to
the investor of each dollar distributed in net reduction of principal of the
security (assuming no losses). The weighted average lives of the Offered
Certificates will be influenced by, among other things, the rate at which
principal of the related Mortgage Loans is paid, which may be in the form of
scheduled amortization, prepayments or liquidations.
Prepayments on mortgage loans are commonly measured relative to a
constant prepayment standard or model. The model used in this Prospectus
Supplement for the Mortgage Loans represents an assumed constant rate of
prepayment ("CPR") each month relative to the then outstanding principal
balance of a pool of mortgage loans for the life of the mortgage loans. CPR
does not purport to be either a historical description of the prepayment
experience of any pool of mortgage loans or a prediction of the anticipated
rate of prepayment of any mortgage loans, including the Mortgage Loans to be
included in the Trust Fund.
The following tables were prepared based on the following assumptions,
among other things (collectively, the "Modeling Assumptions"):
o the initial Class Principal Balances are as set forth on the cover
of this Prospectus Supplement;
o the Pass-Through Rates of the Offered Certificates are as described
herein;
o each Monthly Payment of principal and interest is timely received on
the first day of each month starting in October 1999;
o principal prepayments are received in full on the first day of each
month starting in October 1999 and there are no Net Prepayment
Interest Shortfalls;
o prepayments are received on the Mortgage Loans at the applicable
constant rates indicated in the Prepayment Scenarios described
below;
o there are no defaults or delinquencies on the Mortgage Loans;
o Payment Dates occur on the 25th day of each month, starting in
October 1999;
o there are no re-purchases or substitutions of the Mortgage Loans;
o the Mortgage Rate of each Adjustable Rate Mortgage Loan is adjusted
on the next applicable Adjustment Date to equal the value of the
Index set forth below plus the related Gross Margin, subject to any
Periodic Cap;
o the Mortgage Rates of the Adjustable Rate Mortgage Loans adjust
semi-annually;
o the value of the Index is 6.08625%;
o the value of LIBOR is 5.40625%;
o the Certificates are issued on the Closing Date;
o the sum of the Trustee Fee and the Servicing Fee is 0.5125%;
o the Subsequent Mortgage Loans have been purchased on the Closing
Date and have the same assumed characteristics as the Initial
Mortgage Loans; and
o the Mortgage Loans were aggregated into assumed mortgage loans
having the following characteristics:
<TABLE>
<CAPTION>
ASSUMED MORTGAGE LOAN CHARACTERISTICS
REMAINING
TERM TO REMAINING
PRINCIPAL1 CURRENT NEXT RATE STATED AMORTIZATION
PRINCIPAL/1/ MORTGAGE ADJUSTMENT GROSS INITIAL/2/ MATURITY TERM
LOAN TYPE BALANCE($) RATE(%) DATE MARGIN(%) CAP(%) (MONTHS) (MONTHS)
- ---------------------- ------------ -------- ---------- --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed................. 213,294.89 9.423 N/A N/A N/A 178 178
Fixed................. 275,003.92 9.955 N/A N/A N/A 176 176
Fixed................. 75,302.49 11.125 N/A N/A N/A 178 178
Fixed................. 5,472,152.83 9.691 N/A N/A N/A 177 177
Fixed................. 2,718,597.57 9.854 N/A N/A N/A 177 177
Fixed................. 299,743.21 12.035 N/A N/A N/A 353 353
Fixed................. 2,347,258.73 9.912 N/A N/A N/A 358 358
Fixed................. 2,787,048.74 9.971 N/A N/A N/A 358 358
Fixed................. 47,822,406.44 9.821 N/A N/A N/A 357 357
Fixed................. 15,891,922.86 10.368 N/A N/A N/A 356 356
Fixed................. 25,674.57 12.750 N/A N/A N/A 168 168
Fixed................. 32,205.73 15.000 N/A N/A N/A 178 178
Fixed................. 336,865.49 13.744 N/A N/A N/A 171 171
Fixed................. 424,693.75 12.863 N/A N/A N/A 169 169
Fixed................. 32,879.29 14.500 N/A N/A N/A 234 234
Fixed................. 196,617.27 11.921 N/A N/A N/A 236 236
Fixed................. 156,438.53 13.819 N/A N/A N/A 239 239
Adjustable............ 805,361.38 10.218 06/01/01 6.738 6.534 358 358
Adjustable............ 90,466,187.15 9.720 06/01/01 6.617 6.200 358 358
Adjustable............ 1,672,631.50 10.368 04/01/01 6.908 5.541 355 355
Adjustable............ 100,555.33 9.945 07/01/01 7.253 7.000 358 358
Adjustable............ 6,452,858.57 9.526 04/01/01 6.461 6.786 355 355
Adjustable............ 27,603,579.03 9.772 05/01/01 6.590 6.393 357 357
Adjustable............ 82,438.51 8.990 02/01/04 5.500 1.000 352 352
Adjustable............ 57,650.13 12.273 06/01/03 6.966 3.792 345 345
Adjustable............ 402,089.24 8.748 11/01/99 6.478 1.000 356 356
Adjustable............ 259,498.44 8.250 10/01/99 6.000 1.000 355 355
Adjustable............ 2,487,475.96 8.629 12/01/99 5.960 1.557 356 356
Adjustable............ 3,313,605.50 8.437 12/01/99 6.099 1.422 356 356
Fixed/Balloon......... 152,453.92 12.300 N/A N/A N/A 169 349
Fixed/Balloon......... 35,509.03 9.750 N/A N/A N/A 169 349
- ---------
1. The Principal Balance for each representation line has been increased to reflect a proportional percentage of the Pre-Funded
Amount based upon the current balance as of September 1, 1999.
2. The Periodic Cap on all Adjustable Rate Mortgage Loans is 1.000%.
</TABLE>
The actual characteristics of the Mortgage Loans and the performance of
the Mortgage Loans will differ from the assumptions used in constructing the
tables set forth below, which are hypothetical in nature and are provided only
to give a general sense of how the principal cash flows might behave under
varying prepayment scenarios. For example, it is not expected that the
Mortgage Loans will prepay at a constant rate until maturity, that all of the
Mortgage Loans will prepay at the same rate or that there will be no defaults
or delinquencies on the Mortgage Loans. Moreover, the diverse remaining terms
to maturity of the Mortgage Loans could produce slower or faster principal
distributions than indicated in the tables at the various percentages of CPR
specified, even if the weighted average remaining term to maturity of the
Mortgage Loans is as assumed. Any difference between those assumptions and the
actual characteristics and performance of the Mortgage Loans or actual
prepayment or loss experience will cause the percentages of initial Class
Principal Balances outstanding over time and the weighted average lives of the
Offered Certificates to differ (which difference could be material) from the
corresponding information in the tables for each indicated percentage of CPR.
Subject to the foregoing discussion and assumptions, the following tables
indicate the weighted average lives of the Offered Certificates and set forth
the percentages of the initial Class Principal Balances of the Offered
Certificates that would be outstanding after each of the Payment Dates shown
at the percentages of CPR.
The weighted average life of a Class of Offered Certificates is
determined by (1) multiplying the net reduction, if any, of the applicable
Class Principal Balance by the number of years from the date of issuance of
the Offered Certificate to the related Payment Date, (2) adding the results
and (3) dividing the sum by the total of the net reductions of Class Principal
Balance described in (1) above and rounding to one decimal place.
<PAGE>
PERCENTAGE OF INITIAL CLASS PRINCIPAL BALANCE OF THE
CLASS A CERTIFICATES OUTSTANDING AT THE FOLLOWING PERCENTAGES OF CPR
<TABLE>
<CAPTION>
Payment Date 0% 9% 18% 24% 35% 50%
- ------------ -- -- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage...................... 100 100 100 100 100 100
September 2000.......................... 99 88 77 70 57 39
September 2001.......................... 98 78 59 48 29 9
September 2002.......................... 97 68 44 31 12 0
September 2003.......................... 96 60 35 26 12 0
September 2004.......................... 95 52 28 19 9 0
September 2005.......................... 94 45 23 15 6 0
September 2006.......................... 93 39 19 11 4 0
September 2007.......................... 92 35 15 8 2 0
September 2008.......................... 90 31 12 6 2 0
September 2009.......................... 88 28 10 5 1 0
September 2010.......................... 86 25 8 3 * 0
September 2011.......................... 84 22 6 3 0 0
September 2012.......................... 82 20 5 2 0 0
September 2013.......................... 79 17 4 1 0 0
September 2014.......................... 76 15 3 1 0 0
September 2015.......................... 74 14 3 1 0 0
September 2016.......................... 71 12 2 * 0 0
September 2017.......................... 67 11 2 * 0 0
September 2018.......................... 64 9 1 0 0 0
September 2019.......................... 59 8 1 0 0 0
September 2020.......................... 55 7 1 0 0 0
September 2021.......................... 50 6 * 0 0 0
September 2022.......................... 44 5 * 0 0 0
September 2023.......................... 38 4 0 0 0 0
September 2024.......................... 33 3 0 0 0 0
September 2025.......................... 28 2 0 0 0 0
September 2026.......................... 21 2 0 0 0 0
September 2027.......................... 14 1 0 0 0 0
September 2028.......................... 7 * 0 0 0 0
September 2029.......................... 0 0 0 0 0 0
Weighted Average Life in Years 20.2 7.5 4.0 3.0 1.8 0.9
Without Optional Termination........ 19.2 4.9 2.4 1.7 1.1 0.7
With Optional Termination...........
</TABLE>
- ---------
* Indicates a value between 0.0% and 0.5%.
<PAGE>
PERCENTAGE OF INITIAL CLASS PRINCIPAL BALANCE OF THE
CLASS M1 CERTIFICATES OUTSTANDING AT THE FOLLOWING PERCENTAGES OF CPR
<TABLE>
<CAPTION>
Payment Date 0% 9% 18% 24% 35% 50%
- ------------ -- -- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage.................. 100 100 100 100 100 100
September 2000...................... 100 100 100 100 100 100
September 2001...................... 100 100 100 100 100 100
September 2002...................... 100 100 100 100 100 23
September 2003...................... 100 100 88 65 61 23
September 2004...................... 100 100 71 49 22 23
September 2005...................... 100 100 58 37 14 15
September 2006...................... 100 98 47 28 9 4
September 2007...................... 100 88 38 21 6 0
September 2008...................... 100 79 31 16 2 0
September 2009...................... 100 70 25 12 0 0
September 2010...................... 100 63 20 9 0 0
September 2011...................... 100 56 16 6 0 0
September 2012...................... 100 50 13 5 0 0
September 2013...................... 100 44 10 2 0 0
September 2014...................... 100 39 8 0 0 0
September 2015...................... 100 35 7 0 0 0
September 2016...................... 100 31 5 0 0 0
September 2017...................... 100 27 3 0 0 0
September 2018...................... 100 23 1 0 0 0
September 2019...................... 100 20 0 0 0 0
September 2020...................... 100 17 0 0 0 0
September 2021...................... 100 15 0 0 0 0
September 2022...................... 100 12 0 0 0 0
September 2023...................... 96 10 0 0 0 0
September 2024...................... 84 8 0 0 0 0
September 2025...................... 70 6 0 0 0 0
September 2026...................... 54 4 0 0 0 0
September 2027...................... 37 0 0 0 0 0
September 2028...................... 17 0 0 0 0 0
September 2029...................... 0 0 0 0 0 0
Weighted Average Life in Years 27.0 14.4 7.9 5.9 4.6 3.5
Without Optional Termination.... 24.5 7.8 3.9 2.7 1.8 1.1
With Optional Termination.......
</TABLE>
- ---------
* Indicates a value between 0.0% and 0.5%.
<PAGE>
PERCENTAGE OF INITIAL CLASS PRINCIPAL BALANCE OF THE
CLASS M2 CERTIFICATES OUTSTANDING AT THE FOLLOWING PERCENTAGES OF CPR
<TABLE>
<CAPTION>
Payment Date 0% 9% 18% 24% 35% 50%
- ------------ -- -- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage................. 100 100 100 100 100 100
September 2000..................... 100 100 100 100 100 100
September 2001..................... 100 100 100 100 100 100
September 2002..................... 100 100 100 100 100 100
September 2003..................... 100 100 88 65 35 94
September 2004..................... 100 100 71 49 22 26
September 2005..................... 100 100 58 37 14 0
September 2006..................... 100 98 47 28 9 0
September 2007..................... 100 88 38 21 4 0
September 2008..................... 100 79 31 16 0 0
September 2009..................... 100 70 25 12 0 0
September 2010..................... 100 63 20 9 0 0
September 2011..................... 100 56 16 5 0 0
September 2012..................... 100 50 13 * 0 0
September 2013..................... 100 44 10 0 0 0
September 2014..................... 100 39 8 0 0 0
September 2015..................... 100 35 5 0 0 0
September 2016..................... 100 31 2 0 0 0
September 2017..................... 100 27 0 0 0 0
September 2018..................... 100 23 0 0 0 0
September 2019..................... 100 20 0 0 0 0
September 2020..................... 100 17 0 0 0 0
September 2021..................... 100 15 0 0 0 0
September 2022..................... 100 12 0 0 0 0
September 2023..................... 96 10 0 0 0 0
September 2024..................... 84 8 0 0 0 0
September 2025..................... 70 4 0 0 0 0
September 2026..................... 54 0 0 0 0 0
September 2027..................... 37 0 0 0 0 0
September 2028..................... 17 0 0 0 0 0
September 2029..................... 0 0 0 0 0 0
Weighted Average Life in Years 27.0 14.4 7.8 5.8 4.3 4.6
Without Optional Termination... 24.5 7.8 3.9 2.7 1.8 1.1
With Optional Termination......
</TABLE>
- ---------
* Indicates a value between 0.0% and 0.5%.
<PAGE>
PERCENTAGE OF INITIAL CLASS PRINCIPAL BALANCE OF THE
CLASS B CERTIFICATES OUTSTANDING AT THE FOLLOWING PERCENTAGES OF CPR
<TABLE>
<CAPTION>
Payment Date 0% 9% 18% 24% 35% 50%
- ------------ -- -- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage..................... 100 100 100 100 100 100
September 2000......................... 100 100 100 100 100 100
September 2001......................... 100 100 100 100 100 100
September 2002......................... 100 100 100 100 100 100
September 2003......................... 100 100 88 65 35 7
September 2004......................... 100 100 71 49 22 0
September 2005......................... 100 100 58 37 10 0
September 2006......................... 100 98 47 28 3 0
September 2007......................... 100 88 38 20 0 0
September 2008......................... 100 79 31 12 0 0
September 2009......................... 100 70 25 6 0 0
September 2010......................... 100 63 19 2 0 0
September 2011......................... 100 56 13 0 0 0
September 2012......................... 100 50 8 0 0 0
September 2013......................... 100 44 4 0 0 0
September 2014......................... 100 39 1 0 0 0
September 2015......................... 100 35 0 0 0 0
September 2016......................... 100 31 0 0 0 0
September 2017......................... 100 27 0 0 0 0
September 2018......................... 100 23 0 0 0 0
September 2019......................... 100 19 0 0 0 0
September 2020......................... 100 15 0 0 0 0
September 2021......................... 100 11 0 0 0 0
September 2022......................... 100 7 0 0 0 0
September 2023......................... 96 4 0 0 0 0
September 2024......................... 84 1 0 0 0 0
September 2025......................... 70 0 0 0 0 0
September 2026......................... 54 0 0 0 0 0
September 2027......................... 37 0 0 0 0 0
September 2028......................... 14 0 0 0 0 0
September 2029......................... 0 0 0 0 0 0
Weighted Average Life in Years 27.0 14.1 7.5 5.6 4.0 3.6
Without Optional Termination....... 24.5 7.8 3.9 2.7 1.8 1.1
With Optional Termination..........
</TABLE>
- ---------
* Indicates a value between 0.0% and 0.5%.
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The Pooling and Servicing Agreement provides that the Trust Fund,
exclusive of the assets held in the Credit Reserve Fund and the Basis Risk
Reserve Fund, will comprise several "Lower Tier REMICs" and an "Upper Tier
REMIC" organized in a tiered REMIC structure. Each Lower Tier REMIC will issue
uncertificated regular interests and those interests will be held entirely by
the REMIC immediately above it in the tiered structure. Each of the Lower Tier
REMICs and the Upper Tier REMIC will designate a single class of interests as
the residual interest in that REMIC. The Class R Certificate will represent
ownership of the residual interests in each of the REMICs. Elections will be
made to treat each Lower Tier REMIC and the Upper Tier REMIC as a REMIC for
federal income tax purposes.
Each class of Offered Certificates and the Class X Certificate will
represent beneficial ownership of a corresponding class of regular interests
issued by the Upper Tier REMIC. In addition, each of the Offered Certificates
will represent a beneficial interest in the right to receive payments from the
Basis Risk Reserve Fund.
Upon the issuance of the Offered Certificates, Brown & Wood LLP ("Tax
Counsel") will deliver its opinion to the effect that, assuming compliance
with the Pooling and Servicing Agreement, for federal income tax purposes,
each Lower Tier REMIC and the Upper Tier REMIC will qualify as a REMIC within
the meaning of Section 860D of the Internal Revenue Code of 1986, as amended
(the "Code"). In addition, Tax Counsel will deliver an opinion to the effect
that the Basis Risk Reserve Fund and the Credit Reserve Fund are "outside
reserve funds" that are beneficially owned by the holder of the Class X
Certificate. Moreover, Tax Counsel will deliver an opinion to the effect that
the rights of the holders of the Offered Certificates to receive payments from
the Basis Risk Reserve Funds represent, for federal income tax purposes,
interests in an interest rate cap contract.
TAXATION OF REGULAR INTERESTS
A holder of a Class of Offered Certificates will be treated for federal
income tax purposes as owning an interest in the corresponding Class of
Regular Interests in the Upper Tier REMIC and an interest in a limited
recourse interest rate cap contract (the "Cap Contract"). A holder of such an
Offered Certificate must allocate its purchase price for the Offered
Certificate between its components -- the REMIC Regular Interest component and
the Cap Contract component. For information reporting purposes, the Trustee
will assume that, with respect to any Offered Certificate, the Cap Contract
component will have only nominal value relative to the value of the Regular
Interest component. The IRS could, however, argue that the Cap Contract
components have significant value, and if that argument were to be sustained,
the Regular Interest component could be viewed as having been issued with an
additional amount of original issue discount ("OID") (which could cause the
total amount of OID to exceed a statutorily defined de minimis amount). See
"Certain Federal Income Tax Consequences -- Taxation of Regular Certificates
- --Original Issue Discount" in the Prospectus.
Upon the sale, exchange, or other disposition of an Offered Certificate,
the holder must allocate the amount realized between the components of the
Offered Certificate based on the relative fair market values of those
components at the time of sale. Assuming that an Offered Certificate is held
as a "capital asset" within the meaning of section 1221 of the Code, gain or
loss on the disposition of an interest in the Cap Contract component should be
capital gain or loss, and gain or loss on the disposition of the Regular
Interest component should, subject to the limitation described below, be
capital gain or loss. Gain attributable to the Regular Interest components of
an Offered Certificate will be treated as ordinary income, however, to the
extent such gain does not exceed the excess, if any, of (1) the amount that
would have been includible in the holder's gross income with respect to the
Regular Interest component had income thereon accrued at a rate equal to 110%
of the applicable federal rate as defined in section 1274(d) of the Code
determined as of the date of purchase of the Offered Certificate over (2) the
amount actually included in such holder's income.
The Internal Revenue Service Restructuring and Reform Act of 1998, which
was enacted into law on July 22, 1998, reduced from 18 months to one year the
period during which an individual holder of Offered Certificates must hold
such Certificates in order to benefit from the 20% preferential maximum
capital gains rate upon the sale or exchange of such Certificates. The new
provision generally applies to taxable years ending after December 31, 1997.
Interest on the Regular Interest component of an Offered Certificate must
be included in income by a holder under the accrual method of accounting,
regardless of the holder's regular method of accounting. In addition, the
Regular Interest components of the other Offered Certificates could be
considered to have been issued with IOD. See "Certain Federal Income Tax
Consequences -- Taxation of Regular Securities -- Original Issue Discount" in
the Prospectus. The prepayment assumption that will be used in determining the
accrual of any OID, market discount, or bond premium, if any, will be a rate
equal to 24% CPR. No representation is made that the Mortgage Loans will
prepay at such a rate or at any other rate. OID must be included in income as
it accrues on a constant yield method, regardless of whether the holder
receives currently the cash attributable to such OID.
STATUS OF THE OFFERED CERTIFICATES
The Regular Interest components of the Offered Certificates will be
treated as assets described in Section 7701(a)(19)(C) of the Code, and as
"real estate assets" under Section 856(c)(5)(B) of the Code, generally, in the
same proportion that the assets of the Trust Fund, exclusive of the Basis Risk
Reserve Fund and the Credit Reserve Fund, would be so treated. In addition, to
the extent the Regular Interest component of an Offered Certificate represents
real estate assets under section 856(c)(5)(B) of the Code, the interest
derived from that component would be interest on obligations secured by
interests in real property for purposes of section 856(c)(3) of the Code. The
Cap Contract components of an Offered Certificate will not, however, qualify
as an asset described in Section 7701(a)(19)(C) of the Code or as a real
estate asset under Section 856(c)(5)(B) of the Code.
THE BASIS RISK RESERVE FUND
As indicated above, a portion of the purchase price paid by a holder to
acquire an Offered Certificate will be attributable to the Cap Contract
components of such Offered Certificate. The portion of the overall purchase
price attributable to the Cap Contract components must be amortized over the
life of an Offered Certificate, taking into account the declining balance of
the related Regular Interest component. Treasury regulations concerning
notional principal contracts provide alternative methods for amortizing the
purchase price of an interest rate cap contract. Under one method -- the level
yield constant interest method -- the price paid for an interest rate cap is
amortized over the life of the cap as though it were the principal amount of a
loan bearing interest at a reasonable rate. Holders are urged to consult their
tax advisors concerning the methods that can be employed to amortize the
portion of the purchase price paid for the Cap Contract components of an
Offered Certificate.
Any payments made to a holder from the Basis Risk Reserve Fund will be
treated as periodic payments on an interest rate cap contract. To the extent
the sum of such periodic payments for any year exceeds that year's amortized
cost of the Cap Contract component, such excess is ordinary income. If for any
year the amount of that year's amortized cost exceeds the sum of the periodic
payments, such excess is allowable as an ordinary deduction.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences" in the Prospectus.
STATE INCOME TAX CONSIDERATIONS
In addition to the federal income tax matters described under "Certain
Federal income Tax Consequences" above, prospective investors should consider
the state income tax consequences of the acquisition, ownership and
disposition of the Offered Certificates. State income tax law may differ
substantially from the corresponding federal tax law, and this discussion does
not purport to describe any aspect of the income tax laws of any state.
Therefore, prospective investors should consult their own tax advisors with
respect to the various tax consequences of investments in the Offered
Certificates.
ERISA CONSIDERATIONS
Employee benefit plans ("Plans") that are subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or Section 4975
of the Code, and any person utilizing the assets of a Plan, may not purchase
the Class M1, Class M2 and Class B Certificates, except that any insurance
company may purchase the Class M1, Class M2 and Class B Certificates with
assets of its general account if the exemptive relief granted by the
Department of Labor for transactions involving insurance company general
accounts under Sections I and III in Prohibited Transaction Exemption 95-60,
60 Fed. Reg. 35925 (July 12, 1995) is available with respect to the
investment. The Pooling and Servicing Agreement will include certain
restrictions on the transfer of the Offered Certificates.
The Department of Labor (the "DOL") has granted to Lehman Brothers Inc.
an administrative exemption (Prohibited Transaction Exemption 91-14 et al.;
Exemption Application No. D-7958 et al., 56 Fed. Reg. 7413 (1991)) (the
"Exemption") from certain of the prohibited transaction rules of ERISA with
respect to the initial acquisition, holding and the subsequent disposition by
Plans of series certificates, such as the Class A Certificates, in
pass-through trusts that consist of certain receivables, loans, and other
obligations that meet the conditions and requirements of the Exemption. The
loans covered by the Exemption include mortgage loans and manufactured home
loans such as the Mortgage Loans.
Among the conditions that must be satisfied for the Exemption to apply
are the following:
(1) The acquisition of the Class A Certificates by a Plan is on
terms (including the price for the Class A Certificates) that are at
least as favorable to the Plan as they would be in an arm's length
transaction with an unrelated party;
(2) The rights and interests evidenced by the Class A
Certificates acquired by the Plan are not subordinated to the rights
and interests evidenced by other certificates of the Trust Fund;
(3) The Class A Certificates acquired by the Plan have received
a rating at the time of such acquisition that is in one of the three
highest generic rating categories from either Standard & Poor's
Ratings Services, a division of the McGraw-Hill Companies, Inc.,
Moody's Investors Service, Inc., Fitch IBCA, Inc. or Duff & Phelps
Credit Rating Co.;
(4) The sum of all payments made to the underwriter in
connection with the distribution of the Class A Certificates
represents not more than reasonable compensation for underwriting
the Class A Certificates; the sum of all payments made to and
retained by the Depositor pursuant to the assignment of the Mortgage
Loans to the Trust Fund represents not more than the fair market
value of such Mortgage Loans; the sum of all payments made to and
retained by the Servicer represents not more than reasonable
compensation for such person's services under the Pooling and
Servicing Agreement and reimbursement of such person's reasonable
expenses in connection therewith; and
(5) 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.
Moreover, the Exemption provides relief from certain
self-dealing/conflict of interest prohibited transactions only if, among other
requirements: (i) no fiduciary (or its affiliate) is an obligor with respect
to more than five percent of the fair market value of the obligations
contained in the trust; (ii) the Plan's investment in the Class A Certificates
does not exceed twenty-five percent of all of the Class A Certificates
outstanding at the time of the acquisition; and (iii) immediately after the
acquisition, no more than twenty-five percent of the assets of the Plan are
invested in certificates representing an interest in one or more trusts
containing assets sold or serviced by the same entity.
On July 21, 1997, the DOL published in the Federal Register an amendment
to the Exemption which extends exemptive relief to certain mortgage-backed and
asset-backed securities transactions using a Pre-Funding Account for trusts
issuing pass-through certificates. The amendment generally allows Mortgage
Loans supporting payments to holders of Class A Certificates, and having a
value equal to no more than twenty-five percent of the total principal balance
of the Class A Certificates being offered by the Trust Fund, to be transferred
to the Trust Fund within a 90-day or three-month period 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 is available when the
following conditions are met:
(1) The ratio of the amount allocated to the Pre-Funding
Account to the total principal balance of the Class A Certificates
being offered (the "Pre-Funding Limit") must not exceed twenty-five
percent.
(2) All Subsequent Mortgage Loans transferred after the closing
date must meet the same terms and conditions for eligibility as the
Initial Mortgage Loans used to create the Trust Fund, which terms
and conditions have been approved by the Rating Agency.
(3) The transfer of Subsequent Mortgage Loans to the Trust Fund
during the Pre-Funding Period must not result in the Class A
Certificates to be covered by the Exemption receiving a lower credit
rating from the Rating Agencies upon termination of the Pre-Funding
Period than the rating that was obtained at the time of the initial
issuance of the certificates by the Trust Fund.
(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 in the Trust Fund at the end of
the Pre-Funding Period must not be more than 100 basis points lower
than the average interest rate for the Initial Mortgage Loans which
were transferred to the Trust Fund on the Closing Date.
(5) In order to ensure that the characteristics of the
Subsequent Mortgage Loans are substantially similar to the Initial
Mortgage Loans which are transferred to the Trust Fund,
(i) the characteristics of the Subsequent Mortgage Loans
must be monitored by an insurer or other credit support
provider which is independent of the Depositor; or
(ii) an independent accountant retained by the Depositor
must provide the Depositor with a letter (with copies provided
to each Rating Agency rating the Class A Certificates, the
Underwriter and the Trustee) stating whether or not the
characteristics of the Subsequent Mortgage Loans conform to the
characteristics described in the Prospectus or 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 Initial Mortgage Loans
which were transferred to the Trust Fund as of the Closing
Date.
(6) The Pre-Funding Period must end 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 used in
connection with the pre-funding may be invested only in certain
permitted investments.
(8) The Prospectus or Prospectus Supplement must describe:
(i) any Pre-Funding Account;
(ii) the duration of the Pre-Funding Period;
(iii) the percentage and/or dollar amount of the
Pre-Funding Limit for the Trust Fund; and
(iv) that the amounts remaining in the Pre-Funding Account
at the end of the Pre-Funding Period will be remitted to
holders of the Class A Certificates as repayments of principal.
(9) The Pooling and Servicing Agreement must describe the
permitted investments for the Pre-Funding Account and, if not
disclosed in the Prospectus or Prospectus Supplement, the terms and
conditions for eligibility of Subsequent Mortgage Loans.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of the
Exemption as amended or other exemptions, and the potential consequences to
their specific circumstances, prior to making an investment in the Class A
Certificates. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment prudence 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.
See "ERISA Considerations" in the accompanying Prospectus.
LEGAL INVESTMENT MATTERS
The Certificates will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended
("SMMEA").
Institutions whose investment activities are subject to review by certain
regulatory authorities may be or may become subject to restrictions, which may
be retroactively imposed by the regulatory authorities, on the investment by
those institutions in certain mortgage related securities. In addition,
several states have adopted or may adopt regulations that prohibit certain
state-chartered institutions from purchasing or holding similar types of
securities.
Accordingly, investors should consult their own legal advisors to
determine whether and to what extent the Offered Certificates may be purchased
by them.
See "Legal Investment Considerations" in the Prospectus.
USE OF PROCEEDS
The Depositor will sell the Initial Mortgage Loans to the Trust Fund
concurrently with the delivery of the Certificates. The net proceeds from the
sale of the Certificates will be applied by the Depositor toward the purchase
of the Initial Mortgage Loans from the Seller and the Originator and to
deposit the Pre-Funded Amount in the Pre-Funding Account. The net proceeds
less the Pre-Funded Amount and transaction costs will be used to pay down the
Originator's warehouse facilities relating to the Initial Mortgage Loans
(including warehouse facilities with affiliates of the Underwriter), and any
remaining proceeds will be added to the Originator's general funds and will be
available for general corporate purposes.
UNDERWRITING
Subject to the terms and conditions provided in the underwriting
agreement and in a terms agreement (collectively, the "Underwriting
Agreement") among the Depositor, and the Underwriter, the Depositor has agreed
to sell to the Underwriter, and the Underwriter has agreed to purchase from
the Depositor, all of the Offered Certificates.
The distribution of the Offered Certificates by the Underwriter will be
effected in each case from time to time in one or more negotiated
transactions, or otherwise, at varying prices to be determined, in each case,
at the time of sale. The Underwriter may effect these transactions by selling
the Certificates to or through dealers, and dealers may receive from the
Underwriter, for whom they act as agent, compensation in the form of
underwriting discounts, concessions or commissions. The Underwriter and any
dealers that participate with the Underwriter in the distribution of the
Certificates may be deemed to be an underwriter, and any discounts,
commissions or concessions received by them, and any profit on the resale of
the Certificates purchased by them, may be deemed to be underwriting discounts
and commissions under the Securities Act of 1933, as amended (the "Act"). The
Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against certain civil liabilities, including liabilities under the
Act.
Affiliates of the Depositor have working capital financing and warehouse
facilities with affiliates of the Underwriter. Expenses incurred by the
Depositor in connection with this offering are expected to be approximately
$275,000.
LEGAL MATTERS
Certain legal matters with respect to the Certificates will be passed
upon for the Underwriter by Brown & Wood LLP, Washington, D.C. Certain legal
matters will be passed upon for the Depositor and the Originator by Brown &
Wood LLP, Washington, D.C. and by L. Keith Blackwell, Esquire, General Counsel
for AMRESCO, INC., the parent of the Depositor. Certain legal matters will be
passed upon for the Seller by Karen H. Cornell, Esquire, General Counsel for
the Seller.
RATINGS
It is a condition to the issuance of the Class A Certificates that they
be rated "AAA" by Standard & Poor's Ratings Services, a division of the
McGraw-Hill Companies, Inc. ("S&P") and "AAA" by Duff & Phelps Credit Rating
Co. ("DCR" and together with S&P, the "Rating Agencies"). It is a condition to
the issuance of the Class M1 Certificates that they be rated "AA" by S&P and
by DCR. It is a condition to the issuance of the Class M2 Certificates that
they be rated "A" by S&P and by DCR. It is a condition to the issuance of the
Class B Certificates that they be rated "BBB" by DCR.
A securities 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 organization. A securities rating addresses the likelihood of
the receipt by holders of Offered Certificates of distributions in the amount
of scheduled payments on the Mortgage Loans. The rating takes into
consideration the characteristics of the Mortgage Loans and the structural,
legal and tax aspects associated with the Offered Certificates. The ratings on
the Offered Certificates do not represent any assessment of the likelihood or
rate of principal prepayments. The ratings do not address the possibility that
holders of Offered Certificates might suffer a lower than anticipated yield
due to prepayments. In addition, the ratings do not address the likelihood
that any Basis Risk Shortfall or Unpaid Basis Risk Shortfall will be repaid to
Certificateholders from the Monthly Excess Cashflow Amount.
The security ratings assigned to the Offered 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 any Rating Agency.
The Depositor has not requested a rating of the Offered Certificates by
any rating agency other than the Rating Agencies; there can be no assurance,
however, as to whether any other rating agency will rate the Offered
Certificates or, if it does, what rating would be assigned by the other rating
agency. The rating assigned by the other rating agency to the Offered
Certificates could be lower than the ratings assigned by the Rating Agencies.
<PAGE>
GLOSSARY OF DEFINED TERMS
<PAGE>
A
A Spread.........................................S-25
Accrual Period...................................S-26
Act..............................................S-89
Adjustable Rate Mortgage Loans...................S-41
Adjustment Date..................................S-42
Applied Realized Loss Amount.....................S-36
ARCMI............................................S-60
Assumed Total Loan Balance.......................S-35
Available Funds Cap..............................S-25
B
B Spread.........................................S-25
Balloon Mortgage Loans...........................S-42
Balloon Payments.................................S-42
Basis Risk Reserve Fund..........................S-27
Basis Risk Shortfall.............................S-27
Beneficial Owner.................................S-20
Bloomberg Screen LIUS01M Index Page..............S-30
Book-Entry Certificates..........................S-20
Business Day.....................................S-19
C
Cap Contract.....................................S-83
Cedel............................................S-20
Cedel Participants...............................S-22
Certificate Principal Balance....................S-26
Certificateholders...............................S-19
Certificates.....................................S-19
Class B Principal Distribution Amount............S-34
Class M1 Principal Distribution Amount...........S-33
Class M2 Principal Distribution Amount...........S-33
Class Principal Balance..........................S-19
Closing Date.....................................S-20
Code.............................................S-83
Combined Loan-to-Value Ratio.....................S-41
Compensating Interest............................S-29
Cooperative......................................S-23
Corporate Trust Office...........................S-40
CPR..............................................S-75
Credit Reserve Fund..............................S-36
Current Interest.................................S-27
Custodian........................................S-64
Cut-off Date.....................................S-41
Cut-off Date Balance.............................S-41
D
DCR..............................................S-89
Definitive Certificate...........................S-20
Delayed Adjustment Mortgage Loans................S-41
Delinquency Advance..............................S-68
Delinquency Rate.................................S-33
Depositor........................................S-20
DOL..............................................S-85
DTC..............................................S-20
E
ERISA............................................S-85
Euroclear........................................S-20
Euroclear Operator...............................S-23
Euroclear Participants...........................S-22
European Depositaries............................S-21
Exemption........................................S-85
Extra Principal Distribution Amount..............S-34
F
File.............................................S-65
Final Certification..............................S-65
Financial Intermediary...........................S-21
Fixed Rate Mortgage Loans........................S-41
G
Global Securities................................S-92
Gross Margin.....................................S-42
I
Index............................................S-43
Initial Cap......................................S-42
Initial Mortgage Loans...........................S-40
Interest Carryforward Amount.....................S-27
Interest Remittance Amount.......................S-27
L
LIBOR............................................S-29
LIBOR Determination Date.........................S-29
Liquidated Mortgage Loan.........................S-36
Loan Purchase Price..............................S-60
London Business Day..............................S-29
M
M1 Spread........................................S-25
M2 Spread........................................S-25
Maximum Rate.....................................S-42
Minimum Rate.....................................S-42
Modeling Assumptions.............................S-75
Monthly Excess Cashflow Amount...................S-37
Monthly Excess Interest Amount...................S-29
Monthly Payment..................................S-41
Monthly Remittance Date..........................S-28
Mortgage Loans...................................S-19
Mortgage Pool....................................S-19
Mortgages........................................S-41
N
Net Liquidation Proceeds.........................S-35
Net Maximum Pass-Through Rate....................S-27
Net Mortgage Rate................................S-26
Net Prepayment Interest Shortfalls...............S-29
O
Offered Certificates.............................S-19
Offered Subordinate Certificates.................S-19
OID..............................................S-83
Optimal Interest Remittance Amount...............S-26
Optional Termination.............................S-40
Originator.......................................S-41
Overcollateralization Amount.....................S-34
Overcollateralization Deficiency.................S-34
Overcollateralization Release Amount.............S-34
P
Participant......................................S-21
Pass-Through Rate................................S-25
Payahead.........................................S-28
Payment Date.....................................S-19
Periodic Cap.....................................S-42
Plans............................................S-85
Pooling and Servicing Agreement..................S-63
Pre-Funded Amount................................S-20
Pre-Funding Account..............................S-20
Pre-Funding Period...............................S-20
Prepayment Interest Shortfall....................S-29
Preservation Expenses............................S-69
Principal and Interest Account...................S-67
Principal Balance................................S-26
Principal Distribution Amount....................S-31
Principal Remittance Amount......................S-31
R
Rating Agency....................................S-89
Realized Loss....................................S-36
Realized Loss Amortization Amount................S-38
Record Date......................................S-19
Reference Banks..................................S-29
Relevant Depositary..............................S-21
REMIC Opinion....................................S-66
Remittance Period................................S-28
REO Property.....................................S-69
Reserve Interest Rate............................S-30
Residual Certificate.............................S-19
Rules............................................S-21
S
S&P..............................................S-89
Seller...........................................S-61
Senior Certificates..............................S-19
Senior Enhancement Percentage....................S-34
Senior Principal Distribution Amount.............S-33
Servicer.........................................S-61
Servicing Advances...............................S-69
Servicing Fee....................................S-67
Servicing Fee Rate...............................S-67
SMMEA............................................S-88
Stepdown Date....................................S-33
Subordinate Certificates.........................S-19
Subsequent Cut-off Date..........................S-54
Subsequent Mortgage Loans........................S-41
Subsequent Transfer Date.........................S-54
Substitution Amount..............................S-28
Systems..........................................S-24
T
Targeted Overcollateralization Amount............S-34
Tax Counsel......................................S-83
Terms and Conditions.............................S-23
Three Month Delinquency Rate.....................S-32
Total Expense Rate...............................S-26
Total Loan Balance...............................S-26
Trigger Event....................................S-32
Trust Fund.......................................S-19
Trustee..........................................S-40
Trustee Fee......................................S-40
U
U.S. Person......................................S-95
Underwriting Agreement...........................S-88
Underwriting Guidelines..........................S-55
Unpaid Basis Risk Shortfall......................S-27
Y
Year 2000 Problems...............................S-24
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered AMRESCO
Residential Securities Corporation Mortgage Loan Pass-Through Certificates
(the "Global Securities") will be available only in book-entry form. Investors
in the Global Securities may hold the Global Securities through any of DTC,
Cedel or Euroclear. The Global Securities will be tradable 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 holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior mortgage loan asset backed
certificates issues.
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 and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless those 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 respective
Depositaries, which in turn will hold the positions in accounts as DTC
Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to prior mortgage loan asset backed
certificates issues. 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 applicable to prior 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 PURCHASER. 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 respective Depositary, as the case may be, to
receive the Global Securities against payment. Payment will include interest
accrued on the Global Securities from and including the last interest payment
date to and excluding the settlement date, on the basis of either the actual
number of days in the accrual period and a year assumed to consist of 360 days
or a 360-day year of twelve 30-day months as applicable to the related class
of Global Securities. 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 respective Depositary of 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 (that 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 accounts 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 the 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 overdraft charges, although this 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 sending 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
deliver 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 interest payment to and excluding the settlement date
on the basis of either the actual number of days in the accrual period and a
year assumed to consist of 360 days or a 360-day year of twelve 30-day months
as applicable to the related class of Global Securities. 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 the 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 (that is, 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 were taken. At least three
techniques should be readily available to eliminate this potential problem:
o borrowing through Cedel or Euroclear for one day (until the purchase
side of the day trade is reflected in their Cedel or Euroclear
accounts) in accordance with the clearing system's customary
procedures;
o borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to the 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
o 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
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, unless (1) 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 the beneficial
owner and the U.S. entity required to withhold tax complies with applicable
certification requirements and (2) the 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 Certificateholders
of Global Securities that are non-U.S. Persons 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 the change.
EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
4224). A non-U.S. Person, 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 that are Beneficial Certificateholders
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 the
Certificate Owner or his 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 Certificate 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 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 (1) a citizen or resident of the United
States, (2) a corporation or partnership organized in or under the laws of the
United States or any state or the District of Columbia (other than a
partnership that is not treated as a United States person under any applicable
Treasury regulations), (3) an estate the income of which is includible in
gross income for United States tax purposes, regardless of its source, or (4)
a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States
persons have authority to control all substantial decisions of the trust.
Notwithstanding the preceding sentence, to the extent provided in regulations,
certain trusts in existence on August 20, 1996 and treated as United States
persons prior to that date that elect to continue to be so treated also will
be considered U.S. Persons. 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.
<PAGE>
$208,740,000
AMRESCO RESIDENTIAL SECURITIES CORPORATION
MORTGAGE LOAN TRUST 1999-1
MORTGAGE LOAN PASS-THROUGH CERTIFICATES,
SERIES 1999-1
AMRESCO RESIDENTIAL SECURITIES CORPORATION
DEPOSITOR
AMRESCO RESIDENTIAL MORTGAGE CORPORATION
ORIGINATOR
OCWEN FEDERAL BANK FSB
SERVICER
-------------------------
PROSPECTUS SUPPLEMENT
October 18, 1999
-------------------------
LEHMAN BROTHERS
<PAGE>
- ------------------------------------------------------------------------------
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 October 18, 1999.
<PAGE>
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>
TABLE OF CONTENTS
Page
----
SUMMARY OF PROSPECTUS...............................1
RISK FACTORS........................................7
DESCRIPTION OF THE SECURITIES......................10
General.......................................11
Classes of Securities.........................11
Distributions of Principal and Interest ......13
Book Entry Registration.......................14
List of Owners of Securities..................14
THE TRUSTS.........................................15
Mortgage Loans................................15
Contracts.....................................17
Mortgage-Backed Securities....................17
Other Mortgage Securities.....................17
CREDIT ENHANCEMENT.................................18
SERVICING OF MORTGAGE LOANS AND CONTRACTS..........22
Payments on Mortgage Loans....................23
Advances......................................23
Collection and Other Servicing Procedures.....23
Primary Mortgage Insurance....................25
Standard Hazard Insurance.....................25
Title Insurance Policies......................27
Claims Under Primary Mortgage Insurance
Policies and Standard Hazard Insurance
Policies; Other Realization Upon
Defaulted Loan..............................27
Servicing Compensation and Payment of
Expenses....................................27
Master Servicer...............................28
ADMINISTRATION.....................................28
Assignment of Mortgage Assets.................28
Evidence as to Compliance.....................30
The Trustee...................................31
Administration of the Security Account .......31
Reports.......................................32
Forward Commitments; Pre-Funding..............33
Servicer Events of Default....................33
Rights Upon Servicer Event of Default.........33
Amendment.....................................34
Termination...................................34
USE OF PROCEEDS....................................34
THE DEPOSITOR......................................34
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS.......35
General.......................................35
Foreclosure...................................36
Soldiers' and Sailors' Civil Relief Act ......40
The Contracts.................................41
The Title I Program...........................43
LEGAL INVESTMENT MATTERS...........................44
ERISA CONSIDERATIONS...............................45
CERTAIN FEDERAL INCOME TAX CONSEQUENCES............46
Federal Income Tax Consequences For
REMIC Securities............................46
Taxation of Regular Securities................48
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............................60
Reporting Requirements........................61
Federal Income Tax Consequences for
Securities as to Which No REMIC
Election Is Made............................61
Standard Securities...........................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
<PAGE>
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference
to the Prospectus Supplement relating to a particular series of Securities and
to the related Agreement (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 (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" 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 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.
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.
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 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.
<PAGE>
RISK FACTORS
Prospective investors should consider, among other things, the following
risk factors in connection with the purchase of the Securities:
Declining Real Estate Market; Geographic Concentration. If the
residential real estate market in general or a regional or local area where
Mortgage Assets for a Trust are concentrated should experience an overall
decline in property values, a significant downturn in economic conditions or a
natural disaster, rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the mortgage lending industry.
See "The Trusts - Mortgage Loans" herein.
Limited Obligations. The Securities will not represent an interest in or
obligation of the Depositor. The Securities of each series will not be insured
or guaranteed by any government agency or instrumentality, the Depositor, any
Servicer or the Seller.
Prepayment Considerations; Optional Termination. The prepayment
experience on Mortgage Loans or Contracts constituting or underlying the
Mortgage Assets will affect the average life of each class of Securities
relating to a Trust. Prepayments may be influenced by a variety of economic,
geographic, social and other factors, including changes in interest rate
levels. In general, if mortgage interest rates fall, the rate of prepayment
would be expected to increase. Conversely, if mortgage interest rates rise,
the rate of prepayment would be expected to decrease. Other factors affecting
prepayment of mortgage loans include changes in housing needs, job transfers,
unemployment and servicing decisions. See "Prepayment and Yield
Considerations" in the related Prospectus Supplement. In addition, investors
in the Securities should be aware that the Servicer, the Seller or, if
specified in the related Prospectus Supplement, the Owners of a Class of
Securities or a credit enhancer may at their respective options effect early
retirement of a series of Securities through the purchase of Mortgage Assets
from the related Trust. See "Administration-Termination" herein.
Risk of Higher Default Rates for Mortgage Loans with Balloon Payments. A
portion of the aggregate principal balance of the Mortgage Loans at any time
may be "balloon loans" that provide for the payment of the unamortized
principal balance of such Mortgage Loan in a single payment at maturity
("Balloon Loans"). Such Balloon Loans provide for equal monthly payments,
consisting of principal and interest, generally based on a 30-year
amortization schedule, and a single payment of the remaining balance of the
Balloon Loan generally 5, 7, 10 or 15 years after origination. Amortization of
a Balloon Loan based on a scheduled period that is longer than the term of the
loan results in a remaining principal balance at maturity that is
substantially larger than the regular scheduled payments. The Depositor does
not have any information regarding the default history or prepayment history
of payments on Balloon Loans. Because borrowers of Balloon Loans are required
to make substantial single payments upon maturity, it is possible that the
default risk associated with the Balloon Loans is greater than that associated
with fully-amortizing Mortgage Loans.
Security Interests and Other Aspects of the Contracts. Contracts may be
secured by a security interest in a Manufactured Home. Perfection of security
interests in the Manufactured Homes and enforcement of rights to realize upon
the value of the Manufactured Homes as collateral for the Contracts are
subject to a number of federal and state laws, including the Uniform
Commercial Code as adopted in each state and each state's certificate of title
statutes. The steps necessary to perfect the security interest in a
Manufactured Home will vary from state to state. Because of the expense and
administrative inconvenience involved, no party will be required to amend any
certificates of title to change the lienholder specified therein to the
Trustee and no party will be required to deliver any certificate of title to
the Trustee or note thereon the Trustee's interest. Consequently, in some
states, in the absence of such an amendment, the assignment to the Trustee of
the security interest in the Manufactured Home may not be effective or such
security interest may not be perfected and, in the absence of such notation or
delivery to the Trustee, the assignment of the security interest in the
Manufactured Home may not be effective against creditors of the previous owner
of the related Contract or a trustee in bankruptcy of such previous owner. In
addition, numerous federal and state consumer protection laws impose
requirements on lending under conditional sales contracts and installment loan
agreements such as the Contracts, and the failure by the lender or seller of
goods to comply with such requirements could give rise to liabilities of
assignees for amounts due under such agreements and claims by such assignees
may be subject to set-off as a result of such lender's or seller's
noncompliance. These laws would apply to the Trustee as assignee of the
Contracts. Each Seller of Contracts will warrant that each Contract sold by it
complies with all requirements of law and will make certain warranties
relating to the validity, subsistence, perfection and priority of the security
interest in each Manufactured Home securing a Contract. A breach of any such
warranty that materially adversely affects any Contract would create an
obligation of the Seller to repurchase such Contract unless such breach is
cured. If any related Credit Enhancement is exhausted and recovery of amounts
due on the Contracts is dependent on repossession and resale of Manufactured
Homes securing Contracts that are in default, certain other factors may limit
the ability of the Trust to realize upon the Manufactured Homes or may limit
the amount realized to less than the amount due. See "Certain Legal Aspects of
the Mortgage Assets - The Contracts" herein.
Limited Liquidity. There will be no market for the Securities of any
series prior to the issuance thereof, and there can be no assurance that a
secondary market will develop or, if it does develop, that it will provide
liquidity of investment or will continue for the life of the Securities of
such series. The market value of some or all of the classes of Securities will
fluctuate with changes in prevailing rates of interest. Consequently, the sale
of Securities in any market that may develop may be at a discount from the
principal amount or purchase price. Owners of Securities generally have no
right to request redemption of Securities, and the Securities are subject to
redemption only under the limited circumstances described in the related
Prospectus Supplement
Limited Assets. Owners of Securities of each series must rely upon
distributions on the related Mortgage Assets, together with the other specific
assets pledged for the benefit of such series (which assets may be subject to
release from such pledge prior to payment in full of the Securities), for the
payment of principal of, and interest on, that series of Securities. If the
assets comprising the Trust are insufficient to make payments on such
Securities, no other assets of the Depositor will be available for payment of
the deficiency. Because payments of principal will be applied to classes of
outstanding Securities of a series in the priority specified in the related
Prospectus Supplement, a deficiency may have a disproportionately greater
effect on the Securities of classes having lower priority in payment. In
addition, due to the priority of payments and the allocation of losses,
defaults experienced on the assets comprising a Trust may have a
disproportionate effect on a specified class or classes within such series.
Limitations, Reduction and Substitution of Credit Enhancement. Credit
Enhancement may be provided in one or more of the forms described in the
related Prospectus Supplement, including, but not limited to, prioritization
as to payments of one or more classes of such series, a Mortgage Pool
Insurance Policy, a Financial Guaranty Insurance Policy, a Special Hazard
Insurance Policy, a bankruptcy bond, one or more Reserve Funds, other
insurance, guaranties and similar instruments and agreements, or any
combination thereof. Regardless of the Credit Enhancement provided, the amount
of coverage may be limited in amount and in most cases will be subject to
periodic reduction in accordance with a schedule or formula. Furthermore, such
Credit Enhancement may provide only very limited coverage as to certain types
of losses and may provide no coverage as to certain other types of losses. The
Trustee may be permitted to reduce, terminate or substitute all or a portion
of the Credit Enhancement for any series of Securities, if the applicable
rating agencies indicate that the then-current rating thereof will not be
adversely affected.
Original Issue Discount. All the Compound Interest Securities and
Stripped Securities that are entitled only to interest distributions will be,
and certain of the other Securities may be, issued with original issue
discount for federal income tax purposes. An Owner of a Security issued with
original issue discount will be required to include original issue discount in
ordinary gross income for federal income tax purposes as it accrues, in
advance of receipt of the cash attributable to such income. Accrued but unpaid
interest on such Securities generally will be treated as original issue
discount for this purpose. Moreover, the calculation of original issue
discount on REMIC Securities (as defined herein) is subject to uncertainties
because of the lack of guidance from the Internal Revenue Service under
applicable statutory provisions. See "Certain Federal Income Tax Consequences
- - Federal Income Tax Consequences for REMIC Securities," "- Taxation of
Regular Securities - Variable Rate Regular Securities," "Certain Federal
Income Tax Consequences - Federal Income Tax Consequences for Securities as to
Which No REMIC Election Is Made - Standard Securities," and "Certain Federal
Income Tax Consequences - Premium and Discount" and "- Stripped Securities"
herein.
Book Entry Registration. Because transfers and pledges of Book Entry
Securities may be effected only through book entries at a Clearing Agency
through Clearing Agency Participants, the liquidity of the secondary market
for Book Entry Securities may be reduced to the extent that some investors are
unwilling to hold Securities in book entry form in the name of Clearing Agency
Participants and the ability to pledge Book Entry Securities may be limited
due to lack of a physical certificate. Beneficial Owners of Book Entry
Securities may, in certain cases, experience delay in the receipt of payments
of principal and interest because such payments will be forwarded by the
Trustee to the Clearing Agency who will then forward payment to the Clearing
Agency Participants who will thereafter forward payment to Beneficial Owners.
In the event of the insolvency of the Clearing Agency or of a Clearing Agency
Participant in whose name Securities are recorded, the ability of Beneficial
Owners to obtain timely payment and (if the limits of applicable insurance
coverage by the Securities Investor Protection Corporation are exceeded, or if
such coverage is otherwise unavailable) ultimate payment of principal and
interest on Book Entry Securities may be impaired.
The Status of the Mortgage Assets in the Event of Bankruptcy of the
Seller. The Seller and the Depositor intend that the transfers of the Mortgage
Assets from the Seller to the Depositor, and in turn to the applicable Trust,
constitute sales rather than pledges to secure indebtedness for insolvency
purposes. If, however, the Seller were to become a debtor under the federal
bankruptcy code, it is possible that a creditor, trustee-in-bankruptcy or
receiver of the Seller may argue that the sale thereof by the Seller is a
pledge rather than a sale. This position, if argued or accepted by a court,
could result in a delay in or reduction of distributions on the related
Securities.
Junior Lien Mortgage Loans. Because Mortgage Loans secured by junior
(i.e., second, third, etc.) liens are subordinate to the rights of the
beneficiaries under the related senior deeds of trust or senior mortgages, a
decline in the residential real estate market would adversely affect the
position of the related Trust as a junior beneficiary or junior mortgagee
before having such an effect on the position of the related senior
beneficiaries or senior mortgagees. A rise in interest rates over a period of
time, the general condition of a Mortgaged Property and other factors may also
have the effect of reducing the value of the Mortgaged Property from the value
at the time the junior lien Mortgage Loan was originated and, as a result, may
reduce the likelihood that, in the event of a default by the borrower,
liquidation or other proceeds will be sufficient to satisfy the junior lien
Mortgage Loan after satisfaction of any senior liens and the payment of any
liquidation expenses.
Liquidation expenses with respect to defaulted Mortgage Loans do not vary
directly with the outstanding principal balance of the Mortgage Loans at the
time of default. Therefore, assuming that a Servicer took the same steps in
realizing upon defaulted Mortgage Loans having small remaining principal
balances as in the case of defaulted Mortgage Loans having larger principal
balances, the amount realized after expenses of liquidation would be smaller
as a percentage of the outstanding principal balance of the smaller Mortgage
Loans. To the extent the average outstanding principal balances of the
Mortgage Loans in a Trust are relatively small, realizations net of
liquidation expenses may also be relatively small as a percentage of the
principal amount of the Mortgage Loans.
Reliance on Management of the Timeshare Unit. Unlike most conventional
single-family residential properties, the value of a timeshare unit is
substantially dependent on the management of the resort property in which it
is located. Management of timeshare resort properties includes operation of a
reservation system, maintenance of the physical structure, refurbishing of
individual units, maintenance and management of common areas and recreational
facilities, and facilitating the rental of individual units on behalf of
timeshare owners. In addition, timeshare units, which are purchased for
intervals of one or more specified weeks each year, are marketed as the
owner's purchase of future vacation opportunities rather than as a primary
residence, a second home or an investment. Accordingly, while Mortgagors are
obligated to make payments under their Mortgage Loan irrespective of any
defect in, damage to or change in conditions (such as poor management, faulty
construction or physical, social or environmental conditions) relating to the
timeshare properties, any such defect, damage or change in conditions could
result in delays in payment or in defaults by Mortgagors whose timeshare units
are affected.
Limitations on Interest Payments and Foreclosures. Generally, under the
terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the
"Relief Act"), or similar state legislation, a Mortgagor who enters military
service after the origination of the related Mortgage Loan (including a
Mortgagor who is a member of the National Guard or is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active
duty) may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such Mortgagor's active duty status, unless a
court orders otherwise upon application of the lender. It is possible that
such action could have an effect, for an indeterminate period of time, on the
ability of the related Servicer to collect full amounts of interest on certain
of the Mortgage Loans. In addition, the Relief Act imposes limitations that
would impair the ability of the related Servicer to foreclose on an affected
Mortgage Loan during the Mortgagor's period of active duty status. Thus, in
the event that such a Mortgage Loan goes into default, there may be delays and
losses occasioned by the inability to realize upon the Mortgaged Property in a
timely fashion.
Limited Nature of Ratings. It is a condition to the issuance of the
Securities that each class of Securities be rated in one of the four highest
rating categories by one or more of Moody's, S&P or Fitch. See "Summary of
Prospectus-Ratings" herein. A security rating is not a recommendation to buy,
sell or hold securities and may be subject to revision or withdrawal at any
time. No person is obligated to maintain the rating on any Certificate, and,
accordingly, there can be no assurance that the ratings assigned to any class
of Securities on the date on which such Securities are initially issued will
not be lowered or withdrawn by a Rating Agency at any time thereafter. In the
event any rating is revised or withdrawn, the liquidity of the related
Securities may be adversely affected. Issuance of any of the Securities in
book-entry form may reduce the liquidity of such Securities in the secondary
trading market because investors may be unwilling to purchase Securities for
which they cannot obtain physical securities.
Applicable Legal and Regulatory Risks. Applicable federal and state laws
generally regulate interest rates and other charges, require certain
disclosures, prohibit unfair and deceptive practices, regulate debt collection
and require licensing of the originators of the mortgage loans and contracts.
Depending on the provisions of the applicable law and the specified facts and
circumstances involved, violations of those laws, policies and principles may
limit the ability to collect all or part of the principal of or interest on
the Mortgage Loans and Contracts and may entitle the borrower to a refund of
amounts previously paid. In addition, many state and local authorities have
imposed stringent restrictions on the operations of timeshare developers,
including requirements of filing registration statements and advertising
material with state regulatory authorities regarding timeshare units being
offered and permitting the right to rescind an executed contract within
specified time periods and possibly permitting such purchasers to recover
damages from such timeshare developers. Such remedies could adversely affect
the quality of management of the related resort, in particular, the ability of
the management of the related resorts to minimize losses through remarketing
efforts and/or through the assumption programs. See "Certain Legal Aspects of
the Mortgage Assets" herein.
DESCRIPTION OF THE SECURITIES
Each Trust will be created pursuant to an Agreement entered into among
the Depositor, the Trustee, the Master Servicer, if any, and the Servicer. The
provisions of each Agreement will vary depending upon the nature of the
Securities to be issued thereunder and the nature of the related Trust.
Securities which represent beneficial interests in the Trust will be issued
pursuant to the Agreement. Securities which represent debt obligations of the
Trust will be issued pursuant to an Indenture between the Trust and the
Indenture Trustee. The following summaries and the summaries set forth under
"Administration" describe certain provisions relating to each series of
Securities. The Prospectus Supplement for a series of Securities will describe
the specific provisions relating to such series. Such summaries do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to, all the provisions of the Agreement for each series of
Securities. The Depositor will provide Owners, without charge, on written
request a copy of the Agreement for the related series. Requests should be
addressed to AMRESCO Residential Securities Corporation, 700 N. Pearl Street,
Suite 2400, Dallas, Texas 75201. The Agreement relating to a series of
Securities will be filed with the Securities and Exchange Commission within 15
days after the date of issuance of such series of Securities (the "Delivery
Date").
The Securities of a series will be entitled to payment only from the
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 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 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 (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 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 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 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 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.
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.
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 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.
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.
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 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 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).
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 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 (other than Cooperatives) and that
such title insurance policy contain no coverage exceptions, except customary
exceptions generally accepted in the mortgage banking industry.
Claims Under Primary Mortgage Insurance Policies and Standard Hazard Insurance
Policies; Other Realization Upon Defaulted Loan
Each Servicer will present claims to any primary insurer under any
related primary mortgage insurance policy and to the hazard insurer under any
related standard hazard insurance policy. All collections under any related
primary mortgage insurance policy or any related standard hazard insurance
policy (less any proceeds to be applied to the restoration or repair of the
related Mortgaged Property or to the reimbursement of Advances by the
Servicer) will be remitted to the Trustee.
If any Mortgaged Property securing a defaulted Mortgage Loan is damaged
and proceeds, if any, from the related standard hazard insurance policy are
insufficient to restore the damaged property to a condition sufficient to
permit recovery under any applicable Mortgage Pool Insurance Policy or any
related primary mortgage insurance policy, each Servicer may be required to
expend its own finds to restore the damaged property to the extent specified
in the related Prospectus Supplement, but only to the extent it determines
such expenditures are recoverable from Insurance Proceeds or Liquidation
Proceeds.
If recovery under any applicable Mortgage Pool Insurance Policy or any
related primary mortgage insurance policy is not available, the Servicer will
nevertheless be obligated to attempt to realize upon the defaulted Mortgage
Loan. Foreclosure proceedings will be conducted by the Servicer in accordance
with the Agreement. If the proceeds of any liquidation of the Mortgaged
Property securing the defaulted Mortgage Loan are less than the Principal
Balance of the defaulted Mortgage Loan plus interest accrued thereon, a loss
will be realized on such Mortgage Loan, to the extent the applicable Credit
Enhancement is not sufficient, in the amount of such difference plus the
aggregate of expenses which are incurred by the Servicer in connection with
such proceedings and are reimbursable under the Agreement. In such case there
will be a reduction in the value of the Mortgage Loans and Trust may be unable
to recover the full amount of principal and interest due thereon.
In addition, where a Mortgaged Property securing a defaulted Mortgage
Loan can be resold for an amount exceeding the principal balance of the
related Mortgage Loan together with accrued interest and expenses, it may be
expected that, where retention of any such amount is legally permissible, the
Pool Insurer will exercise its right under the related Mortgage Pool Insurance
Policy, if any, to purchase such Mortgaged Property and realize for itself any
excess proceeds. Any amounts remaining in the Security Account after such
foreclosure or liquidation and attributable to such Mortgage Loan will be
distributed to Owners of the Securities.
Servicing Compensation and Payment of Expenses
As compensation for its servicing duties, each Servicer will be entitled
to a monthly servicing fee in the amount specified in the related Prospectus
Supplement. In addition to the primary compensation, Servicer may be permitted
to retain all assumption underwriting fees and late payment charges, to the
extent collected from Mortgagors.
As set forth above, each Servicer will be entitled to reimbursement for
certain expenses incurred by it in connection with the liquidation of
defaulted Mortgage Loans and Contracts and in connection with advancing
delinquent payments. No loss will be suffered on the Securities by reason of
such expenses to the extent claims for such expenses are paid directly under
any applicable Mortgage Pool Insurance Policy, a primary mortgage insurance
policy, the special hazard insurance policy or from other forms of Credit
Enhancement. In the event, however, that the defaulted Mortgage Loans are not
covered by a Mortgage Pool Insurance Policy, primary mortgage insurance
policies, the Special Hazard Insurance Policy or another form of Credit
Enhancement, or claims are either not made or paid under such policies or
Credit Enhancement, or if coverage thereunder has ceased, such a loss will
occur to the extent that the proceeds from the liquidation of a defaulted
Mortgage Loan or Contract, after reimbursement of the Servicer's expenses, are
less than the Principal Balance of such defaulted Mortgage Loan or Contract.
Master Servicer
A Master Servicer may be specified in the related Prospectus Supplement
for the related series of Securities. Customary servicing functions with
respect to Mortgage Loans constituting the Mortgage Pool will be provided by
the Servicer directly or through one or more Sub-Servicers subject to
supervision by the Master Servicer. If the Master Servicer is not directly
servicing the Mortgage Loans, then the Master Servicer will (i) administer and
supervise the performance by the Servicer of its servicing responsibilities
under the Agreement with the Master Servicer, (ii) maintain a current data
base with the payment histories of each Mortgagor, (iii) review monthly
servicing reports and data relating to the Mortgage Pool for discrepancies and
errors and (iv) act as back-up Servicer during the term of the transaction
unless the Servicer is terminated or resigns in such case the Master Servicer
shall assume the obligations of the Servicer.
The Master Servicer will be a party to the Agreement for any series for
which Mortgage Loans comprise the assets of a Trust. The Master Servicer will
be required to satisfy the standard established for the qualification of the
Master Servicer in the related Agreement. The Master Servicer will be
compensated for the performance of its services and duties under each
Agreement as specified in the related Prospectus Supplement.
ADMINISTRATION
The following summary describes certain provisions which will be common
to each Agreement. The summary does not purport to be complete and is subject
to, and qualified in its entirety by reference to, the provisions of a
particular Agreement. Material terms of a specific Agreement will be further
described in the related Prospectus Supplement.
Assignment of Mortgage Assets
Assignment of the Mortgage Loans. At the time of issuance, the Depositor
will assign the Mortgage Loans to the Trustee, together with all principal and
interest adjusted to the Remittance Rate, subject to exclusions specified in
the Prospectus Supplement, due on or with respect to such Mortgage Loans on or
after the Cut-Off Date. The Trustee, 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 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 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, 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:
(a) the aggregate amount of such distribution allocable to principal,
separately identifying the amount allocable to each class;
(b) the amount of such distribution allocable to interest, separately
identifying the amount allocable to each class;
(c) the aggregate Security Principal Balance of each class of the
Securities after giving effect to distributions on such Distribution Date;
(d) 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;
(e) if applicable, the amount otherwise distributable to any class of
Securities that was distributed to other classes of Securities;
(f) 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;
(g) 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
(h) the aggregate Principal Balances of Mortgage Loans and Contracts
which (a) were delinquent 30-59 days, 60-89 days, and 90 days or more, or
other delinquency categories of similar nature and (b) were in foreclosure.
Customary information deemed necessary for Owners to prepare their tax
returns will be furnished annually (in the case of Book Entry Securities, the
above described statement and such annual information will be sent to the
Clearing Agency, which will provide such reports to the Clearing Agency
Participants in accordance with its procedures).
Forward Commitments; Pre-Funding
The Trustee of a Trust may enter into a Pre-Funding Agreement for the
transfer of additional Mortgage Loans and Contracts to such Trust following
the date on which such Trust is established and the related Securities are
issued. The Trustee of a Trust may enter into Pre-Funding Agreements to permit
the acquisition of additional Mortgage Loans that could not be delivered by
the Depositor or have not formally completed the origination process, in each
case prior to the Delivery Date. Any Pre-Funding Agreement will require that
any Mortgage Loans so transferred to a Trust conform to the requirements
specified in such Pre-Funding Agreement. If a Pre-Funding Agreement is to be
utilized, the related Trustee will be required to deposit in the Purchase
Account all or a portion of the proceeds received by the Trustee in connection
with the sale of one or more classes of Securities of the related series; the
additional Mortgage Loans will be transferred to the related Trust in exchange
for money released from the related Pre-Funding Account. Each Pre-Funding
Agreement will set a specified period during which any such transfers must
occur. The Pre-Funding Agreement or the related Agreement will require that,
if all moneys originally deposited to such Pre-Funding Account are not so used
by the end of such specified period, then any remaining moneys will be applied
as a mandatory prepayment of the related class or classes of Securities as
specified in the related Prospectus Supplement. The specified period for the
acquisition by a Trust of additional Mortgage Loans is not expected to exceed
three months from the date such Trust is established.
Servicer Events of Default
"Events of Default" under the Agreement will consist of (i) any failure
by the Servicer to duly observe or perform in any material respect any other
of its covenants or agreements in the Agreement materially affecting the
rights of Owners which continues unremedied for a specified number of days
after the giving of written notice of such failure to the Depositor by the
Trustee or to the Servicer and the Trustee by the Owners of Securities
evidencing interests in the Trust aggregating not less than 25% of the
affected class of Securities; and (ii) certain events of insolvency,
readjustment of debt, marshaling of assets and liabilities or similar
proceedings and certain actions by the Servicer indicating its insolvency,
reorganization or inability to pay its obligations.
Rights Upon Servicer Event of Default
As long as an Event of Default under the Agreement remains unremedied by
the Servicer, the Trustee or Owners of Securities evidencing an ownership
interest in the Trust may terminate all the rights and obligations of the
Servicer under the Agreement, whereupon the Trustee or Master Servicer, if
any, or a new Servicer appointed pursuant to the Agreement, will succeed to
all the responsibilities, duties and liabilities of the Servicer under the
Agreement and will be entitled to similar compensation arrangements. Following
such termination, the Depositor shall appoint any established mortgage loan
servicer satisfying the qualification standards established in the Agreement
to act as successor to the Servicer under the Agreement. If no such successor
shall have been appointed within a specified number of days following such
termination, then either the Depositor or the Trustee may petition a court of
competent jurisdiction for the appointment of a successor Servicer. Pending
the appointment of a successor Servicer, the Trustee or the Master Servicer,
if any, shall act as Servicer.
The Owners of Securities evidencing an ownership interest in the Trust
will not have any right under the Agreement to institute any proceeding with
respect to the Agreement, unless they previously have given to the Trustee
written notice of default and unless the Owners of the percentage of such
Securities specified in the Prospectus Supplement have made written request to
the Trustee to institute such proceeding in its own name as Trustee thereunder
and have offered to the Trustee reasonable indemnity and the Trustee for a
specified number of days has neglected or refused to institute any such
proceedings. Nevertheless, the Trustee is under no obligation to exercise any
of the trusts or powers vested in it by the Agreement or to make any
investigation of matters arising thereunder or to institute, conduct or defend
any litigation thereunder or in relation thereto at the request, order or
direction of any of the Owners, unless such Owners have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities
which may be incurred therein or thereby.
Amendment
An Agreement generally may be amended by the Depositor, the Servicer and
the Trustee, without the consent of the Owners of the Securities evidencing an
ownership interest in the Trust, to cure any ambiguity, to correct or
supplement any provision therein which may be defective or inconsistent with
any other provision therein, to take any action necessary to maintain REMIC
status of any Trust as to which a REMIC election has been made or to add any
other provisions with respect to matters or questions arising under the
Agreement which are not materially inconsistent with the provisions of the
Agreement; provided that such action will not, as evidenced by an opinion of
counsel satisfactory to the Trustee, adversely affect in any material respect
the interests of any Owners of such Securities. An Agreement may also be
amended by the Depositor, the Servicer, and the Trustee with the consent of
the Owners of Securities evidencing an ownership interest in the Trust
aggregating not less than a majority of the aggregate Security Principal
Balance of such Securities for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of such Agreement
or of modifying in any manner the rights of such Owners; provided, however,
that no such amendment may (i) reduce in any manner the amount of, or delay
the timing of, collections of payments received on the related Mortgage Assets
or distributions which are required to be made on any such Security without
the consent of the Owner of such Security, (ii) adversely affect in any
material respect the interests of the Owners of any class of such Securities
in any manner other than as described in (i) without the consent of the Owners
of Securities of such class evidencing not less than a majority of the
interests of such class or (iii) reduce the aforesaid percentage of Securities
of any such class required to consent to any such amendment without the
consent of the Owners of all such Securities of such class then outstanding.
Any other amendment provisions inconsistent with the foregoing shall be
specified in the related Prospectus Supplement.
Termination
The obligations of the Depositor, the Servicer, and the Trustee created
by the Agreement will terminate upon the payment as required by the Agreement
of all amounts held by the Servicer or in the Security Account and required to
be paid to them pursuant to the Agreement after the later of (i) the maturity
or other liquidation of the last Mortgage Asset subject thereto or the
disposition of all property acquired upon foreclosure of any such Mortgage
Loan or Contract or (ii) the repurchase by the Depositor from the Trust of all
the outstanding Securities or all remaining assets in the Trust. The Agreement
will establish the repurchase price for the assets in the Trust and the
allocation of such purchase price among the classes of Securities. The
exercise of such right will effect early retirement of the Securities of that
series, but the Depositor's right so to repurchase will be subject to the
conditions described in the related Prospectus Supplement. If a REMIC election
is to be made with respect to all or a portion of a Trust, there may be
additional conditions to the termination of such Trust which will be described
in the related Prospectus Supplement. In no event, however, will the Trust
continue beyond the expiration of 21 years from the death of the survivor of
certain persons named in the Agreement. The Trustee will give written notice
of termination of the Agreement to each Owner, and the final distribution will
be made only upon surrender and cancellation of the Securities at an office or
agency of the Trustee specified in such notice of termination.
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 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.
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 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
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 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
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 loans. Certain aspects of
both features of the Contracts are described more fully below.
The Contracts generally are "chattel paper" as defined in the UCC in
effect in the states which the Manufactured Homes initially were registered.
Pursuant to the UCC, the sale of chattel paper is treated in a manner similar
to perfection of a security interest in chattel paper. Under the Agreement,
the Depositor will transfer physical possession of the Contracts to the
Trustee or, if applicable, the Indenture Trustee or its custodians. In
addition, the Depositor will make an appropriate filing of a UCC-1 financing
statement in the appropriate states to give notice of the Trustee's ownership
of the Contracts and, if applicable, the Indenture Trustee's security
interest. The Contracts will not be stamped or marked otherwise to reflect
their assignment by the Depositor. Therefore, if a subsequent purchaser were
able to take physical possession of the Contracts without notice of such
assignment the Trustee's and, if applicable, the Indenture Trustee's and, if
applicable, the Indenture Trustee's interest in Contracts could be defeated.
Security Interests in the Manufactured Homes. The Manufactured Homes
securing the Contracts may be located in all 50 states. Security interests in
manufactured homes may be perfected either by notation of the secured party's
lien on the certificate of title or by delivery of the required documents and
payment of a fee to the state motor vehicle authority, depending on state law.
In some nontitle states, perfection pursuant to the provisions of the UCC is
required. The Depositor may effect such notation or delivery of the required
documents and fees, and obtain possession of the certificate of title, as
appropriate under the laws of the state in which any manufactured home
securing 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
estate records office of the county where the home is located. So long as the
borrower does not violate this agreement, a security interest in the
Manufactured Home will be governed by the certificate of title laws or the
UCC, and the notation of the security interest on the certificate of title or
the filing of a UCC financing statement will be effective to maintain the
priority of the security interest in the Manufactured Home. If, however, a
Manufactured Home is permanently attached to this site, other parties could
obtain an interest in the Manufactured Home which is prior to the security
interest transferred to the Trustee. With respect to a series of Securities
and as described in the related Prospectus Supplement, the Depositor may be
required to perfect a security interest in the Manufactured Home under
applicable real estate laws. If such real estate filings are not required and
if any of the foregoing events were to occur, the only recourse would be to
pursue the Trust's rights to require repurchase for breach of warranties.
The Depositor will assign its security interest in the Manufactured
Homes. Neither the Depositor nor the Trustee or, if applicable, Indenture
Trustee will amend the certificates of title to identify a new secured party.
Accordingly, the Depositor or the Seller will continue to be named as the
secured party on the certificates of title relating to the Manufactured Homes.
In most states, such assignment is an effective conveyance of such security
interest without amendment of any lien noted on the related certificate of
title and the new secured party succeeds to the rights of the secured party.
However, in some states there exists a risk that, in the absence of an
amendment to the certificate of title, such assignment of the security
interest might not be held effective against creditors of the Depositor or the
Seller.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or
administrative error by state recording officials, the notation of the lien on
the certificate of title or delivery of the required documents and fees will
be sufficient to protect against the rights of subsequent purchasers of a
Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the
security interest is not perfected, such security interest would be
subordinate to, among others, subsequent purchasers for value of Manufactured
Homes and holders of perfected security interests. There also exists a risk in
not identifying a new secured party on the certificate of title that, through
fraud or negligence, the security interest could be released.
Enforcement of Security Interests in Manufactured Homes. The Servicer, to
the extent required by the related Agreement, may take action to enforce the
security interest with respect to Contracts in default by repossession and
resale of the Manufactured Homes securing such Contracts in default. So long
as the Manufactured Home has not become subject to the real estate law, a
creditor can repossess a Manufactured Home securing a Contract by voluntary
surrender, by "self-help" repossession that is "peaceful" (i.e., without
breach of the peace) or in the absence of voluntary surrender and the ability
to repossess without breach of the peace, by judicial process. The holder of a
Contract must give the debtor a number of days' notice, which varies from 10
to 30 days depending on the state, prior to commencement of any repossession.
The UCC and consumer protection laws in most states place restrictions on
repossession sales, including requiring prior notice to the debtor and
commercial reasonableness in effecting such a sale. The law in most states
also requires that the debtor be given notice of any sale prior to resale of
the unit so that the debtor may redeem at or before such resale. In the event
of such repossession and resale of a Manufactured Home, the Trustee would be
entitled to be paid out of the sale proceeds before such proceeds could be
applied to the payment of the claims of unsecured creditors or the holders of
subsequently perfected security interests or, thereafter, to the debtor.
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.
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 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
Plans.
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 Brown & Wood LLP, 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 Brown & Wood LLP, 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"). 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.
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, Brown & Wood LLP, 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
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. 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
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, or the debt
instrument otherwise provides terms and conditions that make the likelihood of
late payment or nonpayment a remote contingency. 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 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 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.
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 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).
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.
Treasury 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. Purchasers who pay a premium for their Regular
Securities should consult their tax advisors regarding the election to
amortize premium and the method to be employed.
Sale or Exchange of Regular Securities. If a Regular Securityholder sells
or exchanges a Regular Security, the Regular Securityholder will recognize
gain or loss equal to the difference, if any, between the amount received and
his adjusted basis in the Regular Security. The adjusted basis of a Regular
Security generally will equal the cost of the Regular Security to the seller,
increased by any original issue discount or market discount previously
included in the seller's gross income with respect to the Regular Security and
reduced by amounts included in the stated redemption price at maturity of the
Regular Security that were previously received by the seller and by any
amortized premium.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Security realized by an investor who holds the Regular Security as a
capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Security has been held for the long-term
capital gain holding period (currently more than one year). Gain from the
disposition of a Regular Security that might otherwise be capital gain will be
treated as ordinary income to the extent that such gain does not exceed the
excess, if any, of (i) the amount that would have been includible in the gross
income of the holder if his yield on such Regular Security were 110% of the
applicable Federal rate under Code Section 1274(d) as of the date of purchase
over (ii) the amount of income actually includible in the gross income of such
holder with respect to the Regular Security. In addition, gain or loss
recognized from the sale of a Regular Security by certain banks or thrift
institutions will be treated as ordinary income or loss pursuant to Code
Section 582(c). The maximum tax rate for individuals on the excess of net
long-term capital gain over net short-term capital loss is 28%.
Taxation of Residual Securities
Taxation of REMIC Income. Generally, the "daily portions" of REMIC
taxable income or net loss will be includible as ordinary income or loss in
determining the federal taxable income of holders of Residual Securities
("Residual Securityholders") and will not be taxed separately to the REMIC
Pool. The daily portions of REMIC taxable income or net loss of a Residual
Securityholder are determined by allocating the REMIC Pool's taxable income or
net loss for each calendar quarter ratably to each day in such quarter and by
allocating such daily portion among the Residual Securityholders in proportion
to their respective holdings of Residual Securities in the REMIC Pool on such
day. REMIC taxable income is generally determined in the same manner as the
taxable income of an individual using a calendar year and the accrual method
of accounting, except that (i) the limitation on deductibility of investment
interest expense and expenses for the production of income do not apply, (ii)
all bad loans will be deductible as business bad debts and (iii) the
limitation on the deductibility of interest and expenses related to tax-exempt
income will apply. REMIC taxable income generally means the REMIC Pool's gross
income, including interest, original issue discount income and market discount
income, if any, on the Mortgage Assets, plus income on reinvestment of
cashflows and reserve assets, minus deductions, including interest and
original issue discount expense on the Regular Securities, servicing fees on
the Mortgage Assets and other administrative expenses of the REMIC Pool,
amortization of premium, if any, with respect to the Mortgage Assets, and any
tax imposed on the REMIC's income from foreclosure property. The requirement
that Residual Securityholders report their pro rata share of taxable income or
net loss of the REMIC Pool will continue until there are no Securities of any
class of the related series outstanding.
The taxable income recognized by a Residual Securityholder in any taxable
year will be affected by, among other factors, the relationship between the
timing of recognition of interest and original issue discount or market
discount income or amortization of premium with respect to the Mortgage
Assets, on the one hand, and the timing of deductions for interest (including
original issue discount) on the Regular Securities, on the other hand. Because
of the way REMIC taxable income is calculated, a Residual Securityholder may
recognize "phantom" income (i.e., income recognized for tax purposes in excess
of income as determined under financial accounting or economic principles)
which will be matched in later years by a corresponding tax loss or reduction
in taxable income, but which could lower the yield to Residual Securityholders
due to the lower present value of such future loss or reduction. For example,
if an interest in the Mortgage Assets is acquired by the REMIC Pool at a
discount, and one or more of such Mortgage Assets is prepaid, the Residual
Securityholder may recognize taxable income without being entitled to receive
a corresponding amount of cash because (i) the prepayment may be used in whole
or in part to make distributions in reduction of principal on the Regular
Securities and (ii) the discount income on the Mortgage Loan which is
includible in the REMIC's taxable income may exceed the discount deduction
allowed to the REMIC upon such distributions on the Regular Securities. When
there is more than one class of Regular Securities that distribute principal
sequentially, this mismatching of income and deductions is particularly likely
to occur in the early years following issuance of the Regular Securities when
distributions in reduction of principal are being made in respect of earlier
maturing classes of Securities to the extent that such classes are not issued
with substantial discount. If taxable income attributable to such a
mismatching is realized in general, losses would be allowed in later years as
distributions on the later classes of Regular Securities are made. Taxable
income may also be greater in earlier years than in later years as a result of
the fact that interest expense deductions, expressed as a percentage of the
outstanding principal amount of such a series of Regular Securities, may
increase over time as distributions in reduction of principal are made on the
lower yielding classes of Regular Securities, where interest income with
respect to any given Mortgage Loan will remain constant over time as a
percentage of the outstanding principal amount of that loan. Consequently,
Residual Securityholders must have sufficient other sources of cash to pay any
federal, state or local income taxes due as a result of such mismatching or
unrelated deductions against which to offset such income. Prospective
investors should be aware, however, that a portion of such income may be
ineligible for offset by such investor's unrelated deductions. See the
discussion of "excess inclusions" below under "Limitations on Offset or
Exemption of REMIC Income; Excess Inclusions." The timing of such mismatching
of income and deductions described in this paragraph, if present with respect
to a series of Securities, may have a significant adverse effect upon the
Residual Securityholders after-tax rate of return. In addition, a Residual
Securityholder's taxable income during certain periods may exceed the income
reflected by such Securityholder for such periods in accordance with generally
accepted accounting principles. Investors should consult their own advisors
concerning the proper tax and accounting treatment of their investment in
Residual Securities.
Basis and Losses. The amount of any net loss of the REMIC Pool that may
be taken into account by the Residual Securityholder is limited to the
adjusted basis of the Residual Security as of the close of the quarter (or
time of disposition of the Residual Security if earlier), determined without
taking into account the net loss for the quarter. The initial adjusted basis
of a purchaser of a Residual Security is the amount paid for such Residual
Security. Such adjusted basis will be increased by the amount of taxable
income of the REMIC Pool reportable by the Residual Securityholder and
decreased by the amount of loss of the REMIC Pool reportable by the Residual
Securityholder. A cash distribution from the REMIC Pool also will reduce such
adjusted basis (but not below zero). Any loss that is disallowed on account of
this limitation may be carried over indefinitely with respect to the Residual
Securityholder as to whom such loss was disallowed and may be used by such
Residual Securityholder only to offset any income generated by the same REMIC
Pool. Residual Securityholders should consult their tax advisors about other
limitations on the deductibility of net losses that may apply to them.
A Residual Securityholder will not be permitted to amortize directly the
cost of its Residual Security as an offset to its share of the taxable income
of the related REMIC Pool. Such taxable income will not include cash received
by the REMIC Pool that represents a recovery of the REMIC Pool's basis in its
assets. Such recovery of basis by the REMIC Pool will have the effect of
amortization of the issue price of the Residual Securities over their life.
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
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."
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," an election under Code Section 171 to amortize premium on Mortgage
Assets may be made with respect to a REMIC Pool. Amortizable bond premium will
be treated as an offset to interest income on the Mortgage Assets, rather than
as a separate deduction item.
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 will be subject to
federal income tax in all events. Thus, for example, an excess inclusion (i)
cannot 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") 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.
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.
Under Treasury regulations to be promulgated, a portion of the dividends
paid by a REIT which owns a Residual Security are to be designated as excess
inclusions in an amount corresponding to the Residual Security's allocable
share of the excess inclusions. Similar rules apply in the case of regulated
investment companies, common trust funds and cooperatives. Thus, investors in
such entities which own a Residual Security will be subject to the limitations
on excess inclusions described above. The REMIC Regulations do not provide
guidance on this issue.
Tax-Related Restrictions on Transfer of Residual Securities
Disqualified Organizations. If legal title or beneficial interest in a
Residual Security is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Security for periods after the transfer and (ii) the highest marginal
federal corporate income tax rate. The REMIC Regulations provide that the
anticipated excess inclusion are based on actual prepayment experience to the
date of the transfer and projected payments based on the Prepayment
Assumption. The present value discount rate equals the applicable Federal rate
under Code Section 1274(d) that would apply to a debt instrument that was
issued on the date the Disqualified Organization acquired the Residual
Security and whose term ended on the close of the last quarter in which excess
inclusion was expected to accrue with respect to the Residual Security. Such a
tax generally would be imposed on the transferor of the Residual Security,
except that where such transfer is through an agent (including a broker,
nominee, or other middleman) for a Disqualified Organization, the tax would
instead be imposed on such agent. A transferor of a Residual Security would in
no event, however, be liable for such tax with respect to a transfer if the
transferee furnishes to the transferor an affidavit that the transferee is not
a Disqualified Organization and, as of the time of the transfer, the
transferor does not have actual knowledge that such affidavit is false. The
tax also may be waived by the Treasury Department if the Disqualified
Organization promptly disposes of the Residual Security and the transferor
pays income tax at the highest corporate rate on the excess inclusion for the
period the Residual Security is actually held by the Disqualified
Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Security during a taxable year and
a Disqualified Organization is the record holder of an equity interest in such
entity, then a tax is imposed on such entity equal to the product of (i) the
amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period such interest is held by such
Disqualified Organization and (ii) the highest marginal federal corporate
income tax rate. Such tax would be deductible from the ordinary gross income
of the Pass-Through Entity for the taxable year. The Pass-Through Entity would
not be liable for such tax if it has received an affidavit from such record
holder that (i) states under penalty of perjury that it is not a Disqualified
Organization or (ii) furnishes a social security number and states under
penalties of perjury that the social security number is that of the
transferee, provided that during the period such person is the record holder
of the Residual Security, the Pass-Through Entity does not have actual
knowledge that such affidavit is false.
For these purposes, (i) "Disqualified Organization" means the United
States, any state or political subdivision thereof, any foreign government,
any international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
its activities are subject to tax and a majority of its board of directors is
not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 521) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511 and (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis. Except as may be provided in Treasury
regulations yet to be issued, any person holding an interest in a Pass-Through
Entity as a nominee for another will, with respect to such interest, be
treated as a Pass-Through Entity.
The Agreement with respect to a series of Securities will provide that
neither legal title nor beneficial interest in a Residual Security may be
transferred or registered unless (i) the proposed transferee provides to the
Depositor and the Trustee an affidavit to the effect that such transferee is
not a Disqualified Organization, is not purchasing such Residual Securities on
behalf of a Disqualified Organization (i.e., as a broker, nominee or middleman
thereof) and is not an entity that holds REMIC residual securities as nominee
to facilitate the clearance and settlement of such securities through
electronic book-entry changes in accounts of participating organizations and
(ii) the transferor provides a statement in writing to the Depositor and the
Trustee that it has no actual knowledge that such affidavit is false.
Moreover, the Agreement will provide that any attempted or purported transfer
in violation of these transfer restrictions will be null and void and will
vest no rights in any purported transferee. Each Residual Security with
respect to a series will have a legend referring to such restrictions on
transfer, and each Residual Securityholder will be deemed to have agreed, as a
condition of ownership thereof, to any amendments to the related Agreement
required under the Code or applicable Treasury regulations to effectuate the
foregoing restrictions. Information necessary to compute an applicable excise
tax must be furnished to the Internal Revenue Service and to the requesting
party within 60 days of the request, and the Depositor or the Trustee may
charge a fee for computing and providing such information.
Noneconomic Residual Interests. Under the REMIC Regulations certain
transfers of Residual Securities are disregarded, in which case the transferor
continues to be treated as the owner of the Residual Securities and thus
continues to be subject to tax on its allocable portion of the net income of
the REMIC Pool. Under the Final REMIC Regulations, a transfer of a Noneconomic
Residual Interest (defined below) to a Residual Securityholder (other than a
Residual Securityholder who is not a U.S. Person, as defined below under
"Foreign Investors") is disregarded for all federal income tax purposes unless
no significant purpose of the transfer is to impede the assessment or
collection of tax. A residual interest in a REMIC (including a residual
interest with a positive value at issuance) is a "Noneconomic Residual
Interest" unless, at the time of the transfer, (i) the present value of the
expected future distributions on the residual interest at least equals the
product of the present value of the anticipated excess inclusions and the
highest federal corporate income tax rate in effect for the year in which the
transfer occurs and (ii) the transferor reasonably expects that the transferee
will receive distributions from the REMIC at or after the time at which taxes
accrue on the anticipated excess inclusions in an amount sufficient to satisfy
the accrued taxes. The anticipated excess inclusions and the present value
rate are determined in the same manner as set forth above under "Disqualified
Organizations." A significant purpose to impede the assessment or collection
of tax exists if the transferor, at the time of the transfer, either knew or
should have known (had "improper knowledge") that the transferor would be
unwilling or unable to pay taxes due on its share of the taxable income of the
REMIC. Under the REMIC Regulations, a transferor is presumed not to have
improper knowledge if (i) the transferor conducted, at the time of the
transfer, a reasonable investigation of the financial condition of the
transferee and, as a result of the investigation, the transferor found that
the transferee had historically paid its debts as they came due and found no
significant evidence to indicate that the transferor will not continue to pay
its debts as they come due in the future; and (ii) the transferee represents
to the transferor that it understands that, as the holder of the Noneconomic
Residual Interest, the transferee may incur tax liabilities in excess of any
cash flows generated by the residual interest and that the transferee intends
to pay taxes associated with holding of residual interest as they become due.
The Agreement will require the transferee of a Residual Security to state as
part of the affidavit described above under the heading "Disqualified
Organizations" that such transferee (i) has historically paid its debts as
they come due, (ii) intends to continue to pay its debts as they come due in
the future, (iii) understands that, as the holder of a Noneconomic Residual
Interest, it may incur tax liabilities in excess of any cash flows generated
by the Residual Security, and (iv) intends to pay any and all taxes associated
with holding the Residual Security as they become due. The transferor must
have no reason to believe that such statement is untrue.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Security that has "tax avoidance potential" to a "foreign person"
will be disregarded for all federal tax purposes. This rule appears intended
to apply to a transferee who is not a "U.S. Person" (as defined below), unless
such transferee's income is effectively connected with the conduct of a trade
or business within the United States. A Residual Security is deemed to have
tax avoidance potential unless, at the time of the transfer, the transferor
reasonably expects that, for each excess inclusion, (i) the REMIC Pool will
distribute to the transferee residual interest holder an amount that will
equal at least 30% of the excess inclusions and (ii) that each such amount
will be distributed at or after the time at which the excess inclusion accrues
and not later than the close of the calendar year following the calendar year
of accrual. If the non-U.S. Person transfers the Residual Security back to a
U.S. Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The Prospectus Supplement relating to a series of Securities may provide
that a Residual Security may not be purchased by or transferred to any person
that is not a U.S. Person or may describe the circumstances and restrictions
pursuant to which such a transfer may be made. The term "U.S. Person" means a
citizen or resident of the United States, a corporation, partnership or other
entity created or organized in or under the laws of the United States or any
political subdivision thereof or an estate or trust that is subject to U.S.
federal income tax regardless of the source of its income.
Sale or Exchange of a Residual Security
Upon the sale or exchange of a Residual Security, the Residual
Securityholder will recognize gain or loss equal to the excess, if any, of the
amount realized over the adjusted basis (as described above under "Taxation of
Securities - Basis and Losses") of such Residual Securityholder in such
Residual Security at the time of the sale or exchange. In addition to
reporting the taxable income of the REMIC Pool, a Residual Securityholder will
have taxable income to the extent that any cash distribution to him from the
REMIC Pool exceeds such adjusted basis on that Distribution Date. Such income
will be treated as gain from the sale or exchange of the Residual Security. It
is possible that the termination of the REMIC Pool may be treated as a sale or
exchange of a Residual Securityholder's Residual Security, in which case, if
the Residual Securityholder has an adjusted basis in his Residual Security
remaining when his interest in the REMIC Pool terminates, and if he holds such
Residual Security as a capital asset under Code Section 1221, then he will
recognize a capital loss at that time in the amount of such remaining adjusted
basis.
The Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued, the wash sale rules of Code
Section 1091 will apply to disposition of Residual Securities. Consequently,
losses on dispositions of Residual Securities will be disallowed where the
seller of the Residual Security, during the period beginning six months before
the sale or disposition of the Residual Security and ending six months after
such sale or disposition, acquires (or enters into any other transaction that
results in the application of Code Section 1091) any residual interest in any
REMIC or any interest in a "taxable mortgage pool" (such as a non-REMIC owner
trust) that is economically comparable to a Residual Security.
Taxes That May Be Imposed on the REMIC Pool
Prohibited Transactions. Net income from certain transactions by the
REMIC Pool, called prohibited transactions, will not be part of the
calculation of income or loss includible in the federal income tax returns of
Residual Securityholders, but rather will be taxed directly to the REMIC Pool
at a 100% rate. Prohibited transactions generally include (i) the disposition
of a qualified mortgage other than for (a) substitution within two years of
the Startup Day for a defective (including a defaulted) obligation (or
repurchase in lieu of substitution of a defective (including a defaulted)
obligation at any time) or for any qualified mortgage within three months of
the Startup Day, (b) foreclosure, default or imminent default of a qualified
mortgage, (c) bankruptcy or insolvency of the REMIC Pool or (d) a qualified
(complete) liquidation, (ii) the receipt of income from assets that are not
the type of mortgages or investments that the REMIC Pool is permitted to hold,
(iii) the receipt of compensation for services or (iv) the receipt of gain
from disposition of cash flow investments other than pursuant to a qualified
liquidation. Notwithstanding (i) and (iv), it is not a prohibited transaction
to sell REMIC Pool property to prevent a default on Regular Securities as a
result of a default on qualified mortgages or to facilitate a clean-up call
(generally, an optional termination to save administrative costs when no more
than a small percentage of the Securities is outstanding). The REMIC
Regulations indicate that the modification of a Mortgage Loan generally will
not be treated as a disposition if it is occasioned by a default or reasonably
foreseeable default, an assumption of the Mortgage Loan, the waiver of a
due-on-sale or encumbrance clause or the conversion of an interest rate by a
mortgagor pursuant to the terms of a convertible adjustable rate Mortgage
Loan. The REMIC Regulations also provide that the modification of mortgage
loans underlying Mortgage-Backed Securities will not be treated as a
modification of the Mortgage-Backed Securities, provided that the trust
including the was not created to avoid prohibited transaction rules.
Contributions to the REMIC Pool After the Startup Day. In general, the
REMIC Pool will be subject to a tax at a 100% rate on the value of any
property contributed to the REMIC Pool after the Startup Day. Exceptions are
provided for cash contributions to the REMIC Pool (i) during the three months
following the Startup Day, (ii) made to a qualified reserve fund by a Residual
Securityholder, (iii) in the nature of a guarantee, (iv) made to facilitate a
qualified liquidation or clean-up call and (v) as otherwise permitted in
Treasury regulations yet to be issued.
Net Income from Foreclosure Property. The REMIC Pool will be subject to
federal income tax at the highest corporate rate on "net income from
foreclosure property," determined by reference to the rules applicable to real
estate investment trusts. Generally, property acquired by the REMIC Pool
through foreclosure or deed in lieu of foreclosure would be treated as
"foreclosure property" for a period of two years, with possible extensions.
Net income from foreclosure property generally means (i) gain from the sale of
a foreclosure property that is inventory property and (ii) gross income from
foreclosure property other than qualifying rents and other qualifying income
for a real estate investment trust.
Liquidation of the REMIC Pool
If a REMIC Pool and the Trustee adopt a plan of complete liquidation,
within the meaning of Code Section 860F(a)(4)(A)(i) and sell all the REMIC
Pool's assets (other than cash) within a 90-day period beginning on the date
of the adoption of the plan of liquidation, the REMIC Pool will recognize no
gain or loss on the sale of its assets, provided that the REMIC Pool credits
or distributes in liquidation all the sale proceeds plus its cash (other than
amounts retained to meet claims against the REMIC Pool) to holders of Regular
Securities and Residual Securityholders within the 90-day period.
Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes
in a manner similar to a partnership. The form for such income tax return is
Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. The
Trustee will be required to sign the REMIC Pool's returns. Treasury
regulations provide that, except where there is a single Residual
Securityholder for an entire taxable year, the REMIC Pool generally will be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination by the Internal Revenue Service of
any adjustments to, among other things, items of REMIC income, gain, loss,
deduction or credit in a unified administrative proceeding. The Depositor or
other designated Residual Securityholders will be obligated to act as "tax
matters person," as defined in applicable Treasury regulations, with respect
to the REMIC Pool. If the Code or applicable Treasury regulations do not
permit the Depositor to act as tax matters person in its capacity as agent of
the Residual Securityholders, the Residual Securityholder chosen by the
Residual Securityholders or such other person specified pursuant to Treasury
regulations will be required to act as tax matters person.
Treasury regulations provide that a holder of a Residual Security is not
required to treat items on its return consistently with their treatment on the
REMIC Pool's return if a holder owns 100% of the Residual Securities for the
entire calendar year. Otherwise, each holder of a Residual Security is
required to treat items on its return consistently with their treatment on the
REMIC Pool's return, unless the holder of a Residual Security either files a
statement identifying the inconsistency or establishes that the inconsistency
resulted from incorrect information received from the REMIC Pool. The Service
may assess a deficiency resulting from a failure to comply with the
consistency requirement without instituting an administrative proceeding at
the REMIC Pool level.
Limitations on Deduction of Certain Expenses
An investor who is an individual, estate or trust will be subject to
limitation with respect to certain itemized deductions described in Code
Section 67, to the extent that such itemized deductions, in the aggregate, do
not exceed 2% of the investor's adjusted gross income. In addition, Code
Section 68 provides that itemized deductions otherwise allowable for a taxable
year of an individual taxpayer will be reduced by the lesser of (i) 3% of the
excess, if any, of adjusted gross income over $100,000, adjusted yearly for
inflation ($50,000, adjusted yearly for inflation, in the case of a married
individual filing a separate return), or (ii) 80% of the amount of itemized
deductions otherwise allowable for such year. In the case of a REMIC Pool,
such deductions may include deductions under Code Section 212 for servicing
fees and all administrative and other expenses relating to the REMIC Pool or
any similar expenses allocated to the REMIC Pool with respect to a regular
interest it holds in another REMIC. Such investors who hold REMIC Securities
either directly or indirectly through certain pass-through entities may have
their pro rata share of such expenses allocated to them as additional gross
income, but may be subject to such limitation on deductions. In addition, such
expenses are not deductible at all for purposes of computing the alternative
minimum tax, and may cause such investors to be subject to significant
additional tax liability. Treasury regulations provide that the additional
gross income and corresponding amount of expenses generally are to be
allocated entirely to the holders of Residual Securities in the case of a
REMIC Pool that would not qualify as a fixed investment trust in the absence
of a REMIC election. However, such additional gross income and limitation on
deductions will apply to the allocable portion of such expenses to holders of
Regular Securities, as well as holders of Residual Securities, where such
Regular Securities are issued in a manner that is similar to pass-through
certificates in a fixed investment trust. In general, such allocable portion
will be determined based on the ratio that a REMIC Securityholder's income,
determined on a daily basis, bears to the income of all holders of Regular
Securities and Residual Securities with respect to a REMIC Pool. As a result,
individuals, estates or trusts holding REMIC Securities (either directly or
indirectly through a grantor trust, partnership, S corporation, REMIC, or
certain other pass-through entities described in the foregoing Treasury
regulations) may have taxable income in excess of the interest income at the
pass-through rate on Regular Securities that are issued in a single class or
otherwise consistently with fixed investment trust status or in excess of cash
distributions for the related period on Residual Securities.
Taxation of Certain Foreign Investors
Regular Securities. Interest, including original issue discount,
distributable to Regular Securityholders who are nonresident aliens, foreign
corporations, or other Non-U.S. Persons (as defined below), will be considered
"portfolio interest" and therefore, generally will not be subject to 30%
United States withholding tax, provided that such Non-U.S. Person (i) is not a
"10-percent shareholder" within the meaning of Code Section 871(h)(3)(B) or a
controlled foreign corporation described in Code Section 881(c)(3)(C) and (ii)
provides the Trustee, or the person who would otherwise be required to
withhold tax from such distributions under Code Sections 1441 or 1442, with an
appropriate statement, signed under penalties of perjury, identifying the
beneficial owner and stating, among other things, that the beneficial owner of
the Regular Security is a Non-U.S. Person. If such statement, or any other
required statement, is not provided, 30% withholding will apply unless reduced
or eliminated pursuant to an applicable tax treaty or unless the interest on
the Regular Security is effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Person. In the latter case,
such Non-U.S. Person will be subject to United States federal income tax at
regular rates. Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Regular
Security. The term "Non-U.S. Person" means any person who is not a U.S.
Person.
Residual Securities. The Conference Committee Report to the 1986 Act
indicates that amounts paid to Residual Securityholders who are Non-U.S.
Persons are treated as interest for purposes of the 30% (or lower treaty rate)
United States withholding tax. Treasury regulations provide that amounts
distributed to Residual Securityholders qualify as "portfolio interest,"
subject to the conditions described in "Regular Securities" above, but only to
the extent that (i) the Mortgage Assets were issued after July 18, 1984. and
(ii) the Trust fund or segregated pool of assets therein (as to which a
separate REMIC election will be made), to which the Residual Security relates,
consists of obligations issued in "registered form" within the meaning of Code
Section 163(f)(1). Generally, Mortgage Assets will not be, but regular
interests in another REMIC Pool will be, considered obligations issued in
registered form. Furthermore, a Residual Securityholder will not be entitled
to any exemption from the 30% withholding tax (or lower treaty rate) to the
extent of that portion of REMIC taxable income that constitutes an "excess
inclusion." See "Taxation of Residual Securities - Limitations on Offset or
Exemption of REMIC Income; Excess Inclusions." If the amounts paid to Residual
Securityholders who are Non-U.S. Persons are effectively connected with the
conduct of a trade or business within the United States by such Non-U.S.
Persons, 30% (or lower treaty rate) withholding will not apply. Instead, the
amounts paid to such Non-U.S. Persons will be subject to United States federal
income tax at regular rates. If 30% (or lower treaty rate) withholding is
applicable, such amounts generally will be taken into account for purposes of
withholding only when paid or otherwise distributed (or when the Residual
Security is disposed of) under rules similar to withholding upon disposition
of debt instruments that have original issue discount. See "Tax-Related
Restrictions on Transfer of Residual Securities - Foreign Investors" above
concerning the disregard of certain transfers having "tax avoidance
potential." Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning Residual
Securities.
Backup Withholding
Distributions made on the Regular Securities, and proceeds from the sale
of the Regular Securities to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 31% on "reportable
payments" (including interest distributions, original issue discount, and,
under certain circumstances, principal distributions) unless the Regular
Securityholder complies with certain reporting and/or certification
procedures, including the provision of its taxpayer identification number to
the Trustee, its agent or the broker who effected the sale of the Regular
Security, or such Securityholder is otherwise an exempt recipient under
applicable provisions of the Code. Any amounts to be withheld from
distribution on the Regular Securities would be refunded by the Internal
Revenue Service or allowed as a credit against the Regular Securityholder's
federal income tax liability.
Reporting Requirements
Reports of accrued interest and original issue discount will be made
annually to the Internal Revenue Service and to individuals, estates,
non-exempt and non-charitable trusts, and partnerships who are either holders
of record of Regular Securities or beneficial owners who own Regular
Securities through a broker or middleman as nominee. All brokers, nominees and
all other non-exempt holders of record of Regular Securities (including
corporations, non-calendar year taxpayers, securities or commodities dealers,
real estate investment trusts, investment companies, common trust funds,
thrift institutions and charitable trusts) may request such information for
any calendar quarter by telephone or in writing by contacting the person
designated in Internal Revenue Service Publication 938 with respect to a
particular series of Regular Securities. Holders through nominees must request
such information from the nominee. Treasury regulations provide that
information necessary to compute the accrual of any market discount on the
Regular Securities must be furnished for calendar years beginning after 1990.
The Internal Revenue Service's Form 1066 has an accompanying Schedule Q,
Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each Residual Securityholder by the end of the month
following the close 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
Brown & Wood LLP, 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
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, Brown & Wood LLP, special
counsel to the Depositor, is of the opinion that:
(a) 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.
(b) 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.
(c) 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).
(d) A Standard Security owned by a REMIC will be considered to represent
an "obligation (including any participation or certificate of beneficial
ownership therein) which is principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3)(A) to the extent that
the assets of the related Trust consist of "qualified mortgages" within the
meaning of Code Section 860G(a)(3).
An issue arises as to whether buy-down Mortgage Assets may be
characterized in their entirety under the Code provisions cited in the
immediately preceding paragraph. Code Section 593(d)(l)(C) provides that the
term "qualifying real property loan" does not include a loan "to the extent
secured by a deposit in or share of the taxpayer." The application of this
provision to a buy-down fund with respect to a buy-down Mortgage Loan is
uncertain, but may require that a taxpayer's investment in a buy-down Mortgage
Loan be reduced by the buy-down fund. As to the treatment of buy-down Mortgage
Assets as "qualifying real property loans" under Code Section 593(d)(i) if the
exception of Code Section 593(d)(1)(C) is inapplicable, as "loans . . .
secured "by an interest in real property" under Code Section
7701(a)(19)(C)(v), as "real estate assets" under Code Section 856(c)(5)(A),
and as "obligation[s] principally secured by an interest in real property"
under Code Section 860G(a)(3)(A), there is indirect authority supporting
treatment of an investment in a buy-down Mortgage Loan as entirely secured by
real property if the fair market value of the real property securing the loan
exceeds the principal amount of the loan at the time of issuance or
acquisition, as the case may be. There is no assurance that the treatment
described above is proper. Accordingly, Securityholders are urged to consult
their own tax advisors concerning the effects of such arrangements on the
characterization of such Securityholder's investment for federal income tax
purposes.
Premium and Discount
Securityholders are advised to consult with their tax advisors as to the
federal income tax treatment of premium and discount arising either upon
initial acquisition of Securities or thereafter.
Premium. The treatment of premium incurred upon the purchase of a
Security will be determined generally as described above under " - Taxation of
Regular Securities - Premium."
Original Issue Discount. The Internal Revenue Service has stated in
published rulings that, in circumstances similar to those described herein,
the original issue discount rules will be applicable to a Securityholder's
interest in those Mortgage Assets as to which the conditions for the
application of those sections are met. Rules regarding periodic inclusion of
original issue discount income are applicable to mortgages of corporations
originated after May 27, 1969, mortgages of noncorporate mortgagors (other
than individuals) originated after July l, 1982, and mortgages of individuals
originated after March 2, 1984. Such original issue discount could arise by
the charging of points by the originator of the mortgages in an amount greater
than a statutory de minimis exception, to the extent that the points are not
currently deductible under applicable Code provisions or are not for services
provided by the lender. It is generally not anticipated that adjustable rate
Mortgage Assets will be treated as issued with original issue discount.
However, the application of the OID Regulations to adjustable rate mortgage
loans with incentive interest rates or annual or lifetime interest rate caps
may result in original issue discount.
Original issue discount must generally be reported as ordinary gross
income as it accrues under a constant yield method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
Code Section 1272 provides, however, for a reduction in the amount of original
issue discount includible in the income of a holder of an obligation that
acquires the obligation after its initial issuance at a price greater than the
sum of the original issue price and the previously accrued original issue
discount, less prior payments of principal. Accordingly, if such Mortgage
Assets acquired by a Securityholder are purchased at a price equal to the then
unpaid principal amount of such Mortgage Assets, no original issue discount
attributable to the difference between the issue price and the original
principal amount of such Mortgage Assets (i.e., points) will be includible by
such holder.
Market Discount. Securityholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the Mortgage Assets will be determined
and will be reported as ordinary income generally in the manner described
above under " - Taxation of Regular Securities - Market Discount."
Recharacterization of Servicing Fees. If the servicing fees paid to
Servicers were deemed to exceed reasonable servicing compensation, the amount
of such excess would be nondeductible under Code Section 162 or 212. In this
regard, there are no authoritative guidelines for federal income tax purposes
as to either the maximum amount of servicing compensation that may be
considered reasonable in the context of this or similar transactions or
whether, in the case of the Securities, the reasonableness of servicing
compensation should be determined on a weighted average or loan-by-loan basis.
If a loan-by-loan basis is appropriate, the likelihood that such amount would
exceed reasonable servicing compensation as to some of the Mortgage Assets
would be increased. Recently issued Internal Revenue Service guidance
indicates that a servicing fee in excess of reasonable compensation ("excess
servicing") will cause the Mortgage Assets to be treated under the "stripped
bond" rules. Such guidance provides safe harbors for servicing deemed to be
reasonable and requires taxpayers to demonstrate that the value of servicing
fees in excess of such amounts is not greater than the value of the services
provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a
servicer that receives excess servicing fees would be viewed as retaining an
ownership interest in a portion of the interest payments on the Mortgage
Assets. Under the rules of Code Section 1286, the separation of the right to
receive some of or all the interest payments on an obligation from the right
to receive some or all of the principal payments on the obligation would
result in treatment of such Mortgage Assets as "stripped coupons" and
"stripped bonds." While Securityholders would still be treated as owners of
beneficial interests in a grantor trust for federal income tax purposes, the
corpus of such trust could be viewed as excluding the portion of the Mortgage
Assets the ownership of which is attributed to a servicer, or as including
such portion as a second class of equitable interest. Applicable Treasury
regulations treat such an arrangement as a fixed investment trust, since the
multiple classes of trust interests should be treated as merely facilitating
direct investments in the trust assets and the existence of multiple classes
of ownership interests is incidental to that purpose. In general, such a
recharacterization should not have any significant effect upon the timing or
amount of income reported by a Securityholder, except that the income reported
by a cash method holder may be slightly accelerated. See "Stripped Securities"
below for a further description of the federal income tax treatment of
stripped bonds and stripped coupons.
In the alternative, the amount, if any, by which the servicing fees paid
to the servicers are deemed to exceed reasonable compensation for servicing
could be treated as deferred payments of purchase price by the Securityholders
to purchase an undivided interest in the Mortgage Assets. In such event, the
present value of such additional payments might be included in the
Securityholder's basis in such undivided interests for purposes of determining
whether the Security was acquired at a discount, at par, or at a premium.
Under this alternative, Securityholders may also be entitled to a deduction
for unstated interest with respect to each deferred payment. The Internal
Revenue Service may take the position that the specific statutory provisions
of Code Section 1286 described above override the alternative described in
this paragraph. Securityholders are advised to consult their tax advisors as
to the proper treatment of the amounts paid to the servicers as set forth
herein as servicing compensation or under either of the alternatives set forth
above.
Sale or Exchange of Securities. Upon sale or exchange of a Security, a
Securityholder will recognize gain or loss equal to the difference between the
amount realized on the sale and its aggregate adjusted basis in the Mortgage
Assets and other assets represented by the Security. In general, the aggregate
adjusted basis will equal the Securityholder's cost for the Security,
increased by the amount of any income previously reported with respect to the
Security and decreased by the amount of any losses previously reported with
respect to the Security and the amount of any distributions received thereon.
Except as provided above with respect to market discount on any Mortgage
Assets, and except for certain financial institutions subject to the
provisions of Code Section 582(c), any such gain or loss would be capital gain
or loss if the Security was held as a capital asset.
Stripped Securities
General. Pursuant to Code Section 1286, the separation of ownership of
the right to receive some of or all the principal payments on an obligation
from ownership of the right to receive some of or all the interest payments
results in the creation of "stripped bonds" with respect to principal payments
and "stripped coupons" with respect to interest payments. For purposes of this
discussion, Securities that are subject to those rules will be referred to as
"Stripped Securities." The Securities will be subject to those rules if (i)
the Depositor or any of its affiliates retains (for its own account or for
purposes of resale), in the form of fixed retained yield or otherwise, an
ownership interest in a portion of the payments on the Mortgage Assets, (ii)
the Depositor, any of its affiliates or a servicer is treated as having an
ownership interest in the Mortgage Assets to the extent it is paid (or
retains) servicing compensation in an amount greater than reasonable
consideration for servicing the Mortgage Assets (see "Standard Securities -
Recharacterization of the Servicing Fees" above) and (iii) a class of
Securities are issued in two or more classes or subclasses representing the
right to non pro rata percentages of the interest and principal payments on
the Mortgage Assets.
In general, a holder of a Stripped Security (a "Stripped Securityholder")
will be considered to own "stripped bonds" with respect to its pro rata share
of all or a portion of the principal payments on each Mortgage Loan and/or
"stripped coupons" with respect to its pro rata share of all or a portion of
the interest payments on each Mortgage Loan, including the Stripped Security's
allocable share of the servicing fees paid, to the extent that such fees
represent reasonable compensation for services rendered. See discussion above
under "Standard Securities - Recharacterization of Servicing Fees." For this
purpose the servicing fees will be allocated to the Stripped Securities in
proportion to the respective offering price of each class (or subclass) of
Stripped Securities. The holder of a Stripped Security generally will be
entitled to a deduction each year in respect of the servicing fees, as
described above under " - Federal Income Tax Consequences for Securities as to
Which No REMIC Election is Made - Standard Securities - General," subject to
the limitation described therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally
as a new obligation issued (i) on the date that the stripped interest is
purchased and (ii) at a price equal to its purchase price or, if more than one
stripped interest is purchased, the share of the purchase price allocable to
such stripped interest. Each stripped interest generally will have original
issue discount equal to the excess of its stated redemption price at maturity
(or, in the case of a stripped coupon, the amount payable on the due date of
such coupon) over its issue price. This treatment is based on the
interrelationship of Code Section 1286 and the regulations thereunder, Code
Sections 1272 through 1275, and the OID Regulations. While under Code Section
1286 computations with respect to Stripped Securities arguably should be made
in one of the ways described below, the OID Regulations state, in general,
that all debt instruments issued in connection with the same transaction must
be treated as a single debt instrument. The Trustee will make and report all
computations described below using this aggregate approach, unless substantial
legal authority requires otherwise.
Furthermore, the regulations under Code Section 1286 support the
treatment of a Stripped Security as a single debt instrument issued on the
date it is originated for purposes of calculating any original issue discount.
The preamble to such regulations state that such regulations are premised on
the assumption that an aggregation approach is appropriate in determining
whether original issue discount on a stripped bond or stripped coupon is de
minimis. In addition, under these regulations, a Stripped Security that
represents a right to payments of both interest and principal may be viewed
either as issued with original issue discount or market discount (as described
below), at a de minimis original issue discount, or presumably, at a premium.
The preamble to such regulations also provide that such regulations are
premised on the assumption that generally the interest component of such a
Stripped Security would be treated as stated interest under the original issue
discount rules. Further, the regulations provide that the purchaser of such a
Stripped Security may be required to account for any discount as market
discount rather than original issue discount if either (i) the initial
discount with respect to the Strip Security was treated as zero under the de
minimis rule or (ii) no more than 100 basis points in excess of reasonable
servicing is stripped off the related Mortgage Assets. Any such market
discount would be reportable as described above under "Federal Income Tax
Consequences for REMIC Securities - Taxation of Regular Securities - Market
Discount," without regard to the de minimis rule therein.
Status of Stripped Securities. No specific legal authority exists as to
whether the character of the Stripped Securities, for federal income tax
purposes, will be the same as that of the Mortgage Assets. Stripped Securities
owned by applicable holders should be considered to represent "qualifying real
property loans" within the meaning or Code Section 593(d)(1), "real estate
assets" within the meaning of Code Section 856(c)(A), "obligations(s) . . .
principally secured by an interest in real property" within the meaning of
Code Section 860G(a)(3)(A), and "loans . . . secured by an interest in real
property" within the meaning of Code Section 7701(a)(19)(C)(v), and interest
(including original issue discount) income attributable to Stripped Securities
should be considered to represent "interest on obligations secured by
mortgages on real property" within the meaning or Code Section 856(c)(3)(B),
provided that in each case the Mortgage Assets and interest on such Mortgage
Assets qualify for such treatment. The application of such Code provisions to
buy-down Mortgage Assets is uncertain. See " - Federal Income Tax Consequences
for Securities as to Which No REMIC Election is Made" and " - Standard
Securities - Tax Status" above.
Original Issue Discount. Except as described above under " - General,"
each Stripped Security will be considered to have been issued (i) on the date
that the stripped interest is purchased and (ii) at a price equal to its
purchase price or, if more than one stripped interest is purchased, the share
of the purchase price allocable to such stripped interest. Each stripped
interest generally will have original issue discount equal to the excess of
its stated redemption price at maturity (or, in the case of a stripped coupon,
the amount payable on the due date of such coupon) over its issue price.
Original issue discount with respect to a Stripped Security must be included
in ordinary income as it accrues, in accordance with a constant yield method
that takes into account the compounding of interest, which may be prior to the
receipt of the cash attributable to such income. The amount of original issue
discount required to be included in the income of a Stripped Securityholder in
any taxable year should be computed generally as described above under
"Federal Income Tax Consequences for REMIC Securities - Taxation of Regular
Securities - Original Issue Discount" and " - Variable Rate Regular
Securities." With the apparent exception of a Stripped Security issued with de
minimis original issue discount, as described above under " - General,"
however, the issue price of a Stripped Security will be the purchase price
paid by each holder thereof, and the stated redemption price at maturity will
include the aggregate amount of the payments to be made on the Stripped
Security to such Stripped Securityholder, presumably under the Prepayment
Assumption, other than amounts treated as qualified stated interest.
If the Mortgage Assets prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Stripped Securityholder's recognition of
original issue discount will be either accelerated or decelerated and the
amount of such original issue discount will be either increased or decreased
depending on the relative interests in principal and interest on each Mortgage
Loan represented by such Stripped Securityholder's Stripped Security. While
the 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 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, Brown & Wood LLP, 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 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, Brown &
Wood LLP, 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 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 Brown & Wood LLP,
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
Brown & Wood LLP.
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.
<PAGE>
APPENDIX
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Page
----
1986 Act.............................................44
1996 Act.............................................51
Agreement.............................................1
AMTI.................................................51
Applicable Accounting Standards......................28
Balloon Loans.........................................6
bankruptcy bond......................................19
Beneficial Owners.....................................4
BIF..................................................29
Book Entry Securities.................................4
Clearing Agency.......................................4
Clearing Agency Participants..........................4
Code..................................................4
Companion Securities.................................11
Compound Interest Securities.........................10
Contract Loan Schedule...............................27
Contracts............................................15
Cooperative Loans....................................14
Cooperatives..........................................1
Credit Enhancement....................................4
Custodial Account....................................21
Cut-Off Date.........................................10
Debt Securities......................................63
Defective Mortgage Loan..............................28
Delivery Date.........................................9
Deposit Date.........................................27
Depositor.............................................1
Disqualified Organization............................52
Distribution Date....................................11
DOL..................................................42
Eligible Investments.................................29
ERISA.................................................4
Events of Default....................................30
Exchange Act..........................................2
FDIC.................................................21
FHA...................................................2
FHLMC.................................................2
Financial Guaranty Insurance Policy..................17
Financial Guaranty Insurer...........................17
Fitch.................................................5
FNMA..................................................2
Garn-St. Germain Act.................................37
GNMA..................................................2
Indenture.............................................1
Indenture Trustee.....................................1
Insurance Paying Agent...............................17
Insurance Proceeds...................................20
Insured Payment......................................17
Interest Accrual Period..............................12
Liquidation Proceeds.................................20
Loan-to-Value Ratio..................................15
lockout periods......................................15
Mark to Market Regulations...........................50
Master Servicer.......................................1
MBS..................................................16
Monthly Advance......................................21
Moody's...............................................5
Mortgage Assets.......................................1
Mortgage Loans........................................1
Mortgage Notes.......................................14
Mortgage Pool Insurance Policy.......................18
Mortgage Rates.......................................15
Mortgage-Backed Securities............................2
Mortgaged Properties.................................14
Mortgages............................................14
Mortgagors...........................................20
NCUA.................................................21
Noneconomic Residual Interest........................53
Non-Priority Securities..............................11
Nonrecoverable Advance...............................21
Non-U.S. Person......................................56
Notional Principal Balance...........................12
OID Regulations......................................43
Original Value.......................................15
OTS..................................................37
Owners...............................................11
Parties in Interest..................................42
Partnership Interests................................64
Pass-Through Entity..................................52
Pass-Through Rate.....................................3
Plans................................................41
Policy Statement.....................................41
Pool Insurer.........................................18
Pre-Funding Account...................................3
Pre-Funding Agreement.................................3
Prepayment Assumption................................45
Principal Balance....................................15
Principal Prepayments................................12
Priority Securities..................................11
PTE 83-1.............................................42
Rating Agency.........................................5
Record Date..........................................11
Regular Securities...................................43
Regular Securityholder...............................44
REIT.................................................43
Relief Act............................................8
REMIC.................................................4
REMIC Pool...........................................43
REMIC Regulations....................................43
REMIC Securities.....................................43
Remittance Date......................................21
Remittance Rate......................................21
Reserve Fund.........................................19
Residual Securities..................................43
Residual Securityholders.............................49
Retail Class Security................................45
S&P...................................................5
SAIF.................................................29
Scheduled Amortization Securities....................11
Securities............................................1
Securities............................................1
Security Account.....................................11
Security Interest Rate...............................10
Security Principal Balance............................9
Security Register....................................10
Security Registrar...................................10
Securityholder.......................................57
Seller................................................1
Senior Securities....................................16
Servicer..............................................1
SMMEA.................................................5
Special Allocation Securities........................11
Special Hazard Insurance Policy......................18
Special Hazard Insurer...............................19
Standard Security....................................57
Stripped Securities..................................60
Stripped Securityholder..............................60
Subordinated Securities..............................16
Thrift Institution...................................43
Title I Program......................................40
TMP..................................................44
Trust.................................................1
Trustee...............................................1
U.S. Person..........................................53
UCC..................................................35
Underwriters.........................................64
VA....................................................2
