<PAGE>
As filed with the Securities and Exchange Commission on May 22, 1996
Registration No. 33- 65373
============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3 TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FIRSTPLUS INVESTMENT CORPORATION
(Exact name of registrant as specified in governing instruments)
NEVADA 75-2596063
(State of incorporation) (I.R.S. Employer Identification No.)
1250 MOCKINGBIRD LANE RONALD M. MANKOFF
DALLAS, TEXAS 75247-4902 1250 MOCKINGBIRD LANE
(214) 630-6006 DALLAS, TEXAS 75247-4902
(Address of principal (214) 630-6006
executive offices) (Name and address of agent for service)
Copies to:
MICHAEL THIMMIG
Andrews & Kurth L.L.P.
4400 Thanksgiving Tower
1601 Elm Street
Dallas, Texas 75201
(214) 979-4400
Approximate date of commencement of proposed sale to public. FROM TIME TO
TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT AS DETERMINED BY
MARKET CONDITIONS AND PURSUANT TO RULE 415.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, please check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
-----------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==================================================================================================
Proposed Maximum Proposed Maximum
Title of Securities Amount Being Offering Price Aggregate Amount of
Being Registered Registered Per Unit* Offering Price Registration Fee
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset-Backed Certificates $1,000,000,000 100% $1,000,000,000 $344,827
==================================================================================================
</TABLE>
* Estimated solely for purposes of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
============================================================================
<PAGE>
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
LOCATION IN PROSPECTUS
ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS SUPPLEMENT
----------------------- ---------------------- ----------
<S> <C> <C> <C>
1. Forepart of Registration Statement Forepart of Registration Outside Front Cover Page
and Outside Front Cover Page of Statement; Outside Front Cover
Prospectus Page
2. Inside Front and Outside Back Inside Front Cover Page; Outside Back Cover Page
Cover Pages of Prospectus
3. Summary Information, Risk Factors Summary of Prospectus; Available Summary of Prospectus
and Ratio of Earnings to Fixed Information; Risk Factors Supplement; Risk Factors
Charges
4. Use of Proceeds Use of Proceeds Use of Proceeds
5. Determination of Offering Price * *
6. Dilution * *
7. Selling Security Holders * *
8. Plan of Distribution Plan of Distribution Underwriting
9. Description of Securities to be Outside Front Cover Page; Outside Front Cover Page;
Registered Summary of Prospectus; Summary of Prospectus
Description of the Certificates; Supplement; The
Assets Securing or Underlying the Mortgage Loan Pool; The
Certificates; Credit Enhancement; Guaranty Policy;
Servicing of the Mortgage Loans Prepayment and Yield Considerations;
and Contracts; The Pooling and Description of the Certificates;
Servicing Agreement; The Description of Book Entry
Trustee; ERISA Considerations; Procedures; Certain Federal
Certain Federal Income Tax Income Tax Consequences;
Consequences; State Tax ERISA Considerations
Consequences
10. Interests of Named Experts and Legal Matters Legal Matters
Counsel
11. Material Changes * *
12. Incorporation of Certain Information Incorporation of Certain *
by Reference Documents by Reference
</TABLE>
___________________
* Answer negative or item inapplicable.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
<PAGE>
PROSPECTUS SUPPLEMENT SUBJECT TO COMPLETION; DATED MAY __, 1996
(To Prospectus dated ___________, 199__)
$_______________
FIRSTPLUS INVESTMENT CORPORATION
(Depositor)
FIRSTPLUS FINANCIAL, INC.
(Transferor and Servicer)
FIRSTPLUS HOME LOAN ASSET-BACKED CERTIFICATES, SERIES 199__-__
$__________ _____% Class A-1 Certificates
$__________ _____% Class A-2 Certificates
$__________ _____% Class A-3 Certificates
$__________ _____% Class A-4 Certificates
The FIRSTPLUS Home Loan Asset-Backed Certificates, Series 199__-__ (the
"SERIES 199__-__"), will consist of the following classes: (i) the Class A-1
Certificates, the Class A-2 Certificates, the Class A-3 Certificates and the
Class A-4 Certificates (collectively, the "CLASS A CERTIFICATES" or the "SENIOR
CERTIFICATES"), (ii) the Class B Certificates (the "CLASS B CERTIFICATES") and
(iii) the Class R Certificates (the "CLASS R CERTIFICATES"). The Class R
Certificates and the Class B Certificates are collectively referred to as the
"SUBORDINATED CERTIFICATES"; and the Senior Certificates and the Subordinated
Certificates are collectively referred to as the "CERTIFICATES". Only the
Senior Certificates are offered hereby (the "OFFERED CERTIFICATES"). It is a
condition to the issuance of the Offered Certificates that the each be rated
"_____" by Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
("STANDARD & POOR'S") and "_____" by Moody's Investors Service ("MOODY'S").
For capitalized terms used but not defined herein, SEE the "Index to
Location of Principal Terms" included as an Appendix A to both this Prospectus
Supplement and the Prospectus.
BEFORE PURCHASING ANY OFFERED CERTIFICATES PROSPECTIVE INVESTORS SHOULD
REVIEW THE INFORMATION SET FORTH HEREIN AND IN THE PROSPECTUS, SEE "RISK
FACTORS" BEGINNING ON PAGE S-__ AND "PREPAYMENT AND YIELD CONSIDERATIONS"
BEGINNING ON PAGE S-__ HEREIN, AND SEE "RISK FACTORS" BEGINNING ON PAGE __ IN
THE PROSPECTUS. (cover continued on next page)
____________________
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON
THE OFFERED CERTIFICATES. THE OFFERED CERTIFICATES REPRESENT INTERESTS IN THE
TRUST FUND ONLY AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE
DEPOSITOR, TRANSFEROR, SERVICER, TRUSTEE OR ANY OF THEIR AFFILIATES. NEITHER
THE OFFERED CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE DEPOSITOR, TRANSFEROR OR ANY OF
THEIR AFFILIATES OR ANY OTHER PERSON, EXCEPT THAT THE TITLE I MORTGAGE LOANS
WILL BE PARTIALLY INSURED BY THE FHA AND THE OFFERED CERTIFICATES WILL BE
INSURED UNDER THE GUARANTY POLICY ISSUED BY THE CERTIFICATE INSURER.
____________________
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 SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
____________________
The Offered Certificates will be purchased by the Underwriter from the
Depositor and will be offered by the Underwriter from time to time in negotiated
transactions or otherwise at varying prices to be determined, in each case, at
the time of sale. Proceeds to the Depositor from the sale of the Offered
Certificates will be approximately ____% of the Original Principal Balance of
the Offered Certificates sold, before deducting certain expenses. The Offered
Certificates are offered subject to prior sale, when, as, and if accepted by the
Underwriter, and subject to the Underwriter's right to reject any order in whole
or in part. It is expected that delivery of each Class of the Offered
Certificates will be made in book-entry form only through the facilities of The
Depository Trust Company on or about ______________, 199__.
[UNDERWRITER]
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS ____________, 199__
<PAGE>
The Class A-1, Class A-2, Class A-3 and Class A-4 Certificates will have
initial aggregate principal balances of the approximate dollar amounts set forth
above for each such Class, respectively (the "ORIGINAL CLASS PRINCIPAL
BALANCES"), which in the aggregate, together with the Original Class Principal
Balances of the Class B Certificates, will equal ____% of the sum of the
outstanding principal balances of the Initial Mortgage Loans as of the
_____________, 199__ Cut-Off Date of approximately $_____________, plus the
amount deposited into the Pre-Funding Account as described herein of
approximately $___________. Each of the Offered Certificates will be insured
under a Certificate Guaranty Insurance Policy (the "GUARANTY POLICY") issued by
_________________________ (the "CERTIFICATE INSURER") as described herein, SEE
"The Guaranty Policy" herein, but the Subordinated Certificates will not be so
guaranteed.
The Certificates will evidence in the aggregate the entire beneficial
ownership interest in a trust fund (the "TRUST FUND"), to be formed pursuant
to a Pooling and Servicing Agreement dated as of _____________, 199__ (the
"POOLING AND SERVICING AGREEMENT"), between FIRSTPLUS INVESTMENT CORPORATION,
as depositor (the "DEPOSITOR"), FIRSTPLUS FINANCIAL, INC., as transferor and
servicer (in its capacity as such, the "TRANSFEROR" or the "SERVICER",
respectively), and _______________________________, as trustee (the
"TRUSTEE"). The Trust Fund will consist primarily of certain fixed-rate,
fully amortizing property improvement and/or debt consolidation loans
conveyed to the Trust Fund on or before the Closing Date (the "INITIAL
MORTGAGE LOANS"), any additional property improvement and/or debt
consolidation loans conveyed to the Trust Fund during the Funding Period, as
described herein (the "SUBSEQUENT MORTGAGE LOANS", and together with the
Initial Mortgage Loans, the "MORTGAGE LOANS"), funds on deposit in a trust
account to acquire such Subsequent Mortgage Loans (the "PRE-FUNDING ACCOUNT")
and certain other property. All such Mortgage Loans will be secured by liens
(substantially all of which are junior liens) on the related real properties.
Approximately _____% of the Initial Mortgage Loans (by outstanding principal
balance) will be conventional (i.e., not insured or guaranteed by a
governmental agency) property improvement and/or debt consolidation loans
("CONVENTIONAL MORTGAGE LOANS"), and approximately ____% of the Initial
Mortgage Loans (by outstanding principal balance) will be property
improvement loans that will be partially insured ("TITLE I MORTGAGE LOANS")
by the Federal Housing Administration (the "FHA") of the United States
Department of Housing and Urban Development ("HUD"), subject to the
satisfaction of certain regulatory requirements as described herein, pursuant
to Title I of the National Housing Act of 1934, as amended.
THE MORTGAGE LOANS WILL NOT BE COVERED BY ANY MORTGAGE GUARANTY INSURANCE,
ANY SPECIAL HAZARD INSURANCE, ANY FRAUD INSURANCE OR ANY INSURANCE COVERING
CERTAIN LOSSES RESULTING FROM MORTGAGOR BANKRUPTCY PROCEEDINGS, EXCEPT THAT THE
TITLE I MORTGAGE LOANS WILL BE PARTIALLY INSURED BY THE FHA. The obligations of
the FHA with respect to the insurance concerning the Title I Mortgage Loans will
not be unlimited or unconditional obligations of the FHA, but will be limited by
the amount of insurance coverage available to reimburse for losses on the Title
I Mortgage Loans pursuant to, and will be conditioned upon compliance with, the
regulations and rules of the FHA under the Title I Program as described herein
and in the Prospectus. The FHA insurance coverage available for the Title I
Mortgage Loans may not be sufficient to reimburse all insurable losses on the
Title I Mortgage Loans. SEE "Risk Factors -- Additional Credit Enhancement
Limitations -- Limitations on FHA Insurance" herein, and "Risk Factors -- Credit
Enhancement Limitations -- Limitations on FHA Insurance for Title I Loans" and
"Certain Legal Aspects of Mortgage Assets -- The Title I Program" in the
Prospectus.
Distributions on the Certificates will be made on the 20th day of each
month, or, if such day is not a business day, then on the next business day,
commencing on ______________, 199__ (each, a "DISTRIBUTION DATE"). On each
Distribution Date, holders of the Certificates will be entitled to receive, from
and to the extent that funds are available therefor in the Certificate Account,
distributions with respect to interest and principal calculated as described
herein. SEE "Description of the Certificates" herein.
As described herein, a "real estate mortgage investment conduit" ("REMIC")
election will be made with respect to the Trust Fund (other than the Pre-Funding
Account and the Capitalized Interest Account) for federal income tax purposes.
The Offered Certificates constitute "regular interests" in the REMIC. SEE
"Certain Federal Income Tax Consequences" herein and in the Prospectus.
The yield to maturity on the Offered Certificates will depend on (i) the
rate and timing of principal reductions of the Class Principal Balances for the
Offered Certificates from the receipt of payments of principal and interest on
and other principal reductions of the Mortgage Loans (including scheduled
payments, prepayments, delinquencies, recognition of defaults and allocation of
losses by the Servicer, and substitutions and repurchases by the Transferor and
the Depositor),
ii
<PAGE>
substantially all of which may be prepaid at any time without penalty, (ii) any
principal reductions of the Class Principal Balances of the Offered Certificates
from amounts remaining on deposit in the Pre-Funding Account after the
termination of the Funding Period, and (iii) the price paid for the Offered
Certificates by the holders thereof. Potential investors should carefully
consider the associated risks. SEE "Risk Factors" and "Prepayment and Yield
Considerations" herein.
____________________
THE OFFERED CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT WILL BE PART
OF A SEPARATE SERIES OF CERTIFICATES ISSUED BY THE DEPOSITOR AND ARE BEING
OFFERED PURSUANT TO ITS PROSPECTUS DATED _____________, OF WHICH THIS PROSPECTUS
SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE
PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS OFFERING THAT IS NOT
CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND
THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE OFFERED CERTIFICATES MAY NOT
BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission a
Registration Statement under the Securities Act of 1933 with respect to the
Certificates. This Prospectus Supplement and the related Prospectus, which form
a part of the Registration Statement, omit certain information contained in such
Registration Statement pursuant to the Rules and Regulations of the Commission.
The Registration Statement can be inspected and copied at the Public Reference
Room of the Commission at 450 Fifth Street, N.W. Washington, D.C., and the
Commission's regional offices at Seven World Trade Center, 13th Floor, New York,
New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such materials can be obtained as
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549.
REPORTS TO OWNERS
Monthly and annual reports concerning the Certificates and the Trust Fund
will be sent by the Trustee to the Beneficial Owners of the Offered
Certificates. So long as any Offered Certificate is in book-entry form, such
reports will be sent to Cede & Co., as the nominee of DTC and as the registered
owner of such Offered Certificates pursuant to the Pooling and Servicing
Agreement. DTC will supply such reports to Owners of any such Offered
Certificates in accordance with its procedures.
iii
<PAGE>
TABLE OF CONTENTS
FOR PROSPECTUS SUPPLEMENT
PAGE
SUMMARY OF PROSPECTUS SUPPLEMENT.............................................S-1
RISK FACTORS................................................................S-15
Acquisition of Subsequent Mortgage Loans from Pre-Funding Account....S-15
Additional Effect of Prepayments on Yield............................S-15
Additional Credit Enhancement Limitations............................S-16
Limitations on Rights of Majority Certificateholders.................S-17
Delinquency Status of Initial Mortgage Loans.........................S-17
Additional Factors Affecting Delinquencies, Foreclosures and Losses
on Mortgage Loans....................................................S-18
Limitations on Repurchase or Replacement of Defective Mortgage Loans
by Transferor........................................................S-20
Limitations on Liquidity of Transferor and Servicer..................S-21
Bankruptcy Recharacterization of Sale of Mortgage Loans..............S-21
USE OF PROCEEDS.............................................................S-21
THE MORTGAGE LOAN POOL......................................................S-22
General..............................................................S-22
Characteristics of Initial Mortgage Loans............................S-22
Conveyance of Subsequent Mortgage Loans..............................S-25
THE GUARANTY POLICY.........................................................S-25
General..............................................................S-25
The Certificate Insurer..............................................S-27
FHA INSURANCE FOR TITLE I MORTGAGE LOANS....................................S-28
General..............................................................S-28
Transfer of FHA Insurance............................................S-28
Submission of FHA Claims.............................................S-29
THE DEPOSITOR...............................................................S-30
THE TRANSFEROR AND SERVICER.................................................S-30
General..............................................................S-30
Underwriting Criteria................................................S-31
Repurchase or Substitution of Mortgage Loans.........................S-31
Servicing and FHA Claims Experience..................................S-32
PREPAYMENT AND YIELD CONSIDERATIONS.........................................S-33
General..............................................................S-33
Excess Spread Distributions..........................................S-35
Reinvestment Risk....................................................S-36
Weighted Average Life of the Offered Certificates....................S-36
DESCRIPTION OF THE CERTIFICATES.............................................S-40
General..............................................................S-40
Collection Account and Certificate Account...........................S-40
FHA Insurance Premium Account........................................S-41
Income from Accounts.................................................S-41
Available Remittance Amount..........................................S-41
Distributions on the Offered Certificates............................S-42
Class A Overcollateralization........................................S-45
iv
<PAGE>
Subordination and Allocation of Losses...............................S-46
Reports to Certificateholders........................................S-48
Assignment of Mortgage Loans.........................................S-48
Pre-Funding Account..................................................S-49
Capitalized Interest Account.........................................S-50
Trust Fund Fees and Expenses.........................................S-51
Servicing............................................................S-51
The Trustee..........................................................S-51
Termination..........................................................S-51
The Certificates; Restrictions on Transfer....................... ...S-51
DESCRIPTION OF BOOK ENTRY PROCEDURES........................................S-51
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.....................................S-52
ERISA CONSIDERATIONS........................................................S-52
LEGAL INVESTMENT............................................................S-53
RATINGS.....................................................................S-53
LEGAL MATTERS...............................................................S-54
UNDERWRITING................................................................S-54
APPENDIX A -- INDEX TO LOCATION OF PRINCIPAL TERMS..........................A-1
APPENDIX B -- AUDITED FINANCIAL STATEMENTS FOR THE CERTIFICATE INSURER......B-1
v
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
The following Summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Certain capitalized terms that are used in this
Summary may be defined elsewhere in this Prospectus Supplement or in the
Prospectus. SEE "Index to Location of Principal Terms" included as an Appendix
A to both this Prospectus Supplement and the Prospectus. Capitalized terms that
are used but not defined in this Prospectus Supplement will have the meanings
specified in the Prospectus.
Issuer . . . . . . . . . FIRSTPLUS Home Loan Asset-Back Certificates,
Trust 199_-_ (the "TRUST FUND").
Offered Certificates . . The FIRSTPLUS Home Loan Asset-Backed
Certificates, Series 199__-__, to be issued in the
following Classes:
$_______________ Original Class Principal Balance
of Class A-1 Certificates with a ____% Certificate
Interest Rate and an Assumed Final Distribution
Date in _____________, 20__;
$_______________ Original Class Principal Balance
of Class A-2 Certificates with a ____% Certificate
Interest Rate and an Assumed Final Distribution
Date in ______________, 20__;
$_______________ Original Class Principal Balance
of Class A-3 Certificates with a ____% Certificate
Interest Rate and an Assumed Final Distribution
Date in _______________ 20__; and
$_______________ Original Class Principal Balance
of Class A-4 Certificates with a ____% Certificate
Interest Rate and an Assumed Final Distribution
Date in _______________ 20__.
The Class A-1 Certificates, the Class A-2
Certificates, the Class A-3 Certificates and the
Class A-4 Certificates are collectively, referred
to herein as the "CLASS A CERTIFICATES" or the
"SENIOR CERTIFICATES". Only the Senior
Certificates are offered hereby (the "OFFERED
CERTIFICATES").
The "ASSUMED FINAL DISTRIBUTION DATES" for each
Class of Offered Certificates set forth above are
merely estimates of the final Distribution Dates
and are based upon the assumption that the
aggregate Cut-Off Date Principal Balances of the
Subsequent Mortgage Loans conveyed to the Trust
Fund equals the Pre-Funding Account Deposit, that
such Subsequent Mortgage Loans are all delivered
to the Trust Fund on the Closing Date and that the
Mortgage Loans amortize with no prepayments,
delinquencies, liquidations, substitutions or
repurchases thereof and that the Excess Spread (as
defined below) is distributed in reduction of the
Class Principal Balances of the Class A
Certificates until the Class A
Overcollateralization Level (as defined below) has
been met. The actual maturity of any Class of
Offered Certificates may be substantially earlier,
and in certain instances could be later, than the
Assumed Final Distribution Date of such Class set
forth above. SEE "Prepayment and Yield
Considerations" herein.
Depositor. . . . . . . . FIRSTPLUS INVESTMENT CORPORATION, a Nevada
corporation, as the depositor of the Mortgage
Loans (the "DEPOSITOR").
S-1
<PAGE>
Transferor . . . . . . . FIRSTPLUS FINANCIAL, INC. ("FFI"), a
Texas corporation, and one or more affiliated
corporations of FFI, each as a transferor of
Mortgage Loans to the Depositor (in such capacity,
individually or collectively, the "TRANSFEROR").
Each Transferor, including FFI, is wholly-owned
either directly or indirectly by RAC Financial
Group, Inc. ("RAC").
Servicer . . . . . . . . FFI as the servicer of the Mortgage Loans under
the Pooling and Servicing Agreement (in such
capacity, the "SERVICER").
Trustee. . . . . . . . . ________________________ (the "TRUSTEE").
Custodian. . . . . . . . ________________________ or another person which
the Servicer and the Trustee agree upon as
custodian (the "CUSTODIAN").
Description of Certificates
The FIRSTPLUS Home Loan Asset-Backed Certificates,
Series 199__-__ (the "CERTIFICATES") will represent
an undivided beneficial ownership interest in a
trust fund (the "TRUST FUND"), created pursuant to
a Pooling and Servicing Agreement dated as of
__________________, 199__ (the "POOLING AND
SERVICING AGREEMENT"), between FIRSTPLUS
INVESTMENT CORPORATION, as depositor, FIRSTPLUS
FINANCIAL, INC., as transferor and
servicer, and __________________________________,
as trustee. In addition to the Offered
Certificates, the Certificates also include the
Class B Certificates and the Class R
Certificates (collectively, the "SUBORDINATED
CERTIFICATES"), which are not being offered
hereby.
The Trust Fund will consist primarily of: (i) a
pool of certain property improvement and/or debt
consolidation loans conveyed to the Trust Fund on
or before the Closing Date (the "INITIAL MORTGAGE
LOANS"); any additional property improvement
and/or debt consolidation loans conveyed to the
Trust Fund during the Funding Period (the
"SUBSEQUENT MORTGAGE LOANS", and together with the
Initial Mortgage Loans, the "MORTGAGE LOANS");
(ii) except as specified below, payments in
respect of the Mortgage Loans received after
__________________, 199__, in the case of the
Initial Mortgage Loans, and the related cut-off
date for any Subsequent Mortgage Loans (in each
case, a "CUT-OFF DATE"); (iii) amounts on deposit
in the Pre-Funding Account and the Capitalized
Interest Account (as defined herein) until the end
of the Funding Period; (iv) the Guaranty Policy
issued by the Certificate Insurer; and (v) certain
other funds, rights and property related to the
foregoing. The Transferor will retain accrued
interest at the respective Mortgage Loan Rates on
the principal amount of the Initial Mortgage Loans
up to the Closing Date and of the Subsequent
Mortgage Loans up to the related Subsequent
Transfer Date. The Trust Fund will include the
unpaid principal balance of each Mortgage Loan as
of the related Cut-Off Date (the "CUT-OFF DATE
PRINCIPAL BALANCE"). The "PRINCIPAL BALANCE" of a
Mortgage Loan on any day is equal to its related
Cut-Off Date Principal Balance, minus all
principal reductions credited against the
Principal Balance of such Mortgage Loan since such
Cut-Off Date, including any net loan losses
recorded by the Servicer. With respect to any
date, the "POOL PRINCIPAL BALANCE" will be equal
to the aggregate of the Principal Balances of all
Mortgage Loans as of such date.
On the Closing Date, the "INITIAL POOL PRINCIPAL
BALANCE" will be equal to the aggregate Principal
Balances of the Initial Mortgage Loans as of
__________________, 199__, the related Cut-Off
Date, which is expected to equal approximately
$_____________. On the Closing Date, the "ASSUMED
POOL PRINCIPAL BALANCE" will be equal to the sum
of the Initial Pool Principal Balance, plus the
Pre-Funding Account Deposit, which sum is expected
to equal approximately $_______________.
S-2
<PAGE>
Each of the Offered Certificates will be insured
under a Guaranty Policy issued by the Certificate
Insurer as described herein, SEE "The Guaranty
Policy", but the Subordinated Certificates will
not be so guaranteed.
Form, Denomination
and Registration . . . The Offered Certificates will initially be issued
only in book-entry form. Persons acquiring
beneficial ownership interests in any Class of
Offered Certificates (each a "BENEFICIAL OWNER")
will hold their Certificates through the book
entry facilities of The Depository Trust Company
("DTC"). So long as each Class of Offered
Certificates is in book-entry form, each such
Class of Offered Certificates will be evidenced by
one or more certificates registered in the name of
the nominee of DTC. The interests of such
Beneficial Owners will be represented by book-
entries on the records of DTC and participating
members thereof. No Beneficial Owners will be
entitled to receive a definitive certificate
representing such person's interest, except in the
event that Definitive Certificates (as defined
herein) are issued under the limited circumstances
described herein. All references in this
Prospectus Supplement to any Class of Offered
Certificates reflect the rights of Beneficial
Owners only as such rights may be exercised
through DTC and its participating members for so
long as such Class of Offered Certificates are
held by DTC. SEE "Description of Book Entry
Procedures" herein. Beneficial ownership
interests in each Class of Offered Certificates
will be issued only in minimum denominations of
$250,000 and integral multiples of $5,000 in
excess thereof; provided, however, that one or
more beneficial ownership interests in each Class
of Offered Certificates may be issued in a
different denomination such that the aggregate
initial principal balance of such Class of Offered
Certificates will equal the Original Class
Principal Balance of such Class.
The Mortgage Loan Pool . The "MORTGAGE LOAN POOL" will consist of the
collective pool of the Initial Mortgage Loans
together with any Subsequent Mortgage Loans
conveyed to the Trust Fund after the Closing Date.
All of the Mortgage Loans will be fixed rate,
fully-amortizing property improvement and/or debt
consolidation loans, that will be evidenced by
promissory notes, retail installment sales
contracts, or other evidences of indebtedness (the
"NOTES") and will be secured by mortgages, deeds
of trust or other similar security instruments
(the "MORTGAGES") creating a lien or security
interest on single family (one-to-four unit)
residences, units in planned unit developments,
units in condominium developments and town homes
(the "MORTGAGED PROPERTIES"). Substantially all of
these Mortgages will be junior (i.e., second,
third, etc.) in priority to one or more senior
liens on the related Mortgaged Properties, which
consist primarily of owner occupied single family
residences. The Mortgage Loans have scheduled
monthly payment dates throughout a month. A
majority of the Mortgage Loans will not be insured
or guaranteed by a governmental agency (the
"CONVENTIONAL MORTGAGE LOANS"); while the
remainder of the Mortgage Loans will be partially
insured to the extent described herein by the FHA
under the Title I Program (the "TITLE I MORTGAGE
LOANS"). The Conventional Mortgage Loans will
consist of mortgage loans for which the proceeds
thereof were used as follows: to finance property
improvements ("CONVENTIONAL HOME IMPROVEMENT
LOANS"), for debt consolidation purposes
("CONVENTIONAL DEBT CONSOLIDATION LOANS"), and in
combination to finance approximately 50% property
improvements and approximately 50% for other
purposes, which are marketed by the Transferor
under the name "BUSTER-TM- LOANS" ("CONVENTIONAL
COMBINATION LOANS").
The Initial Mortgage Loans included in the
Mortgage Loan Pool will consist of approximately
___________ loans, having an Initial Pool
Principal Balance of approximately
$_______________. SEE "The Mortgage Loan Pool"
herein. The Initial Mortgage Loans (by
outstanding principal balance) will be
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comprised of the following: approximately ___%
will be Title I Mortgage Loans; and approximately
___% will be Conventional Mortgage Loans, of which
approximately ___% will be Conventional Home
Improvement Loans, approximately ___% will be
Conventional Debt Consolidation Loans and
approximately ___% will be Conventional
Combination Loans. The statistical information
presented in this Prospectus Supplement regarding
the Mortgage Loan Pool is based only on the
Initial Mortgage Loans proposed to be included in
the Mortgage Loan Pool as of the date of this
Prospectus Supplement, and does not take into
account any Subsequent Mortgage Loans that may be
added to the Mortgage Loan Pool during the Funding
Period through application of amounts in the Pre-
Funding Account. In addition, prior to the
Closing Date, the Transferor may remove any of the
Initial Mortgage Loans intended for inclusion in
the Mortgage Loan Pool, substitute comparable
loans therefor, or add comparable loans thereto;
however, the aggregate principal balance of
Initial Mortgage Loans so removed, replaced or
added will not exceed 5.0% of the Initial Pool
Principal Balance. If, prior to the Closing Date,
mortgage loans are removed from or added to the
Mortgage Loan Pool as described herein, an amount
equal to the aggregate principal balances of such
mortgage loans will be added to or deducted from,
respectively, the Pre-Funding Account Deposit on
the Closing Date. As a result of the foregoing,
the statistical information presented herein
regarding the Initial Mortgage Loans proposed to
be included in the Mortgage Loan Pool as of the
date of this Prospectus Supplement may vary in
certain respects from comparable information based
on the actual composition of the Mortgage Loan
Pool at the Closing Date or any Subsequent
Transfer Date.
The Depositor and the Transferor each have the
option (1) to remove Mortgage Loans and substitute
Qualified Substitute Mortgage Loans (as defined
below) during the three month period beginning on
the Closing Date up to an aggregate amount of not
more than __%, without Certificate Insurer
approval, and __%, with Certificate Insurer
approval, of the aggregate Cut-Off Date Principal
Balances of the Mortgage Loans, and (2) to
repurchase any Mortgage Loan incident to the
foreclosure, default or imminent default thereof
at any time after the Closing Date. As used
herein, a "Qualified Substitute Mortgage Loan" will
have characteristics that are generaly the same as
or similar to the characteristics of the Mortgage
Loan which it replaces. See "The Transferor and
the Servicer -- Repurchase or Substitution of
Mortgage Loans".
Acquisition and Origination
of Mortgage Loans. . . Generally, the Mortgage Loans will have been
originated or acquired by the Transferor in one of
four ways: (i) the indirect origination and
purchase of retail installment sales contracts
from a network of independent contractors or
dealers professionally installing property
improvements ("indirect originations"); (ii) the
origination of loans directly to consumers,
including solicitations through direct mail and
telemarketing ("direct originations"); (iii) the
wholesale purchase of loans, on a flow basis,
originated by other unaffiliated lenders, as
correspondents ("correspondent originations"); or
(iv) the purchase, on a bulk basis, of loan
portfolios originated by other unaffiliated
lenders ("portfolio acquisitions"). All of the
Mortgage Loans will be acquired by the Transferor
and sold by the Transferor to the Depositor, who
in turn will convey such Mortgage Loans to the
Trust Fund. The Transferor will retain accrued
interest at the respective Mortgage Loan Rates on
the principal amount of the Initial Mortgage Loans
up to the Closing Date and the Subsequent Mortgage
Loans up to the related Subsequent Transfer Date,
respectively. SEE "Risk Factors -- Additional
Factors Affecting Delinquencies, Foreclosures and
Losses on Mortgage Loans" and "The Mortgage Loan
Pool" herein.
Pre-Funding Account. . . On the Closing Date, the Depositor will direct
that a portion of the sales proceeds from the
Offered Certificates, in the amount of
approximately
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$_______________ (the "PRE-FUNDING ACCOUNT
DEPOSIT"), be deposited in an Eligible Account
(the "PRE-FUNDING ACCOUNT") maintained by and in
the name of the Trustee for the purchase of
Subsequent Mortgage Loans after the Closing Date.
The Pre-Funding Account Deposit will be increased
or decreased by an amount equal to the aggregate
of the principal balances of any mortgage loans
removed from or added to, respectively, the
Mortgage Loan Pool prior to the Closing Date as
described herein, provided that any such increase
or decrease will not exceed ____% of the Initial
Pool Principal Balance. SEE "The Mortgage Loan
Pool" herein. During the period (the "FUNDING
PERIOD") from the Closing Date until the earlier
of (i) the date on which the amount on deposit in
the Pre-Funding Account is reduced below
$_____________ and (ii) __________________, 199__
the amount on deposit in the Pre-Funding Account
will be reduced by the amount used to purchase
Subsequent Mortgage Loans after the Closing Date
in accordance with the applicable provisions of
the Pooling and Servicing Agreement; provided that
the Funding Period will be subject to an earlier
termination if insufficient funds are on deposit
in the Capitalized Interest Account on any
Determination Date to cover any interest shortfall
for distributions to the Class A Certificates and
the Class B Certificates on the immediately
following Distribution Date. Subsequent Mortgage
Loans purchased by and added to the Trust Fund on
any Subsequent Transfer Date (as defined below)
must satisfy the criteria set forth in the Pooling
and Servicing Agreement and must be approved by
the Certificate Insurer. After each transfer of
Subsequent Mortgage Loans to the Trust Fund it is
expected that the Pool Principal Balance will
consist of approximately ____% to ____%
Conventional Mortgage Loans and approximately
____% to ____% Title I Mortgage Loans. SEE "The
Mortgage Loan Pool -- Conveyance of Subsequent
Mortgage Loans" herein. Any date on which such
Subsequent Mortgage Loans will be conveyed by the
Depositor to the Trust Fund after the Closing Date
is a "SUBSEQUENT TRANSFER DATE."
On the Distribution Date following the Due Period
in which such Funding Period ends, the portion of
the Pre-Funding Account Deposit that is remaining
at the end of the Funding Period (net of
reinvestment income which will be transferred to
the Capitalized Interest Account) will be applied
only to reduce the Class Principal Balance of each
Class of Offered Certificates, on a pro rata
basis. Although it is intended that the principal
amount of the Subsequent Mortgage Loans sold to
the Trust Fund after the Closing Date will require
application of substantially all of the Pre-
Funding Account Deposit, and it is not currently
anticipated that there will be any material amount
of principal distributions from amounts remaining
on deposit in the Pre-Funding Account in reduction
of the Class Principal Balances of the Offered
Certificates, no assurance can be given that such
a distribution with respect to the Offered
Certificates will not occur on the Distribution
Date following the Due Period in which the Funding
Period ends. In any event, it is unlikely that
the aggregate principal balances of the Subsequent
Mortgage Loans transferred to the Trust Fund will
be exactly equal to the Pre-Funding Account
Deposit, and thus, some portion of the Pre-Funding
Account Deposit remaining at the end of the
Funding Period, if any, will be distributed in
reduction of the Class Principal Balance of each
Class of Offered Certificates, on a pro rata
basis, on the Distribution Date following the Due
Period in which such Funding Period ends. SEE
"Risk Factors -- Acquisition of Subsequent
Mortgage Loans from Pre-Funding Account" and
"Description of the Certificates -- Pre-Funding
Account" herein.
Capitalized Interest
Account. . . . . . . . . On the Closing Date, at the direction of the
Depositor an amount (the "CAPITALIZED INTEREST
ACCOUNT DEPOSIT") sufficient to cover the
projected interest shortfall for ____ days form
the Pre-Funding Account, as approved by
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the Rating Agencies, will be deposited in an
Eligible Account maintained by and in the name of
the Trustee (the "CAPITALIZED INTEREST ACCOUNT")
from a portion of the sales proceeds from the
Offered Certificates. The amount on deposit in
the Capitalized Interest Account will be
specifically allocated to cover shortfalls in
interest on the Class A Certificates and the Class
B Certificates that may arise as a result of the
utilization of the Pre-Funding Account for the
purchase by the Trust Fund of Subsequent Mortgage
Loans and will be so applied by the Trustee for
the distribution of interest to
Certificateholders. Any amounts remaining in the
Capitalized Interest Account on any Determination
Date, that are not required to cover the
anticipated interest shortfall described above,
will be distributed to the Depositor, including
any net reinvestment income thereon. SEE
"Description of the Certificates -- Capitalized
Interest Account" herein.
Closing Date . . . . . . . . On or about __________________, 199__ ("CLOSING
DATE").
Cut-Off Date . . . . . . . . __________________, 199__ for the Initial Mortgage
Loans, and the cut-off date specified in the
Subsequent Transfer Agreement for the Subsequent
Mortgage Loans ("CUT-OFF DATE").
Distribution Date. . . . . . The 20th day of each month or, if such day is not
a business day, then the next succeeding business
day, commencing __________________, 199__ (each, a
"DISTRIBUTION DATE").
Due Period . . . . . . . . . With respect to a Distribution Date, the calendar
month immediately preceding such Distribution
Date (except with respect to the first
Distribution Date, which will consist of the
partial calendar month commencing on the Cut-Off
Date) (each, a "DUE PERIOD").
Determination Date . . . . . The 5th business day prior to each Distribution
Date ("DETERMINATION DATE").
Record Date . . . . . . . . The last business day of the month immediately
preceding the month in which each Distribution
Date occurs ("RECORD DATE").
Distributions on
Offered Certificates . . . On each Distribution Date, funds available to be
distributed to the holders of the Offered
Certificates will be distributed to the holders of
record of the Offered Certificates as of the
immediately preceding Record Date. As further
described herein (SEE "Description of the
Certificates -- Distributions on the Offered
Certificates"), on each Distribution Date, to the
extent that funds are available in the Certificate
Account after taking into account all prior
distributions therefrom, distributions of interest
and principal with respect to each Class of
Certificates will be made in the following order
of priority: (1) interest distributions, on a pro
rata basis, to the holders of each Class of Class
A Certificates then outstanding, in an amount
equal to the Interest Remittance Amount and
Interest Carry-Forward Amount, if any, applicable
to the Class A Certificates; (2) principal
distributions to the Class A-1 Certificateholders,
until the Class Principal Balance thereof has been
reduced to zero, in an amount equal to the
Principal Remittance Amount and the Principal
Carry-Forward Amount, if any, applicable to the
Class A-1 Certificates; (3) principal
distributions to the Class A-2 Certificateholders,
until the Class Principal Balance thereof has been
reduced to zero, in an amount equal to the
Principal Remittance Amount and the Principal
Carry-Forward Amount, if any, applicable to the
Class A-2 Certificates; (4) principal
distributions to the Class A-3 Certificateholders,
until the Class Principal Balance thereof has been
reduced to zero, in an amount equal to the
Principal Remittance Amount and the Principal
Carry-Forward Amount, if
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any, applicable to the Class A-3 Certificates;
(5) principal distributions to the Class A-4
Certificateholders, until the Class Principal
Balance thereof has been reduced to zero, in an
amount equal to the Principal Remittance Amount
and the Principal Carry-Forward Amount, if any,
applicable to the Class A-4 Certificates; (6)
interest distributions to the Class B
Certificateholders in an amount equal to the
Interest Remittance Amount and Interest
Carry-Forward Amount, if any, applicable to the
Class B Certificates; (7) principal distributions
to the Class B Certificateholders until the Class
Principal Balance thereof has been reduced to
zero, in an amount equal to the Principal
Remittance Amount and the Principal Carry-Forward
Amount, if any, applicable to the Class B
Certificates; and (8) then Excess Spread (as
defined herein) to make additional principal
distributions on the Class A Certificates pursuant
to the preceding sequence of principal
distributions, until the occurrence of a Class R
Distribution Trigger (as defined herein), and then
to the Class B Certificates for any loan losses
allocated thereto and then to the Class R
Certificates. The "CLASS PRINCIPAL BALANCE" of
each Class of Offered Certificates will equal, as
of any date of determination, the Original Class
Principal Balance of such Class reduced by the sum
of all principal amounts previously distributed to
Certificateholders of such Class on all previous
Distribution Dates, other than any amounts that
constitute mortgagor payments that are recovered
from the Certificateholders of such Class as
voidable preferences by a trustee in bankruptcy,
and as further reduced by all losses or
write-offs, if any, previously allocated to the
holders of such Class of Certificates on all
previous Distribution Dates.
Accordingly, principal distributions will not be
distributed with respect to any Class of
Certificates until the respective Class Principal
Balances of all Certificates having an earlier
Class designation have been reduced to zero.
Although a Class of Class A Certificates having a
higher numerical designation will not be
subordinate to any Class of Class A Certificates
having a lower numerical designation with respect
to the allocation of losses from the Mortgage
Loans, such Class of Class A Certificates having a
higher numerical designation will not be entitled
to any distributions of principal until the Class
Principal Balances of all Classes of Class A
Certificates having a lower numerical designation
then outstanding have been reduced to zero. SEE
"Description of the Certificates -- Distributions
on the Offered Certificates" and "-- Subordination
and Allocation of Losses" herein.
INTEREST . . . . . . . The Interest Remittance Amount, that the holders
of each Class of Offered Certificates will be
entitled to receive on each Distribution Date,
will be equal to thirty days' accrued interest at
the respective Certificate Interest Rate for such
Class on the then outstanding Class Principal
Balance of such Class (except with respect to the
first Distribution Date, on which
Certificateholders will receive only __________
days of accrued interest). Interest on the
Offered Certificates will accrue on the basis of a
360-day year consisting of twelve 30-day months.
SEE "Description of the Certificates --
Distributions on the Offered Certificates" herein.
PRINCIPAL . . . . . . The Principal Remittance Amount as more fully
described herein (SEE "Description of the
Certificates -- Distributions on the Offered
Certificates"), that the holders of the Offered
Certificates will be entitled to receive on each
Distribution Date, will equal to the sum of: (i)
scheduled principal payments received by the
Servicer during the related Due Period, (ii) all
partial and full principal prepayments received by
the Servicer during the related Due Period, (iii)
the amount attributable to the principal portion
of any proceeds received from the liquidation of
any defaulted Mortgage Loan during the related Due
Period, including any proceeds received from the
payment of FHA insurance
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<PAGE>
claims which have been submitted to the FHA for
reimbursement of losses on Title I Mortgage Loans
("FHA CLAIMS"), and (iv) certain other amounts
described in the definition of Principal
Remittance Amount, including the principal portion
of any net loan losses allocable to the Offered
Certificates. As more fully described herein (SEE
"Description of the Certificates -- Distributions
on the Offered Certificates"), additional amounts
may be distributed as principal to the holders of
the Class A Certificates from the distribution of
any funds remaining in the Pre-Funding Account
after the termination of the Funding Period and
from the distribution of Excess Spread, if any, on
any Distribution Date until the actual Class A
Overcollateralization equals or exceeds the
Required Class A Overcollateralization Level (as
such terms are defined herein) (as further defined
herein, a "CLASS R DISTRIBUTION TRIGGER"). All
distributions of principal with respect to the
Certificates of a particular Class will be applied
on a pro rata basis among all the Certificates of
such Class.
Certain Prepayment and
Yield Considerations . . . The yield on the Offered Certificates of any Class
will depend on, among other things, the
Certificate Interest Rate for such Class of
Certificates. The yield on any Offered
Certificate that is purchased at a discount or
premium will also be affected by the rate and
timing of distributions in respect of principal on
such Certificate, which in turn will be affected
by (i) the rate and timing of principal payments
(including principal prepayments) on the Mortgage
Loans and (ii) the extent to which such principal
distributions are applied on any Distribution Date
in reduction of the Class Principal Balance of the
Class to which such Certificate belongs. SEE
"Description of the Certificates--Distributions on
the Offered Certificates" herein.
An investor that purchases any Offered Certificate
at a discount should consider the risk that a
slower than anticipated rate of principal
distributions on such Certificate will result in
an actual yield that is lower than such investor's
expected yield. An investor that purchases any
Offered Certificate at a premium should consider
the risk that a faster than anticipated rate of
principal distributions on such Certificate will
result in an actual yield that is lower than such
investor's expected yield. Insofar as an
investor's initial investment in any Offered
Certificate is repaid, there can be no assurance
that such amounts can be reinvested in a
comparable alternative investment with a
comparable yield.
The actual rate of principal distributions,
including prepayments, on the Mortgage Loans
cannot be predicted. The investment performance
of the Offered Certificates may vary materially
and adversely from the investment expectations of
investors due to prepayments on the Mortgage Loans
being higher or lower than anticipated by
investors. The actual yield to the holder of a
Offered Certificate may not be equal to the yield
anticipated at the time of purchase of the
Certificate or, notwithstanding that the actual
yield is equal to the yield anticipated at that
time, the total return on investment expected by
the investor or the expected weighted average life
of the Certificate may not be realized. For a
discussion of certain factors affecting prepayment
of the Mortgage Loans, SEE "Prepayment and Yield
Consideration" herein. In deciding whether to
purchase any Offered Certificates, an investor
should make an independent decision as to the
appropriate prepayment assumptions to be used.
On each Distribution Date, until the Required
Class A Overcollateralization Level is achieved
with respect to the Offered Certificates, the
allocation of the Excess Spread for such
Distribution Date as an additional distribution of
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principal on the Offered Certificates will
accelerate the amortization of such Offered
Certificates relative to the amortization of the
Mortgage Loans.
[The structure of the Offered Certificates will
cause yield of certain Classes to be particularly
sensitive to changes in the rates of prepayment of
the Mortgage Loans and other factors, as follows:]
Credit Enhancement . . . . . Credit enhancement with respect to the Offered
Certificates will be provided primarily by the
Guaranty Policy. Additional credit enhancement
with respect to the Offered Certificates that will
be utilized prior to the Guaranty Policy will be
provided by (i) the overcollateralization and
subordination with respect to the Subordinated
Certificates from the portion of the Pool
Principal Balance attributable to the Subordinated
Certificates and from the acceleration of the
principal amortization of the Offered Certificates
with Excess Spread as described herein; and (ii)
with respect to the Title I Mortgage Loans, the
proceeds received from the payment of FHA Claims.
No reserve fund or spread account will be
established as part of the Trust Fund for the
Offered Certificates. SEE "Risk Factors --
Additional Credit Enhancement Limitations" herein.
The Guaranty Policy . . . . The Depositor will obtain in the name of the
Trustee a Certificate Guaranty Insurance Policy
(the "GUARANTY POLICY") from ___________ _________
___________ (the "CERTIFICATE INSURER"), pursuant
to which the Certificate Insurer will irrevocably
and unconditionally guaranty payment on each
Distribution Date to the Trustee, for the benefit
of the holders of the Offered Certificates, of the
related Interest Remittance Amount and the related
Principal Remittance Amount then payable on each
such Class. Only the Offered Certificates will be
insured by the Guaranty Policy. The Subordinated
Certificates will not be guaranteed by or benefit
from such Guaranty Policy. For a description of
the Certificate Insurer, SEE "The Guaranty Policy
-- The Certificate Insurer" herein.
So long as (i) there does not exist a continuing
failure by the Certificate Insurer to make a
required payment under the Guaranty Policy and
(ii) certain bankruptcy-related events specified
in the Pooling and Servicing Agreement have not
occurred with respect to the Certificate Insurer
(any of the events described in (i) and (ii), a
"CERTIFICATE INSURER DEFAULT"), the Certificate
Insurer will have the right to exercise all
rights, including voting rights, which the holders
of the Offered Certificates are entitled to
exercise on a majority basis under the Pooling and
Servicing Agreement (the "MAJORITY
CERTIFICATEHOLDERS"), without any consent of such
holders. The holders of the Offered Certificates
will retain the right to exercise only those
rights, including voting rights, which require
100% of the holders of the Offered Certificates to
exercise such rights or each holder of a Offered
Certificate affected by the proposed action to
exercise such rights, but even the exercise of
these rights by such holders in certain instances
may be subject to the consent or cooperation of
the Certificate Insurer. SEE "Risk Factors --
Limitations on Rights of Majority
Certificateholders" herein.
On each Distribution Date, after the holders of
the Offered Certificates have been paid all
amounts to which they are entitled, the
Certificate Insurer will be entitled to be
reimbursed for any unreimbursed Guaranteed
Payments under the Guaranty Policy together with
interest thereon at the rate specified in the
Insurance Agreement (the "CERTIFICATE INSURER
REIMBURSEMENT AMOUNT") and any accrued and unpaid
Certificate Guaranty Insurance Premiums. In
connection with each Guaranteed Payment on a
Offered Certificate, the Trustee, as
attorney-in-fact for the holder thereof, will be
required to assign to
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<PAGE>
the Certificate Insurer the rights of such
Certificateholder with respect to such Offered
Certificate, to the extent of such Guaranteed
Payments, including, without limitation, in
respect of any amounts due to such
Certificateholder as a result of a securities law
violation arising from the offer and sale of such
Offered Certificates. In the event of any
Certificate Insurer Reimbursement Amount
attributable to the Offered Certificates, the
holders of the Class B Certificates will not be
entitled to receive distributions of interest
and/or principal, as applicable, and the holders
of the Class R Certificates will not be entitled
to receive distributions of any remaining amounts
available in the Certificate Account (after making
all prior distributions), until the Certificate
Insurer has been distributed such Certificate
Insurer Reimbursement Amount in full. The
Certificate Insurer's obligation under the
Guaranty Policy will be discharged to the extent
Guaranteed Payments are received by the Trustee,
whether or not such Guaranteed Payments are
properly applied by the Trustee. SEE "The
Guaranty Policy" herein. The Guaranty Policy is
noncancellable for any reason. The Guaranty Policy
does not guarantee any specified rate of
prepayments, nor does the Guaranty Policy provide
funds to redeem any of the Offered Certificates on
any specified date.
Class A
Overcollateralization . . . On the Closing Date, the "INITIAL CLASS A
OVERCOLLATERALIZATION" will equal the excess of
the Assumed Pool Principal Balance over the
Original Class Principal Balance of all Classes of
Offered Certificates, which excess will equal the
Original Class Principal Balance of the Class B
Certificates of $_______________, or
approximately ___% of the Assumed Pool Principal
Balance. As of each Determination Date occurring
after termination of the Funding Period, the
"CLASS A OVERCOLLATERALIZATION" will equal the
excess of the Pool Principal Balance over the
Class Principal Balance of all Classes of Offered
Certificates. An additional overcollateralization
feature has been designed to accelerate the
principal amortization of the Offered Certificates
relative to the principal amortization of the
Mortgage Loans thereby increasing the Class A
Overcollateralization. This will be accomplished
by distributing to the holders of the Offered
Certificates, in the manner described below, any
remaining amounts available in the Certificate
Account on each Distribution Date (after making
all prior distributions) that would otherwise be
made to the holders of the Class R Certificates
(the "EXCESS SPREAD"). SEE "Description of the
Certificates -- Distributions on the Offered
Certificates". Until the Class A
Overcollateralization equals or exceeds the
Required Class A Overcollateralization Level,
distributions of Excess Spread, if any, on a
Distribution Date that would otherwise be made to
the holders of the Class B Certificates or the
Class R Certificates, as applicable, will be made
as an additional distribution of principal to the
holders of the Offered Certificates, sequentially
among the Classes of the Offered Certificates in
order of their respective Class designations.
The Pooling and Servicing Agreement sets forth the
Required Class A Overcollateralization Level and
provides that, subject to certain floors, caps and
triggers, the Required Class A
Overcollateralization Level may increase or
decrease over time. On the Closing Date, assuming
that the Assumed Pool Principal Balance has the
same characteristics as the Initial Pool Principal
Balance, the Required Class A
Overcollateralization Level would be equal to
$______________, which is _____% of the Assumed
Pool Principal Balance. An increase in the
Required Class A Overcollateralization Level will
result if the delinquency or default experience on
the Mortgage Loans exceeds certain levels set
forth in the Pooling and Servicing Agreement. If
such an increase occurs, then to the extent that
Excess Spread is available, the principal
amortization of the Offered Certificates would be
accelerated by the distribution of such Excess
Spread to the holders of the Offered Certificates
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<PAGE>
until the Required Class A Overcollateralization
Level is achieved. The Required Class A
Overcollateralization Level may be decreased under
certain circumstances, and in any event if the
Class A Overcollateralization is equal to or
greater than the Required Class A
Overcollateralization Level (a "CLASS R
DISTRIBUTION TRIGGER"), then the rate of principal
amortization of the Offered Certificates would
slow from the cessation of the Excess Spread
distributions to the holders of the Offered
Certificates. SEE "Description of the
Certificates -- Class A Overcollateralization"
herein.
While the distribution of Excess Spread to holders
of the Offered Certificates in the manner
specified above has been designed to produce and
maintain a given level of overcollateralization
with respect to the Offered Certificates, there
can be no assurance that Excess Spread will be
generated in sufficient amounts to ensure that
such overcollateralization level will be achieved
or maintained at all times. Net losses on
Liquidated Mortgage Loans will be allocated first
to reduce the principal imputed to the Class R
Certificates, if any, and then to reduce the Class
Principal Balance of the Class B Certificates,
thereby reducing the Class A
Overcollateralization. SEE "Description of the
Certificates -- Subordination and Allocation of
Losses" and "Risk Factors -- Additional Credit
Enhancement Limitations" herein.
Subordination . . . . . . . The rights of the holders of the Class B
Certificates to receive distributions from amounts
available in the Certificate Account (after making
all prior distributions therefrom) on each
Distribution Date will be subordinated, to the
extent described herein, to such rights of the
holders of the Offered Certificates. This
subordination is intended to enhance the
likelihood of regular receipt by the holders of
the Offered Certificates of the full amount of
interest and principal distributions due to such
holders and to afford such holders protection
against losses on the Mortgage Loans. The rights
of the holders of the Class R Certificates to
receive distributions of Excess Spread on each
Distribution Date following the Class R
Distribution Trigger will be subordinated to
rights of the holders of the Class A Certificates
and the Class B Certificates. This subordination
is intended to enhance the likelihood of regular
receipt by the holders of the Class A Certificates
and Class B Certificates of the full amount of
interest and principal distributions due to such
holders and to afford all such holders protection
against losses on the Mortgage Loans. SEE
"Description of the Certificates -- Subordination
and Allocation of Losses" herein.
FHA Title I Program . . . . Under the Title I coinsurance program (the "TITLE
I PROGRAM") and subject to the regulations,
rules and procedures promulgated by the FHA
(the "FHA REGULATIONS"), approved lenders
("TITLE I LENDERS") may obtain insurance
payments against approximately 90% of certain
losses incurred with respect to eligible Title
I loans up to the amount of insurance in such
Title I Lender's FHA insurance coverage reserve
account (such account, an "FHA RESERVE"). Under
the Title I Program, the FHA maintains an FHA
Reserve for each Title I Lender and the amount
of insurance therein is limited to a maximum of
10% of the amount disbursed, advanced or
expended by the Title I Lender in originating
or purchasing each eligible loan registered
with the FHA for Title I insurance, with
certain adjustments permitted or required by
the FHA Regulations. The FHA will recognize
the Depositor as the owner of the Title I
Mortgage Loans for purposes of the related FHA
insurance coverage. The FHA will not recognize
the Trust Fund or the Certificateholders as the
owners of the Title I Mortgage Loans, or any
portion thereof, and the Certificateholders
will not be entitled to submit FHA Claims to
the FHA, but will be dependent upon the
Depositor and any FHA Claims Administrator to
submit, process and administer FHA Claims with
respect to the Title I Mortgage Loans.
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Accordingly, the Trust Fund and the
Certificateholders will have no direct right to
receive insurance payments from the FHA. SEE
"Risk Factors -- Credit Enhancement Limitations --
Limitations on FHA Insurance for Title I Loans"
and "Certain Legal Aspects of the Mortgage Assets
-- The Title I Program" in the Prospectus.
FHA Insurance on the
Title I Mortgage Loans . . The Transferor will transfer the FHA insurance
coverage for the Title I Mortgage Loans to the
Depositor for the benefit of the
Certificateholders. Due to the FHA procedures for
transferring FHA insurance coverage from one
Title I Lender to another, the insurance coverage
for the Title I Mortgage Loans will not be
effectively transferred from the Transferor to the
Depositor by the Closing Date; rather, the FHA
insurance coverage for the Title I Mortgage Loans
will be transferred to the Depositor's FHA Reserve
on subsequent dates (each, a "TRANSFER DATE"),
that will occur as promptly as practical after the
Closing Date for any such loans that are Initial
Mortgage Loans and the related Subsequent Transfer
Date for any such loans that are Subsequent
Mortgage Loans (the final amount of such
transferred coverage as acknowledged by the FHA is
herein called the "FHA INSURANCE AMOUNT"). SEE
"FHA Insurance for Title I Mortgage Loans --
Transfer of FHA Insurance" herein.
The FHA Insurance Amount to be transferred from
the Transferor's FHA Reserve to the Depositor's
FHA Reserve in respect of the Title I Mortgage
Loans is expected to equal not less than _____%
of the Cut-Off Date Principal Balances of the
Title I Mortgage Loans that are expected to be
conveyed to the Trust Fund, including any
Subsequent Mortgage Loans. SEE "Risk
Factors -- Additional Credit Enhancement
Limitations -- Limitations on FHA Insurance"
herein. If the FHA Insurance Amount so
transferred is less than _____% of the Cut-Off
Date Principal Balances of the Title I Mortgage
Loans that are actually conveyed to the Trust
Fund, then the amount of the Required Class A
Overcollateralization level will be increased
by a minimum of ___% of the amount of such
shortfall.
The obligation of the FHA to reimburse losses in
the portfolio of Title I loans owned by a Title I
Lender is limited to the insurance coverage in
such Title I Lender's FHA Reserve, which insurance
coverage generally is not maintained on a loan-by-
loan basis. Thus, if a Title I Lender's FHA
Reserve were to be depleted, all Title I Mortgage
Loans held by such Title I Lender would become
effectively uninsured. The Depositor's FHA
Reserve, which will include the FHA Insurance
Amount for Series 199__-__, [currently includes
insurance coverage in respect of other Title I
loans included in the prior issuances effected by
the Depositor of Asset-Backed Certificates (the
"PRIOR SERIES") and] may subsequently include
insurance coverage in respect of other Title I
loans that are included in future issuances
effected by the Depositor of one or more series of
similar certificates (together with the Prior
Series, the "ADDITIONAL SERIES"). The FHA
Insurance Amount for the Series 199__-__ will be
commingled in the Depositor's FHA Reserve with the
insurance coverage relating to any Title I loans
included in any Additional Series. On each
Transfer Date, the Depositor will record on its
books and records the FHA Insurance Amount for the
Title I Mortgage Loans whose transfer to the
Depositor has been acknowledged by the FHA on such
date, separately from insurance coverage
attributable to Title I loans for any Additional
Series. Promptly after the final Transfer Date,
the Depositor (or the FHA Claims Administrator) is
required to certify to the Rating Agencies, the
Certificate Insurer and the Trustee as to the
actual FHA Insurance Amount transferred to the
Trustee's FHA Reserve. The Depositor and any FHA
Claims Administrator will not submit any FHA Claim
in respect of a Title I Mortgage Loan to the FHA
on behalf of the Trust Fund if the FHA Insurance
Amount, as shown on the records of the Depositor
relating to the Series 199__-__, is insufficient
to reimburse such FHA Claim. In addition, the
Depositor has agreed that neither it nor any FHA
Claims Administrator will submit any FHA claims in
respect of any Title I loans included in any
Additional Series where such claims would reduce
the FHA Insurance Amount. SEE "FHA Insurance
for Title I Mortgage Loans -- Submission of FHA
Claims" herein.
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FHA Claims Administrator . . The Depositor and Trustee, on behalf of the
Certificateholders, will enter into an FHA Claims
Administration Agreement on the Closing Date (the
"FHA CLAIMS ADMINISTRATION AGREEMENT") with the
Servicer to administer, process and submit all FHA
Claims in the name and on behalf of the Depositor
and to record and monitor the FHA Insurance Amount
for the Title I Mortgage Loans for the Depositor
(in such capacity, the Servicer, and any successor
acting in such capacity, the "FHA CLAIMS
ADMINISTRATOR"). SEE "The Transferor and
Servicer" herein. The Servicer will not receive
any additional fees or compensation for serving as
such (other than the Servicing Fee).
Servicing of the
Mortgage Loans . . . . . . The Servicer will perform the mortgage loan
servicing functions with respect to the Mortgage
Loans pursuant to the Pooling and Servicing
Agreement. The Servicer may have subcontracted
its servicing obligations and duties with respect
to certain Mortgage Loans to certain unaffiliated
lenders from whom the Transferor purchased such
Mortgage Loans, pursuant to a subservicing
agreement between the Servicer and such lender
(each such lender, in this capacity, a
"SUBSERVICER"). However, the Servicer will not be
relieved of its servicing obligations and duties
with respect to these Mortgage Loans.
The Servicer will be entitled to a fee, payable
monthly on each Distribution Date, equal to one-
twelfth of 1.0% per annum on the Pool Principal
Balance (as adjusted for Liquidated Mortgage
Loans) as of the first day of the immediately
preceding Due Period (the "SERVICING FEE"), but
with respect to the first Distribution Date such
monthly fee will be pro rated based on _______
days for __________________ 199__. The Servicer
will be responsible for paying the subservicing
fees, payable monthly, to each Subservicer for the
servicing of the Mortgage Loans being subserviced
pursuant to a subservicing agreement.
FHA Insurance Premium and
Fees of Certificate Insurer,
Trustee, and Custodian. . . On each Distribution Date, prior to distributions
on the Certificates, amounts available in the
Certificate Account will be distributed (i) to
deposit a portion of the FHA Insurance premium
into the FHA Insurance Premium Account (the "FHA
INSURANCE PREMIUM DEPOSIT AMOUNT") for the Title I
Mortgage Loans, and (ii) to pay the following
periodic Trust Fund fees: (1) the Certificate
Insurer premium (the "CERTIFICATE GUARANTY
INSURANCE PREMIUM"); (2) the Trustee fee; and (3)
the Custodian fee for custody of the Trustee's
Mortgage Loan Files (the "CUSTODIAN FEE");
provided, however, that with respect to the first
Distribution Date the payment of all such monthly
fees will be prorated
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<PAGE>
based on _____ days for ___________ 199__. SEE
"Description of the Certificates -- Distributions
on the Offered Certificates" herein.
Optional Termination . . . . On any Distribution Date after which the Class
Principal Balance of the Offered Certificates then
outstanding is less than 10% of the sum of the
Initial Pool Principal Balance and the aggregate
Cut-Off Date Principal Balance of the Subsequent
Mortgage Loans conveyed to the Trust Fund, the
Servicer may, at its option, terminate the Pooling
and Servicing Agreement by purchasing from the
Trust Fund all of the Mortgage Loans and REO
Properties (as defined in the Pooling and
Servicing Agreement) at a price (the "TERMINATION
PRICE") equal to the sum of (i) Pool Principal
Balance, plus (ii) the sum of thirty days' accrued
interest on the Pool Principal Balance computed at
the weighted average Mortgage Loan Rate for the
Mortgage Loans (including REO Properties) then
outstanding, plus (iii) any accrued and unpaid
interest on the Class A Certificates and Class B
Certificates as of the immediately preceding
Distribution Date. The Servicer will pay the
unpaid fees and expenses, if any, of the Trustee,
the Certificate Insurer, the Custodian and the
Servicer in connection with such optional
termination.
Certain Federal Income Tax
Consequences . . . . . . . For a discussion of certain tax matters, SEE
"Certain Federal Income Tax Consequences" herein
and in the Prospectus.
Ratings . . . . . . . . . . It is a condition to the initial issuance of the
Offered Certificates that the Class A-1
Certificates, the Class A-2 Certificates, Class A-
3 Certificates and the Class A-4 Certificates each
be rated "_____" by Standard & Poor's and "_____"
by Moody's. Standard & Poor's and Moody's are
sometimes referred to herein, collectively, as the
"RATING AGENCIES". A security rating does not
address the frequency of principal prepayments or
the corresponding effect on yield to investors.
Neither the Depositor, the Transferor, the
Servicer, the Trustee, the Certificate Insurer nor
any other person is obligated to maintain the
rating on any Offered Certificate. SEE "Ratings"
herein.
ERISA Considerations . . . . For a discussion of certain ERISA Considerations,
SEE "ERISA Considerations" in the Prospectus.
Legal Investment . . . . . . For a discussion of certain legal investment
consideration, SEE "Legal Investment Matters" in
the Prospectus.
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<PAGE>
RISK FACTORS
Prospective investors in the Offered Certificates should consider the risk
factors set forth under "Risk Factors" in the Prospectus and the following risk
factors in connection with the purchase of a Offered Certificate. These factors
are intended to identify the significant sources of risk affecting an investment
in the Certificates. Unless the context indicates to the contrary, any
numerical or statistical information presented is based upon the characteristics
of the Initial Mortgage Loans proposed to be included in the Mortgage Loan Pool
as of the date of this Prospectus Supplement.
ACQUISITION OF SUBSEQUENT MORTGAGE LOANS FROM PRE-FUNDING ACCOUNT
VARIATION IN CREDIT QUALITY AND CHARACTERISTICS OF SUBSEQUENT MORTGAGE
LOANS. Any conveyance of Subsequent Mortgage Loans is subject to the conditions
set forth in the Pooling and Servicing Agreement, which include among others:
(i) each Subsequent Mortgage Loan must satisfy the representations and
warranties specified in the Pooling and Servicing Agreement; (ii) the Transferor
will not select such Subsequent Mortgage Loans in a manner that it believes is
adverse to the interest of the Certificateholders and the Certificate Insurer;
and (iii) as of each Cut-Off Date (each, a "SUBSEQUENT CUT-OFF DATE" applicable
thereto, all of the Mortgage Loans, including the Subsequent Mortgage Loans to
be conveyed by the Depositor as of such Subsequent Cut-Off Date, will satisfy
certain aggregate statistical criteria set forth in the Pooling and Servicing
Agreement. Although each Subsequent Mortgage Loan must satisfy the eligibility
criteria referred to above at the time of its transfer to the Trust Fund, the
Subsequent Mortgage Loans may have been originated or purchased by the
Transferor using credit criteria different from those which were applied to the
Initial Mortgage Loans and may be of a different credit quality and have
different loan characteristics from the Initial Mortgage Loans. After the
transfer of the Subsequent Mortgage Loans to the Trust Fund, the aggregate
statistical characteristics of the Mortgage Loan Pool may vary from those of the
Initial Mortgage Loans as described herein. SEE "The Mortgage Loan Pool --
Characteristics of Initial Mortgage Loans", and "-- Conveyance of Subsequent
Mortgage Loans" herein.
ABILITY TO ACQUIRE SUBSEQUENT MORTGAGE LOANS. The ability of the Trust
Fund to acquire Subsequent Mortgage Loans is dependent upon the ability of the
Transferor to purchase additional mortgage loans that satisfy the eligibility
criteria for the transfer of Subsequent Mortgage Loans, which may be affected by
a variety of social and economic factors. These economic factors include
prevailing interest rates, unemployment levels, the rate of inflation, consumer
perception of economic conditions generally and the availability of mortgage
loan financing and similar types of consumer financing. However, the Transferor
and Depositor are unable to determine and have no basis to predict whether and
to what extent economic or social factors will affect the ability of the
Transferor to originate and purchase Subsequent Mortgage Loans.
EFFECT OF PREPAYMENT FROM PRE-FUNDING ACCOUNT. If the Pre-Funding Account
Deposit has not been fully applied to purchase Subsequent Mortgage Loans by the
end of the Funding Period, then on the business day immediately preceding the
next Distribution Date, any amount remaining in the Pre-Funding Account (net of
reinvestment income which will be transferred to the Capitalized Interest
Account) will be transferred to the Certificate Account and applied to reduce
the Class Principal Balance of the Offered Certificates, on a pro rata basis.
If pro rata principal distributions are made on the Offered Certificate as a
result of such amounts remaining in the Pre-Funding Account after the
termination of the Funding Period, then the holders of the Offered Certificates
will not receive accrued interest attributable to such principal distributions
during the 20-day period that will elapse between the end of the monthly accrual
period immediately preceding the Distribution Date on which such principal
distributions will be made and such Distribution Date. SEE "Prepayment and
Yield Considerations" herein. Although no assurances can be given, the
Depositor expects that the principal amount of the Subsequent Mortgage Loans
sold to the Trust Fund will require the application of substantially all of the
Pre-Funding Account Deposit and that there will be no material principal
prepayment distributed to the holders of the Offered Certificates from the
amount remaining in the Pre-Funding Account at the termination of the Funding
Period.
ADDITIONAL EFFECT OF PREPAYMENTS ON YIELD
The extent to which the yield to maturity of a Offered Certificate may vary
from the anticipated yield will depend upon the degree to which it is purchased
at a premium or discount, and the degree to which the timing of distributions to
holders thereof is sensitive to scheduled payments, prepayments, liquidations,
defaults and purchases of Mortgage Loans and to the distribution of Excess
Spread and amounts remaining in the Pre-Funding Account after the Funding Period
ends. In the case of any Offered Certificate purchased at a discount, an
investor should consider the risk that a slower than anticipated rate of
principal distributions to the
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<PAGE>
holders of the Offered Certificates (including without limitation principal
prepayments on the Mortgage Loans) could result in an actual yield to such
investor that is lower than the anticipated yield and, in the case of any
Offered Certificate purchased at a premium, the risk that a faster than
anticipated rate of principal distributions to the holders of the Offered
Certificates (including without limitation principal prepayments on the Mortgage
Loans) could result in an actual yield to such investor that is lower than the
anticipated yield. Further, in the event that significant prepayments of
principal distributions are made to Certificateholders as a result of excessive
prepayments, liquidations, repurchases and purchases of the Mortgage Loans or
distributions of Excess Spread or amounts remaining in the Pre-Funding Account,
there can be no assurance that Certificateholders will be able to reinvest such
distributions in a comparable alternative investment having a comparable yields.
SEE "Prepayment and Yield Considerations" herein.
ADDITIONAL CREDIT ENHANCEMENT LIMITATIONS
ADEQUACY OF CREDIT ENHANCEMENT. Credit enhancement with respect to the
Offered Certificates will be provided by the Guaranty Policy. Additional credit
enhancement with respect to the Offered Certificates that will be utilized prior
to the Guaranty Policy will be provided by (i) the overcollateralization and
subordination with respect to the Class B Certificates and Class R Certificates
from the portion of the Pool Principal Balance attributable to the Class B
Certificates and Class R Certificates and from the acceleration of the principal
amortization of the Class A Certificates with Excess Spread, as described
herein; and (ii) with respect to the Title I Mortgage Loans, the proceeds
received from the payment of FHA Claims. If the Mortgage Loans experience
higher rates of delinquencies, defaults and losses (SEE "Additional Factors
Affecting Delinquencies, Foreclosure, and Losses on Mortgage Loans" below) than
initially anticipated in connection with the rating of the Offered Certificates,
there can be no assurance that the amounts available from such additional credit
enhancement will be adequate to cover any delays or shortfalls on the amounts
otherwise distributable on the Offered Certificates which result from such
delinquencies, defaults and losses. If the amounts available from such
additional credit enhancement are inadequate, then the holders of the Offered
Certificates will bear the risk of any delays and losses resulting from such
delinquencies, defaults and losses on the Mortgage Loans, unless such delays or
losses are covered by the Guaranty Policy and paid by the Certificate Insurer.
No reserve fund or spread account will be established as part of the Trust Fund
for the Offered Certificates.
While the distribution of Excess Spread to the Offered
Certificateholders in the manner specified herein has been designed to
produce and maintain a given level of Class A Overcollateralization with
respect to the Offered Certificates, there can be no assurance that Excess
Spread will be generated in sufficient amounts to ensure that such
overcollateralization level will be achieved or maintained at all times. Net
losses on Liquidated Mortgage Loans will be allocated first to reduce the
Pool Principal Balance imputed to the Class R Certificates, if any, and the
Class Principal Balance of the Class B Certificates, thereby reducing the
Class A Overcollateralization. SEE "Description of the Certificates --
Subordination and Allocation of Losses" herein.
RATINGS OF CERTIFICATE INSURER. The rating of the Offered Certificates
depends primarily on an assessment by the Rating Agencies of the claims-paying
ability of the Certificate Insurer. Any reduction in a rating assigned to the
claims-paying ability of the Certificate Insurer below the rating initially
given to the Offered Certificates may result in a reduction in the rating of the
Offered Certificates or any Class thereof.
ADDITIONAL LIMITATIONS ON FHA INSURANCE. Since the FHA Insurance Amount
for the Title I Mortgage Loans is limited as described herein and in the
Prospectus, and since the adequacy of such FHA Insurance Amount is dependent
upon future events, including reductions for the payment of FHA claims, no
assurance can be given that the FHA Insurance Amount is or will be adequate to
cover 90% of all potential losses on the Title I Mortgage Loans or that the
Title I Mortgage Loans will qualify for the payment of FHA Claims. If the FHA
Insurance amount for the Title I Mortgage Loans is reduced to zero, such loans
will be effectively uninsured from and after the date of such reduction. SEE
"Certain Legal Aspects of the Mortgage Assets -- The Title I Program" in the
Prospectus.
Due to the FHA procedures for transferring FHA insurance coverage from
one Title I Lender to another, the transfer by the FHA of the FHA Insurance
Amount for the Initial Mortgage Loans that are Title I Mortgage Loans from the
Transferor's FHA Reserve to the Depositor's FHA Reserve will not be completed on
the Closing Date, but rather will occur on the Transfer Dates. SEE "Summary of
Prospectus Supplement -- FHA Insurance of Title I Mortgage Loans" herein. On
each Transfer Date, the FHA Claims Administrator on behalf of the Depositor will
record the FHA Insurance Amount for the Title I Mortgage Loans whose transfer to
the Depositor has been acknowledged by the FHA on such date separately from the
insurance coverage attributable to Title I loans for any Additional Series on
the books and records of the Depositor. Although the FHA Claims Administrator
and the Depositor will separate on the Depositor's books and records the FHA
Insurance Amount from the FHA insurance coverage available with respect to other
Title I loans reported for insurance in the Depositor's FHA Reserve, the FHA
will not recognize such separate treatment. Accordingly, claims paid to the
Depositor or the FHA Claims Administrator by the FHA with respect to such other
Title I loans could reduce the FHA Insurance Amount. In the Pooling and
Servicing Agreement and the FHA Claims Administration Agreement, the Depositor
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<PAGE>
and the FHA Claims Administrator will agree not to submit claims to the FHA with
respect to such other Title I loans if the effect thereof would be to reduce the
FHA Insurance Amount for the Title I Mortgage Loans. If the Depositor or the
FHA Claims Administrator inadvertently submits a claim to the FHA in respect of
a Title I loan that is not a Title I Mortgage Loan at a time when the insurance
coverage in the Depositor's FHA Reserve other than the FHA Insurance Amount has
been reduced below the amount of such claim, the FHA Insurance Amount will be
reduced because the FHA will honor such claim so long as the total insurance
coverage in the Depositor's FHA Reserve, including that constituting the FHA
Insurance Amount, has not been exhausted. SEE "Certain Legal Aspects of the
Mortgage Assets -- The Title I Program" in the Prospectus. In the event of the
bankruptcy of the Depositor, there can be no assurance that a trustee in
bankruptcy would continue to separate insurance coverage, including the FHA
Insurance Amount, in the Depositor's FHA Reserve with respect to Title I
Mortgage Loans for the Series 199_-_, any Additional Series or any other Title I
loans owned by the Depositor in the same manner as provided in the Pooling and
Servicing Agreement.
PROPOSED LEGISLATION AFFECTING FHA INSURANCE. In August 1995, bills
were introduced in both houses of the United States Congress that would, among
other things, abolish the Department of Housing and Urban Development ("HUD"),
reduce federal spending for housing and community development activities and
eliminate the Title I Program. As a result of the proposed legislation that
would abolish HUD, if enacted, and the budget legislation impasse between
Congress and the President that occurred during November 1995 and continued into
January 1996, no assurance can be given that the Title I Program will continue
in existence or that HUD will continue to receive sufficient funding for the
operation of the Title I Program. The elimination of the Title I Program, a
significant reduction in its authorized funding or future shut-downs of HUD due
to the continuation of the budget impasse will have, in all likelihood, a
material adverse affect on the FHA Insurance for the Title I Mortgage Loans,
which could include, without limitation, delays in transferring the FHA
Insurance to the Depositor's FHA Reserve, delays in the processing and payment
of FHA Claims or the termination or reduction of the FHA Insurance for the
Title I Mortgage Loans. HUD has indicated that the recent government shut-down
has caused a number of delays in the Title I Program, including delays in the
processing and payment of claims and the recording of Title I loans for FHA
insurance.
LIMITATIONS ON RIGHTS OF MAJORITY CERTIFICATEHOLDERS
Prior to a Certificate Insurer Default, the Certificate Insurer will
have the right to exercise all rights, including voting rights, which the
holders of the Offered Certificates are entitled to exercise on a majority basis
under the Pooling and Servicing Agreement (the "MAJORITY CERTIFICATEHOLDERS"),
without any consent of such holders. The holders of the Offered Certificates
will retain the right to exercise only those rights, including voting rights,
which require 100% of the holders of the Offered Certificates to exercise such
rights or each holder of a Offered Certificate affected by the proposed action
to exercise such rights, but even the exercise of these rights by such holders
in certain instances may be subject to the consent or cooperation of the
Certificate Insurer. While the interests of the Certificate Insurer will
generally be aligned with the holders of the Offered Certificates insured by the
Guaranty Policy, in certain instances the Certificate Insurer could exercise the
rights of the Majority Certificateholders, or its consent to the exercise of
certain rights of the Offered Certificateholders, in a manner that is adverse or
detrimental to the interests of one or more holders of Offered Certificates.
For example, under certain circumstances the Certificate Insurer could exercise
certain rights of the Majority Certificateholders, or refuse its consent to the
exercise of certain rights by the holders of the Offered Certificates, in a
manner that results in an unanticipated prepayment of principal to the holders
of the Offered Certificates when the prevailing market interest rates at which
such principal can be reinvested have declined. SEE "Prepayment and Yield
Considerations" herein.
DELINQUENCY STATUS OF INITIAL MORTGAGE LOANS
Approximately __% of the Initial Mortgage Loans were 31 days or more,
but less than 60 days, late in their scheduled monthly payments of principal and
interest as of the __________________, 199__ Cut-Off Date. Approximately _____%
of the Initial Pool Principal Balance consists of Initial Mortgage Loans that
have a first scheduled monthly payment due date occurring after
__________________, 199__; and therefore, it was not possible for such Initial
Mortgage Loans to have had a scheduled monthly payment that was 31 days or more
late as of the __________________, 199__ Cut-Off Date. The inclusion of such
delinquent Initial Mortgage Loans in the Trust Fund may adversely affect the
rate of defaults and prepayments in respect of the Mortgage Loan Pool and the
yield on the Offered Certificates. Furthermore, even if such delinquent Initial
Mortgage Loans become current after the Cut-Off Date, such Mortgage Loans
generally will have a greater likelihood of subsequently becoming delinquent in
their scheduled monthly payments. In addition, to the extent that scheduled
monthly payments of principal and interest are not made on such delinquent
Initial Mortgage Loans, then the additional credit enhancement available for the
Offered Certificates will be depleted by the amounts attributable to such
delinquent payments, subject to the partial reimbursement, if any, of such
additional credit enhancement if such delinquent payments or any
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<PAGE>
liquidation proceeds are subsequently collected from such delinquent Initial
Mortgage Loans. SEE "Additional Credit Enhancement Limitations -- Adequacy of
Credit Enhancement" above.
ADDITIONAL FACTORS AFFECTING DELINQUENCIES, FORECLOSURES AND LOSSES ON MORTGAGE
LOANS
UNDERWRITING GUIDELINES. Pursuant to the underwriting guidelines of the
Transferor the assessment of the creditworthiness of the related borrower is the
primary consideration in underwriting the Mortgage Loans, and the evaluation of
the adequacy of the value of the related Mortgaged Property in relation to the
Mortgage Loan, together with the amount of all liens senior to the lien of the
Mortgage Loan (i.e., the "combined loan-to-value ratio"), is given less
consideration in underwriting the Mortgage Loans, and with respect to certain
Title I Mortgage Loans may not be considered at all in the underwriting of such
Title I Mortgage Loans. SEE "The Transferor and Servicer -- Underwriting
Criteria" herein. In fact, the related Mortgaged Properties generally will have
high combined loan-to-value ratios and in some instances the combined loan-to-
value ratios may exceed 100% of the value of the related Mortgaged Properties.
Furthermore, the Mortgage Loans originated or purchased by the Transferor
generally will be made to borrowers who typically are less financially
sophisticated with respect to their ability to obtain financing at lower
interest rates and who typically do not qualify for loans conforming to the FNMA
or FHLMC underwriting guidelines for first lien, single family mortgage loans.
Accordingly, the Mortgage Loans are likely to experience higher rates of
delinquencies, defaults and losses (which rates could be substantially higher)
than those rates that would be experienced by similar mortgage loans
underwritten in conformity with the FNMA or FHLMC underwriting guidelines for
first lien, single family mortgage loans. In addition, the losses sustained
from defaulted Mortgage Loans are likely to be more severe in relation to the
outstanding principal balance of such defaulted Mortgage Loans, because the
costs incurred in the collection and liquidation of defaulted Mortgage Loans in
relation to the smaller principal balances thereof are proportionately higher
than first-lien, single family mortgage loans, and because the Mortgage Loans
are typically secured by junior liens on Mortgaged Properties with relatively
high combined loan-to-value ratios. SEE "Additional Credit Enhancement
Limitations -- Adequacy of Credit Enhancement" above.
Although creditworthiness of the related borrower is the primary
consideration in the underwriting of the Mortgage Loans, no assurance can be
given that such creditworthiness of the borrower will not deteriorate as a
result of future economic and social factors, which deterioration may result in
a delinquency or default of such borrower on the related Mortgage Loan.
Furthermore, because the adequacy of the value of the related Mortgaged Property
is given less consideration in underwriting the Mortgage Loan, no assurance can
be given that any proceeds will be recovered from the foreclosure or liquidation
of the related Mortgaged Property from a defaulted Mortgage Loan, other than
the possibility of receiving payment from a claim for FHA insurance on a
defaulted Title I Mortgage Loan.
ACQUISITIONS FROM THIRD PARTIES. A significant portion of the Mortgage
Loans will have been acquired by the Transferor through either correspondent
purchases or portfolio acquisitions. SEE "The Mortgage Loan Pool -- General"
herein. All of the Mortgage Loans that consist of portfolio acquisitions and,
in the case of Title I Mortgage Loan correspondent purchases, will have been
reunderwritten or reviewed only on a limited sample basis (approximately ___% to
___%) for compliance with the Transferor's underwriting guidelines. These
Mortgage Loans acquired by the Transferor may have been originated by the
originator thereof using credit criteria different from the underwriting
guidelines of the Transferor and may be of a different credit quality.
Furthermore, with respect to those Mortgage Loans acquired by the Transferor
that have not been reunderwritten or reviewed, the Transferor has primarily
relied upon the applicable representations and warranties made by the seller or
originator in determining whether such Mortgage Loans satisfy the
representations and warranties under the Pooling and Servicing Agreement with
respect thereto. Accordingly, these Mortgage Loans acquired by the Transferor
through either portfolio acquisitions or, in the case of Title I Mortgage Loans,
correspondent purchases may subsequently be determined to have breached the
representations and warranties under the Pooling and Servicing Agreement, and if
such breach cannot be cured within the cure period, then the Transferor may be
required to repurchase such Defective Mortgage Loans resulting in an
unanticipated prepayment of principal to the holders of the Offered
Certificates. In addition, the Transferor may have acquired certain Mortgage
Loans which were originated by an originator that, at the time of origination
thereof, was not an approved FHA lender or an approved FNMA or FHLMC
seller/servicer, and therefore, did not have an internal quality control program
with respect to the underwriting and origination of such Mortgage Loans.
Accordingly, these Mortgage Loans, which were not subject to an internal quality
control program at the time of origination, may have a greater likelihood of
subsequently being determined to have breached the applicable representations
and warranties under the Pooling and Servicing Agreement, and if such breach
cannot be cured within the cure period, then the Transferor will be required to
repurchase such Defective Mortgage Loans resulting in an unanticipated
prepayment of principal to the holders of the Offered Certificates. SEE
"Limitations on Repurchase or Replacement of Defective Mortgage Loans by
Transferor" below.
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LIMITED HISTORICAL DELINQUENCY AND LOSS INFORMATION. Since January
1995, the Transferor and the Servicer have substantially increased the volume
of Title I loans and conventional junior lien loans that they have
originated, purchased, sold and/or serviced, and thus, they have limited
historical experience with respect to the performance, including the
delinquency and loss experience and the rate of prepayments of Title I loans
and conventional junior lien loans, with respect to their entire portfolio of
loans and in particular with respect to such increased volume of loans.
Accordingly, the delinquency experience and loan loss and liquidation
experience set forth under "The Transferor and Servicer -- Servicing and FHA
Claims Experience" herein may not be indicative of the performance of the
Mortgage Loans included in the Mortgage Loan Pool. Prospective investors
will have to make an investment determination based on the Mortgage Loan
underwriting criteria, the availability of the Credit Enhancement and other
information provided herein, and not on any prior delinquency experience and
loan loss and liquidation experience information set forth herein.
GEOGRAPHIC CONCENTRATION. Approximately _____% and _____% of the
Initial Pool Principal Balance will consist of Mortgage Loans that are secured
by Mortgaged Properties located in the States of ____________ and ____________,
respectively. Because of the relative geographic concentration of the Mortgage
Loans within these States, delinquencies and losses on the Mortgage Loans may be
higher than would be the case if the Mortgage Loans were more geographically
diversified. For example, adverse economic conditions in these States or
geographic regions (which may or may not affect real property values) may affect
the ability of the related borrowers to make timely payments of their scheduled
monthly payments of principal and interest and, accordingly, the actual rates of
delinquencies, defaults and losses on such Mortgage Loans could be higher than
those currently experienced in the mortgage lending industry for similar types
of mortgage loans. In addition, certain of the Mortgaged Properties may be more
susceptible to certain types of special hazards that are not covered by any
casualty insurance, such as earthquakes, floods and other natural disasters and
major civil disturbances, than residential properties located in other parts of
the country. [With respect to those Mortgage Loans secured by Mortgaged
Properties located in the State of California, the California residential real
estate market has experienced a sustained decline over the last several years.
In general, declines in the California residential real estate market may
adversely affect the values of the Mortgaged Properties securing such Mortgage
Loans such that the principal balances of such Mortgage Loans, together with any
senior mortgage loans on such Mortgaged Properties, will equal or exceed the
value of such Mortgaged Properties. Accordingly, the actual rates of
delinquencies, foreclosures and losses on such California Mortgage Loans could
be higher than those currently experienced in the mortgage lending industry in
general.]
NO SERVICING ADVANCES. In the event of a delinquency or a default with
respect to a Mortgage Loan, neither the Servicer nor any Subservicer will have
an obligation to advance scheduled monthly payments of principal and interest
with respect to such Mortgage Loan.
DEPENDENCE ON SERVICER FOR SERVICING MORTGAGE LOANS. Pursuant to the
Pooling and Servicing Agreement, the Servicer, or each Subservicer on behalf of
the Servicer, will perform the daily loan servicing functions for the Mortgage
Loans that include, without limitation, the collection of payments from the
Mortgage Loans, the remittance of funds from such collections to the Certificate
Account for distribution to the Certificateholders, the bookkeeping and
accounting for such collections and all other servicing activities relating to
the Mortgage Loans, the preparation of the monthly servicing and remittance
reports pursuant to the Pooling and Servicing Agreement and the maintenance of
all records and files pertaining to such servicing activities. The Majority
Certificateholders or the Trustee, with the consent of the Certificate Insurer,
or the Certificate Insurer may remove the Servicer upon the Servicer's failure
to remedy an Event of Default under the Pooling and Servicing Agreement, in
which event a successor servicer will be appointed pursuant to the terms of the
Pooling and Servicer Agreement. Absent such a transfer, the holders of Offered
Certificates will be dependent upon the Servicer to adequately and timely
perform its servicing obligations and remit to the Trustee the funds from the
payments of principal and interest received on the Mortgage Loans, and with
respect to Mortgage Loans being serviced by a Subservicer, the Servicer will be
dependent upon such Subservicer to adequately and timely perform its servicing
obligations and remit to the Servicer the funds from the payments of principal
and interest received on these Mortgage Loans. The manner in which the
Servicer, and each Subservicer, as applicable, performs its servicing
obligations will affect the amount and timing of the principal and interest
payments received on the Mortgage Loans. The principal and interest payments
received on the Mortgage Loans are the primary source of funds for the
distributions due to the Certificateholders under the Pooling and Servicing
Agreement. Accordingly, the Certificateholders will be dependent upon the
Servicer, and each Subservicer, as applicable, to adequately and timely perform
its servicing obligations and such performance will affect the amount and timing
of distributions to the Certificateholders. SEE "The Transferor and Servicer --
Servicing and FHA Claims Experience" herein.
REALIZATION UPON DEFAULTED MORTGAGE LOANS. Substantially all of the
Mortgage Loans are secured by junior liens, and the related senior liens are not
included in the Mortgage Loan Pool. The primary risk to holders of Mortgage
Loans secured by junior liens is the possibility that adequate funds will not be
received in connection with a foreclosure of the
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related Mortgaged Property to satisfy fully both the senior lien(s) and the
Mortgage Loan. SEE "Risk Factors -- Certain Factors Affecting Delinquencies,
Foreclosures and Losses on Mortgage Assets -- Limitations on Realization of
Junior Liens" in the Prospectus. According to the loan servicing practices of
the Servicer and any Subservicer for loans secured by junior liens in their
portfolios and as a result of the costs involved in realizing upon a defaulted
junior lien mortgage loan, the Servicer or any Subservicer will not (i) pursue
the foreclosure of a defaulted Mortgage Loan, (ii) satisfy the senior
mortgage(s) at or prior to the foreclosure sale of the Mortgaged Property, or
(iii) advance funds to keep the senior mortgage(s) current. The Trust Fund will
have no source of funds (and may not be permitted under the REMIC provisions of
the Code) to satisfy the senior mortgage(s) or make payments due to the senior
mortgagee(s), and, therefore, Certificateholders should not expect that any
senior mortgage(s) will be kept current by the Trust Fund for the purpose of
protecting the Trust Fund's junior lien. SEE "Certain Legal Aspects of the
Mortgage Assets -- Foreclosure -- Junior Liens" in the Prospectus.
OTHER LEGAL CONSIDERATIONS. The underwriting, origination, servicing
and collection of the Mortgage Loans are subject to a variety of state and
federal laws, public policies and principles of equity. SEE "Risk Factors --
Certain Factors Affecting Delinquencies, Foreclosures and Losses on Mortgage
Assets -- Certain Legal Considerations" in the Prospectus. The Transferor will
be required to repurchase or replace any Mortgage Loan which did not comply with
applicable state and federal laws and regulations on or prior to the Closing
Date for any Initial Mortgage Loan or Subsequent Transfer Date for any
Subsequent Mortgage Loan. SEE "Limitations on Repurchase or Replacement of
Defective Mortgage Loans by Transferor" below.
Depending on the provisions of applicable law and the specific facts and
circumstances involved, violations of these laws, policies or principles may
limit the ability of the Servicer or any Subservicer to collect all or part of
the principal or interest on the Mortgage Loans, may entitle the borrower to a
refund of amounts previously paid, and, in addition, could subject the Servicer
or any Subservicer to damages and administrative sanctions. Further, violations
of state law can affect the insurability of the Title I Mortgage Loans under FHA
Regulations. SEE "Certain Legal Aspects of the Mortgage Assets -- The Title I
Program -- FHA Insurance Claims Procedures" in the Prospectus. If the Servicer
or any Subservicer is unable to collect all or part of the principal or interest
on any Mortgage Loans because of a violation of the aforementioned laws, public
policies or general principles of equity, then the Trust Fund may be delayed or
unable to make all distributions owed to the Certificateholders to the extent
any related losses are not otherwise covered by amounts available from the
credit enhancement provided for the Offered Certificates, including the Guaranty
Policy. Furthermore, depending upon whether damages and sanctions are assessed
against the Servicer, any Subservicer or the Transferor, such violations may
materially impact the financial ability of the Servicer or Subservicer to
continue to act in such capacity or the ability of the Transferor to repurchase
or replace Defective Mortgage Loans if such violation breaches a representation
or warranty contained in the Pooling and Servicing Agreement.
LIMITATIONS ON REPURCHASE OR REPLACEMENT OF DEFECTIVE MORTGAGE LOANS BY
TRANSFEROR
Pursuant to the Pooling and Servicing Agreement, the Transferor has
agreed to cure in all material respects any breach of the Transferor's
representations and warranties set forth in the Pooling and Servicing Agreement
with respect to the Mortgage Loans, which breach materially and adversely
affects the value of the Mortgage Loans or the interest of the
Certificateholders ("DEFECTIVE MORTGAGE LOANS"). If the Transferor cannot cure
such breach within a specified period of time, the Transferor is required to
repurchase such Defective Mortgage Loans from the Trust Fund or substitute other
loans for such Defective Mortgage Loans. Although a significant portion of the
Mortgage Loans will have been acquired from unaffiliated correspondent lenders,
the Transferor will make the representations and warranties for all such
Mortgage Loans. To the extent that the Transferor has obtained any
representations and warranties from such unaffiliated correspondent lenders, the
Transferor, and the Trustee as the successor to the Transferor's rights with
respect thereto, will have an additional party that is liable for the repurchase
of any Mortgage Loan in breach of the applicable representations and warranties
made by such party. For a summary description of the Transferor's
representations and warranties, SEE "The Pooling and Servicing Agreement --
Assignment of Mortgage Loans" in the Prospectus. In addition, the Transferor is
required to repurchase from the Trust Fund any Title I Mortgage Loan, for which
the related FHA insurance coverage has not been transferred from the
Transferor's FHA Reserve to the Trustee's FHA Reserve within 150 days after the
Closing Date (in the case of the Initial Mortgage Loans) or each Subsequent
Transfer Date (in the case of Subsequent Mortgage Loans) or within such longer
period as may be approved by the Certificate Insurer, or any Title I Mortgage
Loan for which an FHA Claim has been denied and a representation or warranty of
the Transferor has been breached.
No assurance can be given that, at any particular time, the Transferor
will be capable, financially or otherwise, of repurchasing or replacing
Defective Mortgage Loans in the manner described above, or that, at any
particular time, any
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unaffiliated lender from whom the Transferor obtained the Defective Mortgage
Loans will be capable, financially or otherwise, of repurchasing any Defective
Mortgage Loans from the Transferor. If the Transferor repurchases, or is
obligated to repurchase, defective mortgage loans from any Additional Series,
the financial ability of the Transferor to repurchase Defective Mortgage Loans
from this Series may be adversely affected. In addition, other events relating
to the Transferor and its mortgage banking operations can occur that would
adversely affect the financial ability of the Transferor to repurchase defective
Mortgage Loans from this Series, including without limitation the sale or other
disposition of all or any significant portion of its assets. If the Transferor
is unable to repurchase or replace a Defective Mortgage Loan, and if applicable,
such unaffiliated lender is unable to repurchase or replace a Defective Mortgage
Loan it sold to the Transferor, then the Servicer, on behalf of the Trust Fund,
will pursue other customary and reasonable efforts, if any, to recover the
maximum amount possible with respect to such Defective Mortgage Loan, and any
resulting loss will be borne by the Certificateholders to the extent that such
loss is not otherwise covered by amounts available from the credit enhancement
provided for the Offered Certificates, including the Guaranty Policy. SEE
"Additional Credit Enhancement Limitation -- Adequacy of Credit Enhancement"
above, and "The Transferor and Servicer" herein.
LIMITATIONS ON LIQUIDITY OF TRANSFEROR AND SERVICER
As a result of the Transferor's increasing volume of loan originations
and purchases, and its expanding securitization activities, the Transferor
requires substantial capital to fund its operations and has operated, and
expects to continue to operate, on a negative operating cash flow basis.
Currently, the Transferor funds substantially all of its operations, including
its loan originations and purchases, from the capital recently contributed by
RAC, its parent, from the RAC initial public offering in February 1996 and from
borrowings under the Transferor's lending arrangements with certain third
parties, including warehouse and term credit facilities. There can be no
assurance that RAC will be able to contribute additional capital from any
subsequent secondary public offerings or that, as the Transferor's existing
lending arrangements mature, the Transferor will have access to the financing
necessary for its operations or that such financing will be available to the
Transferor on favorable terms. To the extent that RAC is not able to make a
secondary public offering of its stock and that the Transferor is unable to
arrange new warehouse and/or term credit facilities, the Transferor may have to
curtail loan origination and purchasing activities, which could have a material
adverse effect on the Transferor's financial condition and, in turn, its ability
to service the Mortgage Loans and to repurchase any Defective Mortgage Loans.
BANKRUPTCY RECHARACTERIZATION OF SALE OF MORTGAGE LOANS
The Depositor believes that upon the sale of the Offered Certificates to
an independent third party for fair value and without recourse, such sale will
constitute an absolute and unconditional sale of such Offered Certificates and
the interest in the Mortgage Loans evidenced thereby. However, in the event of
the bankruptcy of the Depositor or the Transferor at a time when either of them
or any affiliate thereof holds all or a substantial portion of the Class B
Certificates or the Class R Certificates, a trustee in bankruptcy could attempt
to recharacterize the sale of the Mortgage Loans to the Trust Fund as a
borrowing by the Depositor or the Transferor or any such affiliate, with the
result that Certificateholders are deemed to be creditors of the Depositor or
the Transferor or such affiliate, secured by a pledge of the Mortgage Loans. If
such an attempt were successful, a trustee in bankruptcy could elect to
accelerate payment of the Offered Certificates and liquidate the Mortgage Loans
with the holders of the Offered Certificates entitled to the then outstanding
Class Principal Balance thereof together with accrued interest, as the case may
be, to the extent of the value of the Mortgage Loans at such time. If such
value were less than outstanding Class Principal Balance of the Offered
Certificates, a principal deficiency could occur. Thus, the holders of Offered
Certificates could lose the right to future payments of interest, might suffer
reinvestment loss in a lower interest rate environment and could suffer a loss
of principal and interest to the extent that such loss is not otherwise covered
by amounts available from the credit enhancement provided for the Offered
Certificates, including the Guaranty Policy. SEE "Additional Credit Enhancement
Limitations -- Adequacy of Credit Enhancement" above.
USE OF PROCEEDS
The proceeds from the sale of the Offered Certificates, net of certain
expenses, will be used by the Depositor as consideration for the purchase of the
Initial Mortgage Loans from the Transferor and to fund the Pre-Funding Account
Deposit and the Capitalized Interest Account Deposit. The Transferor in turn
will use all or a substantial portion of such proceeds from the sale of the
Initial Mortgage Loans to repay certain indebtedness in the form of one or more
warehouse financing arrangements, which have been utilized to finance the
acquisition of such Initial Mortgage Loans and are secured by such Initial
Mortgage Loans, and to replenish its working capital funds that were previously
used to originate or acquire the Mortgage Loans not pledged under a warehouse
financing arrangement. SEE "Underwriting" herein.
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<PAGE>
THE MORTGAGE LOAN POOL
GENERAL
The "MORTGAGE LOAN POOL" will consist of the collective pool of the
Initial Mortgage Loans together with any Subsequent Mortgage Loans conveyed to
the Trust Fund after the Closing Date. All of the Mortgage Loans will be
evidenced by promissory notes, retail installment sales contracts or other
evidences of indebtedness (the "NOTES") and will be secured by mortgages, deeds
of trust or other similar security instruments (the "MORTGAGES") creating a lien
or security interest on single family (one-to-four unit) residences, units in
planned unit developments, units in condominium developments and town homes (the
"MORTGAGED PROPERTIES") located in various states. Substantially all of these
Mortgages will be junior in priority to one or more senior liens on the related
Mortgaged Properties, which consist primarily of owner-occupied single family
residences. The indebtedness secured by the related senior liens will not be
included in the Mortgage Loan Pool. Certain of the Mortgage Loans will be
partially insured to the extent described herein (and subject to the conditions
described herein) by the FHA under the Title I Program (the "TITLE I MORTGAGE
LOANS"); while all of the other Mortgage Loans will not be insured or guaranteed
by a governmental agency (the "CONVENTIONAL MORTGAGE LOANS"). The Conventional
Mortgage Loans will consist of mortgage loans for which the proceeds thereof
were used as follows: to finance property improvements ("CONVENTIONAL HOME
IMPROVEMENT LOANS"), for debt consolidation purposes ("CONVENTIONAL DEBT
CONSOLIDATION LOANS"), and in combination to finance approximately 50% property
improvements and approximately 50% for other purposes, which are marketed by the
Transferor under the name "BUSTER-TM- LOANS" ("CONVENTIONAL COMBINATION
LOANS"). The Mortgage Loans have scheduled monthly payment dates throughout a
month. No Mortgage Loan provides for deferred interest or negative
amortization. There will not be any commercial or multifamily loans included in
the Mortgage Loan Pool.
Generally, the Mortgage Loans will have been originated or acquired by
the Transferor in one of four ways: (i) the indirect origination and purchase
of retail installment sales contracts from a network of independent contractors
or dealers professionally installing the property improvements ("indirect
originations"); (ii) the origination of loans directly to consumers, including
but not limited to solicitations through direct mail and telemarketing ("direct
originations"); (iii) the wholesale purchase of loans, on a flow basis,
originated by other unaffiliated lenders, as correspondents ("correspondent
purchases"); or (iv) the purchase, on a bulk basis, of loan portfolios
originated by other unaffiliated lenders ("portfolio acquisitions"). A
substantial percentage (no less than ___%) of the Mortgage Loans that consist of
indirect originations, direct originations and correspondent purchases (other
than Title I Mortgage Loans), will have been underwritten (in the case of
originations) and reunderwritten (in the case of purchases), to determine
whether such Mortgage Loans comply with the underwriting standards of the
Transferor. However, all of the Mortgage Loans that consist of portfolio
acquisitions and, in the case of Title I Mortgage Loan correspondent purchases,
will have been reunderwritten or reviewed only on a limited sample basis
(approximately __% to __%) for compliance with the Transferor's underwriting
standards.
The Mortgage Loans including both Initial Mortgage Loans and Subsequent
Mortgage Loans that will have been acquired from correspondent purchases from
the two largest unaffiliated lenders will not constitute more than ____% and
____%, respectively, of the aggregate Cut-Off Date Principal Balances of the
Mortgage Loans. The Mortgage Loans including both Initial Mortgage Loans and
Subsequent Mortgage Loans that will have been acquired from portfolio
acquisitions from any individual unaffiliated lender will not constitute more
than ___% of the aggregate Cut-Off Date Principal Balances of the Mortgage
Loans.
For a description of the underwriting criteria applicable to the
Mortgage Loans, SEE "The Transferor and Servicer -- Underwriting Criteria"
herein. All of the Mortgage Loans will be acquired by the Transferor and sold
by the Transferor to the Depositor, and pursuant to the Pooling and Servicing
Agreement, the Depositor will sell, convey, transfer and assign the Mortgage
Loans to the Trustee for the benefit of the Certificateholders. With respect to
the Initial Mortgage Loans and the Subsequent Mortgage Loans, the Transferor
will retain accrued interest at the respective Mortgage Loan Rates on the
principal amount of the Initial Mortgage Loans up to the Closing Date and of the
Subsequent Mortgage Loans up to the related Transfer Date, respectively.
CHARACTERISTICS OF INITIAL MORTGAGE LOANS
The following is a brief description of certain terms of the Initial
Mortgage Loans proposed to be included in the Mortgage Loan Pool as of the date
of this Prospectus Supplement. Unless otherwise indicated, this description
does not take into account any Subsequent Mortgage Loans that may be added to
the Mortgage Loan Pool during the Funding Period through the application of
amounts on deposit in the Pre-Funding Account. Prior to the Closing Date, the
Transferor may
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remove any of the Initial Mortgage Loans intended for inclusion in the Mortgage
Pool, substitute comparable loans therefor, or add comparable loans thereto;
however, the aggregate principal balance of Initial Mortgage Loans so removed,
replaced or added cannot exceed ____% of the Initial Pool Principal Balance. To
the extent that, prior to the Closing Date, mortgage loans are removed from or
added to the Mortgage Loan Pool, an amount equal to the aggregate principal
balances of such mortgage loans, will be added to or deducted from,
respectively, the Pre-Funding Account Deposit on the Closing Date. As a result,
the statistical information presented below regarding the Initial Mortgage Loans
proposed to be included in the Mortgage Loan Pool as of the date of this
Prospectus Supplement may vary in certain respects from comparable information
based on the actual composition of the Mortgage Loan Pool at the Closing Date.
In addition, after the __________________, 199__ Cut-Off Date the actual
Mortgage Loan Pool may vary from the description below due to a number of
factors, including prepayments after the __________________, 199__ Cut-Off Date
or the purchase of any Subsequent Mortgage Loans after the Closing Date. SEE "-
- - Conveyance of Subsequent Mortgage Loans" below. A schedule of the Initial
Mortgage Loans included in the Mortgage Loan Pool as of the Closing Date will be
attached to the Pooling and Servicing Agreement delivered to the Trustee upon
delivery of the Certificates.
After each transfer of Subsequent Mortgage Loans to the Trust Fund it is
expected that the Pool Principal Balance will consist of approximately ____% to
____% Conventional Mortgage Loans and approximately ____% to ____% Title I
Mortgage Loans.
The Initial Mortgage Loans included in the initial Mortgage Loan Pool
will consist of approximately _______ loans having an Initial Pool Principal
Balance of approximately $___________. The Initial Mortgage Loans (by
outstanding principal balance) will be comprised of the following: approximately
___% will be Title I Mortgage Loans; and approximately ___% will be Conventional
Mortgage Loans, of which approximately ___% will be Conventional Home
Improvement Loans, approximately ___% will be Conventional Debt Consolidation
Loans and approximately ___% will be Conventional Combination Loans. With
respect to the Initial Mortgage Loans, approximately ____% of the Title I
Mortgage Loans will have been originated within the last 6 months; approximately
____% will have been originated more than 6 months but less than 24 months prior
to the date hereof; approximately ____% of the Conventional Mortgage Loans will
have been originated within the last 6 months and approximately ____% of the
Conventional Mortgage Loans will have been originated more than 6 months but
less than 24 months prior to the date hereof. Certain characteristics of the
Initial Mortgage Loans included in the Mortgage Loan Pool, as of the
__________________, 199__ Cut-Off Date, are set forth in the tables below.
PORTFOLIO SUMMARY BY LOAN TYPE
[Insert Table]
MORTGAGE LOAN RATE
[Insert Table]
LOAN GRADE CLASSIFICATIONS
[Insert Table]
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GEOGRAPHIC CONCENTRATION
[Insert Table]
CUT-OFF DATE LOAN PRINCIPAL BALANCES
[Insert Table]
REMAINING TERM TO MATURITY
[Insert Table]
MONTHS SINCE ORIGINATION
[Insert Table]
The weighted average Mortgage Loan Rate of the Initial Mortgage Loans
will be approximately _____% per annum. All Initial Mortgage Loans will have
interest rates of at least ___% per annum but not more than ___% per annum. The
Initial Mortgage Loans will have an average outstanding principal balance as of
the __________________, 199__ Cut-Off Date of approximately $_____________. The
Initial Mortgage Loans will have had an average outstanding principal balance at
origination of approximately $_____________. All of the Initial Mortgage Loans
will have been originated after __________________, 199__, and prior to
__________________, 199__. None of the Initial Mortgage Loans will have a
scheduled maturity later than __________________, 20__. The weighted average
remaining term to maturity of the Initial Mortgage Loans as of the
__________________, 199__ Cut-Off Date was approximately ____ months.
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CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS
Under the Pooling and Servicing Agreement the obligation of the
Trust Fund to purchase Subsequent Mortgage Loans on a Subsequent Transfer Date
for assignment to the Mortgage Loan Pool is subject to the requirements
described under "Conveyance of Subsequent Mortgage Loans" in the Prospectus,
as well as the following additional requirements: (i) generally such
Subsequent Mortgage Loans may not be 30 or more days contractually delinquent
as of the related Subsequent Cut-Off Date, (ii) the original term to stated
maturity of such Subsequent Mortgage Loans may not exceed 20 years; (iii)
generally each such Subsequent Mortgage Loan will have an interest rate of not
less than ______%, and a scheduled maturity no later than 20___; (iv) such
Subsequent Mortgage Loans will be underwritten or re-underwritten, as
applicable, in accordance with the underwriting guidelines of the Transferor
(SEE "The Transferor and Servicer -- Underwriting Criteria") or
originated in a manner similar to the Initial Mortgage Loans; and (v)
following the purchase of such Subsequent Mortgage Loans by the Trust Fund,
the Mortgage Loans included in the Mortgage Loan Pool (including the
Subsequent Mortgage Loans purchased by the Trust Fund after the Closing Date)
(a) will have a weighted average Mortgage Loan Rate of at least _____%, in the
case of Title I Mortgage Loans, and ______%, in the case of Conventional
Mortgage Loans; (b) will have weighted average term to maturity as of
__________________, 199__ of approximately ___ to ___ months; and (c) will not
include Mortgage Loans from portfolio acquisitions from any individual
unaffiliated lender that, together with any Initial Mortgage Loans acquired
from the same unaffiliated lender, would exceed __% of the aggregate Cut-Off
Date Principal Balances of the Mortgage Loans. Following the transfer of such
Subsequent Mortgage Loans to the Mortgage Loan Pool, the aggregate statistical
characteristics of the Mortgage Loans then held in the Mortgage Loan Pool may,
and likely will, vary from those of the Initial Mortgage Loans included in the
Initial Mortgage Loan Pool. SEE "Risk Factors -- Acquisition of Subsequent
Mortgage Loans from Pre-Funding Account".
THE GUARANTY POLICY
GENERAL
The following discussion under this heading of "The Guaranty Policy"
will only be applicable to holders of the Offered Certificates. The following
information has been furnished by the Certificate Insurer for use herein.
The Certificate Insurer, in consideration of the payment of the premium
due under and subject to the terms of the Guaranty Policy, will unconditionally
and irrevocably guarantee to any holder of the Offered Certificates that an
amount equal to each full and complete Guaranteed Payment for such Offered
Certificates will be received by the Trustee or its successor on behalf of such
holder from the Certificate Insurer for distribution by the Trustee to each such
holder of such holder's proportionate share of such Guaranteed Payment. The
Certificate Insurer's obligations under the Guaranty Policy with respect to a
particular Guaranteed Payment for the Offered Certificates will be finally and
completely discharged to the extent funds equal to the applicable Guaranteed
Payment are received from the Certificate Insurer by the Trustee, whether or not
such funds are properly applied by the Trustee. Guaranteed Payments will be
made only at the time set forth in the Guaranty Policy and no accelerated
Guaranteed Payments will be made regardless of any acceleration of the Offered
Certificates, unless such acceleration is at the sole option of the Certificate
Insurer.
Notwithstanding the foregoing paragraph, the Guaranty Policy does not
cover shortfalls, if any, attributable to the liability of the Trust Fund, the
Servicer or the Trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability).
The Certificate Insurer will pay any Guaranteed Payment for the Offered
Certificates that is a Preference Amount (as defined below) on the Business Day
following receipt on a Business Day by the Fiscal Agent (as defined below) of
(i) a certified copy of the order of a bankruptcy court requiring the return of
a preference payment, (ii) an opinion of counsel satisfactory to the Certificate
Insurer that such order is final and not subject to appeal, (iii) an assignment
in such form as is reasonably required by the Certificate Insurer irrevocably
assigning to the Certificate Insurer all rights and claims of each
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holder of such Offered Certificates relating to or arising under such Class of
Certificates against the debtor which made such preference payment or otherwise
with respect to such preference payment and (iv) appropriate instruments to
effect the appointment of the Certificate Insurer as agent for each holder of
such Offered Certificates in any legal proceeding related to such preference
payment, such instruments being in a form satisfactory to the Certificate
Insurer, provided that if such documents are received after 12:00 noon New York
City time on such Business Day, they will be deemed to be received on the
following Business Day. Such payments will be disbursed to the receiver or
trustee in bankruptcy named in the final order of the court exercising
jurisdiction on behalf of each holder of such Offered Certificates and not to
any such holder directly unless such holder has returned principal or interest
paid on such Offered Certificates to such receiver or trustee in bankruptcy, in
which case such payment will be disbursed to such holder.
The Certificate Insurer will pay any other amount payable under the
Guaranty Policy no later than 12:00 noon New York City time on the later of (i)
the Distribution Date on which the related Interest Remittance Amount or
Principal Remittance Amount for the Offered Certificates is due or (ii) the
Business Day following receipt in New York, New York on a Business Day by
_________________________________, as Fiscal Agent for the Certificate Insurer
or any successor fiscal agent appointed by the Certificate Insurer (the "FISCAL
AGENT"), of a Notice (as defined below); provided that if such Notice is
received after 12:00 noon New York City time on such Business Day, it will be
deemed to be received on the following Business Day. If any such Notice
received by the Fiscal Agent is not in proper form or is otherwise insufficient
for the purpose of making a claim under the Guaranty Policy it will be deemed
not to have been received by the Fiscal Agent for purposes of this paragraph,
and the Certificate Insurer or the Fiscal Agent, as the case may be, will
promptly so advise the Trustee and the Trustee may submit an amended Notice.
Guaranteed Payments for a Offered Certificate due under the Guaranty
Policy, unless otherwise stated herein, will be disbursed by the Fiscal Agent to
the Trustee on behalf of the holders of such Class of Certificates by wire
transfer of immediately available funds in the amount of such Guaranteed Payment
less, in respect of Guaranteed Payments related to Preference Amounts, any
amount held by the Trustee for the payment of such Guaranteed Payment and
legally available therefor.
The Fiscal Agent is the agent of the Certificate Insurer only and the
Fiscal Agent will in no event be liable to any holders of any Offered
Certificates for any acts of the Fiscal Agent or any failure of the Certificate
Insurer to deposit or cause to be deposited sufficient funds to make payments
due under the Guaranty Policy.
Moody's rates the claims paying ability of the Certificate Insurer "____".
Standard & Poor's rates the claims paying ability of the Certificate Insurer
"____". Fitch Investors Service, L.P. rates the claims paying ability of the
Certificate Insurer "____". Each such rating of the Certificate Insurer should
be evaluated independently. Any further explanation of the significance of the
above ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold any Class of
the Offered Certificates, and such ratings may be subject to revision or
withdrawal at any time by the rating agencies. Any downward revision or
withdrawal of any of the above ratings may have an adverse effect on the market
price of any Offered Certificates. The Certificate Insurer does not guaranty
the market price of any Offered Certificates nor does it guaranty that the
ratings on any Offered Certificates will not be down-graded or withdrawn.
As used herein under the heading, "The Guaranty Policy", the following
terms will have the following meanings:
"BUSINESS DAY" means any day other than a Saturday, a Sunday or a day on
which banking institutions in New York City or in the city in which the
corporate trust office of the Trustee is located are authorized or obligated by
law or executive order to close.
"OFFERED CERTIFICATEHOLDER" means (for purposes of the Guaranty Policy)
each registered holder of a Offered Certificate (other than the Trust Fund, the
Depositor, the Servicer, or any Subservicer) who, on the applicable Distribution
Date, is entitled to receive payment on such Offered Certificate pursuant to its
terms.
"DEFICIENCY AMOUNT" means (for purposes of the Guaranty Policy) and as of
any Distribution Date, the amount by which the sum of the Interest Remittance
Amount and Principal Remittance Amount for the Offered Certificates exceeds the
Amount Available for distribution on such Offered Certificates for such
Distribution Date. SEE "Description of Certificates -- Distributions on Offered
Certificates" herein.
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<PAGE>
"GUARANTEED PAYMENTS" means with respect to the Guaranty Policy for the
Offered Certificates (i) as of any Distribution Date, any Deficiency Amount and
(ii) any unpaid Preference Amount.
"INSURANCE AGREEMENT" means the Insurance and Indemnification Agreement
dated as of _______________, 199__, between the Certificate Insurer, as insurer,
FIRSTPLUS INVESTMENT CORPORATION, as Depositor, FIRSTPLUS FINANCIAL, INC.,
as Servicer, FHA Claims Administrator and Transferor, and
________________________, as contract holder and Trustee.
"NOTICE" means the telephonic or telegraphic notice, promptly confirmed in
writing by telecopy, substantially in the form of Exhibit A attached to the
Guaranty Policy, the original of which is subsequently delivered by registered
or certified mail, from the Trustee specifying the Guaranteed Payment which will
be due and owing on the applicable Distribution Date.
"POOLING AND SERVICING AGREEMENT" means the Pooling and Servicing Agreement
dated as of __________________, 199__ between FIRSTPLUS FINANCIAL, INC.,
a Texas corporation, as Transferor and Servicer, FIRSTPLUS INVESTMENT
CORPORATION, as Depositor, and ___________________________, as Trustee, without
regard to any amendment or supplement thereto.
"PREFERENCE AMOUNT" means any amount previously distributed to any holder
of a Offered Certificate with respect to such Offered Certificates that is
recoverable and sought to be recovered as a voidable preference by a trustee in
bankruptcy pursuant to the United States Bankruptcy Code (11 U.S.C.), as amended
from time to time, in accordance with a final nonappealable order of a court
having competent jurisdiction.
Capitalized terms used in the Guaranty Policy and not otherwise defined in
such Guaranty Policy will have the respective meanings set forth in the Pooling
and Servicing Agreement as of the date of execution of the Guaranty Policy,
without giving effect to any subsequent amendment or modification to the Pooling
and Servicing Agreement unless such amendment or modification has been approved
in writing by the Certificate Insurer in accordance with the terms of the
Pooling and Servicing Agreement.
Any notice under the Guaranty Policy or service of process on the Fiscal
Agent of the Certificate Insurer may be made at the address listed below for the
Fiscal Agent of the Certificate Insurer or such other address as the Certificate
Insurer shall specify in writing to the Trustee. The notice address of the
Fiscal Agent is _______________________________________________________________,
or such other address as the Fiscal Agent and the Certificate Insurer shall
specify to the Trustee in writing.
The Guaranty Policy is being issued under and pursuant to, and shall be
construed under, the laws of the State of New York, without giving effect to the
conflict of laws principles thereof. The insurance provided by the Guaranty
Policy is not covered by the Property/Casualty Insurance Security Fund specified
in Article 76 of the New York Insurance Law. The Guaranty Policy is not
cancelable for any reason. The premium on the Guaranty Policy is not refundable
for any reason including payment, or provision being made for payment, prior to
maturity of the Offered Certificates.
THE CERTIFICATE INSURER
The following information has been supplied by the Certificate Insurer for
inclusion herein.
The Certificate Insurer is domiciled in the State of _______________ and
licensed to do business in all 50 states, the District of Columbia, the
Commonwealth of Puerto Rico.
All information regarding the Certificate Insurer, including the financial
statements of the Certificate Insurer for the year ended December 31, 199__,
prepared in accordance with generally accepted accounting principles and
included in the Annual Report on Form 10-K of ________________________ for the
year ended December 31, 199__ (available from the Certificate Insurer upon
request or from the Securities and Exchange Commission), is hereby incorporated
by reference into this Prospectus Supplement and shall be deemed to be a part
hereof. Any statement contained in a document incorporated by reference herein
shall be modified or superseded for purposes of this Prospectus Supplement to
the extent that a statement contained herein or in any other subsequently filed
document which also is incorporated by reference herein modifies or supersedes
such statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute part of this Prospectus
Supplement.
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<PAGE>
The tables below present selected financial information of the Certificate
Insurer determined in accordance with statutory accounting practices prescribed
or permitted by insurance regulatory authorities ("SAP") and generally accepted
accounting principles ("GAAP"):
<TABLE>
<CAPTION>
SAP GAAP
-------------------- --------------------
December 31 September 30 December 31 September 30
199__ 199__ 199__ 199__
----------- ------------ ----------- ------------
(millions) (millions)
(Audited) (Unaudited) (Audited) (Unaudited)
<S> <C> <C> <C> <C>
Admitted Assets..... $ $ Assets............... $ $
Liabilities......... Liabilities..........
Capital and Surplus. Shareholder's Equity.
</TABLE>
[All financial statements of the Certificate Insurer included in documents
filed by the Certificate Insurer pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act") prior
to the termination of the offering of the Certificates shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing such documents.]
[The Certificate Insurer's audited financial statements for the fiscal
years ended December 31, 1994 and 1995 prepared in accordance with statutory
accounting practices are set forth below.]
The Certificate Insurer does not accept any responsibility for the accuracy
or completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of the information regarding the Guaranty Policy and the Certificate Insurer set
forth under the heading "The Guaranty Policy" and the subheading "The
Certificate Insurer" and the accuracy of the information with respect to the
Certificate Insurer that is incorporated by reference herein. The foregoing
information set forth herein under the heading "The Guaranty Policy" regarding
the Guaranty Policy and the Certificate Insurer (including the data in the
foregoing tables) has been provided by the Certificate Insurer and has not been
reviewed or verified by the Transferor, the Servicer, the Depositor, the Trustee
or the Underwriter.
FHA INSURANCE FOR TITLE I MORTGAGE LOANS
GENERAL
Although Title I loans are available for several types of properties, the
Title I Mortgage Loans will include primarily one-to four-family property
improvement loans. A majority of the Title I Mortgage Loans among the Initial
Mortgage Loans will be direct loans, as a result of the inclusion of the Title I
Mortgage Loans purchased by the Transferor from unaffiliated lenders. A portion
of the Title I Mortgage Loans among the Initial Mortgage Loans will be dealer
loans. For a general description of the Title I Program and the FHA Insurance
provided thereunder for the Title I Mortgage Loans see "Certain Legal Aspects of
the Mortgage Assets -- The Title I Program" in the Prospectus.
TRANSFER OF FHA INSURANCE
In order to accomplish the transfer of the FHA Insurance Amount for the
Title I Mortgage Loans, as soon as practicable after the Closing Date, the
Transferor will prepare and submit a Transfer Report to the FHA regarding the
assignment of the Title I Mortgage Loans to the Depositor at such time as the
Transferor has determined that the FHA has registered substantially all of the
insurance coverage for the Title I Mortgage Loans within the Transferor's FHA
Reserve, including such insurance for any Title I Mortgage Loans acquired from
any other Title I Lenders. On each Transfer Date, the FHA Claims Administrator,
on behalf the Depositor, will allocate on the Depositor's books and records that
portion of the insurance coverage within Depositor's FHA Reserve equal to the
FHA Insurance Amount transferred by the FHA with respect to the related Title I
Mortgage Loans as available for FHA Claims relating to the Title I Mortgage
Loans. Also, as soon as practicable after the final Transfer Date, the
Depositor or the FHA Claims Administrator is required to certify to the Rating
Agencies, the Certificate Insurer and the Trustee as to the actual amount of the
initial FHA Insurance Amount. With respect to the transfer of the FHA Insurance
Amount, SEE "Risk Factors -- Additional Credit Enhancement Limitations --
Limitations on FHA Insurance" herein, and "Certain Legal Aspects of the Mortgage
Assets -- The Title I Program" in the Prospectus.
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<PAGE>
The FHA Insurance Amount to be transferred from the Transferor's FHA
Reserve to the Depositor's FHA Reserve in respect of the Title I Mortgage Loans
will NOT equal 10% of the outstanding principal balance of the Title I Mortgage
Loans, because of previous reductions in the FHA Insurance Amount. The FHA
Insurance Amount to be transferred from the Transferor's FHA Reserve to the
Depositor's FHA Reserve for the Title I Mortgage Loans is expected to equal not
less than ___% of the Cut-off Date Principal Balances of the Title I Mortgage
Loans that are expected to be conveyed to the Trust Fund including any
Subsequent Mortgage Loans. If the FHA Insurance Amount so transferred is less
than __% of the Cut-Off Date Principal Balances of the Title I Mortgage Loans
that are actually conveyed to the Trust Fund, then the Required Class a
Overcollateralization Level will be increased by ___% of the amount of such
shortfall.
On the final Transfer Date, such FHA Insurance Amount will be the maximum
amount of insurance coverage in the Depositor's FHA Reserve that will be
available for the submission of claims on the Title I Mortgage Loans, and
thereafter, such FHA Insurance Amount will be decreased as a result of payments
by the FHA in respect of FHA Claims submitted for the Title I Mortgage Loans
after the Transfer Dates and as a result of the repurchase or substitution of
Title I Mortgage Loans by the Transferor. Except in connection with the
conveyance to the Trust Fund of any Subsequent Mortgage Loans that are Title I
Mortgage Loans and the substitution of Title I Mortgage Loans, the FHA Insurance
Amount for the Title I Mortgage Loans will not be increased for any other Title
I loans, either previously or subsequently owned by the Depositor and reported
for insurance in the Depositor's FHA Reserve.
On the final Transfer Date, the amount of FHA insurance coverage that will
have been transferred from the Transferor's FHA Reserve to the Depositor's FHA
Reserve will be less than the maximum amount of insurance coverage transferrable
which would otherwise equal 10% of the unpaid principal balance or the purchase
price, if less. However, if individual Title I Mortgage Loans are repurchased
from the Depositor, on behalf of the Trust Fund, by the Transferor, the Servicer
and/or any Subservicer, then with respect to any individual Title I Mortgage
Loan the amount of FHA insurance coverage that will be transferred from the
Depositor's FHA Reserve, in all likelihood, will be the maximum amount of
insurance coverage of 10% of the unpaid principal balance or the purchase price,
if less, until such time as the Depositor's FHA Reserve has been reduced to a
balance which is less than such maximum amount. Accordingly, the transfer of
insurance coverage from the Depositor's FHA Reserve as the result of the
repurchase of Title I Mortgage Loans will cause a disproportionately larger
reduction to the FHA Insurance Amount for each individual Title I Mortgage Loan
and if a significant amount of Title I Mortgage Loans are repurchased, could
result in a substantial reduction of such FHA Insurance Amount and the relative
percentage of such FHA Insurance Amount to the principal balance of the Title I
Mortgage Loans remaining in the Trust Fund.
The Pooling and Servicing Agreement provides that the Depositor or the FHA
Claims Administrator then acting as its agent and attorney-in-fact shall submit
an FHA Claim with respect to any Title I Mortgage Loan that goes into default if
the default cannot be cured. If, as a result of the delay in the transfer of
the FHA Insurance described above, the FHA Insurance is not available with
respect to any defaulted Title I Mortgage Loan at the time it goes into default,
then the amount required to make interest payments to the Certificateholders
with respect to the principal amount thereof, until such FHA Insurance becomes
available and a claim for insurance can be made, if at all, will be paid from
other amounts, if any, available in the Certificate Account.
SUBMISSION OF FHA CLAIMS
The Depositor and Trustee will contract with the Servicer to serve as FHA
Claims Administrator and as such to handle all aspects of administering,
processing and submitting FHA Claims with respect to the Title I Mortgage Loans,
in the name and on behalf of the Depositor. The Servicer (acting as FHA Claims
Administrator) will file all claims with the FHA and monitor the FHA Insurance
Amount with respect to the Title I Mortgage Loans. In the event it is
determined that any FHA Claims Administrator is no longer able to perform its
duties hereunder, the Trustee or its designee will perform the obligations and
duties of the FHA Claims Administrator until a successor has assumed the FHA
Claims Administrator's responsibilities and obligations under the Pooling and
Servicing Agreement.
In the case of the Trust Fund, if the Depositor were to hold loans insured
under the Title I Program on behalf of another trust fund, if the FHA were to
determine that insurance claims were paid in respect of loans ineligible for
insurance that related to such other trust fund and if such other trust fund, on
behalf of the Depositor, was unable or otherwise failed to repurchase the
ineligible loans, then the FHA could offset the amount of the repurchase
obligation against insurance proceeds payable with respect to one or more Title
I Mortgage Loans. If the Depositor or the Trustee were unable to recover the
amount of such offset from the other trust fund, the Trust Fund could experience
a loss as a result. Accordingly, claims
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<PAGE>
paid to the Depositor or the FHA Claims Administrator by the FHA with respect to
Title I loans other than the Title I Mortgage Loans may reduce the FHA Insurance
Amount.
In no event will the Depositor or any FHA Claims Administrator submit any
FHA Claim if the amount of such FHA Claim would exceed the FHA Insurance Amount.
In addition, the Depositor or any FHA Claims Administrator will not submit any
claim for FHA insurance relating to a Title I loan not part of the Trust Fund if
the effect thereof would be to reduce the FHA Insurance Amount.
THE DEPOSITOR
FIRST PLUS INVESTMENT CORPORATION (the "DEPOSITOR") is a Nevada
corporation, formerly known as Remodelers Investment Corporation, organized
in 1995 and is a wholly owned subsidiary of RAC. The Depositor was formed
as a limited purpose finance company to effect the securitization of
conventional (i.e., not insured or guaranteed by a governmental agency) pr
operty improvement and/or debt consolidation loans, property improvement and
manufactured housing loans partially insured by the FHA under the Title I
Program, and other types of assets.
The Transferor will sell, convey, transfer and assign all of its right,
title and interest in and to the Mortgage Loans to the Depositor. In turn, the
Depositor will sell, convey, transfer and assign the Mortgage Loans to the
Trustee for the benefit of the Trust Fund.
THE TRANSFEROR AND SERVICER
GENERAL
FIRSTPLUS FINANCIAL INC. ("FFI"), formerly known as Remodelers National
Funding Corp., a Texas corporation, was organized in 1986 and received its
Title I contract of insurance in October of 1986. FFI and one or more
affiliated corporations will transfer the Mortgage Loans to the Depositor
(individually or collectively in such capacity, the "TRANSFEROR"). FFI also
will service the Mortgage Loans under the Pooling and Servicing Agreement (in
such capacity, the "SERVICER"). Each Transferor, including FFI, is wholly
owned either directly or indirectly by RAC Financial Group, Inc., a Nevada
corporation ("RAC"), and is primarily engaged in the business of originating,
purchasing, underwriting, selling and/or servicing residential mortgage loans
including home improvement and/or debt consolidation loans, which may include
loans insured under the Title I Program. The following affiliates of FFI may
be a Transferor of one or more Mortgage Loans to the Depositor: SFA: State
Financial Acceptance Corporation ("SFAC") and __________________________.
Collectively the Transferor presently maintains a staff of approximately 200
employees, including 11 experienced collectors responsible for delinquent and
defaulted loans. As of September 30, 1995, FFI administered and serviced
approximately 21,000 loans representing approximately $238.6 million in
principal balance (including loans subserviced by others).
In February 1996, RAC completed an initial public offering of its common
stock. As of June 30, 1995, the RAC Consolidated Financial Statements, as
audited, which included RAC and its affiliates, FFI and SFAC, set forth total
assets of $38,504,169, total liabilities of $30,763,211 and total
stockholders' equity of $7,740,958, and for the nine months ended September
30, 1995 set forth net income of $4,866,823. As of October 4, 1994, the RAC
Consolidated Balance Sheet, as audited, which included RAC, FFI and SFAC, set
forth total assets of $11,953,591, total liabilities of $9,352,591 and total
stockholders' equity of $2,601,000. In light of the rapid growth of RAC and
its affiliates, the historical financial performance of RAC and its affiliates
may be of limited relevance in predicting future performance. Any credit or
other problems associated with the large number of loans originated in the
recent past will not become apparent until sometime in the future.
Consequently, historical results of operations of RAC and its affiliates may
be of limited relevance to an investor seeking to predict the future financial
condition of RAC and its affiliates. SEE "Risk Factors -- Limitations on
Liquidity of Transferor and Servicer" herein.
FFI, as the Servicer, will service the Mortgage Loans pursuant to the
Pooling and Servicing Agreement and be entitled to the Servicing Fee and
additional servicing compensation for serving as the Servicer. SEE " --
Servicing and FHA Claims Experience" below and "Description of Certificates --
Servicing" herein. In addition, on the Closing Date FFI will contract with the
Depositor and Trustee to act as FHA Claims Administrator pursuant to the FHA
Claims Administration Agreement. The FHA Claims Administrator, as agent and
attorney-in-fact for the Depositor, will handle all aspects of administering,
processing and submitting FHA Claims with respect to the Title I Mortgage Loans,
on behalf and in the name
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<PAGE>
of the Depositor, and will record and monitor the FHA Insurance with respect to
the Title I Mortgage Loans for the Depositor. FFI will not be entitled to any
fees, in addition to the servicing fees described herein, with respect to
serving as FHA Claims Administrator on behalf of the Depositor and Trustee.
UNDERWRITING CRITERIA
The Transferor believes that all Title I Mortgage Loans underwritten by it
will have been underwritten pursuant to the underwriting requirements of the FHA
and the Transferor's own underwriting requirements. The Transferor believes
that all Conventional Mortgage Loans underwritten by it will have been
underwritten pursuant to the Transferor's own underwriting requirements.
Generally, the underwriting standards of the Transferor, which are substantially
similar for both Title I Mortgage Loans and Conventional Mortgage Loans, are
more stringent than those of the FHA. The Transferor relies principally on the
creditworthiness of the borrower, and to a lesser extent on the underlying
collateral, for repayment of the Title I Mortgage Loans and the Conventional
Mortgage Loans.
Generally, the Title I Mortgage Loans and Conventional Mortgage Loans
originated or purchased by the Transferor will have been made to borrowers that
typically have limited access to consumer financing for a variety of reasons,
such as high levels of debt service-to-income, unfavorable past credit
experience, insufficient home equity value, lower income or a limited credit
history. With respect to the loans originated or purchased by the Transferor,
the collection of loan payments from the related borrowers is subject to various
risks from these borrowers, including without limitation the risk that a
borrower will not satisfy their debt service payments, including payments of
interest and principal on the loan, and that the realizable value of the related
mortgaged property will not be sufficient to repay the outstanding interest and
principal owed on the loan. The Transferor use its own credit evaluation
criteria to classify the borrowers of loans by risk class as "A" through "D"
grade credits. These criteria include, as a significant component, the credit
evaluation score methodology developed by Fair, Issac and Company, a consulting
firm specializing in creating default predictive models through scoring
mechanisms. For fiscal 1995, approximately 76% of the conventional loans
originated or purchased by the Transferor were classified as "B" grade credits
or better, and approximately 62% of the Title I loans originated or purchased by
the Transferor were classified as "B" grade credits or better.
The Transferor's underwriting requirements provide a number of guidelines
to assist underwriters in the credit review and decision process. The
Transferor's underwriting requirements provide for the evaluation of a loan
applicant's creditworthiness through the use of a consumer credit report,
verification of employment and a review of the debt service-to-income ratio of
the applicant, which ratio generally may not exceed 45% of the applicant's gross
income. Income is verified through various means, including without limitation
applicant interviews, written verifications with employers, review of pay stubs
or tax returns. The borrower must demonstrate sufficient levels of disposable
income to satisfy debt repayment requirements. In accordance with these
standards, for Title I Mortgage Loans originated prior to August 1994, an
appraisal of the Mortgaged Property was obtained in connection with originating
Mortgage Loans with an original principal balance in excess of $15,000. After
August 1994, appraisals are only required if the original principal balance
exceeded $15,000 and the home was not owner-occupied or the owner had occupied
the home for less than six months. No title insurance naming the Transferor as
insured was purchased for any Mortgage Loan. Certain FHA guidelines with respect
to Title I Mortgage Loans are described under "Certain Aspects of the Mortgage
Assets -- The Title I Program" in the Prospectus.
REPURCHASE OR SUBSTITUTION OF MORTGAGE LOANS
The Transferor is required (i) within 60 days after discovery or notice
thereof to cure in all material respects any breach of the representations or
warranties made with respect to a Defective Mortgage Loan or (ii) on the
Determination Date next succeeding the end of such 60 day period, to
repurchase such Defective Mortgage Loan as of the date of purchase, plus all
accrued and unpaid interest on such Defective Mortgage Loan to but not
including the Due Date in the Due Period most recently ended prior to such
Determination Date computed at the Mortgage Loan Rate, plus the amount of any
unreimbursed Servicing Advances made by the Servicer with respect to such
Defective Mortgage Loan. In lieu of repurchasing a Defective Mortgage Loan,
the Transferor may replace such Defective Mortgage Loan with one or more
Qualified Substitute Mortgage Loans. If the aggregate outstanding principal
balance of the Qualified Substitute Mortgage Loan(s) is less than the
outstanding principal balance of the Defective Mortgage Loan(s) plus accrued
interest thereon, the Transferor will also remit for distribution to the
Certificateholders an amount equal to such shortfall. The Transferor is also
required to repurchase any Title I Mortgage Loan, the FHA Insurance Amount in
respect of which has not been transferred on the books and records of the FHA
from the Transferor to the Trustee within 150 days after the Closing Date, in
the case of Initial Mortgage Loans, and the Subsequent Transfer Date, in the
case of Subsequent Mortgage Loans, or within such longer period as may be
approved by the Certificate Insurer. As used herein, a "QUALIFIED SUBSTITUTE
MORTGAGE LOAN" is a mortgage loan that (i) has an interest rate of not less
than (and not more than two percentage points more than) the Mortgage Loan
Rate for the Defective Mortgage Loan which it replaces (each, a "DELETED
MORTGAGE LOAN"), (ii) matures not more than one year later than and not more
than one year earlier than the Deleted Mortgage Loan, (iii) has a principal
balance (after application of all payments received on or prior to the date of
such substitution) equal to or less than the Principal Balance of the Deleted
Mortgage Loan as of such date, (iv) has a lien priority no lower than the
Deleted Mortgage Loan, (v) satisfies the criteria set forth from time to time
in the definition of "qualified replacement mortgage" at Section 860G(a)(4)
of the Code (or any successor statute therto), (vi) complies as of the date of
substitution with each representation and warranty set forth in the Pooling
and Servicing Agreement with respect to the Mortgage Loans, (vii) in the case
of a Deleted Mortgage Loan which is a Title I Mortgage Loan, is the same type
of loan as the Deleted Mortgage Loan, either a property improvement loan or a
manufactured home loan (as those terms are defined in the FHA Regulations) and
is covered by FHA Insurance under the Title I Program, and (viii) is secured
by a Mortgage on Mortgaged Property. The repurchase and/or substitution
obligation described above will constitute the sole remedy available to the
Certificateholders with respect to a Defective Mortgage Loan.
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<PAGE>
No assurance can be given that, at any particular time, the Transferor
will be capable, financially or otherwise, of repurchasing Defective Mortgage
Loans or substituting Qualified Substitute Mortgage Loans for Defective
Mortgage Loans in the manner described above. If the Transferor repurchases,
or is obligated to repurchase, Defective Mortgage Loans from any Additional
Series, the financial ability of the Transferor to repurchase Defective
Mortgage Loans from this Series may be adversely affected. In addition, other
events relating to the Transferor and its mortgage banking operations can
occur that would adversely affect the financial ability of the Transferor to
repurchase Defective Mortgage Loans from this Series, including without
limitation the sale or other disposition of all or any significant portion of
its assets. If the Transferor is unable to repurchase or replace a defective
Mortgage Loan, the Servicer, on behalf of the Trust Fund, will pursue other
customary and reasonable efforts, if any, to recover the maximum amount
possible with respect to such Defective Mortgage Loan. If the Servicer is
unable to collect all amounts due to the Trust Fund with respect to such
Defective Mortgage Loan, the resulting loss will be borne by the
Certificateholders to the extent that such loss is not otherwise covered by
amounts available from the credit enhancement provided for the Offered
Certificates. SEE "Risk Factors -- Additional Credit Enhancement Limitations"
and -- Limitations on Repurchase or Replacement of Defective Mortgage Loans by
Transferor" herein.
The Depositor and the Transferor each have the option (1) to remove
Mortgage Loans and substitute Qualified Substitute Mortgage Loans during the
three month period beginning on the Closing Date up to an aggregate amount of
not more than __%, without Certificate Insurer approval, and ___%, with
Certificate Insurer approval, of the aggregate Cut-Off Date Principal Balances
of the Mortgage Loans, and (2) to repurchase any Mortgage Loan incident to the
foreclosure, default or imminent default thereof at any time after the Closing
Date. See "Assets Securing or Underlying the Certificates -- Additions,
Substitution and Withdrawal of Assets" in the Prospectus.
SERVICING AND FHA CLAIMS EXPERIENCE
Since January 1995, the Transferor and the Servicer, have substantially
increased the volume of Title I loans and conventional junior lien loans that
they have originated, purchased, sold and/or serviced, and thus, they have
limited historical experience with respect to the performance, including the
delinquency and loss experience and the rate of prepayments of Title I loans and
conventional junior lien loans, with respect to their entire portfolio of loans
and in particular with respect to such increased volume of loans. Accordingly,
the delinquency experience and loan loss and liquidation experience set forth
below may not be indicative of the performance of the Mortgage Loans included in
the Mortgage Loan Pool.
The following table sets forth delinquency and default experience with
respect to loans from the prior series of similar asset-backed certificates
issued in private placement transactions in which the Transferor acted as both
the transferor and servicer, including loans serviced by the Servicer and loans
serviced by a subservicer.
<TABLE>
<CAPTION>
DELINQUENCY AND DEFAULT EXPERIENCE FOR THE TRANSFEROR'S PRIOR SECURITIZATION TRANSACTIONS
AS OF , 199
-----------------------------
DAYS DELINQUENT 1994-1 1995-1 1995-2 1995-3
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Current.......... $ % $ % $ % $ %
30-59............ $ % $ % $ % $ %
60-89............ $ % $ % $ % $ %
90+.............. $ % $ % $ % $ %
Total delinquencies $ % $ % $ % $ %
(30+)..........
Defaults......... $ % % % %
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
FHA Claims Pending $
FHA Claims Paid . $
FHA Claims Denied $
</TABLE>
S-32
<PAGE>
The delinquency and FHA claims experience information contained in the
preceding table have been calculated on the basis of the indicated loans being
serviced as of the end of the indicated periods. However, because the amount of
loans originated or purchased has increased over these periods as a result of
new originations and loan purchases, the amount of loans serviced as of the end
of any indicated period will include many loans which will not have been
outstanding long enough to give rise to some or all of the indicated periods of
delinquency or to have resulted in defaults or FHA claims. Accordingly, the
delinquency and FHA claims experience set forth in the preceding table may be of
limited relevance in predicting future performance. In fact, in the absence of
additions of newly originated and purchased loans to the amount of loans
serviced, the delinquency percentages indicated above would be higher and could
be substantially higher. In addition, because certain of the related borrowers
for loans originated or purchased by the Transferor may be less creditworthy and
have a higher risk of credit default, as of any future date the actual rates of
delinquencies, defaults and losses on the loans serviced by the Servicer or a
Subservicer, including the Mortgage Loans, could be higher and under adverse
economic conditions could be substantially higher, than those rates indicated in
the preceding table or the rates that are then being experienced in the consumer
finance industry in general. An economic recession could result in decreases in
the financial strength of borrowers and decreases in collateral values. If the
real estate market and economy decline, further increases in delinquencies,
defaults, losses and FHA claims may be experienced. Any sustained period of
increased rates of delinquencies, defaults and losses on loans being serviced by
the Servicer could have a material adverse effect on the Servicer's financial
condition, and, in turn, its ability to service the Mortgage Loans and, in its
capacity as the Transferor, to repurchase Defective Mortgage Loans. SEE "Risk
Factors -- Additional Factors Affecting Delinquencies, Foreclosures and Losses
on Mortgage Loans -- Dependence or Servicer for Servicing Mortgage Loans" and
"Risk Factors -- Limitations on Repurchase or Replacement of Defective Mortgage
Loans by Transferor" herein.
On ______________, 199__, approximately ___% (by dollar volume) of the
Servicer's entire loan servicing portfolio consisted of loans securitized by the
Servicer in its capacity as the Transferor and sold to grantor trusts in
connection with the prior series of similar certificates issued in private
placement transactions. The applicable pooling and servicing agreement for each
of these trusts provides that the trustee of the related trust may terminate the
Servicer's servicing rights if the related loan delinquency or loss experience
exceeds certain standards. On __________________, 199__, none of the trusts had
loan delinquency or loss experience (as set forth in the preceding table) which
exceeded the applicable standards, and thus, no servicing rights have been
terminated under the related pooling and servicing agreements. However, there
can be no assurance that the future loan delinquency and loss experience for any
of these trusts will not exceed the applicable standard in the future, and if
such standard is exceeded that the servicing rights of the Servicer will not be
terminated.
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
Each Mortgage Loan bears simple interest at a fixed rate of interest (the
"MORTGAGE LOAN RATE"). The interest portion of each monthly payment on a
Mortgage Loan is calculated as the product of one-twelfth of the Mortgage Loan
Rate and the principal balance thereof immediately prior to the monthly payment
date.
The effective yield to the holders of each Class of the Offered
Certificates will be slightly lower than the yield otherwise produced by the
applicable Certificate Interest Rate, because the distribution of the interest
accrued during each Due Period (a calendar month consisting of thirty days,
except for the first Due Period) will not be made until the Distribution Date
occurring in the following Due Period. SEE "Description of the Certificates --
Distributions on the Offered Certificates" herein. This delay will result in
funds being passed through to the Certificateholders approximately 20 days after
the end of the monthly accrual period, during which 20-day period no interest
will accrue on such funds. This payment structure could have particularly
severe consequences if significant pro rata principal distributions are made on
the Offered Certificates as a result of a substantial amount of funds remaining
on deposit in the Pre-Funding Account after the termination of the Funding
Period, because interest will not accrue on such principal distributions during
the 20-day period that will elapse between the end of the Due Period immediately
preceding the Distribution Date on which such principal distributions will be
made and such Distribution Date. As discussed in greater detail below greater
than anticipated distributions of principal can also affect the yield on Offered
Certificates purchased at a price greater or less than par.
The rate of principal payments on the Offered Certificates, the aggregate
amount of each interest payment on the Offered Certificates and the yield to
maturity on the Offered Certificates will be directly related to and affected by
the rate and timing of principal reductions on the Mortgage Loans. The
principal reductions on such Mortgage Loans may be in the
S-33
<PAGE>
form of scheduled amortization payments or unscheduled payments or reductions,
which may include prepayments, repurchases and liquidations or write-offs due to
default, casualty, insurance or other dispositions. In addition, the Servicer
may, at its option, purchase from the Trust Fund all of the outstanding Mortgage
Loans and REO Properties, and thus effect the early retirement of the Offered
Certificates, on any Distribution Date following the Determination Date on which
the Pool Principal Balance is less than 10% of the sum of the Initial Pool
Principal Balance, plus the aggregate Cut-Off Date Principal Balance of the
Subsequent Mortgage Loans conveyed to the Trust Fund. SEE "Description of the
Certificates--Termination" herein.
The "WEIGHTED AVERAGE LIFE" of a Offered Certificate refers to the average
amount of time that will elapse from the __________________, 199__ Cut-Off Date
to the date each dollar in respect of principal of such Offered Certificate is
repaid. The weighted average life of the Offered Certificates will be
influenced by, among other factors, the rate at which principal reductions occur
on the Mortgage Loans and the rate at which Excess Spread is distributed to
holders of the Offered Certificates as described herein. If substantial
principal prepayments on the Mortgage Loans are received from unscheduled
prepayments, liquidations or repurchases, then the distributions to the holders
of the Offered Certificates resulting from such prepayments may significantly
shorten the actual average life of the Offered Certificates than would otherwise
be the case. If the Mortgage Loans experience delinquencies and defaults in the
payment of principal, then the holders of the Offered Certificates will
similarly experience a delay in the receipt of principal distributions
attributable to such delinquencies and defaults which in certain instances may
result in a longer actual average life of the Offered Certificates than would
otherwise be the case. However, to the extent that the Principal Balances from
Liquidated Mortgage Loans are included in the principal distributions on the
Offered Certificate as a result of delinquencies and defaults on the Mortgage
Loans and as a result of loss allocations having reduced the Class A
Overcollateralization to zero, then the holders of the Offered Certificate will
experience an acceleration in the receipt of principal distributions which in
certain instances may result in a shorter actual average life of the Offered
Certificates than would otherwise be the case. Interest shortfalls on the
Mortgage Loans due to principal prepayments in full and curtailments and any
resulting shortfall in amounts distributable on the Offered Certificates will be
covered to the extent of amounts available from the credit enhancement provided
for the Offered Certificates. SEE "Risk Factors -- Additional Credit
Enhancement Limitations -- Adequacy of Credit Enhancement" herein.
The rate and timing of principal reductions on the Mortgage Loans will be
influenced by a variety of economic, geographic, social and other factors. For
example, these factors may include changes in borrowers' housing needs, job
transfers, unemployment, the borrowers' net equity in the mortgaged properties,
servicing decisions, homeowner mobility, the existence and enforceability of
"due-on-sale" clauses, seasoning of loans, market interest rates for home
improvement, home equity and/or debt consolidation loans and the availability of
funds for such loans. The Mortgage Loans generally may be prepaid in full or in
part at any time without penalty. As with fixed rate obligations generally, the
rate of prepayment on a pool of loans is affected by prevailing market interest
rates for loans of a comparable term and risk level. If prevailing interest
rates were to fall significantly below the respective Mortgage Loan Rates on the
Mortgage Loans, the rate of prepayment (and refinancing) would be expected to
increase. Conversely, if prevailing interest rates were to rise significantly
above the respective Mortgage Loan Rates on the Mortgage Loans, the rate of
prepayment on the Mortgage Loans would be expected to decrease. In addition,
depending on prevailing market interest rates, the future outlook for market
interest rates and economic conditions generally, some borrowers may sell or
refinance mortgaged properties in order to realize their equity in the mortgaged
properties, to meet cash flow needs or to make other investments. The Depositor
and the Transferor make no representations as to the particular factors that
will affect the prepayment of the Mortgage Loans, as to the relative importance
of such factors, or as to the percentage of the principal balance of the
Mortgage Loans that will be paid as of any date.
Greater than anticipated distributions of principal to holders of the
Offered Certificates will increase the yield on Offered Certificates purchased
at a price less than par but will decrease the yield on Offered Certificates
purchased at a price greater than par, which distributions of principal may be
attributable to scheduled payments and prepayments of principal on the Mortgage
Loans, to Excess Spread and to amounts remaining on deposit in the Pre-Funding
Account after the Funding Period ends. The effect on an investor's yield due to
distributions of principal to the holders of the Offered Certificates (including
without limitation prepayments on the Mortgage Loans) occurring at a rate that
is faster (or slower) than the rate anticipated by the investor during any
period following the issuance of the Offered Certificates will not be entirely
offset by a subsequent like reduction (or increase) in the rate of such
distributions of principal during any subsequent period.
The rate of delinquencies and defaults on the Mortgage Loans, and the
recoveries, if any, on defaulted Mortgage Loans and foreclosed properties, will
also affect the rate and timing of principal payments on the Mortgage Loans, and
accordingly, the weighted average life of the Offered Certificates, and could
cause a delay in the payment of principal or a slower rate of principal
amortization to the holders of Offered Certificates. Alternatively, the
occurrence of delinquencies
S-34
<PAGE>
and defaults on the Mortgage Loans could result in an increase in principal
payments or more rapid rate of principal amortization of the Offered
Certificates as a result of the inclusion of the Principal Balances from
Liquidated Mortgage Loans in the amounts distributable to the holders of the
Offered Certificates as a result of loss allocations having reduced the Class A
Overcollateralization to zero. Certain factors may influence such delinquencies
and defaults, including origination and underwriting standards, loan-to-value
ratios and delinquency history. In general, defaults on residential mortgage
loans are expected to occur with greater frequency in their early years,
although little data is available with respect to the rate of default on junior
lien mortgage loans. The rate of default on Mortgage Loans with high
loan-to-value ratios or secured by junior liens may be higher than that of
mortgage loans with lower loan-to-value ratios or secured by first liens on
comparable properties. Furthermore, the rate and timing of prepayments,
defaults and liquidations on the Mortgage Loans will be affected by the general
economic condition of the region of the country in which the related Mortgaged
Properties are located. SEE "The Mortgage Loan Pool" herein. The risk of
delinquencies and loss is greater and voluntary principal prepayments are less
likely in regions where a weak or deteriorating economy exists, as may be
evidenced by, among other factors, increasing unemployment or falling property
values.
Because principal distributions are paid to certain Classes of Offered
Certificates before other Classes, holders of the Classes having a later
priority of principal distribution bear a greater risk of losses from
delinquencies and defaults on the Mortgage Loans than holders of Classes having
earlier priorities for payment of principal. Holders of the Class B
Certificates will bear a greater risk of losses than holders of the Class A
Certificates; and holders of Class R Certificates will bear a greater risk of
losses than holders of the Class A Certificates and the Class B Certificates.
SEE "Description of the Certificates -- Subordination and Allocation of Losses"
herein. Nevertheless, even if losses are allocated to any Class A Certificates,
the holders of such Class will be distributed the full amount of the interest
and principal distributions due such holders to the extent that Guaranteed
Payments therefor are made under the Guaranty Policy.
Although certain data have been published with respect to the historical
prepayment experience of certain residential mortgage loans, such mortgage loans
may differ in material respects from the Mortgage Loans and such data may not be
reflective of conditions applicable to the Mortgage Loans. No prepayment
history is generally available with respect to the Mortgage Loans or mortgage
loans similar thereto, and there can be no assurance that the Mortgage Loans
will achieve or fail to achieve any particular rate of principal prepayment. A
number of factors suggest that the prepayment experience of the Mortgage Loan
Pool may be significantly different from that of a pool of conventional first
lien, single family mortgage loans with equivalent interest rates and
maturities. One such factor is that the principal balance of the average
Mortgage Loan is smaller than that of the average conventional first lien
mortgage loan. A smaller principal balance may be easier for a borrower to
prepay than a larger balance and, therefore, a higher prepayment rate may result
for the Mortgage Loan Pool than for a pool of first lien mortgage loans,
irrespective of the relative average interest rates and the general interest
rate environment. In addition, in order to refinance a first lien mortgage
loan, the borrower must generally repay any junior liens. However, a small
principal balance may make refinancing a Mortgage Loan at a lower interest rate
less attractive to the borrower as the perceived impact to the borrower of lower
interest rates on the size of the monthly payment may not be significant. Other
factors that might be expected to affect the prepayment rate of the Mortgage
Loan Pool include general economic conditions, the amounts of and interest rates
on underlying senior mortgage loans, and the tendency of borrowers to use real
property mortgage loans as long-term financing for home purchase and junior
liens as shorter-term financing for a variety of purposes, which may include the
direct or indirect financing of home improvement, education expenses, debt
consolidation and purchases of consumer durables such as automobiles.
Accordingly, the Mortgage Loans may experience a higher rate of prepayment than
first lien mortgage loans.
EXCESS SPREAD DISTRIBUTIONS
An overcollateralization feature has been designed to accelerate the
principal amortization of the Offered Certificates relative to the principal
amortization of the Mortgage Loans. Until the Class A Overcollateralization
equals or exceeds the Required Class A Overcollateralization Level,
distributions of Excess Spread, if any, on a Distribution Date that would
otherwise be made to holders of the Class R Certificates will be made as
additional distributions of principal to the holders of the Offered
Certificates, sequentially among the Classes of Offered Certificates in order of
their respective Class designations. If purchased at a premium or a discount,
the yield to maturity on a Offered Certificate will be affected by the rate at
which Excess Spread is distributed to the Offered Certificateholders in
reduction of the Class Principal Balance of such Classes. If the actual rate of
such Excess Spread distributions on the Offered Certificates is slower than the
rate anticipated by an investor who purchases a Offered Certificate at a
discount, the actual yield to such investor will be lower than such investor's
anticipated yield. If the actual rate of Excess Spread distributions is faster
than the rate anticipated by an investor who purchases a Offered Certificate at
a premium, the actual yield to such investor will be lower than such investor's
S-35
<PAGE>
anticipated yield. The amount of Excess Spread on any Distribution Date will be
affected by the actual amount of interest received, collected or recovered in
respect of the Mortgage Loans during the related Due Period.
REINVESTMENT RISK
The reinvestment risk with respect to an investment in the Offered
Certificates will be affected by the rate and timing of principal payments
(including prepayments) in relation to the prevailing interest rates at the time
of receipt of such principal payments. For example, during periods of falling
interest rates holders of the Offered Certificates are likely to receive an
increased amount of principal payments from the Mortgage Loans at a time when
such holders may be unable to reinvest such payments in investments having a
yield and rating comparable to the Offered Certificates. Conversely, during
periods of rising interest rates holders of Offered Certificates are likely to
receive a decreased amount of principal prepayments from the Mortgage Loans at a
time when such holders may have an opportunity to reinvest such payments in
investments having a higher yield than, and a comparable rating to, the Offered
Certificates.
WEIGHTED AVERAGE LIFE OF THE OFFERED CERTIFICATES
The following information is given solely to illustrate the effect of
prepayments of the Mortgage Loans on the estimated weighted average lives of the
Offered Certificates under certain stated assumptions and is not a prediction of
the prepayment rate that might actually be experienced by the Mortgage Loans.
Weighted average life refers to the average amount of time that will elapse from
the date of delivery of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average life of the
Offered Certificates will be influenced by the rate at which principal of the
Mortgage Loans is paid, which may be in the form of scheduled amortization or
prepayments (for this purpose, the term "prepayment" includes reductions of
principal resulting from unscheduled full or partial prepayments, refinancings,
liquidations and write-offs due to defaults, casualties or other dispositions
and repurchases by or on behalf of the Transferor or the Depositor) and the rate
at which Excess Spread is distributed to holders of the Offered Certificates as
described herein.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement is a
Constant Prepayment Rate ("CPR"). The CPR represents an assumed constant annual
rate of prepayment each month, expressed as a per annum percentage of the
scheduled principal balance of the pool of mortgage loans for that month. As
used in the tables on pages ___and ___, the column headed "0%" assumes that none
of the Mortgage Loans is prepaid before maturity. The columns headed "0%",
"5%", "10%", "13%", "15%", "17%", "20%", "25%" and "30%" assume that prepayments
on the Mortgage Loans are made at CPRs of 0%, 5%, 10%, 13%, 15%, 17%, 20%, 25%
and 30%, respectively. Neither the Transferor nor the Depositor make any
representations about the appropriateness of the CPR model.
MODELING ASSUMPTIONS. For purposes of preparing the tables on pages
___and ___, the following assumptions (the "MODELING ASSUMPTIONS") have been
made.
(i) the Mortgage Loan Pool consists of _____ hypothetical
mortgage loans each having Mortgage Loan Rate of _____%, and a remaining
term to stated maturity (in months) of ____, and each having the
following respective outstanding principal balance, Cut-Off Date and
closing or delivery date: (1) $____________, ____________, 199_, and
____________, 199_; (2) $_____________, _____________, 199_, and
____________, 199_; and (3) $_____________, _________, 199_, and
_____________, 199_.;
(ii) all scheduled principal payments on such mortgage loans
are timely received on the first day of a Due Period, which will begin
on the first day of each month and end on the thirtieth day of the
month, with the first Due Period commencing in _______________ 199__,
and no delinquencies or losses occur on such mortgage loans;
(iii) the scheduled payments on the mortgage loans have been
calculated on the outstanding principal balance (prior to giving effect
to prepayments), the Mortgage Loan Rate and the remaining term to stated
maturity such that the mortgage loans will fully amortize by their
remaining term to stated maturity;
(iv) all scheduled payments of interest and principal have
been made through the applicable Cut-Off Date;
S-36
<PAGE>
(v) the mortgage loans in the Mortgage Loan Pool prepay
monthly at the specified percentages of CPR and NO OPTIONAL TERMINATION
of the Certificates occurs;
(vi) the Closing Date for the Certificates is
__________________, 199__ and each year will consist of 360 days;
(vii) cash distributions are received by the
Certificateholders on the 20th day of each month, commencing in
_______________ 199__; and
(viii) the Required Class A Overcollateralization Level is
$_______________ and will not be reduced;
(ix) the applicable Certificate Insurer Guaranty Premium for
each Class of Offered Certificates has been added to the Certificate
Interest Rate for each such Class of Offered Certificates, and the
Certificate Interest Rate for the Class B Certificates is __%;
(x) the Mortgage Loan Rate for the mortgage loans is net of
the aggregate of the FHA Insurance Premium for the Title I Mortgage
Loans; and additional fees deducted from the proceeds of the mortgage
loans include the Trustee's fee, the Custodian's fee, the Servicing Fee
and the REMIC Administration Fee, which additional fees in the aggregate
equal ____% (___ basis points) on a per annum basis; and
(xi) no reinvestment income from any Trust Fund account is
earned and available for distribution.
The tables on the following two pages indicate at the specified percentages of
CPR the corresponding weighted average life of each Class of Offered
Certificates.
S-37
<PAGE>
ASSUMING FULL DELIVERY OF SUBSEQUENT MORTGAGE LOANS
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF CPR (1)
<TABLE>
<CAPTION>
Class A-1
-------------------------------------------------------------------
Distribution Date 0% 5% 10% 13% 15% 17% 20% 25% 30%
- -------------------------------- -- -- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Balance. . . . . . . .
_________ 1997 . . . . . . . .
_________ 1998 . . . . . . . .
_________ 1999 . . . . . . . .
_________ 2000 . . . . . . . .
_________ 2001 . . . . . . . .
_________ 2002 . . . . . . . .
_________ 2003 . . . . . . . .
_________ 2004 . . . . . . . .
_________ 2005 . . . . . . . .
_________ 2006 . . . . . . . .
_________ 2007 . . . . . . . .
_________ 2008 . . . . . . . .
_________ 2009 . . . . . . . .
_________ 2010 . . . . . . . .
_________ 2011 . . . . . . . .
_________ 2012 . . . . . . . .
_________ 2013 . . . . . . . .
_________ 2014 . . . . . . . .
_________ 2015 . . . . . . . .
_________ 2016 . . . . . . . .
_________ 2017 . . . . . . . .
_________ 2018 . . . . . . . .
<CAPTION>
Class A-2
-------------------------------------------------------------------
Distribution Date 0% 5% 10% 13% 15% 17% 20% 25% 30%
- -------------------------------- -- -- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Balance. . . . . . . .
_________ 1997 . . . . . . . .
_________ 1998 . . . . . . . .
_________ 1999 . . . . . . . .
_________ 2000 . . . . . . . .
_________ 2001 . . . . . . . .
_________ 2002 . . . . . . . .
_________ 2003 . . . . . . . .
_________ 2004 . . . . . . . .
_________ 2005 . . . . . . . .
_________ 2006 . . . . . . . .
_________ 2007 . . . . . . . .
_________ 2008 . . . . . . . .
_________ 2009 . . . . . . . .
_________ 2010 . . . . . . . .
_________ 2011 . . . . . . . .
_________ 2012 . . . . . . . .
_________ 2013 . . . . . . . .
_________ 2014 . . . . . . . .
_________ 2015 . . . . . . . .
_________ 2016 . . . . . . . .
_________ 2017 . . . . . . . .
_________ 2018 . . . . . . . .
Weighted Average Life (2):
No Optional
Termination: . . . . . . . .
</TABLE>
--------------
(1) The percentages in this table have been rounded to the nearest
whole number.
(2) The weighted average life of a Certificate is determined by (a)
multiplying the amount of each distribution of principal thereof
by the number of years from the date of issuance to the related
Distribution Date, (b) summing the results and (c) dividing the
sum by the aggregate distributions of principal referred to in
clause (a) and rounding to two decimal places.
S-38
<PAGE>
ASSUMING FULL DELIVERY OF SUBSEQUENT MORTGAGE LOANS
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF CPR (1)
<TABLE>
<CAPTION>
Class A-3
-------------------------------------------------------------------
Distribution Date 0% 5% 10% 13% 15% 17% 20% 25% 30%
- -------------------------------- -- -- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Balance. . . . . . . .
_________ 1997 . . . . . . . .
_________ 1998 . . . . . . . .
_________ 1999 . . . . . . . .
_________ 2000 . . . . . . . .
_________ 2001 . . . . . . . .
_________ 2002 . . . . . . . .
_________ 2003 . . . . . . . .
_________ 2004 . . . . . . . .
_________ 2005 . . . . . . . .
_________ 2006 . . . . . . . .
_________ 2007 . . . . . . . .
_________ 2008 . . . . . . . .
_________ 2009 . . . . . . . .
_________ 2010 . . . . . . . .
_________ 2011 . . . . . . . .
_________ 2012 . . . . . . . .
_________ 2013 . . . . . . . .
_________ 2014 . . . . . . . .
_________ 2015 . . . . . . . .
_________ 2016 . . . . . . . .
_________ 2017 . . . . . . . .
_________ 2018 . . . . . . . .
<CAPTION>
Class A-4
-------------------------------------------------------------------
Distribution Date 0% 5% 10% 13% 15% 17% 20% 25% 30%
- -------------------------------- -- -- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Balance. . . . . . . .
_________ 1997 . . . . . . . .
_________ 1998 . . . . . . . .
_________ 1999 . . . . . . . .
_________ 2000 . . . . . . . .
_________ 2001 . . . . . . . .
_________ 2002 . . . . . . . .
_________ 2003 . . . . . . . .
_________ 2004 . . . . . . . .
_________ 2005 . . . . . . . .
_________ 2006 . . . . . . . .
_________ 2007 . . . . . . . .
_________ 2008 . . . . . . . .
_________ 2009 . . . . . . . .
_________ 2010 . . . . . . . .
_________ 2011 . . . . . . . .
_________ 2012 . . . . . . . .
_________ 2013 . . . . . . . .
_________ 2014 . . . . . . . .
_________ 2015 . . . . . . . .
_________ 2016 . . . . . . . .
_________ 2017 . . . . . . . .
_________ 2018 . . . . . . . .
Weighted Average Life (2):
No Optional
Termination: . . . . . . . .
</TABLE>
--------------
(1) The percentages in this table have been rounded to the nearest
whole number.
(2) The weighted average life of a Certificate is determined by (a)
multiplying the amount of each distribution of principal thereof
by the number of years from the date of issuance to the related
Distribution Date, (b) summing the results and (c) dividing the
sum by the aggregate distributions of principal referred to in
clause (a) and rounding to two decimal places.
These tables have been prepared based on the Modeling Assumptions (including the
assumptions regarding the characteristics and performance of the Mortgage Loans
which may differ from the actual characteristics and performance thereof) and
should be read in conjunction therewith.
S-39
<PAGE>
It is unlikely that the Mortgage Loans will prepay at a constant rate or
that all of the Mortgage Loans will prepay at the same rate. Moreover, the
Mortgage Loans actually included in the Mortgage Loan Pool will not conform to
the assumptions made as to the characteristics of such Mortgage Loans in
preparing the above tables. In fact, the characteristics of the Mortgage Loans
will differ in many respects from such assumed characteristics. SEE "The
Mortgage Loan Pool" herein. To the extent that the Mortgage Loans actually
included in the Mortgage Loan Pool have characteristics that differ from those
assumed in preparing the tables, the Offered Certificates are likely to have
weighted average lives that are shorter or longer than those indicated.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The FIRSTPLUS Home Loan Asset-Backed Certificates, Series 199__-__, will
consist of the Class A-1 Certificates, the Class A-2 Certificates, the Class A-3
Certificates, the Class A-4 Certificates, the Class B Certificates and the Class
R Certificates (each, a "CLASS"). Only the Class A-1, Class A-2, Class A-3 and
Class A-4 Certificates (collectively, the "CLASS A CERTIFICATES" or the "OFFERED
CERTIFICATES") are offered hereby.
On the 20th day of each month, commencing __________________, 199__, or, if
such day is not a business day, the first business day immediately following
(each such date, a "DISTRIBUTION DATE"), the Trustee or its designee will
distribute to the persons in whose names the Offered Certificates of each Class
are registered on the last day of the month immediately preceding the month of
the related Distribution Date (the "RECORD DATE"), the portion of the aggregate
distribution to be made to the Certificateholders of such Class to which such
holder is entitled, as described below. Prior to Book Entry Termination,
distributions on the Book Entry Certificates will be made to Beneficial Owners
only through DTC and its DTC Participants. SEE "Description of Book Entry
Procedures" herein.
Beneficial ownership interests in each Class of Offered Certificates will
be issued in minimum denominations of $250,000 and integral multiples of $10,000
in excess thereof; provided, however, that one or more beneficial ownership
interests in each Class of Offered Certificates may be issued in a different
denomination such that the aggregate initial principal balance of all
Certificates of such Class will equal the Original Class Principal Balance of
such Class.
The Certificates represent fractional undivided beneficial ownership
interests in the Trust Fund created and held pursuant to the Pooling and
Servicing Agreement. The Trust Fund consists of (i) the Initial Mortgage Loans
and any Subsequent Mortgage Loans conveyed to the Trust Fund and all proceeds
thereof, (ii) such assets as from time to time are identified as REO Properties,
(iii) such assets as from time to time are deposited in the Collection Account,
the Certificate Account, and the FHA Insurance Premium Account or invested in
certain types of permitted instruments, (iv) funds deposited and held in the
Pre-Funding Account and the Capitalized Interest Account or invested in certain
types of permitted instruments until the end of the Funding Period, (v) the
Trustee's rights under all insurance policies, if any, with respect to the
Mortgage Loans required to be maintained under the Pooling and Servicing
Agreement and any Insurance Proceeds, (vi) the Trustee's rights under the FHA
Insurance applicable to the Title I Mortgage Loans, including the right to make
FHA Claims and the right to direct any FHA Claims Administrator, as agent and
attorney-in-fact on behalf of the Trustee, to make FHA Claims, subject to the
terms of the Pooling and Servicing Agreement, (vii) the Guaranty Policy for the
Offered Certificates, (viii) Net Liquidation Proceeds, FHA Insurance Proceeds,
Guaranty Policy Proceeds and Released Mortgaged Property Proceeds and (ix) all
right, title and interest of the Transferor in and to the obligations of any
seller pursuant to a loan sale agreement under which any Mortgage Loans were
purchased by the Transferor.
COLLECTION ACCOUNT AND CERTIFICATE ACCOUNT
The Servicer is required to use its best efforts to deposit in an Eligible
Account (the "COLLECTION ACCOUNT"), within one business day and in any event to
deposit within two business days of receipt, all payments received after each
Cut-Off Date on account of principal and interest on the related Mortgage Loans,
all Net Liquidation Proceeds, Insurance Proceeds, FHA Insurance Proceeds,
Released Mortgaged Property Proceeds, any amounts payable in connection with the
repurchase or substitution of any Mortgage Loan and any amount required to be
deposited in the Collection Account in connection with the termination of the
Pooling and Servicing Agreement. The foregoing requirements for deposit in the
Collection Account will be exclusive of payments on account of principal and
interest on the Mortgage Loans collected on or before the applicable Cut-Off
Date. The Servicer may make withdrawals from the Collection Account only for
the purposes specified in the Pooling and Servicing Agreement. The Collection
Account may be maintained at any depository institution which satisfies
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the requirements set forth in the definition of Eligible Account in the Pooling
and Servicing Agreement. Initially, the Collection Account will be maintained
with ______________________________________. On the business day prior to each
Distribution Date, the Servicer is required to transfer from the Collection
Account to the Trustee the Available Remittance Amount for deposit in an
Eligible Account (the "CERTIFICATE ACCOUNT") established and maintained by the
Trustee.
Any Subservicer will also maintain a collection account to deposit all
payments received with respect to the Mortgage Loans being serviced by such
Subservicer. Such Subservicer's collection account will be an Eligible Account
and will satisfy requirements that are substantially similar to the requirements
for the Collection Account set forth in the Pooling and Servicing Agreement.
FHA INSURANCE PREMIUM ACCOUNT
In order to provide for the payment of the FHA Premium Amount on each Title
I Mortgage Loan, the Trustee will establish and maintain an Eligible Account
(the "FHA INSURANCE PREMIUM ACCOUNT") into which an initial deposit will be made
on the Closing Date in the amount required under the Pooling and Servicing
Agreement and into which will be deposited on a monthly basis an amount equal to
one twelfth of the product of the original principal balance of each outstanding
Title I Mortgage Loan multiplied by the appropriate annual premium rate
applicable to each such Title I Mortgage Loan (the "FHA INSURANCE PREMIUM
DEPOSIT AMOUNT"). Amounts may be withdrawn from the FHA Insurance Premium
Account on each Distribution Date to reimburse the Transferor or FHA Claims
Administrator, or any Person acting on either of their behalf, for any amounts
advanced to the FHA by such entity in respect of the FHA Premium Amount relating
to any Title I Mortgage Loan in lieu of withdrawals from the FHA Insurance
Premium Account. In addition, monies in excess of that required to be
maintained in the FHA Insurance Premium Account as of the Distribution Date
occurring in ________ of each year commencing in __________ will be transferred
to the Certificate Account.
The Servicer's Monthly Remittance Report will indicate the FHA Premium
Amount for each Title I Mortgage Loan outstanding as of the first day of the
immediately preceding Due Period. The FHA Premium Amount for each Title I
Mortgage Loan is an annual premium that ranges from 0.50% to 1.00% of the
original principal balance of each such Title I Mortgage Loan, depending on the
type of loan and its term to maturity. For the Title I Mortgage Loans that are
property improvement loans with maturities in excess of 25 months, which
comprise substantially all of the Title I Mortgage Loans, the annual premium
rate is 0.50% of the original principal balance of each such Mortgage Loan. On
or before the 23rd day of each calendar month and in accordance with the FHA
Regulations, the Trustee will withdraw from the FHA Insurance Premium Account
and pay to the FHA an amount equal to the FHA Premium Amount for each Title I
Mortgage Loan as to which such FHA Premium Amount is payable to the FHA during
such calendar month.
INCOME FROM ACCOUNTS
So long as no Event of Default will have occurred and be continuing, and
consistent with any requirements of the Code, amounts on deposit in the
Certificate Account and the FHA Insurance Premium Account (each, together with
the Collection Account, an "ACCOUNT") will be invested by the Trustee, as
directed by the Depositor, in one or more Permitted Instruments (as defined in
the Pooling and Servicing Agreement) bearing interest or sold at a discount. So
long as no Event of Default will have occurred and be continuing, and consistent
with any requirements of the Code, amounts on deposit in the Collection Account
will be invested by the Servicer, as directed by the Depositor, in one or more
Permitted Instruments bearing interest or sold at a discount. No such
investment in any Account will mature later than the business day immediately
preceding the next Distribution Date. All income or other gain from investments
in any Account will be deposited in such Account immediately on receipt, unless
otherwise specified herein.
AVAILABLE REMITTANCE AMOUNT
Distributions on the Certificates on each Distribution Date will be made
from the Available Remittance Amount. The Servicer will calculate the Available
Remittance Amount on the fifth business day prior to each Distribution Date
(each such day, a "DETERMINATION DATE"). With respect to each Distribution
Date, the "AVAILABLE REMITTANCE AMOUNT" is the sum of (i) all amounts received
on the Mortgage Loans or required to be paid by the Servicer, the Transferor or
the Depositor (exclusive of amounts not required to be deposited in the
Collection Account and amounts permitted to be withdrawn by the Servicer from
the Collection Account pursuant to the Pooling and Servicing Agreement) during
the related Due Period (or, in the case of amounts paid by the Transferor in
connection with the purchase or substitution of a Mortgage Loan for defective
loan documentation or a breach of representation or warranty, as of the related
Determination Date) as reduced by any portion thereof that may not be withdrawn
therefrom pursuant to an order of a United States bankruptcy court of
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competent jurisdiction imposing a stay pursuant to Section 362 of the United
States Bankruptcy Code, (ii) in the case of a Distribution Date relating to a
Due Period that occurs prior to the end of the Funding Period, an amount from
the Capitalized Interest Account sufficient to fund any shortfall in the
Interest Remittance Amount, (iii) in the case of the Distribution Date following
the Due Period in which the Funding Period ends, amounts, if any, remaining in
the Pre-Funding Account at the end of the Funding Period (net of reinvestment
income which must be transferred to the Capitalized Interest Account), (iv) with
respect to the final Distribution Date in connection with the purchase of all
the Mortgage Loans and REO Properties by the Servicer, the Termination Price and
(v) any and all income or gain from investments in the Collection Account.
DISTRIBUTIONS ON THE OFFERED CERTIFICATES
On each Distribution Date, the sum of (i) the Available Remittance Amount
and (ii) any income or gain from investments in the Certificate Account (such
sum, the "AMOUNT AVAILABLE") will be distributed by the Trustee, along with any
Guaranteed Payment deposited in the Certificate Account by or on behalf of the
Certificate Insurer (which payments may only be used to pay the holders of the
Offered Certificates the respective Interest Remittance Amount, the Interest
Carry-Forward Amount, the Principal Remittance Amount or the Principal Carry-
Forward Amount, as applicable, of such Class of Certificates) sequentially in
the following order of priority to the extent of the Amount Available and any
Guaranteed Payment (with respect to any Offered Certificate only):
(i) first to the FHA Insurance Premium Account, an amount equal
to the aggregate FHA Insurance Premium Deposit Amount;
(ii) then to the Certificate Insurer, an amount equal to the
Certificate Guaranty Insurance Premium;
(iii) then to the Trustee, an amount equal to the Trustee Fee and
then, if applicable, to the Custodian, an amount equal to the Custodian
Fee;
(iv) then pro rata to the Class A-1, Class A-2, Class A-3 and
Class A-4 Certificateholders as a distribution of principal, any amounts
deposited into the Certificate Account from the amounts remaining in the
Pre-Funding Account after the Funding Period ends;
(v) then pro rata to the Class A-1, Class A-2, Class A-3 and
Class A-4 Certificateholders (A) the Interest Remittance Amount applicable
to the respective Class A Certificates and (B) the Interest Carry-Forward
Amount, if any, applicable to the respective Class A Certificates;
(vi) then to the Class A-1 Certificateholders, (A) to be applied
to reduce the Class Principal Balance of the Class A-1 Certificates until
such Class Principal Balance is reduced to zero, an amount equal to the
Principal Remittance Amount and (B) the Principal Carry-Forward Amount, if
any, applicable to the Class A-1 Certificates;
(vii) then to the Class A-2 Certificateholders, (A) to be applied
to reduce the Class Principal Balance of the Class A-2 Certificates until
such Class Principal Balance is reduced to zero, an amount equal to that
portion of the Principal Remittance Amount, if any, remaining after any
distributions pursuant to clause (vi) above and (B) the Principal Carry-
Forward Amount, if any, applicable to the Class A-2 Certificates;
(viii) then to the Class A-3 Certificateholders, (A) to be applied
to reduce the Class Principal Balance of the Class A-3 Certificates until
such Class Principal Balance is reduced to zero, an amount equal to that
portion of the Principal Remittance Amount, if any, remaining after any
distributions pursuant to clauses (vi) and (vii) above and (B) the
Principal Carry-Forward Amount, if any, applicable to the Class A-3
Certificates;
(ix) then to the Class A-4 Certificateholders, (A) to be applied
to reduce the Class Principal Balance of the Class A-4 Certificates until
such Class Principal Balance is reduced to zero, an amount equal to that
portion of the Principal Remittance Amount, if any, remaining after any
distributions pursuant to clauses (vi), (vii) and (viii) above and (B) the
Principal Carry-Forward Amount, if any, applicable to the Class A-4
Certificates;
(x) then to the Certificate Insurer, reimbursement for any
Guaranteed Payments in respect of the Class A Certificates not previously
reimbursed (the "CERTIFICATE INSURER REIMBURSEMENT AMOUNT");
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(xi) then to the Class B Certificateholders, (A) the Interest
Remittance Amount applicable to the Class B Certificates and (B) the
Interest Carry-Forward Amount, if any, applicable to the Class B
Certificates;
(xii) then to the Class B Certificateholders, (A) to be applied to
reduce the Class Principal Balance of the Class B Certificates until such
Class Principal Balance is reduced to zero, an amount equal to that portion
of the Principal Remittance Amount, if any, remaining after any
distributions pursuant to clauses (vi), (vii), (viii), (ix) and (x) above
and (B) the Principal Carry-Forward Amount, if any, applicable to the Class
B Certificates;
(xiii) then after making all of the foregoing distributions, to the
extent of any remaining Amount Available, to the Servicer an amount equal
to Servicing Advances previously made by the Servicer and not previously
reimbursed; and
(xiv) then after making all of the foregoing distributions, (A) to
the Class A Certificateholders, as an additional sequential distribution of
principal, the remaining balance, if any, of the Amount Available after all
of the foregoing distributions pursuant to clauses (i) through (xiii) above
(the "EXCESS SPREAD") until the Class A Overcollateralization Amount equals
or exceeds the Required Class A Overcollateralization Amount (the "CLASS R
DISTRIBUTION TRIGGER"); and, if a Class R Distribution Trigger occurs, then
(B) to the Class B Certificateholders an amount equal to the portion of the
Excess Spread, if any, remaining after any distributions to the Class A
Certificateholders pursuant to the preceding subclause (A), until the Class
B Loss Reimbursement Amount is reduced to zero, and then (C) to the Class R
Certificateholders an amount equal to the portion of the Excess Spread, if
any, remaining after any distributions to the Class A Certificateholders
and Class B Certificateholders pursuant to the preceding subclauses (A) and
(B).
If the Amount Available is insufficient to distribute in full the amounts
described in items (v) through (ix) above to the Holders of the Offered
Certificates, the Trustee will make a claim under the Guaranty Policy for the
amount of such insufficiency in accordance with the terms thereof. Guaranteed
Payments, if any, for any Offered Certificates under the Guaranty Policy will be
available only for distribution to Holders of the Offered Certificates, as
appropriate, to compensate for any shortfalls in respect of the Interest
Remittance Amounts and the Principal Remittance Amounts with respect to the
Offered Certificates.
All distributions made to the Class A-1 Certificateholders, the Class A-2
Certificateholders, the Class A-3 Certificateholders, the Class A-4
Certificateholders, the Class B Certificateholders or the holders of the Class R
Certificates as a Class on each Distribution Date will be made on a pro rata
basis among the Certificateholders of the respective Class of record on the next
preceding Record Date based on the Percentage Interest represented by their
respective Certificates, and except as otherwise provided herein under
"Description of Book Entry Procedures," will be made through the book-entry
system maintained by DTC.
If, on a particular Distribution Date, the Amount Available and any
Guaranteed Payment applied in the order described above are not sufficient to
make a full distribution of the Interest Remittance Amount on any Class of
Offered Certificates, then any such unpaid Interest Remittance Amounts will be
carried forward as an Interest Carry-Forward Amount for each such Class and be
distributed to holders of each such Class of Offered Certificates on the next
Distribution Date to the extent that sufficient funds are available. Such an
interest shortfall could occur, for example, if losses realized on the Mortgage
Loans were exceptionally high or were concentrated in a particular month and if
Guaranteed Payments were not timely received under the Guaranty Policy. Any
unpaid Interest Remittance Amount will not bear interest and no interest will
accrue on any Interest Carry-Forward Amount outstanding with respect to any
Class of Offered Certificates.
The "INTEREST REMITTANCE AMOUNT" on any Distribution Date and for each
Class of Offered Certificates will be equal to 30 days' interest at the
applicable Certificate Interest Rate on the Class Principal Balance of such
Class immediately prior to such Distribution Date (except for the first
Distribution Date, on which Certificateholders will receive only _____ days of
accrued interest).
The "PRINCIPAL REMITTANCE AMOUNT" on each Distribution Date will be equal
to the lesser of (A) the Class Principal Balance of the Class A Certificates and
Class B Certificates immediately prior to such Distribution Date and (B) the sum
of (i) each scheduled payment of principal collected by the Servicer in the
related Due Period (excluding partial payments held in escrow pursuant to FHA
Regulations), (ii) all partial and full principal prepayments received by the
Servicer during such related Due Period, (iii) the principal portion of all Net
Liquidation Proceeds, FHA Insurance Proceeds, Insurance Proceeds and Released
Mortgaged Property Proceeds received during the related Due Period, (iv) (a)
that portion of the purchase price
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of any repurchased Mortgage Loan which represents principal and (b) the
principal portion of any Substitution Adjustments required to be deposited in
the Collection Account as of the related Determination Date, (v) upon the
reduction of the Class A Overcollateralization to zero and so long as the
Guaranty Policy is in effect, then with respect to the Class A Certificates, the
principal portion of any Net Loan Losses (as defined below) in excess of such
Class A Overcollateralization. Notwithstanding clause (v) of the definition of
Principal Remittance Amount, if on the final Distribution Date the funds
available from any Excess Spread and any Guaranteed Payment received by the
Trustee are not sufficient to provide for the distribution of the portion of the
Principal Remittance Amount attributable to clause (v) of the definition of
Principal Remittance Amount for such Distribution Date and any preceding
Distribution Date, then the holders of the Class A Certificates will not be
distributed such portion of the Principal Remittance Amount, in which event such
portion of the Principal Remittance Amount, including any such portion
represented by a Principal Carry-Forward Amount, will be written-off and the
corresponding Class Principal Balances of all Class A Certificates will be
reduced to zero without the distribution of funds to fully pay the Class A
Certificateholders. If the Class A Overcollateralization is reduced to zero and
so long as the Guaranty Policy is in effect, then with respect to the Class A
Certificates the principal portion of any Net Loan Losses will be included
within the Principal Remittance Amount for the related Distribution Date.
However, no corresponding proceeds of principal from the Mortgage Loans will be
included in the Amount Available to provide funds for the distribution of the
portion of the Principal Remittance Amount attributable to such Net Loan Losses,
and the distribution of this portion of the Principal Remittance Amount to the
Class A Certificateholders will be dependent upon the receipt of funds from,
first, the Excess Spread, if any, and, second, if such Excess Spread does not
provide sufficient funds, any Guaranteed Payment received by the Trustee. If
sufficient funds for the distribution of this portion of the Principal
Remittance Amount are not provided from the Excess Spread and the Guaranteed
Payment on the applicable Distribution Date, then the amount of such
insufficiency would become a Principal Carry-Forward Amount, which would
ultimately be subject to the write-off on the final Distribution Date to the
extent that sufficient funds are not provided from the receipt of Excess Spread
and Guaranteed Payments on or before such final Distribution Date.
As set forth above, on each Distribution Date the Principal Remittance
Amount will be distributed to the Class A Certificateholders, sequentially in
order of their respective Class designations until the Class Principal Balance
for each such Class has been reduced to zero; and thereafter, to the Class B
Certificateholders. Accordingly, no payments of the Principal Remittance Amount
will be made on any Class A Certificate of a particular Class until all Class A
Certificates having an earlier Class designation have been paid in full, and no
payments of the Principal Remittance Amount will be made on any Class B
Certificates until all Class A Certificates have been paid in full.
The "FHA INSURANCE PROCEEDS" on each Distribution Date will be equal to
with respect to any Title I Mortgage Loan the proceeds, if any, received by the
Trustee (or any FHA Claims Administrator) during the prior Due Period from the
FHA pursuant to the FHA Insurance from the related FHA Claim. The "INSURANCE
PROCEEDS" on each Distribution Date will be equal to with respect to any
Mortgage Loan the proceeds paid to the Trustee or the Servicer by any insurer
pursuant to any insurance policy covering a Mortgage Loan, Mortgaged Property or
REO Property or any other insurance policy that relates to a Mortgage Loan, net
of any expenses which are incurred by the Trustee or the Servicer in connection
with the collection of such proceeds and not otherwise reimbursed to the Trustee
or the Servicer, but excluding any FHA Insurance Proceeds, Guaranty Policy
Proceeds and proceeds of any insurance policy that are to be applied to the
restoration or repair of the Mortgaged Property or released to the borrower in
accordance with customary loan servicing procedures. A "LIQUIDATED MORTGAGE
LOAN" is a defaulted Mortgage Loan as to which the Servicer has determined that
all recoverable liquidation and insurance proceeds have been received, which
will be deemed to occur upon the earlier of: (a) with respect to a Title I
Mortgage Loan, the receipt of FHA Insurance Proceeds after the submission of an
FHA Claim, (b) the liquidation of the related Mortgaged Property acquired
through foreclosure or similar proceedings, (c) the Servicer's determination in
accordance with customary servicing practices that no further amounts are
collectible from the Mortgage Loan and any related security, or (d) any portion
of a scheduled monthly payment of principal and interest is in excess of 300
days past due. The "NET LIQUIDATION PROCEEDS" on each Distribution Date will be
equal to any cash amounts received from Liquidated Mortgage Loans, whether
through trustee's sale, foreclosure sale, disposition of REO or otherwise (other
than FHA Insurance Proceeds, Insurance Proceeds and Released Mortgaged Property
Proceeds), and any other cash amounts received in connection with the management
of the Mortgaged Properties from defaulted Mortgage Loans, in each case, net of
any reimbursements to the Servicer made from such amounts for any unreimbursed
Servicing Advances made and any other fees and expenses paid in connection with
the foreclosure, conservation and liquidation of the related Liquidated Mortgage
Loan or Mortgaged Properties. The "RELEASED MORTGAGED PROPERTY PROCEEDS" on
each Distribution Date will be equal to with respect to any Mortgage Loan, the
proceeds received by the Servicer in connection with (i) a taking of an entire
Mortgaged Property by exercise of the power of eminent domain or condemnation or
(ii) any release of part of the Mortgaged Property from the lien of the related
Mortgage, whether by partial condemnation, sale or otherwise, which in either
case are not released to the
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borrower in accordance with applicable law, customary mortgage servicing
procedures and the Pooling and Servicing Agreement.
The "CLASS PRINCIPAL BALANCE" of any Class of Offered Certificates as of
any date of determination is equal to the Original Class Principal Balance of
such Class reduced by all amounts in respect of principal previously distributed
to the Certificateholders of such Class on all previous Distribution Dates
(other than any amounts that constitute mortgagor payments that are recovered
from such Certificateholders as voidable preferences by a trustee in bankruptcy)
and by all amounts allocated to such Class on all previous Distribution Dates
attributable to any losses as determined by the Servicer under the Pooling and
Servicing Agreement (SEE the subheading "Subordination and Allocation of Losses"
below).
The "INTEREST CARRY-FORWARD AMOUNT" is the amount, if any, by which the
interest portion of the Remittance Amount applicable to any Class of Offered
Certificates as of the immediately preceding Distribution Date exceeded the
amount of the actual distribution to the Certificateholders of such Class in
respect of interest made on such immediately preceding Distribution Date. No
interest will accrue on any Interest Carry-Forward Amount with respect to any
Class of Certificates.
The "PRINCIPAL CARRY-FORWARD AMOUNT" is the amount, if any, by which the
principal portion of the Remittance Amount applicable to any Class of Offered
Certificates as of the immediately preceding Distribution Date exceeded the
amount of the actual distribution to the Certificateholders of such Class in
respect of principal. Interest will accrue on the Class Principal Balance,
which includes any Principal Carry-Forward Amount, with respect to any Class of
Certificates.
With respect to each Distribution Date and with respect to each Class of
Offered Certificates, the sum of the Interest Remittance Amount applicable to
such Class, the Principal Remittance Amount, if any, applicable to such Class,
an amount equal to any amount that constitutes any mortgagor payment that is
recovered from the Certificateholders of such Class during the related Due
Period as a voidable preference by a trustee in bankruptcy pursuant to the
United States Bankruptcy Code in accordance with a final, nonappealable order of
a court having competent jurisdiction, the Interest Carry-Forward Amount
applicable to such Class and the Principal Carry-Forward Amount applicable to
such Class constitutes the "REMITTANCE AMOUNT".
With respect to any Distribution Date, on which a Class R Distribution
Trigger occurs, all or a portion of the Excess Spread, if any, will be
distributed to the Class R Certificateholders. Any amounts so distributed to
the Class R Certificateholders will not be available on future Distribution
Dates for distribution to the Class A Certificateholders or the Class B
Certificateholders.
CLASS A OVERCOLLATERALIZATION
On the Closing Date, the "INITIAL CLASS A OVERCOLLATERALIZATION" which
provides credit enhancement for the Class A Certificates will equal the excess
of the Assumed Pool Principal Balance over the Original Class Principal Balance
of all Classes of Class A Certificates, which excess will equal the Original
Class Principal Balance of the Class B Certificates of $__________, or
approximately ___% or the Assumed Pool Principal Balance. As of each
Determination Date occurring after termination of the Funding Period, the "CLASS
A OVERCOLLATERALIZATION" will equal the excess of the Pool Principal Balance
over the Class Principal Balance of all Classes of Class A Certificates. A
limited acceleration of the principal amortization of the Class A Certificates
relative to the principal amortization of the Mortgage Loans has been designed
to increase the Class A Overcollateralization by making additional sequential
distributions of principal to the Class A Certificateholders, in the manner
described herein.
Until a Class R Distribution Trigger occurs, distributions of Excess
Spread, if any, on a Distribution Date that would otherwise be made to the
holders of the Class B Certificates and the Class R Certificates, as applicable,
will be made as an additional distribution of principal to the holders of the
Class A Certificates, sequentially among the Classes of the Class Certificates
in order of their respective Class designations. The distribution of such Excess
Spread is intended to accelerate the amortization of the Class Principal Balance
of all Classes of Class A Certificates, and thereby increase the Class A
Overcollateralization. If distributions of such Excess Spread are made to the
holders of the Class A Certificates such that the Pool Principal Balance exceeds
the aggregate Class Principal Balance of the Class A and Class B Certificates
then outstanding, then a portion of the Pool Principal Balance, equal to such
excess, will become attributable to the Class R Certificates. In addition, the
relative percentage of the Class Principal Balance of the Class B Certificates
to the Pool Principal Balance will increase as a result of the principal
amortization of the Class A Certificates prior to the principal amortization of
the Class B Certificates. On any Distribution Date on which a Class R
Distribution Trigger occurs, all or a portion of the Excess Spread may be
distributed to the holders of the Class B Certificates and the Class R
Certificates, as
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applicable, and not to the Class A Certificates; therefore, ceasing the
acceleration of the principal amortization of the Class A Certificates.
While the distribution of Excess Spread to holders of the Class A
Certificates in the manner specified above has been designed to produce and
maintain a given level of Class A Overcollateralization, there can be no
assurance that Excess Spread will be generated in sufficient amounts to ensure
that such overcollateralization level will be achieved or maintained at all
times. Net losses on Liquidated Mortgage Loans will be allocated first to
reduce the principal imputed to the Class R Certificates, if any, and the Class
Principal Balance of the Class B Certificates, thereby reducing the Class A
Overcollateralization. SEE "Description of the Certificates -- Subordination
and Allocation of Losses" and "Risk Factors -- Additional Credit Enhancement
Limitations -- Adequacy of Credit Enhancement" herein.
If the delinquency or default experience on the Mortgage Loans exceeds
certain levels set forth in the Pooling and Servicing Agreement, then the
Required Class A Overcollateralization Level will increase, and to the extent
that Excess Spread is available, the principal amortization of the Class A
Certificates will be accelerated by the distribution of such Excess Spread to
the Class A Certificateholders for a temporary period until the Required Class A
Overcollateralization Level is achieved. If the delinquency and default
experience on the Mortgage Loans is lower than certain levels set forth in the
Pooling and Servicing Agreement then under certain circumstances the Required
Class A Overcollateralization Level will decrease. If a Class R Distribution
Trigger occurs, then the rate of principal amortization of the Class A
Certificates will slow from the cessation of the Excess Spread distributions to
the Class A Certificateholders.
Pursuant to the Pooling and Servicing Agreement, as of each Determination
Date, the "REQUIRED CLASS A OVERCOLLATERALIZATION LEVEL" will be the sum of the
Required Title I OC Level (as defined therein) and the Required Conventional OC
Level (as defined therein), each of which will determined based on a calculation
reviewed and approved by the Certificate Insurer and each Rating Agency. In
fact, after the Funding Period ends, the Required Title I OC Level will be
calculated based on certain percentages of the Cut-Off Date Principal Balances
of the Title I Mortgage Loans, until the Credit Support Reduction Date, and
thereafter, will be calculated based on the lesser of certain percentages of the
Cut-Off Date Principal Balances of the Title I Mortgage Loans and the
outstanding Principal Balances of the Title I Mortgage Loans. After the Funding
Period ends, the Required Conventional OC Level will be calculated based on
certain percentages of the Cut-Off Date Principal Balances of the Conventional
Mortgage Loans, until the Credit Support Reduction Date, and thereafter, will be
calculated based on the lesser of certain percentages of the Cut-Off Date
Principal Balances of the Conventional Mortgage Loans and the outstanding
Principal Balances of the Conventional Mortgage Loans. The percentages used in
calculating the Required Title I OC Level and the Required Conventional OC Level
will be determined based on the delinquency and default experience of the Title
I Mortgage Loans and the Conventional Mortgage Loans, respectively. The "CREDIT
SUPPORT REDUCTION DATE" will be the Remittance Date occurring on the later of
(i) the [thirty-sixth (36th)] Remittance Date, or (ii) the Remittance Date on
which the Pool Principal Balance is equal to or less than [fifty percent (50%)]
of the aggregate Cut-Off Date Principal Balances of the Mortgage Loans. On the
Closing Date, assuming that the Assumed Pool Principal Balance has the same
characteristics as the Initial Pool Principal Balance, the Required Class A
Overcollateralization Level would be equal to $_____________, which is ______%
of the Assumed Pool Principal Balance.
While the Required Class A Overcollateralization Level may be reduced as
described in the Pooling and Servicing Agreement, no distributions of principal
will be made to the holders of the Class B Certificates or the Class R
Certificates which would have the effect of reducing the Class A
Overcollateralization. The Class A Overcollateralization will be reduced as a
result of the allocation of Net Loan Losses, first to the principal imputed to
the Class R Certificates and next to the Class Principal Balance of the Class B
Certificates.
SUBORDINATION AND ALLOCATION OF LOSSES
The rights of the holders of the Class B Certificates and Class R
Certificates to receive distributions with respect to the Mortgage Loans in the
Trust Fund will be subordinated, to the extent described herein, to such rights
of the holders of the Class A Certificates. This subordination is intended to
enhance the likelihood of regular receipt by the holders of the Class A
Certificates of the full amount of interest and principal distributions due to
such holders and to afford such holders protection against losses on the
Mortgage Loans. The protection afforded to the holders of the Class A
Certificates by means of the subordination feature will be accomplished by the
preferential right of such Class A Certificateholders, on each Distribution
Date, to receive their interest and principal distributions prior to any
interest and principal distributions being made to the holders of the Class B
Certificates, and, subject to the occurrence of a Class R Distribution Trigger,
prior to any distributions of the Excess Spread on deposit on such date in the
Certificate Account being made to the holders of the Class R Certificates, and,
if necessary, by the right of such holders of the Class A Certificates to
receive their future distributions
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of interest and principal from the Certificate Account that otherwise would have
been distributed to the holders of the Class B Certificates as interest and
principal and as Excess Spread, if applicable, and to the holders of the Class R
Certificates as Excess Spread, if applicable.
On the Closing Date, the Original Class Principal Balance of the Class B
Certificates in the aggregate will evidence the beneficial ownership of
approximately ____% of the Assumed Pool Principal Balance and ____% of the
Original Class Principal Balance for all Classes of Class A Certificates.
Subject to the occurrence on each Distribution Date of a Class R Distribution
Trigger, and further subject to the right of the holders of the Class B
Certificates to reimbursement for any unreimbursed Net Loan Losses previously
allocated to such Class B Certificates, the Class R Certificates will evidence
the right to receive, on such Distribution Date, all or a portion of the Excess
Spread.
On each Distribution Date, with respect to the Liquidated Mortgage Loans
occurring during the immediately preceding Due Period, the "NET LOAN LOSSES"
will be equal to the amount (but not less than zero) determined as of the
related Determination Date equal to: (i) the aggregate uncollected Principal
Balances of and accrued and unpaid interest on such Liquidated Mortgage Loans as
of the last day of such Due Period, with interest computed at the weighted
average interest rate for the Class A Certificates and Class B Certificates plus
the aggregate rate of the Trustee Fees, Custodian Fees, REMIC Administration
Fees, the Servicing Fees and Certificate Insurer Premium, and without
application of any amounts included in clause (ii) below, minus (ii) the
aggregate amount of any recoveries with respect to such Liquidated Mortgage
Loans from whatever source, including any Net Liquidation Proceeds, FHA
Insurance Proceeds, any Insurance Proceeds, any Released Mortgaged Property
Proceeds, any payments from the related borrower and any payments made to
purchase such Liquidated Mortgage Loans pursuant to the Pooling and Servicing
Agreement, less the amount of any expenses incurred in connection with such
recoveries and liquidation.
If on any Distribution Date Net Loan Losses occur, then the principal
portion of the Net Loan Losses attributable to such Liquidated Mortgage Loans
will be allocated as follows: (i) first to reduce the portion of the Pool
Principal Balance attributable to the Class R Certificates (which is the excess
of the Pool Principal Balance over the aggregate Class Principal Balance of the
Class A Certificates and the Class B Certificates), until such excess has been
reduced to zero; and (ii) second, to reduce the Class Principal Balance of the
Class B Certificates, until such Class Principal Balance has been reduced to
zero; provided that with respect to clause (ii) above, the interest portion of
such Net Loan Losses that corresponds to the principal portion thereof will be
allocated to the Class B Certificates to reduce to zero the amount of any
accrued and unpaid interest on such Class B Certificates, including any Interest
Carry-Forward Amount for such Class B Certificates. After the reduction of the
Class A Overcollateralization to zero, the principal portion of any Net Loan
Losses will not be allocated to reduce the Class Principal Balance of the Class
A Certificates, but rather the principal portion of any such Net Loan Losses
will be included in the Principal Remittance Amount attributable to the Class A
Certificates. SEE the definition of "Principal Remittance Amount" under the
subheading "Distributions on the Offered Certificates" above. Accordingly, if
the Net Loan Losses occur after the Class A Overcollateralization has been
reduced to zero, the holders of such Class A Certificates will be distributed,
as appropriate, the full amount of the interest and principal distributions due
such holders to the extent that sufficient funds are received from the Excess
Spread and that Guaranteed Payments are made under the Guaranty Policy.
The Class A-2 Certificates will not be subordinate to Class A-1
Certificates with respect to the allocation of losses, the Class A-3
Certificates will not be subordinate to the Class A-2 and Class A-1 Certificates
with respect to the allocation of losses, and the Class A-4 Certificates will
not be subordinate to the Class A-3, Class A-2 and Class A-1 Certificates with
respect to the allocation of losses. Nevertheless, the Class A-2 Certificates
will not be entitled to any distributions of principal until the Class Principal
Balance of the Class A-1 Certificates has been reduced to zero; the Class A-3
Certificates will not be entitled to any distributions of principal until the
Class Principal Balances of the Class A-2 and Class A-1 Certificates have been
reduced to zero; and the Class A-4 Certificates will not be entitled to any
distributions of principal until the Class Principal Balances of the Class A-3,
Class A-2 and Class A-1 Certificates have been reduced to zero.
If Net Loan Losses are allocated to reduce the Class Principal Balance of
the Class B Certificates and the corresponding amount of the accrued and unpaid
interest on such Class B Certificates, then the Class B Certificateholders may
be reimbursed for such allocated Net Loan Losses to the extent that any Excess
Spread would otherwise be distributable upon a Class R Distribution Trigger (the
amount of such allocated Net Loan Losses less any reimbursement received from
Excess Spread, if any, will equal the "CLASS B LOSS REIMBURSEMENT AMOUNT").
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REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Trustee will be required to forward to each
Certificateholder, the Depositor, the Certificate Insurer, the Rating Agencies
and any FHA Claims Administrator a statement which will set forth, among other
things:
(i) the Available Remittance Amount for such Distribution Date;
(ii) the Class Principal Balance of each Class of Offered
Certificates and the Pool Principal Balance (including until the Funding
Period ends, the amount remaining in the Pre-Funding Account and the
Capitalized Interest Account as of such Distribution Date) as of the first
day of the related Due Period and after giving effect to distributions made
to the Holders of the Offered Certificates on such Distribution Date;
(iii) the Class Pool Factor with respect to each Class of Offered
Certificates then outstanding;
(iv) the amount of principal and interest received on the
Mortgage Loans during the related Due Period;
(v) the Principal Remittance Amount, the Interest Remittance
Amount, the Interest Carry-Forward Amount and the Principal Carry-Forward
Amount, if any, with respect to each Class of Offered Certificates then
outstanding;
(vi) whether a Class R Distribution Trigger has occurred on such
Distribution Date, and if so, the amount of any Excess Spread or any other
amount to be distributed to the holders of the Class R Certificates on such
Distribution Date;
(vii) the Servicing Fees, the Trustee Fees, the Custodian Fees,
the Certificate Guaranty Insurance Premium, the REMIC Administration Fee
and the amounts deposited to the FHA Insurance Premium Deposit Amount;
(viii) the FHA Insurance Amount before and after such Distribution
Date, and the aggregate number of FHA Claims submitted, the aggregate
principal balance of all the Mortgage Loans relating to FHA Claims finally
rejected by the FHA and the amount of FHA Insurance Proceeds received, in
each case during the related Due Period, and the cumulative amount of FHA
Insurance Proceeds received;
(ix) the Class A Overcollateralization on such Distribution Date,
the Required Class A Overcollateralization Level, as of such Distribution
Date, the Net Loan Losses incurred during the related Due Period and the
cumulative Net Loan Losses as of such Distribution Date;
(x) the weighted average maturity of the Mortgage Loans and the
weighted average Mortgage Loan Rate of the Mortgage Loans;
(xi) certain performance information, including delinquency and
foreclosure information, as set forth in the Servicer's Monthly Remittance
Report;
(xii) the amount of any Guaranteed Payment included in the amounts
distributed on such Distribution Date, and the amount of any Certificate
Insurer Reimbursement Amount, and any such obligations remaining
unsatisfied after distributions on such Distribution Date; and
(xiii) the aggregate Principal Balance of the Mortgage Loans that
became Defaulted Mortgage Loans during the related Due Period, and the
cumulative amount thereof from the Closing Date.
ASSIGNMENT OF MORTGAGE LOANS
On the Closing Date, the Transferor will sell, convey, transfer and assign
all of its right, title and interest in and to the Initial Mortgage Loans to the
Depositor, and the Depositor will sell, convey, transfer and assign the Initial
Mortgage Loans to the Trustee. The Trustee will, concurrently with the sale,
conveyance, transfer and assignment of the Initial Mortgage Loans and the
deposit of funds in the Pre-Funding Account, deliver the Certificates to the
Depositor in exchange
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for the Initial Mortgage Loans and the Pre-Funding Account Deposit. Each
Initial Mortgage Loan will be identified in a schedule appearing as an exhibit
to the Pooling and Servicing Agreement (the "MORTGAGE LOAN SCHEDULE").
Following the Closing Date, the funds in the Pre-Funding Account will be
used to purchase from the Depositor, from time to time prior to the end of the
Funding Period, subject to the availability thereof, Subsequent Mortgage Loans
consisting of closed-end fixed rate, property improvement and/or debt
consolidation loans. SEE "The Mortgage Loan Pool -- Conveyance of Subsequent
Mortgage Loans" herein. In connection with each purchase of such Subsequent
Mortgage Loans, the Trust Fund will be required to pay to the Depositor from the
Pre-Funding Account a cash purchase price of not more than 100% of the principal
balance thereof; the Trust Fund may pay a cash purchase price of less than 100%
for the purpose of increasing the amounts available for distribution, but in no
event less than the fair market value of such Subsequent Mortgage Loans. In
connection with any purchase of Subsequent Mortgage Loans by the Trust Fund
after the Closing Date, the Transferor will assign to the Depositor all of its
right, title and interest in and to such Subsequent Mortgage Loans and the
Depositor in turn will assign to the Trustee all of its right, title and
interest in and to such Subsequent Mortgage Loans, except that the Transferor
will retain the accrued and unpaid interest on the principal amount of the
Subsequent Mortgage Loans up to the Subsequent Transfer Date.
In addition, the Depositor will, as to each Mortgage Loan, deliver to the
Trustee or the Custodian the Note endorsed to the order of the Trustee or the
Custodian without recourse, the Mortgage with evidence of recording indicated
thereon (except for any Mortgage not returned from the public recording office),
an assignment of the Mortgage with evidence of recording thereon (except for any
assignment of Mortgage to the Trustee or the Custodian not returned from the
public recording office), intervening assignments of the Mortgage and assumption
and modification agreements (each, a "TRUSTEE'S MORTGAGE LOAN FILE"). In the
event that, with respect to any Mortgage Loan, the Depositor cannot deliver the
Mortgage or any assignment with evidence of recording thereon concurrently with
the conveyance thereof under the Pooling and Servicing Agreement because they
have not yet been returned by the public recording office, the Depositor will
deliver or cause to be delivered to the Trustee or the Custodian a certified
true photocopy of such Mortgage or assignment. The Depositor will deliver or
cause to be delivered to the Trustee or the Custodian any such Mortgage or
assignment with evidence of recording indicated thereon upon receipt thereof
from the public recording office. The Trustee agrees, for the benefit of the
Certificateholders, to review (or cause to be reviewed) each Trustee's Mortgage
Loan File within 45 days after the conveyance of the related Mortgage Loan to
the Trust Fund to ascertain that all required documents have been executed and
received.
PRE-FUNDING ACCOUNT
On the Closing Date, cash in the aggregate amount of approximately
$__________ (the "PRE-FUNDING ACCOUNT DEPOSIT") will be deposited in an Eligible
Account (the "PRE-FUNDING ACCOUNT"), which account will be part of the Trust
Fund and will be maintained as an Eligible Account with the Trustee, in its
corporate trust department for the purchase of Mortgage Loans. The Pre-Funding
Account Deposit will be increased or decreased by an amount equal to the
aggregate of the principal balances of any mortgage loans removed from or added
to, respectively, the Mortgage Loan Pool prior to the Closing Date, provided
that any such increase or decrease will not exceed ____% of the Initial Pool
Principal Balance. During the period (the "FUNDING PERIOD") from the Closing
Date until the earlier of (i) the date on which the amount on deposit in the
Pre-Funding Account is reduced below $_________, and (ii)__________________,
199__, the amount on deposit in the Pre-Funding Account will be reduced by the
amount thereof used to purchase Subsequent Mortgage Loans in accordance with the
applicable provisions of the Pooling and Servicing Agreement; provided that the
Funding Period will be subject to an earlier termination if insufficient funds
are on deposit in the Capitalized Interest Account on any Determination Date to
cover any interest shortfall for distributions to the Class A Certificates and
the Class B Certificates on the immediately following Distribution Date.
Subsequent Mortgage Loans purchased by and added to the Trust Fund on any
Subsequent Transfer Date must satisfy the criteria set forth in the Pooling and
Servicing Agreement and must be approved by the Certificate Insurer. Assuming
that the aggregate Cut-Off Date Principal Balances of all Subsequent Mortgage
Loans conveyed to the Trust Fund equals the Pre-Funding Account Deposit, then it
is expected that the Assumed Pool Principal Balance will consist of
approximately ____% to ____% Title I Mortgage Loans, and approximately _____% to
_____% Conventional Mortgage Loans. SEE "The Mortgage Loan Pool -- Conveyance
of Subsequent Mortgage Loans" herein.
On the Distribution Date following the Due Period in which such Funding
Period ends, the portion of the Pre-Funding Account Deposit that is remaining at
the end of the Funding Period (net of reinvestment income which is required to
be transferred to the Capitalized Interest Account) will be applied only to
reduce the Class Principal Balances of all Classes of Offered Certificates, on a
pro rata basis,
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thereby reducing the weighted average lives of such Certificates. If pro rata
principal distributions are made on the Offered Certificates as a result of
funds remaining on deposit in the Pre-Funding Account after the termination of
the Funding Period, interest will not accrue on such principal distributions
during the 20-day period that will elapse between the end of the monthly accrual
period immediately preceding the Distribution Date on which such principal
distributions will be made and such Distribution Date.
Amounts on deposit in the Pre-Funding Account will be invested in
Permitted Investments. The Pooling and Servicing Agreement requires that no
Permitted Investment shall evidence either the right to receive (a) only
interest with respect to the obligations underlying such Permitted Investment
or (b) both principal and interest payments derived from obligations
underlying such Permitted Investment where the interest and principal payments
with respect to such Permitted Investment provide a yield to maturity at par
greater than 120% of the yield to maturity at par of the underlying
obligations. Further, no Permitted Investment may be purchased at a price
greater than par if such Permitted Investment may be prepaid or called at a
price less than its purchase price prior to stated maturity. Permitted
Investments are required to mature as may be necessary for the purchase of
Subsequent Mortgage Loans on any Subsequent Transfer Date no later than the
Business Day prior to the related Subsequent Transfer Date, and in any case,
no later than the Business Day prior to the applicable Distribution Date. All
interest and any other investment earnings on amounts on deposit in the
Pre-Funding Account will be transferred to the Capitalized Interest Account.
CAPITALIZED INTEREST ACCOUNT
On the Closing Date, at the direction of the Depositor, an amount (the
"CAPITALIZED INTEREST ACCOUNT DEPOSIT") sufficient to cover the projected
interest shortfall for _______ days from the Pre-Funding Account, as approved by
the Rating Agencies, will be deposited in an Eligible Account maintained by and
in the name of the Trustee (the "CAPITALIZED INTEREST ACCOUNT") from a portion
of the sales proceeds from the Offered Certificates. The amount on deposit in
the Capitalized Interest Account will be specifically allocated to cover
shortfalls in interest (the "INTEREST SHORTFALL") on the Class A Certificates
and the Class B Certificates that may arise as a result of the utilization of
the Pre-Funding Account for the purchase by the Trust Fund of Subsequent
Mortgage Loans after the Closing Date and will be so applied by the Trustee for
the distribution of interest to Certificateholders. In fact, on each
Remittance Date that relates to a Due Period during the Funding Period, the
Interest Shortfall will represent the insufficiency arising from the
difference between (A) the amount of interest that accrues during such Due
Period on the excess of the aggregate Class Principal Balance of all Class A
Certificates and Class B Certificates over the aggregate Pool Principal
Balance at the rate equal to sum of the weighted average Certificate Interest
Rate on all Class A Certificates and Class B Certificates, plus the monthly
rate attributable to the Trustee Fees, Custodian Fees and Certificate
Guaranty Insurance Premium and (B) the amount of reinvestment income that
accrues during such Due Period on the funds on deposit in the Pre-Funding
Account and the Capitalized Interest Account at the rate realized from the
Permitted Investments in which funds are invested. The initial deposit in the
Capitalized Interest Account on the Closing Date will be sufficient to cover
only _______________ days of interest, reflecting the Interest Shortfall with
respect to the __________________ Distribution Date and the __________________
Distribution Date. If the Transferor and Depositor deliver Subsequent Mortgage
Loans on or prior to __________________, 199__, the Trustee may release to the
Depositor the portion of the Capitalized Interest Account Deposit which, based
on a recomputation of the Interest Shortfall, will not be needed on the
__________________ Distribution Date. Additionally, on or before
__________________, 199__, the Depositor may deposit into the Capitalized
Interest Account the Interest Shortfall with respect to the __________________
Distribution Date. The Depositor's failure to make the required Interest
Shortfall deposit on __________________, 199__ with respect to the
__________________ Distribution Date will cause the Funding Period to end on
__________________, 199__. Any amounts remaining in the Capitalized Interest
Account on any Determination Date, that are not required to cover the
anticipated interest shortfall described above, will be distributed to the
Depositor,
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including any net reinvestment income thereon, and such amounts will not
thereafter be available for distribution to the Certificateholders.
Amounts on deposit in the Capitalized Interest Account will be invested in
Permitted Investments as defined in the Pooling and Servicing Agreement. All
such Permitted Investments are required to mature no later than the Business Day
prior to the applicable Distribution Date as specified in the Pooling and
Servicing Agreement. All interest and any other investment earnings on amounts
on deposit in the Capitalized Interest Account will be available to cover any
Interest Shortfall.
TRUST FUND FEES AND EXPENSES
As compensation for their services pursuant to the Pooling and Servicing
Agreement, the Trustee is entitled to the Trustee Fee, the Custodian is entitled
to the Custodian Fee, and the Servicer is entitled to the Servicing Fee and
additional servicing compensation and reimbursement as described under the
"Servicing" subheading below. As compensation for issuing the Guaranty Policy,
the Certificate Insurer is entitled to the Certificate Guaranty Insurance
Premium.
SERVICING
The Servicer is entitled to a Servicing Fee, payable monthly on each
Distribution Date, equal to ____% per annum on the Pool Principal Balance (as
adjusted for Liquidated Mortgage Loans) as of the first day of the immediately
preceding Due Period divided by 12. The Servicer will pay the fees of each
Subservicer out of the amounts it receives as the Servicing Fee. In addition to
the Servicing Fee, the Servicer is entitled to retain additional servicing
compensation in the form of assumption and other administrative fees, release
fees, insufficient funds charges, late payment charges and any other servicing-
related fees.
THE TRUSTEE
________________________ , has been named Trustee pursuant to the Pooling
and Servicing Agreement. The Trustee has accepted appointment as the
Certificate Registrar and Paying Agent pursuant to the Pooling and Servicing
Agreement. The address of the Trustee is:
TERMINATION
The Servicer may, at its option, terminate the Pooling and Servicing
Agreement on any Distribution Date on which the Class Principal Balance of the
Certificates is less than 10% of the sum of the Initial Pool Principal Balance
and the aggregate Cut-Off Date Principal Balance of all Subsequent Mortgage
Loans conveyed to the Trust Fund. Such termination will be effected by the
Servicer purchasing from the Trust Fund all of the Mortgage Loans and REO
Properties at the Termination Price. In connection with any such purchase, the
Servicer will pay the outstanding fees and expenses, if any, of the Trustee, the
Certificate Insurer, the Custodian, and the Servicer.
THE CERTIFICATES; RESTRICTIONS ON TRANSFER
Each Class of the Class A Certificates will be represented by a global
certificate registered in the name of the nominee of The Depository Trust
Company. No person acquiring an interest in the Class A Certificates will be
entitled to receive a definitive certificate representing such person's
interest. SEE "Description of Book Entry Procedures" herein.
DESCRIPTION OF BOOK ENTRY PROCEDURES
Each of the Class A-1 Certificates, the Class A-2 Certificates, the Class
A-3 Certificates and the Class A-4 Certificates (collectively, the "BOOK ENTRY
CERTIFICATES") will be represented by a single certificate registered in the
name of the nominee of The Depository Trust Company ("DTC"). DTC will maintain
book entry records of ownership, transfers and pledges by purchasers and other
beneficial owners (each a "BENEFICIAL OWNER") of such Book Entry Certificates
only in the names of its participants and indirect participants (the "DTC
PARTICIPANTS"), which include securities brokers and dealers, banks and trust
companies and clearing corporations and may include certain other organizations.
Prior to Book Entry Termination (as defined below), Beneficial Owners who are
not DTC Participants may transfer and pledge their interests in the Book Entry
Certificates, and exercise any other rights and remedies of Certificateholders,
only through DTC Participants
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or other entities that maintain relationships with DTC Participants. The
Trustee will have no responsibility to monitor or restrict the transferability
of interests in the Book Entry Certificates through the facilities of DTC. DTC
may charge its customary fee to DTC Participants in connection with any such
transfers and pledges. In addition, prior to Book Entry Termination,
distributions on the Book Entry Certificates will be made to Beneficial Owners
only through DTC and its DTC Participants.
Each Class of the Book Entry Certificates will be issued in certificated,
registered form ("DEFINITIVE CERTIFICATES") to Beneficial Owners or their
nominees, and thereupon such Beneficial Owners will become Certificateholders
if, and only if, one of the following events has occurred (any such event being
referred to as "BOOK ENTRY TERMINATION"): (i) DTC or the Transferor advises the
Trustee in writing that DTC is no longer willing or able properly to discharge
its responsibilities as a clearing corporation with respect to the Book Entry
Certificates and the Transferor and the Trustee are unable to engage a qualified
successor to serve as DTC, or (ii) DTC and DTC Participants, at the direction of
Beneficial Owners representing a majority of the outstanding principal amount of
the Book Entry Certificates, advise the Trustee in writing that the continuation
of a book entry system is no longer in the best interests of Beneficial Owners.
Upon Book Entry Termination, Beneficial Owners will become registered
Certificateholders and will deal directly with the Trustee with respect to
transfers, notices and payments.
DTC has advised the Transferor and the Trustee that, prior to Book Entry
Termination, DTC will take any action permitted to be taken by a
Certificateholder under the Pooling and Servicing Agreement only at the
direction of one or more DTC Participants to whom the Book Entry Certificates
are credited in an account maintained by DTC. DTC has advised that it will take
such action with respect to any principal amount of the Book Entry Certificates
only at the direction of and on behalf of DTC Participants with respect to those
principal amounts of such Book Entry Certificates.
Issuance of the Book Entry Certificates in book entry form rather than as
physical certificates may adversely affect the liquidity of such Certificates in
the secondary market and the ability of Certificateholders to pledge them. In
addition, since distributions on the Book Entry Certificates will be made by the
Trustee to DTC and DTC will credit such distributions to the accounts of its
Participants, which will further credit them to the accounts of indirect
participants of the Book Entry Certificateholders, such Certificateholders may
experience delays in the receipt of such distributions. SEE "Risk Factors --
Limited Liquidity and Fluctuation in Value from Market Conditions -- Book Entry
Registration" in the Prospectus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
An election will be made to treat the assets of the Trust Fund as a REMIC
for federal income tax purposes. The Class A-1 Certificates, Class A-2
Certificates, Class A-3 Certificates, and Class B Certificates will be regular
interests in the Trust Fund, and the Class R Certificates will be the residual
interest in the Trust Fund.
The Offered Certificates may be treated as having been issued with original
issue discount. As a result, holders of Offered Certificates may be required to
recognize income with respect to the Offered Certificates somewhat in advance of
the receipt of cash attributable to that income. The prepayment assumption that
will be used for purposes of computing original issue discount for federal
income tax purposes is a CPR of ____%. No representation is made that the
Mortgage Loans will, in fact, prepay at this or any other rate.
SEE "Certain Federal Income Tax Consequences" in the Prospectus.
ERISA CONSIDERATIONS
As described in the Prospectus under "ERISA Considerations," the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") and the Code impose
certain duties and restrictions on any person which is an employee benefit plan
within the meaning of Section 3(3) of ERISA or Code Section 4975 or any person
utilizing the assets of such employee benefit plan (an "ERISA Plan") and certain
persons who perform services for ERISA Plans. For example, unless exempted,
investment by an ERISA Plan in the Certificates may constitute a prohibited
transaction under ERISA or the Code. There are certain exemptions issued by the
United States Department of Labor (the "DOL") that may be applicable to an
investment by an ERISA Plan in the Certificates, including Prohibited
Transaction Class Exemption 83-1 ("PTE 83-1"). For a further discussion of PTE
83-1, including the necessary conditions to its applicability, and other
important factors to be considered by an ERISA Plan contemplating investing in
the Certificates, SEE "ERISA Considerations" in the Prospectus.
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On __________________, the DOL issued to the Underwriter an individual
administrative exemption, Prohibited Transaction Exemption _____________, Fed.
Reg. __________ (the "Exemption"), from certain of the prohibited transaction
rules of ERISA with respect to the initial purchase, the holding, and the
subsequent resale by an ERISA Plan of certificates in pass-through trusts that
meet the considerations and requirements of the Exemption. The Exemption might
apply to the acquisition, holding and resale of the Certificates by an ERISA
Plan, provided that specified conditions are met.
Among the conditions which would have to be satisfied for the Exemption to
apply to the acquisition by an ERISA Plan of the Certificates, is the condition
that the ERISA Plan investing in the Certificates be an "accredited investor" as
defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933 (the "SECURITIES ACT").
Before purchasing any Certificate, a fiduciary of an ERISA Plan should make
its own determination as to the availability of the exemptive relief provided in
the Exemption or the availability of any other prohibited transaction exemptions
(including PTE 83-1), and whether the conditions of any such exemption will be
applicable to the Certificates.
Any fiduciary of an ERISA Plan considering whether to purchase any
Certificate should not only consider the applicability of exemptive relief, but
should also carefully review with its own legal advisors the applicability of
the fiduciary duty and prohibited transaction provisions of ERISA and the Code
to such investment. SEE "ERISA Considerations" in the Prospectus.
LEGAL INVESTMENT
The Offered Certificates offered hereby will not constitute "mortgage
related securities" under the Secondary Mortgage Market Enhancement Act of 1984
("SMMEA") because a substantial number of the Mortgage Loans are secured by
liens on real estate that are not first liens, as required by SMMEA.
Accordingly, many institutions with legal authority to invest in "mortgage
related securities" may not be legally authorized to invest in the Offered
Certificates.
Although the Title I Mortgage Loans underlying the Offered Certificates are
partially insured under the Title I Program by the FHA, the FHA has not
guaranteed payments on the Offered Certificates themselves. Therefore, the
Offered Certificates should not be considered to be "exempt" securities within
the meaning of the Securities Act or the Exchange Act.
There may be restrictions on the ability of certain investors, including
depository institutions, either to purchase the Offered Certificates or to
purchase Offered Certificates representing more than a specified percentage of
the investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent the Offered Certificates constitute legal
investments for such investors.
RATINGS
At their initial issuance the Class A-1 Certificates, the Class A-2
Certificates, the Class A-3 Certificates and the Class A-4 Certificates will be
rated "_____" by Standard & Poor's and "_____" by Moody's. A security rating is
not a recommendation to buy, sell or hold securities and may be subject to
revision or withdrawal at any time.
The ratings on mortgage pass-through securities address the likelihood of
the receipt by security holders of all distributions on the underlying mortgage
loans to which they are entitled. Ratings also address the structural, legal
and issuer-related aspects associated with mortgage pass-through securities,
including the nature of the underlying mortgage loans. In general, the ratings
on mortgage pass-through securities address credit risk and not prepayment risk.
Ratings on mortgage pass-through securities do not represent any assessment of
the likelihood that principal prepayments will be made by borrowers or the
degree to which the rate of such prepayments might differ from that originally
anticipated. As a result, the initial ratings assigned to the Offered
Certificates do not address the possibility that holders of the Offered
Certificates might suffer a lower than anticipated yield in the event of
principal payments on the Offered Certificates resulting from funds remaining in
the Pre-Funding Account at the end of the Funding Period or rapid prepayments of
the Mortgage Loans, or in the event that the Trust Fund is terminated prior to
the Assumed Final Distribution Dates of each Class of Offered Certificates.
S-53
<PAGE>
The Depositor has not discussed ratings on the Offered Certificates with
any rating agency other than the Rating Agencies. However, there can be no
assurance as to whether any other rating agency will rate the Offered
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. Any rating on the Offered Certificates by another rating agency,
if assigned at all, may be lower than the ratings assigned to the Offered
Certificates by the Rating Agencies.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the rating initially assigned to any
of the Offered Certificates is subsequently lowered for any reason, no person or
entity is obligated to provide any additional support or credit enhancement with
respect to such Offered Certificates.
LEGAL MATTERS
Certain legal matters will be passed upon for the Transferor by Andrews &
Kurth L.L.P., Dallas, Texas, and for the Underwriter by________________________.
In addition, Andrews & Kurth L.L.P. will pass on certain other legal matters for
the Depositor. Certain legal matters will be passed upon for the Certificate
Insurer by _______________________________.
UNDERWRITING
__________________________ (the "UNDERWRITER"), has agreed, subject
to the terms and conditions of the Underwriting Agreement, to purchase from
the Depositor the entire principal amount of the Offered Certificates offered
hereby. [In connection with the offering of the Offered Certificates to
prospective investors the Underwriter has assumed that the Mortgage Loans
will prepay based upon a CPR of ___%. However, no assurance can be given as
to the actual rate at which the Mortgage Loans will prepay or that the rate
of prepayment will remain constant over the term of such Mortgage Loans. SEE
"Prepayment and Yield Considerations -- Weighted Average Life of the Offered
Certificates" herein.]
The Depositor has been advised by the Underwriter that it proposes to offer
the Offered Certificates from time to time in negotiated transactions or
otherwise at varying prices to be determined, in each case, at the time of sale.
The Underwriter may effect such transactions by selling the Offered Certificates
to or through certain dealers and such dealers may receive compensation in the
form of underwriting discounts, concessions or commissions from the Underwriter
and any purchasers of such Offered Certificates for whom they may act as agent.
The Underwriter and any dealers that participate with the Underwriter in the
distribution of the Offered Certificates may be deemed to be underwriters, and
any amounts or commissions received by them and any profits on the resale of
such Offered Certificates positioned by them may be deemed to be underwriting
discounts or commissions, under the Securities Act.
The Depositor and the Transferor will indemnify the Underwriter against
certain civil liabilities, including liabilities under the Securities Act or
contribute to payments the Underwriter may be required to make in respect
thereof.
S-54
<PAGE>
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL TERMS
Page
----
"Additional Series". . . . . . . . . . . . . . . . . . . . . . . . . . . S-12
"Amount Available" . . . . . . . . . . . . . . . . . . . . . . . . . . . S-42
"Assumed Final Distribution Dates" . . . . . . . . . . . . . . . . . . . .S-1
"Assumed Pool Principal Balance" . . . . . . . . . . . . . . . . . . . . .S-2
"Available Remittance Amount". . . . . . . . . . . . . . . . . . . . . . S-41
"Beneficial Owner" . . . . . . . . . . . . . . . . . . . . . . . . .S-3, S-51
"Book Entry Certificates". . . . . . . . . . . . . . . . . . . . . . . . S-51
"Book Entry Termination" . . . . . . . . . . . . . . . . . . . . . . . . S-52
"Capitalized Interest Account Deposit" . . . . . . . . . . . . . . .S-5, S-50
"Capitalized Interest Account" . . . . . . . . . . . . . . . . . . .S-6, S-50
"Certificate Account". . . . . . . . . . . . . . . . . . . . . . . . . . S-41
"Certificate Guaranty Insurance Premium" . . . . . . . . . . . . . . . . S-13
"Certificate Insurer Default". . . . . . . . . . . . . . . . . . . . . . .S-9
"Certificate Insurer Reimbursement Amount" . . . . . . . . . . . . .S-9, S-42
"Certificate Insurer". . . . . . . . . . . . . . . . . . . . . . . . .ii, S-9
"Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-2
"Class A Certificates" . . . . . . . . . . . . . . . . . . . . S-1, S-1, S-40
"Class A Overcollateralization". . . . . . . . . . . . . . . . . . S-10, S-45
"Class B Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . .S-1
"Class B Loss Reimbursement Amount". . . . . . . . . . . . . . . . . . . S-47
"Class Principal Balance". . . . . . . . . . . . . . . . . . . . . .S-7, S-45
"Class R Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . .S-1
"Class R Distribution Trigger" . . . . . . . . . . . . . . . .S-8, S-11, S-43
"Class". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-40
"Closing Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .S-6
"Collection Account" . . . . . . . . . . . . . . . . . . . . . . . . . . S-40
"Conventional Combination Loans" . . . . . . . . . . . . . . . . . .S-3, S-22
"Conventional Debt Consolidation Loans". . . . . . . . . . . . . . .S-3, S-22
"Conventional Home Improvement Loans". . . . . . . . . . . . . . . .S-3, S-22
"Conventional Mortgage Loans". . . . . . . . . . . . . . . . . . . .S-3, S-22
"Credit Support Reduction Date". . . . . . . . . . . . . . . . . . . . . S-46
"Cut-Off Date Principal Balance" . . . . . . . . . . . . . . . . . . . . .S-2
"Cut-Off Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2, S-6
"Definitive Certificates". . . . . . . . . . . . . . . . . . . . . . . . S-52
"Depositor". . . . . . . . . . . . . . . . . . . . . . . . . . .ii, S-1, S-30
"Determination Date" . . . . . . . . . . . . . . . . . . . . . . . .S-6, S-41
"Distribution Date". . . . . . . . . . . . . . . . . . . . . . .ii, S-6, S-40
"DTC Participants" . . . . . . . . . . . . . . . . . . . . . . . . . . . S-51
"DTC". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .S-3, S-51
"Due Period" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .S-6
"Excess Spread". . . . . . . . . . . . . . . . . . . . . . . . . . S-10, S-43
"Exchange Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-28
"FHA Claims Administration Agreement". . . . . . . . . . . . . . . . . . S-13
"FHA Claims Administrator" . . . . . . . . . . . . . . . . . . . . . . . S-13
"FHA Claims" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .S-8
"FHA Insurance Amount" . . . . . . . . . . . . . . . . . . . . . . . . . S-12
"FHA Insurance Premium Account". . . . . . . . . . . . . . . . . . . . . S-41
"FHA Insurance Premium Deposit Amount" . . . . . . . . . . . . . . S-13, S-41
"FHA Insurance Proceeds" . . . . . . . . . . . . . . . . . . . . . . . . S-44
"FHA Reserve". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-11
"FHA". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii, S-11
"Fiscal Agent" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-26
A-1
<PAGE>
"Funding Period" . . . . . . . . . . . . . . . . . . . . . . . . . .S-5, S-49
"Guaranteed Payments". . . . . . . . . . . . . . . . . . . . . . . . . . S-27
"Guaranty Policy". . . . . . . . . . . . . . . . . . . . . . . . . . .ii, S-9
"HUD". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii, S-17
"Initial Class A Overcollateralization". . . . . . . . . . . . . . S-10, S-45
"Initial Mortgage Loans" . . . . . . . . . . . . . . . . . . . . . . .ii, S-2
"Initial Pool Principal Balance" . . . . . . . . . . . . . . . . . . . . .S-2
"Insurance Agreement". . . . . . . . . . . . . . . . . . . . . . . . . . S-27
"Insurance Proceeds" . . . . . . . . . . . . . . . . . . . . . . . . . . S-44
"Interest Carry-Forward Amount". . . . . . . . . . . . . . . . . . . . . S-45
"Interest Remittance Amount" . . . . . . . . . . . . . . . . . . . . . . S-43
"Interest Shortfall" . . . . . . . . . . . . . . . . . . . . . . . . . . S-50
"Liquidated Mortgage Loan" . . . . . . . . . . . . . . . . . . . . . . . S-44
"Majority Certificateholders". . . . . . . . . . . . . . . . . . . .S-9, S-17
"Moody's". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .S-1
"Mortgage Loan Pool" . . . . . . . . . . . . . . . . . . . . . . . .S-3, S-22
"Mortgage Loan Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . S-33
"Mortgage Loan Schedule" . . . . . . . . . . . . . . . . . . . . . . . . S-49
"Mortgage Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . .ii, S-2
"Mortgaged Properties" . . . . . . . . . . . . . . . . . . . . . . .S-3, S-22
"Mortgages". . . . . . . . . . . . . . . . . . . . . . . . . . . . .S-3, S-22
"Net Liquidation Proceeds" . . . . . . . . . . . . . . . . . . . . . . . S-44
"Net Loan Losses". . . . . . . . . . . . . . . . . . . . . . . . . . . . S-47
"Notes". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .S-3, S-22
"Notice" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-27
"Pool Principal Balance" . . . . . . . . . . . . . . . . . . . . . . . . .S-2
"Pooling and Servicing Agreement". . . . . . . . . . . . . . . .ii, S-2, S-27
"Preference Amount". . . . . . . . . . . . . . . . . . . . . . . . . . . S-27
"Pre-Funding Account Deposit". . . . . . . . . . . . . . . . . . . .S-5, S-49
"Pre-Funding Account". . . . . . . . . . . . . . . . . . . . . .ii, S-5, S-49
"Principal Balance". . . . . . . . . . . . . . . . . . . . . . . . . . . .S-2
"Principal Carry-Forward Amount" . . . . . . . . . . . . . . . . . . . . S-45
"Principal Remittance Amount". . . . . . . . . . . . . . . . . . . S-43, S-47
"Prior Series" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-12
"RAC". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .S-2, S-30
"Rating Agencies". . . . . . . . . . . . . . . . . . . . . . . . . . . . S-14
"Record Date". . . . . . . . . . . . . . . . . . . . . . . . . . . .S-6, S-40
"Released Mortgaged Property Proceeds" . . . . . . . . . . . . . . . . . S-44
"REMIC". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii
"Remittance Amount". . . . . . . . . . . . . . . . . . . . . . . . . . . S-45
"Required Class A Overcollateralization Level" . . . . . . . . . . . . . S-46
"RNFC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .S-2, S-30
"Securities Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-53
"Senior Certificates". . . . . . . . . . . . . . . . . . . . . . . . S-1, S-1
"Servicer" . . . . . . . . . . . . . . . . . . . . . . . . . . .ii, S-2, S-30
"Servicing Fee". . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-13
"SMMEA". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-53
"Standard & Poor's". . . . . . . . . . . . . . . . . . . . . . . . . . . .S-1
"Subordinated Certificates". . . . . . . . . . . . . . . . . . . . . S-1, S-2
"Subsequent Mortgage Loans". . . . . . . . . . . . . . . . . . . . . .ii, S-2
"Subsequent Transfer Agreement". . . . . . . . . . . . . . . . . . . . . S-24
"Subservicer". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-13
"Termination Price". . . . . . . . . . . . . . . . . . . . . . . . . . . S-14
"Title I Lenders". . . . . . . . . . . . . . . . . . . . . . . . . . . . S-11
"Title I Mortgage Loans" . . . . . . . . . . . . . . . . . . . .ii, S-3, S-22
"Title I Program". . . . . . . . . . . . . . . . . . . . . . . . . . . . S-11
"Transfer Date". . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-12
A-2
<PAGE>
"Transferor" . . . . . . . . . . . . . . . . . . . . . . . . . .ii, S-2, S-30
"Trust Fund" . . . . . . . . . . . . . . . . . . . . . . . . . . ii, S-1, S-2
"Trustee". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .ii, S-2
"Trustee's Mortgage Loan File" . . . . . . . . . . . . . . . . . . . . . S-49
"Underwriter". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-54
A-3
<PAGE>
APPENDIX B
AUDITED FINANCIAL STATEMENTS
FOR THE CERTIFICATE INSURER
B-1
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
<PAGE>
SUBJECT TO COMPLETION; DATED MAY , 1996
PROSPECTUS
ASSET-BACKED CERTIFICATES
(ISSUABLE IN SERIES)
FIRSTPLUS INVESTMENT CORPORATION
AND CERTAIN TRUSTS, ALL OF THE BENEFICIAL OWNERSHIP INTEREST
IN WHICH IS OWNED BY FIRSTPLUS INVESTMENT CORPORATION
This Prospectus relates to Asset-Backed Certificates (the "CERTIFICATES")
which may be issued from time to time in one or more series (each, a
"SERIES") by FIRSTPLUS INVESTMENT CORPORATION (the "DEPOSITOR") on terms
determined at the time of sale and described in this Prospectus and the
related Prospectus Supplement (a "PROSPECTUS SUPPLEMENT"). As specified in
the related Prospectus Supplement, the Certificates of a Series may be
issued in one or more classes (each, a "CLASS") and certain of these Classes
of Certificates (the "OFFERED CERTIFICATES") will be offered hereby and by
such Prospectus Supplement.
Each Series of Certificates will represent in the aggregate the entire
beneficial ownership interest in a trust fund (a "TRUST FUND") to be formed
by the Depositor as the depositor pursuant to a Pooling and Servicing
Agreement. The issuer ("ISSUER") with respect to a Series of Certificates
will be the Trust Fund. The Trust Fund for each Series of Certificates will
consist primarily of a segregated pool (a "MORTGAGE ASSET POOL") of one or
more of the following mortgage related assets (the "MORTGAGE ASSETS") : (i)
pools of single family (one- to four-unit) residential mortgage loans,
including mortgage loans that are secured by first or junior liens on the
related mortgaged properties, mortgage loans for property improvement, debt
consolidation and/or home equity purposes, timeshare mortgage loans and loans
evidenced by conditional sales contracts and installment sales or installment
loan agreements that are secured by first or junior liens on real property
(the "MORTGAGE LOANS"); (ii) pools of loans evidenced by conditional sales
contracts and installment sales or installment loan agreements, including
secured and unsecured loans for manufactured housing purposes and unsecured
loans for home improvement, debt consolidation and/or home equity purposes
(the "CONTRACTS"); and (iii) mortgage-backed certificates, mortgage pass-
through certificates or mortgage participation certificates (the "AGENCY
SECURITIES"), issued or guaranteed by the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA") or the
Federal Home Loan Mortgage Corporation ("FHLMC"). To the extent specified in
the related Prospectus Supplement, the Mortgage Loans and Contracts may include
Title I Mortgage Loans and Title I Contracts. If specified in the related
Prospectus Supplement, the Trust Fund for a Series of Certificates may include
the rights or other ancillary or incidental assets (together with the Mortgage
Assets, collectively, the "ASSETS") that are intended (i) to provide credit
enhancement for ultimate or timely distributions of proceeds from the Mortgage
Assets or (ii) to assure the servicing of the Mortgage Assets.
SEE "ERISA CONSIDERATIONS" herein and in the related Prospectus
Supplement for a discussion of restrictions on the acquisition of
Certificates by "plan fiduciaries."
Before purchasing any Offered Certificates, prospective investors should
review the information set forth on page 11 herein under the caption "Risk
Factors" and such information as may be set forth under the caption "Risk
Factors" in the related Prospectus Supplement.
(COVER CONTINUED ON NEXT PAGE)
--------------
PROCEEDS OF THE ASSETS OF A TRUST FUND WILL BE THE SOLE SOURCE OF
PAYMENTS ON THE OFFERED CERTIFICATES. THE OFFERED CERTIFICATES WILL NOT
REPRESENT AN INTEREST IN OR OBLIGATION OF THE DEPOSITOR OR ANY OF ITS
AFFILIATES. EXCEPT AS SET FORTH HEREIN AND IN THE RELATED PROSPECTUS
SUPPLEMENT, NEITHER THE OFFERED CERTIFICATES NOR THE UNDERLYING MORTGAGE
ASSETS WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR BY THE DEPOSITOR, ANY OF ITS AFFILIATES, OR ANY OTHER
PERSON.
--------------
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 Certificates 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.
There will have been no public market for any Series of Certificates
prior to the offering thereof. There can be no assurance that a secondary
market will develop for the Certificates of any Series or, if it does
develop, that such market will continue.
RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE. THIS PROSPECTUS MAY NOT BE
USED TO CONSUMMATE SALES OF THE OFFERED CERTIFICATES FOR ANY SERIES UNLESS
ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
<PAGE>
THE DATE OF THIS PROSPECTUS IS ______________, 199__.
(COVER CONTINUED FROM PREVIOUS PAGE)
Each Series will be issued in one or more Classes, one or more of which
may be Principal Only Certificates, Interest Only Certificates, Compound
Interest Certificates, Variable Interest Rate Certificates, Scheduled
Amortization Certificates, Companion Certificates, Special Allocation
Certificates or any other Class of Certificates, if any, included in such
Series and described in the related Prospectus Supplement. Principal Only
Certificates will not accrue, and will not be entitled to receive, any
interest. Payments or distribution of interest on each Class of Certificates
other than Principal Only Certificates and Compound Interest Certificates
will be made on each Distribution Date as specified in the related Prospectus
Supplement. Interest will not be paid or distributed on Compound Interest
Certificates on a current basis until the date or period specified in the
related Prospectus Supplement. Prior to such time, interest on such Class of
Compound Interest Certificates will accrue and the amount of interest so
accrued will be added to the principal thereof on each Distribution Date.
The amount of principal and interest available and payable on each Series on
each Distribution Date will be applied to the Classes of such Series in the
order and as otherwise specified in the related Prospectus Supplement.
Principal payments or distributions on each Class of a Series will be made on
a pro rata, or other selection basis among Certificates of such Class, as
specified in the related Prospectus Supplement. Certificates of a Series
will be subject to redemption or repurchase only under the circumstances and
according to the priorities described herein and in the related Prospectus
Supplement. The Depositor or its affiliates may retain or hold for sale from
time to time all or a portion of one or more Classes of a Series.
The yield on each Class of a Series will be affected by the rate of
payment of principal and interest (including prepayments) on the related
Mortgage Assets and the timing of receipt of such payments as described
herein and in the related Prospectus Supplement.
If specified in the Prospectus Supplement for a Series, one or more
elections may be made to treat all or specified portions of the related Trust
Fund as a "real estate mortgage investment conduit" ("REMIC") or to treat the
arrangement by which such Series is issued as a REMIC, for federal income tax
purposes. If applicable, the Prospectus Supplement for a Series will specify
which Class or Classes of such Series of Certificates will be considered to
be regular interests in the related REMIC and which Class of Certificates or
other interests will be designated as the residual interest in the related
REMIC. SEE "Certain Federal Income Tax Consequences" herein.
ii
<PAGE>
PROSPECTUS SUPPLEMENT
As further described herein, the Prospectus Supplement relating to each
series of Offered Certificates will, among other things, set forth, as and to
the extent appropriate: (i) a description of each Class of such Offered
Certificates, including with respect to each such Class the following (A) the
distribution provisions, (B) the aggregate principal amount, if any, (C) the
rate at which interest accrues from time to time, if at all, or the method of
determining such rate, and (D) whether interest will accrue from time to
time on its aggregate principal amount, if any, or on a specified notional
amount, if at all; (ii) information with respect to any other Classes of
Certificates of the same Series; (iii) the respective dates on which
distributions are to be made; (iv) information as to the Assets, including
the Mortgage Assets and Credit Enhancement, constituting the related Trust
Fund; (v) the circumstances, if any, under which the related Trust Fund may
be subject to early termination; (vi) additional information with respect to
the method of distribution of such Offered Certificates; (vii) whether one
or more REMIC elections will be made and the designation of the "regular
interests" and "residual interests" in each REMIC to be created and the
identity of the person (the "REMIC ADMINISTRATOR") responsible for the
various tax-related duties in respect of each REMIC to be created; (viii)
the initial percentage ownership interest in the related Trust Fund to be
evidenced by each Class of Certificates of such Series; (ix) information
concerning the Trustee (as defined herein) of the related Trust Fund; (x) if
the related Trust Fund includes Mortgage Loans or Contracts, information
concerning the Servicer and any Master Servicer (each as defined herein) of
such Mortgage Loans or Contracts; (xi) information as to the nature and
extent of subordination of any Class of Certificates of such Series,
including a Class of Offered Certificates; and (xii) whether such Offered
Certificates will be initially issued in definitive or book-entry form.
The actual characteristics of the Mortgage Assets relating to a Series
will not deviate in any material respect from the parameters specified in the
related Prospectus Supplement; provided, however, that if the characteristics
described therein materially differ from the actual characteristics, a
supplement to such Prospectus Supplement will be distributed.
AVAILABLE INFORMATION
The Depositor is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and in
accordance therewith is required to file reports and other information (the
"REPORTS") with the Securities and Exchange Commission (the "COMMISSION").
The Depositor has filed with the Commission a Registration Statement under
the Securities Act of 1933, as amended (the "SECURITIES ACT"), with respect
to the Certificates. This Prospectus, which forms a part of the Registration
Statement, and the Prospectus Supplement relating to each Series of
Certificates contain summaries of the material documents referred to herein
and therein, but do not contain all of the information contained in such
Registration Statement pursuant to the rules and regulations of the
Commission. For further information, reference is made to such Registration
Statement and the exhibits thereto. The Registration Statement can be
inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street
N.W., 1st Floor, Room 1024, Washington, D.C. 20549, and at the following
regional offices of the Commission: Chicago Regional Office, Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and New
York Regional Office, 7 World Trade Center, 13th Floor, New York, New York
10048.
The Depositor does not plan to send any financial information to
Certificateholders. The Trustee will include with each distribution to
Certificateholders a statement containing certain payment information with
respect to such Certificates.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Depositor pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering of the Certificates shall be deemed
to be incorporated by reference in this Prospectus and to be a part hereof
from the date of filing of such documents. 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 another subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Depositor will provide without charge to each person to whom a copy
of this Prospectus has been delivered, upon the request of such person, a
copy of any or all of the documents referred to above which have been or may
be incorporated in this Prospectus by reference (other than exhibits to such
documents, unless such exhibits are specifically incorporated by
iii
<PAGE>
reference into any such document). Requests for such copies should be
directed to Christopher J. Gramlich, Vice President, FIRSTPLUS INVESTMENT
CORPORATION, 1250 Mockingbird Lane, Dallas, Texas 75247-4902, (214) 630-6006.
iv
<PAGE>
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT. . . . . . . . . . . . . . . . . . . . . iii
AVAILABLE INFORMATION. . . . . . . . . . . . . . . . . . . . . iii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE. . . . . . . . iii
TABLE OF CONTENTS. . . . . . . . . . . . . . . . . . . . . . . iv
SUMMARY OF PROSPECTUS. . . . . . . . . . . . . . . . . . . . . 1
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . 11
[* 2 moved from here; text not shown]
Limited Liquidity and Fluctuation in Value from Market
Conditions. . . . . . . . . . . . . . . . . . . . . . . . . 11
Limited Assets of Trust Fund . . . . . . . . . . . . . . . 12
Effect of Prepayments on Average Life. . . . . . . . . . . 12
Effect of Prepayments on Yield . . . . . . . . . . . . . . 14
Limitations of Credit Enhancement. . . . . . . . . . . . . 14
Limited Nature of Ratings. . . . . . . . . . . . . . . . . 15
Adverse Tax Consequences . . . . . . . . . . . . . . . . . 15
Certain Factors Affecting Delinquencies, Foreclosures and
Losses on Underlying Loans. . . . . . . . . . . . . . . . 16
Risks Associated with Certain Mortgage Assets . . . . . . 18
DESCRIPTION OF THE CERTIFICATES. . . . . . . . . . . . . . . . 19
General. . . . . . . . . . . . . . . . . . . . . . . . . . 19
The Certificates - General . . . . . . . . . . . . . . . . 20
Form of Certificates; Transfer and Exchange. . . . . . . . 20
REMIC Election . . . . . . . . . . . . . . . . . . . . . . 21
Classes of Certificates. . . . . . . . . . . . . . . . . . 21
Distributions of Principal and Interest. . . . . . . . . . 22
** 1 Termination . . . . . . . . . . . . . . . . . . . . . 24
Book Entry Registration. . . . . . . . . . . . . . . . . . 24
Mutilated, Destroyed, Lost or Stolen Certificates. . . . . 25
ASSETS SECURING OR UNDERLYING THE CERTIFICATES . . . . . . . . 25
** 2 General . . . . . . . . . . . . . . . . . . . . . . . 25
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . 26
Agency Securities. . . . . . . . . . . . . . . . . . . . . 27
Contracts. . . . . . . . . . . . . . . . . . . . . . . . . 31
Additions, Substitution and Withdrawal of Assets . . . . . 32
Pre-Funding Arrangements . . . . . . . . . . . . . . . . . 32
CREDIT ENHANCEMENT . . . . . . . . . . . . . . . . . . . . . . 33
General. . . . . . . . . . . . . . . . . . . . . . . . . . 33
Subordination. . . . . . . . . . . . . . . . . . . . . . . 33
Overcollateralization. . . . . . . . . . . . . . . . . . . 34
Cross-Support. . . . . . . . . . . . . . . . . . . . . . . 34
Certificate Insurance. . . . . . . . . . . . . . . . . . . 34
Pool Insurance . . . . . . . . . . . . . . . . . . . . . . 34
Special Hazard Insurance . . . . . . . . . . . . . . . . . 34
Reserve Funds. . . . . . . . . . . . . . . . . . . . . . . 35
Other Insurance, Guarantees and Similar Instruments or
Agreements. . . . . . . . . . . . . . . . . . . . . . . . 35
v
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TABLE OF CONTENTS
(continued)
PAGE
----
SERVICING OF THE MORTGAGE LOANS AND CONTRACTS. . . . . . . . . . 35
Enforcement of Due-on-Sale Clauses . . . . . . . . . . . . . 36
Realization upon Defaulted Mortgage Loans. . . . . . . . . . 36
Waivers and Deferments of Certain Payments . . . . . . . . . 37
Subservicers . . . . . . . . . . . . . . . . . . . . . . . . 37
Removal and Resignation of Servicer. . . . . . . . . . . . . 37
Advances . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Servicing Procedures . . . . . . . . . . . . . . . . . . . . 37
Administration and Servicing Compensation and Payment of
Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 38
THE POOLING AND SERVICING AGREEMENT. . . . . . . . . . . . . . . 39
Assignment of Mortgage Assets. . . . . . . . . . . . . . . . 39
Conveyance of Subsequent Mortgage Loans. . . . . . . . . . . 40
Repurchase or Substitution of Mortgage Loans and Contracts . 40
Evidence as to Compliance. . . . . . . . . . . . . . . . . . 41
List of Certificateholders . . . . . . . . . . . . . . . . . 41
Administration of the Certificate Account. . . . . . . . . . 41
Reports to Certificateholders . . . . . . . . . . . . . . . 42
Events of Default. . . . . . . . . . . . . . . . . . . . . . 43
Rights Upon Event of Default . . . . . . . . . . . . . . . . 43
Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . 43
[* 1 moved from here; text not shown]
USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . 44
THE DEPOSITOR. . . . . . . . . . . . . . . . . . . . . . . . . . 44
THE SERVICER AND THE TRANSFEROR. . . . . . . . . . . . . . . . . 44
THE TRUSTEE. . . . . . . . . . . . . . . . . . . . . . . . . . . 45
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS . . . . . . . . . . 45
General Legal Considerations . . . . . . . . . . . . . . . . 45
Foreclosure. . . . . . . . . . . . . . . . . . . . . . . . . 47
Truth in Lending Act . . . . . . . . . . . . . . . . . . . . 53
Applicability of Usury Laws. . . . . . . . . . . . . . . . . 53
Soldiers' and Sailors' Civil Relief Act. . . . . . . . . . . 53
The Title I Program. . . . . . . . . . . . . . . . . . . . . 54
LEGAL INVESTMENT MATTERS . . . . . . . . . . . . . . . . . . . . 61
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . 61
CERTAIN FEDERAL INCOME TAX CONSEQUENCES. . . . . . . . . . . . . 63
Federal Income Tax Consequences for REMIC Certificates . . . 63
Federal Income Tax Consequences for Certificates as to
Which No REMIC Election Is Made . . . . . . . . . . . . . . 80
STATE TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . . . 86
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . 86
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . 86
vi
<PAGE>
TABLE OF CONTENTS
(continued)
PAGE
----
FINANCIAL INFORMATION AND ADDITIONAL INFORMATION . . . . . . . . 86
vii
<PAGE>
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and in the
Prospectus Supplement with respect to the Series offered thereby and to the
related Pooling and Servicing Agreement. Unless otherwise specified,
initially 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. Reference is made to the "Index to Location
of Principal Terms" set forth in Appendix A for the location of certain
capitalized terms.
Securities Offered . . . . . Asset Backed Certificates issuable in Series
as described in the Prospectus Supplement.
Certificates of a Series will be issued pursuant
to a pooling and servicing agreement (each, a
"POOLING AND SERVICING AGREEMENT") between the
Depositor, as depositor, the Servicer, any
Administrators, the Master Servicer, if any,
and the Trustee for such Series and will
evidence beneficial interests in the assets
included in a trust fund (the "TRUST FUND") and
assigned to the Trustee for the applicable
Series. Holders of Certificates are referred
to herein as "HOLDERS" or "CERTIFICATEHOLDERS."
The Certificates of any Series may be issued in
one or more classes (each a "CLASS"), as
specified in the related Prospectus Supplement.
One or more Classes of Certificates of each
Series:
(i) may be entitled to receive distributions
allocable only to principal ("PRINCIPAL ONLY
CERTIFICATES"), only to interest ("INTEREST
ONLY CERTIFICATES") or to any combination
thereof;
(ii) may be entitled to receive distributions
only of prepayments of principal throughout the
lives of the Certificates of such Series 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 such Series throughout the lives of
the Certificates of such Series or during
specified periods;
(iv) may be entitled to receive such
distributions only after the occurrence of
events specified in the Prospectus Supplement;
(v) may be entitled to receive distributions in
accordance with a schedule or formula or on the
basis of collections from designated portions
of the Assets securing such Series or in the
related Trust Fund;
(vi) may be entitled to receive interest at a
rate that is subject to change from time to
time ("VARIABLE INTEREST RATE CERTIFICATES") or
at a fixed rate;
(vii) may accrue interest, with such accrued
interest added to the principal amount of the
Certificates of such Class and no payments
being made thereon until such time as is
specified in the related Prospectus Supplement
("COMPOUND INTEREST CERTIFICATES").
As specified in the related Prospectus
Supplement, each Series of Certificates will be
entitled to distributions from the Assets
included in the related Trust Fund and any
other assets pledged or otherwise available for
the benefit of Holders of such Series. The
timing and
1
<PAGE>
amounts of such distributions may vary among
Classes, over time, or otherwise as specified
in the related Prospectus Supplement.
The Depositor or its affiliates may retain or
hold for sale from time to time all or a
portion of one or more Classes of a Series.
The Certificates of each Class of a Series will
be issued either in fully registered form or in
book entry form in the authorized denominations
specified in the Prospectus Supplement. The
Certificates and Mortgage Assets will be
guaranteed or insured, if at all, to
the extent specified in the related Prospectus
Supplement; otherwise the Certificates will not
be guaranteed or insured by GNMA, FNMA, FHLMC,
any governmental entity or by any other person,
and the Mortgage Assets (other than Agency
Securities) relating to a Series will not be
guaranteed or insured by any governmental
agency or instrumentality or any other insurer.
Depositor. . . . . . . . . . FIRSTPLUS INVESTMENT CORPORATION will transfer
the Assets for a Series to the related Trust
Fund (the "DEPOSITOR"). SEE "The Depositor."
Issuer . . . . . . . . . . . The Issuer will be the Trust Fund established
by the Depositor pursuant to the related
Pooling and Servicing Agreement (the "ISSUER").
Servicer . . . . . . . . . . If the related Trust Fund includes Mortgage
Loans or Contracts, the entity or entities
named as the Servicer in the related Prospectus
Supplement (the "SERVICER"), that will act as
servicer with respect to such Mortgage Loans or
Contracts. The Servicer may be an affiliate of
the Depositor.
Administrator. . . . . . . . The entity or entities named as Administrator,
if any, in the related Prospectus Supplement
(the "ADMINISTRATOR"), will act as
administrator with respect to one or more
aspects related to any Mortgage Loans or
Contracts included in the related Trust Fund
(e.g., REMIC Administrator, FHA Claims
Administrator, etc.). The Administrator may be
an affiliate of the Depositor.
Master Servicer. . . . . . . If the related Trust Fund includes Mortgage
Loans or Contracts, the entity or entities, if
any, named as the master servicer in the
related Prospectus Supplement (the "MASTER
SERVICER"), that will act as master servicer
with respect to such Mortgage Loans or
Contracts. The Master Servicer may be an
affiliate of the Depositor.
Trustee. . . . . . . . . . . A bank, trust company or other fiduciary acting
as a trustee and named in the related
Prospectus Supplement (the "TRUSTEE"), that
will enter into the related Pooling and
Servicing Agreement.
Distributions of Interest. . Each Class of a Series (other than a Class of
Principal Only Certificates) will accrue
interest at the rate set forth in (or, in the
case of Variable Interest Certificates, as
determined as provided in) the related
Prospectus Supplement (the "CERTIFICATE
INTEREST RATE"). One or more Classes of a
Series may be entitled to receive distributions
of interest only to the extent of amounts
available to make such distributions. Interest
on each Class will accrue during the respective
periods and be paid or distributed on the
respective dates specified in the related
Prospectus Supplement (each such period a "DUE
PERIOD" and each such date a "DISTRIBUTION
DATE"). Interest on all Certificates
2
<PAGE>
that bear or receive interest, other than
Compound Interest Certificates, will be
distributed on the Distribution Dates specified
in the related Prospectus Supplement. However,
failure to distribute interest on a current
basis may not necessarily be an Event of Default
with respect to a particular Series or Class of
Certificates. Interest on any Class of
Compound Interest Certificates will not be paid
or distributed currently, but will accrue and
the amount of the interest so accrued will be
added to the principal thereof on each
Distribution Date until such time as is
specified in the related Prospectus Supplement.
Principal Only Certificates will not accrue,
and will not be entitled to receive, any
interest. Upon maturity or earlier termination
of the Certificates of any Class or earlier
termination of the Trust Fund for any Series,
interest will be paid to the date specified in
the related Prospectus Supplement.
Each payment of interest on each Class of
Certificates (or addition to principal of a
Class of Compound Interest Certificates) on a
Distribution Date will include all interest
accrued during the related Due Period. If the
Due Period for a Series ends on a date other
than a Distribution Date for such Series, the
yield realized by the Holders of such
Certificates may be lower than the yield that
would result if the Due Period ended on such
Distribution Date. Additionally, if specified
in the related Prospectus Supplement, interest
accrued for a Due Period for one or more
Classes may be calculated on the assumption
that principal distributions (and additions to
principal of the Certificates), and allocations
of losses on the Mortgage Assets (if specified
in the related Prospectus Supplement), are made
on the first day of the preceding Due Period
and not on the Distribution Date for such
preceding Due Period when actually made or
added. Such method would produce a lower
effective yield than if interest were
calculated on the basis of the actual principal
amount outstanding.
With respect to each Class of Variable Interest
Rate Certificates of a Series, the related
Prospectus Supplement will set forth: (i) the
initial Certificate Interest Rate, (or the
manner of determining the initial Certificate
Interest Rate); (ii) the formula, index or
other method by which the Certificate Interest
Rate will be determined from time to time;
(iii) the periodic intervals at which such
determination will be made; (iv) the interest
rate cap (the "MAXIMUM VARIABLE INTEREST RATE")
if any, and the interest rate floor (the
"MINIMUM VARIABLE INTEREST RATE"), if any, on
the Certificate Interest Rate for such Variable
Interest Rate Certificates; and (v) any other
terms relevant to such Class of Certificates.
SEE "Description of the Certificates --
Distributions of Principal and Interest" and
-- "Distributions of Interest."
Distributions of Principal . Principal distributions on the Certificates of
a Series will be made from amounts available
therefor on each Distribution Date in an
aggregate amount determined as set forth in the
related Prospectus Supplement and will be
allocated among the respective Classes of a
Series of Certificates at the times, in the
manner and in the priority set forth in the
related Prospectus Supplement.
Except with respect to Compound Interest
Certificates and Interest Only Certificates,
on each Distribution Date principal
distributions will be made on the Certificates
of a Series in an aggregate amount determined
as specified
3
<PAGE>
in the related Prospectus Supplement. If a
Series has a Class of Compound Interest
Certificates, additional principal distributions
on the Certificates of such Series will be made
on each Distribution Date in an amount equal to
the interest accrued, but not then payable or
distributable, on such Class of Compound
Interest Certificates for the related Due
Period. SEE "Description of the Certificates
-- Distributions of Principal and Interest
-- Distributions of Principal."
Unscheduled Distributions. . If specified in the related Prospectus
Supplement, the Certificates of a Series will
be subject to receipt of distributions before
the next scheduled Distribution Date as
described under "Description of Certificates --
Distributions of Principal and Interest --
Unscheduled Distributions."
Allocation of Losses . . . . If specified in the related Prospectus
Supplement, on any Distribution Date on which
the principal balance of the Mortgage Assets
relating to a Series is reduced due to losses
on such Mortgage Assets, (i) the amount of such
losses will be allocated first, to reduce the
aggregate outstanding principal balance of the
Subordinate Certificates of such Series or
other subordination or reserves, if any, and,
thereafter, to reduce the aggregate outstanding
principal balance of the remaining Certificates
of such Series in the priority and manner
specified in such Prospectus Supplement until
the aggregate outstanding principal balance of
each Class of such Certificates so specified
has been reduced to zero or paid in full, thus
reducing the amount of principal distributable
on each such Class of Certificates or (ii) such
losses may be allocated in any other manner set
forth in the related Prospectus Supplement.
As specified in the related Prospectus
Supplement, such reductions of principal of a
Class or Classes of a Series of Certificates
will be allocated to the Holders of the
Certificates of such Class or Classes pro rata
in the proportion which the outstanding
principal of each Certificate of such Class or
Classes bears to the aggregate outstanding
principal balance of all Certificates of such
Class or Classes. SEE "Description of the
Certificates -- Distributions of Principal and
Interest -- Distributions of Principal."
Assumed Final Distribution
Date. . . . . . . . . . . . The "ASSUMED FINAL DISTRIBUTION DATE" for each
Class of Certificates of a Series will be the
date after which no Certificates of such
Class will remain outstanding, as specified
and determined on the basis of the assumptions
set forth in the related Prospectus Supplement.
The Assumed Final Distribution Date of a Class
of Certificates may equal the maturity date of
the Mortgage Asset in the related Trust Fund
which has the latest stated maturity or will be
determined as described in the related
Prospectus Supplement.
The actual maturity date of the Certificates of
a Series will depend primarily upon the rate
and timing of principal and interest payments
(including the level of prepayments) with
respect to the Mortgage Assets (including in
the case of Agency Securities the Mortgage
Loans that back such Agency Securities)
securing or underlying such Series of
Certificates. The actual maturity of any
Certificates is likely to occur earlier and may
occur substantially earlier than the Assumed
Final Distribution Date of the Certificates as
a result of the application
4
<PAGE>
of prepayments and the allocation of other
distributions to the reduction of the principal
balances of the Certificates. The rate and
timing of principal and interest payments
including prepayments on the Mortgage Assets
securing or underlying a Series will depend on
a variety of factors, including certain
characteristics of such Mortgage Assets and the
prevailing level of interest rates from time to
time, as well as on a variety of economic,
demographic, tax, legal, social and other
factors. No assurance can be given as to the
actual rate and timing of principal and
interest payments including the level of
prepayments experienced with respect to a
Series. SEE "Risk Factors -- Effect of
Prepayments on Average Life" herein.
Assets Securing or
Underlying the
Certificates. . . . . . . . Each Series of Certificates will represent
beneficial ownership interests in a Trust Fund.
As specified in the related Prospectus
Supplement the Mortgage Assets included in the
Trust Fund with respect to a Series of
Certificates will include Mortgage Assets
consisting of one or more of the following:
(i) a pool (a "Mortgage Pool") of single
family (one- to four-unit)
residential mortgage loans, including
mortgage loans that are secured by first
or junior liens on the related
mortgaged properties, mortgage loans
for property improvement, debt
consolidation and/or home equity
purposes timeshare mortgage
loans and loans evidenced by
conditional sales contracts and
installment sales or installment
loan agreements that are secured by
first or junior liens on real property
("Mortgage Loans");
(ii) a pool (a "Contract Pool") of loans
evidenced by conditional sales
contracts, installment sales or
installment loan agreements,
including secured and unsecured loans
for manufactured housing purposes and
unsecured loans for home improvement,
debt consolidation and/or home equity
purposes ("Contracts"); and
(iii) mortgage-backed certificates,
mortgage pass-through certificates or
mortgage participation certificates,
including residual interests ("AGENCY
SECURITIES") issued or guaranteed by
the Government National Mortgage
Association ("GNMA"), the Federal
National Mortgage Association
("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC");
As specified in the related Prospectus
Supplement, a Trust Fund may also include, or
the related Certificates may also have the
benefits of, certain rights and other
ancillary and incidental assets (together
with the Mortgage Assets, collectively, the
"ASSETS"), that are intended (i) to enhance
the likelihood of ultimate or timely
distributions of proceeds from the Mortgage
Assets to Certificateholders, including letters
of credit, insurance policies, guaranties,
reserve funds or other types of credit
enhancement or any combination thereof (the
"Credit Enhancement"), or (ii) to assure the
servicing of the Mortgage Assets, including
interest rate exchange agreements, reinvestment
income and cash accounts. The Certificates of
any Series will be entitled to payment only from
the Assets included in the related Trust Fund
and any other Assets pledged or otherwise
available for the benefit of the holders of
such Certificates as specified in the related
Prospectus Supplement.
5
<PAGE>
A. Mortgage Loans . . . . . As specified in the related Prospectus
Supplement for a Series, "Mortgage Loans" may
include: (i) conventional (I.E., not insured
or guaranteed by any governmental agency)
Mortgage Loans secured by first liens on
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 (i.e., second,
third, etc.) liens on the related mortgaged
properties, including loans for property
improvements, debt consolidation and/or home
equity purposes (which may be evidenced by
retail installment sales contracts and
installment loan agreements); (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 unit
and access to the accompanying recreational
facilities for the week or weeks owned and
(v) loans evidenced by conditional sales
contracts and installment sales or installment
loan agreements that are secured by first or
junior liens on real property. SEE "Assets
Securing or Underlying the Certificates
Mortgage Loans" herein. To the extent
described in the related Prospectus Supplement,
certain of the junior lien Mortgage Loans will
be conventional (i.e., not insured or
guaranteed by a governmental agency) mortgage
loans ("CONVENTIONAL MORTGAGE LOANS"), while
other junior lien Mortgage Loans that are
property improvement loans will be partially
insured by the Federal Housing Administration
under the Title I Program ("TITLE I MORTGAGE
LOANS").
The related Prospectus Supplement for a Series
will describe any Mortgage Loans included in
the Trust Fund and will specify certain
information regarding the payment terms of such
Mortgage Loans. SEE "Assets Securing or
Underlying the Certificates -- Mortgage Loans."
B. Contracts. . . . . . . As specified in the related Prospectus
Supplement for a Series, "Contracts" may
include: (i) loans evidenced by conditional
sales contracts and installments sales or loan
agreements, including loans secured by new or
used Manufactured Homes (as defined herein)
that are not considered to be interests in
real property because such Manufactured Homes
are not permanently affixed to real estate
("Secured Contracts"), and (ii) unsecured loans
for Manufactured Homes or for property improve-
ment, debt consolidation and/or home equity
purposes (such unsecured loans are
collectively, the "Unsecured Contracts"). SEE
"Assets Securing or Underlying the Certificates
Contracts" herein. To the extent described in
the related Prospectus Supplement, certain
Contracts that are secured by Manufactured Homes
and Unsecured Contracts will be conventional
(i.e., not insured or guaranteed by a
governmental agency) loan contracts (the
"CONVENTIONAL CONTRACTS") , while other
Contracts that are secured by Manufactured Homes
or that are unsecured loans for Manufactured
Homes or property improvements will be partially
insured by the FHA under the Title I Program
(the "TITLE I CONTRACTS"). The related
Prospectus Supplement for a Series will further
describe any Contracts included in the Trust
Fund. SEE "Assets Securing or Underlying the
Certificates -- Contracts."
C. Agency Securities. . . . As specified in the related Prospectus
Supplement for a Series, "Agency Securities"
may include: (i) "fully modified pass-through"
mortgage-backed certificates guaranteed as to
timely payment of principal and interest by
GNMA ("GNMA Certificates"); (ii)
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guaranteed mortgage pass-through certificates
issued and guaranteed as to timely payment of
principal and interest by FNMA ("FNMA
Certificates"); (iii) mortgage participation
certificates issued and guaranteed as to timely
payment of interest and, to the extent
specified in the related Prospectus Supplement,
ultimate payment of principal by FHLMC ("FHLMC
Certificates"); (iv) stripped mortgage-backed
securities representing an undivided interest
in all or a part of either the principal
distributions (but not the interest
distributions) or the interest distributions
(but not the principal distributions) or in
some specified portion of the principal and
interest distributions (but not all of such
distributions) on certain GNMA, FNMA or FHLMC
Certificates and, unless otherwise specified in
the Prospectus Supplement, guaranteed to the
same extent as the underlying securities; (v)
other types of mortgage-backed certificates,
mortgage pass-through certificates or mortgage
participation certificates issued or guaranteed
by GNMA, FNMA or FHLMC, such as FNMA Guaranteed
REMIC Pass-Through Certificates and FHLMC
Multiclass Mortgage Participation Certificates,
and including residual interest securities, as
described in the related Prospectus Supplement;
or (vi) a combination of such Agency Securities.
All GNMA Certificates will be backed by the
full faith and credit of the United States. No
FHLMC or FNMA Certificates will be backed,
directly or indirectly, by the full faith and
credit of the United States. SEE "Assets
Securing or Underlying the Certificates --
Agency Securities."
D. Pre-Funding
Arrangements. . . . . To the extent provided in the related
Prospectus Supplement for a Series, the related
Pooling and Servicing Agreement will provide
for a commitment by the related Trust Fund to
subsequently purchase additional Mortgage
Assets ("Subsequent Mortgage Assets") from the
Depositor following the date on which the Trust
Fund is established and the related
Certificates are issued (a "Pre-Funding
Arrangement"). SEE "Assets Securing or
Underlying the Certificates -- Pre-Funding
Arrangement" herein.
Credit Enhancement . . . . . If specified in the related Prospectus
Supplement, a Series, 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
overcollateralization, subordination, cross
support, mortgage pool insurance, certificate
insurance, special hazard insurance, a
bankruptcy bond, reserve funds, cash accounts,
other insurance, guarantees, letters of credit
and similar instruments and arrangements. The
protection against losses afforded by any such
Credit Enhancement will be limited. SEE "Risk
Factors -- Limitations of Credit Enhancement"
and "Credit Enhancement" herein.
Book Entry Registration. . . If the Prospectus Supplement for a Series so
provides, Certificates of one or more Classes
of such Series may be issued in book entry form
("BOOK ENTRY CERTIFICATES") in which case a
single Certificate will be issued in the name
of a clearing agency (a "CLEARING AGENCY")
registered with the Securities and Exchange
Commission, or its nominee. Transfers and
pledges of Book Entry Certificates may be made
only through entries on the books of the
Clearing Agency in the name of brokers,
dealers, banks and other organizations eligible
to maintain accounts with the Clearing Agency
("CLEARING AGENCY PARTICIPANTS") or their
nominees. Transfers and pledges by purchasers
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and other beneficial owners of Book Entry
Certificates ("BENEFICIAL OWNERS") other than
Clearing Agency Participants may be effected
only through Clearing Agency Participants.
Beneficial Owners will receive distributions of
principal and interest, and, if applicable, may
tender Certificates for repurchase to the
related Trustee, only through the Clearing
Agency and Clearing Agency Participants. Except
as otherwise specified in this Prospectus or a
related Prospectus Supplement, the terms
"CERTIFICATEHOLDERS" and "HOLDERS" shall be
deemed to include Beneficial Owners. SEE "Risk
Factors -- Limited Liquidity and Fluctuation in
Value from Market Condition -- Book Entry
Registration" and "Description of the
Certificates -- Book Entry Registration."
Certain Federal Income Tax
Consequences. . . . . . . . The federal income tax consequences to Holders
of a Series will depend on, among other
factors, whether one or more elections are made
to treat the related Trust Fund or specified
portions thereof as a "real estate mortgage
investment conduit" ("REMIC") under the
provisions of the Internal Revenue Code of
1986, as amended (the "CODE"). The Prospectus
Supplement for each Series will specify whether
such an election will be made.
If the applicable Prospectus Supplement so
specifies with respect to a Series of
Certificates, one or more REMIC elections will
be made with respect to such Series of
Certificates. Certificates of such Series will
be designated as "regular interests" in a REMIC
("REGULAR CERTIFICATES") or as "residual
interests" in a REMIC ("RESIDUAL CERTIFICATES").
If the applicable Prospectus Supplement so
specifies with respect to a Series of
Certificates, the Certificates of such Series
will not be treated as regular or residual
interests in a REMIC for federal income tax
purposes but instead will be treated as (i)
indebtedness of the Issuer, (ii) an undivided
beneficial ownership interest in the Mortgage
Assets (and the arrangement pursuant to which
the Mortgage Assets will be held and the
Certificates will be issued will be treated as
a grantor trust under Subpart E, part I of
subchapter J of Chapter 1 of Subtitle A of the
Code and not as an association taxable as a
corporation for federal income tax purposes);
(iii) equity interests in an association that
will satisfy the requirements for qualification
as a real estate investment trust; or (iv)
interests in an entity that will satisfy the
requirements for qualification as a partnership
for federal income tax purposes. The federal
income tax consequences to Holders of any such
Series will be described in the related
Prospectus Supplement to the extent not
described herein.
Compound Interest Certificates and Principal
Only Certificates will, and certain other
Classes of Certificates may, be issued with
original issue discount that is not de minimis.
In such cases, the Holder will be required to
include the original issue discount in gross
income as it accrues, which may be prior to the
receipt of cash, or a portion of the cash,
attributable to such income. If a Certificate
is issued at a premium, the Holder will be
entitled to make an election to amortize such
premium on a constant yield method.
Certificates constituting regular or residual
interests in a REMIC will generally represent
"qualifying real property loans" for mutual
savings banks and domestic building and loan
associations, "loans secured by an interest in
real property" for domestic building and loan
associations and "real estate
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assets" for real estate investment trusts to
the extent that the underlying mortgage loans
and interest thereon qualify for such
treatment. Non-REMIC Certificates will not
qualify for such treatment.
A Holder of a Residual Certificate will be
required to include in its income its pro rata
share of the taxable income of the REMIC. In
certain circumstances, the Holder of a Residual
Certificate may have REMIC taxable income or
tax liability attributable to REMIC taxable
income for a particular period in excess of
cash distributions for such period or have an
after-tax return that is less than the
after-tax return on comparable debt
instruments. In addition, a portion (or, in
some cases, all) of the income from a Residual
Certificate (i) except in certain circumstances
with respect to a Holder classified as a thrift
institution under the Code, may not be subject
to offset by losses from other activities, (ii)
for a Holder that is subject to tax under the
Code on unrelated business taxable income, may
be treated as unrelated business taxable income
and (iii) for a foreign Holder, may not qualify
for exemption from or reduction of withholding.
Further, individual Holders are subject to
limitations on the deductibility of expenses of
the REMIC. SEE "Certain Federal Income Tax
Consequences."
ERISA Considerations . . . . A fiduciary of any employee benefit plan
subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or
the Code should carefully review with its own
legal advisors whether the purchase or holding
of Certificates could give rise to a
transaction prohibited or otherwise
impermissible under ERISA or the Code. SEE
"ERISA Considerations." To the extent
described in the Prospectus Supplement for a
Series, certain Classes of Certificates of such
Series 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, the Master Servicer, if any,
or the Administrator, if any, to additional
obligations. If specified in the related
Prospectus Supplement, the United States
Department of Labor may have issued to the
Underwriter an administrative exemption for
certain classes of securities. SEE "Description
of the Certificates -- General" and "ERISA
Considerations."
Legal Investment Matters . . Certificates of each Series will not constitute
"mortgage related securities" under the
Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") because, to the extent
specified in the related Prospectus Supplement,
a substantial number of the Mortgage Loans will
be secured by liens on real estate that are not
first liens, as required by SMMEA.
Accordingly, many institutions with legal
authority to invest in "mortgage related
securities" may not be legally authorized to
invest in the Certificates of any Series.
Investors should consult their own legal
advisors in determining whether and to what
extent the Certificates of any particular
Series constitute legal investments for such
investors.
Use of Proceeds. . . . . . . Substantially all of the net proceeds from the
sale of a Series will be applied to the
simultaneous purchase of the Mortgage Assets
included in the related Trust Fund or to
reimburse the amounts previously used to effect
such purchase, the costs of carrying the
Mortgage Assets until sale of such Series and
to pay other expenses connected with pooling
the Mortgage Assets and issuing such Series.
SEE "Use of Proceeds."
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<PAGE>
Rating . . . . . . . . . . . It is a condition to the issuance of each Class
of a Series specified as being offered by the
related Prospectus Supplement that the
Certificates of such Class be rated in one of
the four highest rating categories established
for such Certificates by a nationally
recognized statistical rating agency (a "Rating
Agency").
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<PAGE>
RISK FACTORS
In considering an investment in the Offered Certificates of any Series,
investors should consider, among other things, the following risk factors and
any other factors set forth under the heading "Risk Factors" in the related
Prospectus Supplement. In general, to the extent that the factors discussed
below pertain to or are influenced by the characteristics or behavior of the
underlying loans included in a particular Trust Fund (which comprise the
Mortgage Assets consisting of Mortgage Loans or the Contracts), they would
similarly pertain to and be influenced by the characteristics or behavior of
the mortgage loans underlying any Agency Securities included in such Trust
Fund.
LIMITED LIQUIDITY AND FLUCTUATION IN VALUE FROM MARKET CONDITIONS
GENERAL. The Offered Certificates of any Series may have limited or no
liquidity. Accordingly, an investor may be forced to bear the risk of its
investment in any Offered Certificates for an indefinite period of time.
Furthermore, except to the extent described herein and in the related
Prospectus Supplement, Certificateholders will have no redemption rights, and
the Offered Certificates of each Series are subject to early retirement only
under certain specified circumstances described herein and in the related
Prospectus Supplement. SEE "Description of the Certificates -- Termination"
herein.
LACK OF A SECONDARY MARKET. There can be no assurance that a secondary
market for the Offered Certificates of any Series will develop or, if it does
develop, that it will provide holders with liquidity of investment or that it
will continue for as long as such Certificates remain outstanding. The
Prospectus Supplement for any Series of Offered Certificates may indicate
that an underwriter specified therein intends to establish a secondary market
in such Offered Certificates; however, no underwriter will be obligated to do
so. Any such secondary market may provide less liquidity to investors than
any comparable market for securities that evidence interests in single-family
mortgage loans. To the extent provided in the related Prospectus Supplement,
the Certificates may be listed on any securities exchange.
** 3 BOOK ENTRY REGISTRATION. Because transfers and pledges of Book
Entry Certificates can be effected only through book entries at a Clearing
Agency through Clearing Agency Participants, the liquidity of the secondary
market for Book Entry Certificates may be reduced to the extent that some
investors are unwilling to hold Certificates in book entry form in the name
of Clearing Agency Participants, and the ability to pledge Book Entry
Certificates may be limited due to lack of a physical certificate. Beneficial
Owners of Book Entry Certificates may, in certain cases, experience delay in
the receipt of distributions of principal and interest since such
distributions will be forwarded by the related Trustee to the Clearing Agency
who will then forward payment to the Clearing Agency Participants who will
thereafter forward payment to Beneficial Owners. In the event of the
insolvency of the Clearing Agency or of a Clearing Agency Participant in
whose name Certificates are recorded, the ability of Beneficial Owners to
obtain timely payment and (if the limits of applicable insurance coverage by
the Securities Investor Protection Corporation are exceeded, or if such
coverage is otherwise unavailable) ultimate payment of principal and interest
on Book Entry Certificates may be impaired.
LIMITED NATURE OF ONGOING INFORMATION. The primary source of ongoing
information regarding the Offered Certificates of any Series, including
information regarding the status of the related Mortgage Assets and any
Credit Enhancement for such Certificates, will be the periodic reports to
Certificateholders to be delivered pursuant to the related Pooling and
Servicing Agreement as described herein under the heading "The Pooling and
Servicing Agreement - Reports to Certificateholders". There can be no
assurance that any additional ongoing information regarding the Offered
Certificates of any Series will be available through any other source. The
limited nature of such information in respect of a Series of Offered
Certificates may adversely affect the liquidity thereof, even if a secondary
market for such Certificates does develop.
SENSITIVITY TO FLUCTUATIONS IN PREVAILING INTEREST RATES. Insofar as a
secondary market does develop with respect to any Series of Offered
Certificates or Class thereof, the market value of such Certificates will be
affected by several factors, including the perceived liquidity thereof, the
anticipated cash flow thereon (which may vary widely depending upon the
prepayment and default assumptions applied in respect of the underlying
Mortgage Loans) and prevailing interest rates. The price payable at any
given time in respect of certain Classes of Offered Certificates (in
particular, a Class with a relatively long average life, or a Class of
Companion Certificates, Interest Only Certificates or Principal Only
Certificates) may be extremely sensitive to small fluctuations in prevailing
interest rates; and the relative change in price for an Offered Certificate
in response to an upward or downward movement in prevailing interest rates
may not necessarily equal the relative change in price for such Offered
Certificate in response to an equal but opposite movement in such rates.
Accordingly, the sale of Offered Certificates by a holder in any secondary
market that may develop may be at a discount from the price paid
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<PAGE>
by such holder. The Depositor is not aware of any source through which price
information about the Offered Certificates will be generally available on an
ongoing basis.
LIMITED ASSETS OF TRUST FUND
The Offered Certificates and Mortgage Assets for a Series will be
guaranteed or insured, if at all, to the extent specified in the related
Prospectus Supplement; otherwise neither the Offered Certificates of any
Series nor the Mortgage Assets in the related Trust Fund will be guaranteed
or insured by the Depositor or any of its affiliates, by any governmental
agency or instrumentality or by any other person, and no Offered Certificate
of any Series will represent a claim against or security interest in the
Trust Funds for any other Series. Accordingly, if the related Trust Fund has
insufficient assets to make payments on a Series of Offered Certificates, no
other assets will be available for payment of the deficiency, and the holders
of one or more Classes of such Offered Certificates will be required to bear
the consequent loss. To the extent provided in the related Prospectus
Supplement for a Series that consists of one or more Classes of Subordinate
Certificates, on any Distribution Date in respect of which losses or
shortfalls in collections on the Mortgage Assets have been incurred, all or a
portion of the amount of such losses or shortfalls will be borne first by one
or more Classes of the Subordinate Certificates, and, thereafter, by the
remaining Classes of Certificates in the priority and manner and subject to
the limitations specified in such Prospectus Supplement. Because
distributions of principal on the Certificates of a Series may, if provided
in the related Prospectus Supplement, be applied to outstanding Classes of
such Series in the priority specified in the related Prospectus Supplement, a
deficiency that arises after Certificates of a Class of any such Series
having higher priority in payment have been fully or partially repaid will
have a disproportionately greater effect on the Certificates of Classes of
such Series having lower priority in payment. The disproportionate effect of
any such deficiency is further increased in the case of Classes of Compound
Interest Certificates of any Series because, prior to the retirement of all
Classes of such Series having higher priority in payment than such Compound
Interest Certificates, interest is not payable, to the extent provided in the
related Prospectus Supplement, but is accrued and added to the principal of
such Compound Interest Certificates.
ADDITIONS, SUBSTITUTIONS AND WITHDRAWALS OF ASSETS. To the extent
provided in the related Prospectus Supplement for a Series, the Depositor
may, subsequent to the issuance of such a Series, deliver additional Assets
or withdraw Assets previously included in the Trust Fund for such Series,
substituting assets therefore or depositing additional Assets or withdrawing
Assets previously deposited in a Reserve Fund for such Series. The effect of
delivery or substitution of other Assets may be to alter the characteristics
and composition of the Assets underlying such Series, either of which may
alter the timing and amount of distributions or the date of the final
distribution on the Certificates of such Series. SEE "Assets Securing or
Underlying the Certificates --Additions, Substitution and Withdrawal of
Assets" herein. Furthermore, certain amounts on deposit from time to time in
certain funds or accounts constituting part of a Trust Fund, including the
Certificate Account and any accounts maintained as Credit Enhancement, may be
withdrawn under certain conditions, if and to the extent described in the
related Prospectus Supplement, for purposes other than the payment of
principal of or interest on the related Series of Certificates.
EFFECT OF PREPAYMENTS ON AVERAGE LIFE
As a result of prepayments on the underlying loans, which comprise the
Mortgage Assets consisting of Mortgage Loans or the Contracts or the mortgage
loans or contracts backing the Agency Securities included in any Trust Fund
(in either case, the "Underlying Loans"), the amount and timing of
distributions of principal and/or interest on the Offered Certificates of the
related Series may be highly unpredictable. Prepayments on the Underlying
Loans in any Trust Fund will result in a faster rate of principal payments on
one or more Classes of the related Series of Certificates than if payments on
such Underlying Loans were made as scheduled. Thus, the prepayment
experience on the Underlying Loans in a Trust Fund may affect the average
life of one or more Classes of Certificates of the related Series, including
a Class of Offered Certificates. The rate of principal payments on pools of
mortgage loans and installment loan contracts varies among pools and from
time to time is influenced by a variety of economic, demographic, geographic,
social, tax and legal factors. For example, if prevailing interest rates
fall significantly below the interest rates borne by the Underlying Loans
included in a Trust Fund, then, subject to the particular terms of the
Underlying Loans (e.g., provisions that prohibit voluntary prepayments during
specified periods or impose penalties in connection therewith) and the
ability of borrowers to obtain new financing, principal prepayments on such
Underlying Loans are likely to be higher than if prevailing interest rates
remain at or above the rates borne by those Underlying Loans. Conversely, if
prevailing interest rates rise significantly above the interest rates borne
by the Underlying Loans included in a Trust Fund, then principal prepayments
on such Underlying Loans are likely to be lower than if prevailing interest
rates remain at or below the interest rates borne by those Underlying Loans.
In addition to fluctuations in prevailing interest rates, the rate of
prepayments on the Underlying Loans may be influenced by changes and
developments
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in the types and structures of loan products being offered to consumers
within the mortgage banking and consumer finance industry and by
technological developments and innovations to the loan underwriting and
origination process.
Accordingly, there can be no assurance as to the actual rate of
prepayment on the Underlying Loans in any Trust Fund or that such rate of
prepayment will conform to any model described herein or in any Prospectus
Supplement. As a result, depending on the anticipated rate of prepayment for
the Underlying Loans in any Trust Fund, the retirement of any Class of
Certificates of the related Series could occur significantly earlier or
later, and the average life thereof could be significantly shorter or longer,
than expected.
In comparison to first lien single family mortgage loans, the Depositor
is not aware of any reliable statistical information regarding the rates of
prepayment of the Contracts and junior lien Mortgage Loans that is available
for these types of loans based upon the historical loan performance of this
segment of the mortgage banking and consumer finance industry. In fact, this
segment of the mortgage banking and consumer finance industry has undergone
significant growth and expansion, including an increase in new loan
originations, as a result of certain social and economic factors, including
recent tax law changes that limit the deductibility of consumer interest to
indebtedness secured by an individual's principal residence and changes and
developments in the types and structures of loan products being offered to
consumers. Therefore, no assurance can be given as to the level of
prepayments that the Contracts and junior lien Mortgage Loans will
experience. In fact, a number of factors suggest that the prepayment
experience of the Contracts and junior lien Mortgage Loans may be
significantly different from that of any first lien Mortgage Loans with
equivalent interest rates and maturities.
** 4 Additional prepayment, yield and weighted average life
considerations with respect to a Series of Certificates will be set forth in
the related Prospectus Supplement.
The extent to which prepayments on the Underlying Loans included in any
Trust Fund ultimately affect the average life of any Class of Certificates of
the related Series will depend on the terms and provisions of such
Certificates. A Class of Certificates, including a Class of Offered
Certificates, may provide that on any Distribution Date the holders of such
Certificates are entitled to a pro rata share of the prepayments on the
Underlying Loans in the related Trust Fund that are distributable on such
date, to a disproportionately large share (which, in some cases, may be all)
of such prepayments, or to a disproportionately small share (which, in some
cases, may be none) of such prepayments. A Class of Certificates that
entitles the holders thereof to a disproportionately large share of the
prepayments on the Underlying Loans in the related Trust Fund increases the
likelihood of early retirement of such Class ("Call Risk") if the rate of
prepayment is relatively fast; while a Class of Certificates that entitles
the holders thereof to a disproportionately small share of the prepayments on
the Underlying Loans in the related Trust Fund increases the likelihood of an
extended average life of such Class ("Extension Risk") if the rate of
prepayment is relatively slow. To the extent described in the related
Prospectus Supplement, the respective entitlement of the various Classes of
Certificateholders of such Series to receive payments (and, in particular,
prepayments) of principal of the Underlying Loans in the related Trust Fund
may vary based on the occurrence of certain events (e.g., the retirement of
one or more Classes of Certificates of such Series) or whether certain
contingencies do or do not occur (e.g., prepayment and default rates with
respect to such Underlying Loans).
A Series of Certificates may include one or more Classes of Scheduled
Amortization Certificates, which will entitle the holders thereof to receive
principal distributions according to a specified principal payment schedule.
Although prepayment risk cannot be eliminated entirely from any Class of
Certificates, a Classes of Scheduled Amortization Certificates will generally
provide a relatively stable cash flow so long as the actual rate of
prepayment on the Underlying Loans included in the related Trust Fund remains
relatively constant at the rate, or within the range of rates, of prepayment
used to establish the specific principal payment schedule for such
Certificates. Prepayment risk with respect to a given Mortgage Asset Pool
does not disappear, however, and the stability afforded to Scheduled
Amortization Certificates comes at the expense of one or more Companion Classes
of the same Series, any of which Companion Classes may also be a Class of
Offered Certificates. In general, and as more specifically described in the
related Prospectus Supplement, a Companion Class may entitle the holders
thereof to a disproportionately large share of prepayments on the Underlying
Loans in the related Trust Fund when the rate of prepayment is relatively
fast, and/or may entitle the holders thereof to a disproportionately small
share of prepayments on the Underlying Loans in the related Trust Fund when
the rate of prepayment is relatively slow. As and to the extent described in
the related Prospectus Supplement, a Companion Class absorbs some (but not
all) of the Call Risk and/or Extension Risk that would otherwise belong to
the related Scheduled Amortization Certificates if all payments of principal
of the Underlying Loans in the related Trust Fund were allocated on a pro
rata basis.
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EFFECT OF PREPAYMENTS ON YIELD
A Series of Certificates may include one or more classes of Offered
Certificates offered at a premium or discount. Yields on such Classes of
Certificates will be sensitive, and in some cases extremely sensitive, to
prepayments on the Underlying Loans in the related Trust Fund and, where the
amount of interest payable with respect to a Class is disproportionately
large, as compared to the amount of principal, as with certain classes of
Stripped Interest Certificates, a holder might fail to recover its original
investment under some prepayment scenarios. The extent to which the yield to
maturity of any Class of Offered Certificates may vary from the anticipated
yield will depend upon the degree to which such Certificates are purchased at
a discount or premium and the amount and timing of distributions thereon. An
investor should consider, in the case of any Offered Certificate purchased at
a premium, the risk that a faster than anticipated rate of principal payments
could result in an actual yield to such investor that is lower than the
anticipated yield.
LIMITATIONS OF CREDIT ENHANCEMENT
LIMITATIONS REGARDING TYPES OF LOSSES COVERED. The related Prospectus
Supplement for a Series of Certificates will describe any Credit Enhancement
provided with respect thereto. Use of Credit Enhancement will be subject to
the conditions and limitations described herein and in the related Prospectus
Supplement. Moreover, such Credit Enhancement may not cover all potential
losses or delays; for example, Credit Enhancement may or may not cover loss
by reason of fraud or negligence by a mortgage loan originator or other
parties. Any such losses or delays not covered by Credit Enhancement may, at
least in part, be allocated to, or affect distributions to, one or more
Classes of Offered Certificates.
DISPROPORTIONATE BENEFITS TO CERTAIN CLASSES AND SERIES. A Series of
Certificates may include one or more Classes of Subordinate Certificates
(which may include Offered Certificates), if provided in the related
Prospectus Supplement. Although subordination is intended to reduce the
likelihood of temporary shortfalls and ultimate losses to holders of Senior
Certificates, the amount of subordination will be limited and may decline
under certain circumstances. In addition, if principal payments on one or
more Classes of Offered Certificates of a Series are made in a specified
order of priority, any related Credit Enhancement may be exhausted before the
principal of the later paid classes of Offered Certificates of such Series
has been repaid in full. As a result, the impact of losses and shortfalls
experienced with respect to the Mortgage Assets may fall primarily upon those
classes of Offered Certificates having a later right of payments. Moreover,
if a form of Credit Enhancement covers the Offered Certificates of more than
one Series and losses on the related Mortgage Assets exceed the amount of
such Credit Enhancement, it is possible that the holders of Offered
Certificates of one (or more) such Series will be disproportionately
benefited by such Credit Enhancement to the detriment of the holders of
Offered Certificates of one (or more) other such Series.
LIMITATIONS REGARDING THE AMOUNT OF CREDIT ENHANCEMENT. The amount of
any applicable Credit Enhancement supporting one or more classes of Offered
Certificates, including the subordination of one or more other Classes of
Certificates, will be determined on the basis of criteria established by each
Rating Agency rating such Classes of Certificates based on an assumed level
of defaults, delinquencies and losses on the Underlying Loans that comprise
or back the Mortgage Assets and certain other factors. There can be no
assurance that the default, delinquency and loss experience on such
Underlying Loans will not exceed such assumed levels. SEE "Credit
Enhancement" herein. If the defaults, delinquencies and losses on such
Underlying Loans do exceed such assumed levels, the holders of one or more
Classes of Offered Certificates will be required to bear such additional
defaults, delinquencies and losses. Regardless of the form of Credit
Enhancement provided with respect to a Series, the amount of coverage will be
limited in amount and in most cases will be subject to periodic reduction in
accordance with a schedule or formula.
** 5 LIMITATIONS ON FHA INSURANCE FOR TITLE I LOANS. The related
Prospectus Supplement will specify the number and percentage of the Title I
Mortgage Loans and/or Title I Contracts, if any, included in the related
Trust Fund that are partially insured by the FHA pursuant to Title I
Program. Since the FHA Insurance Amount for the Title I Mortgage Loans and
Title I Contracts is limited as described herein and in the related
Prospectus Supplement, and since the adequacy of such FHA Insurance Amount is
dependent upon future events, including reductions for the payment of FHA
claims, no assurance can be given that the FHA Insurance Amount is or will be
adequate to cover 90% of all potential losses on the Title I Mortgage Loans
and Title I Contracts included in the related Trust Fund. If the FHA
Insurance Amount for the Title I Mortgage Loans and Title I Contracts is
reduced to zero, such loans and contracts will be effectively uninsured from
and after the date of such reduction. Under the Title I Program, until a
claim for insurance reimbursement is submitted to the FHA, the FHA does NOT
review or approve for qualification for insurance the individual Title I
Mortgage Loan or Title I Contract insured thereunder (as is typically the
case with other federal loan insurance programs). Consequently, the FHA has
not acknowledged that any of the Title I Mortgage Loans and Title I Contracts
are eligible for FHA insurance, nor has the FHA reviewed or approved the
underwriting and qualification by the originating lenders of any individual
Title I Mortgage Loans and Title I Contracts. SEE "Certain Legal Aspects of
the Mortgage Assets -- The Title I Program" herein.
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The availability of FHA Insurance reimbursement following a default on a
Title I Mortgage Loan or Title I Contract is subject to a number of
conditions, including strict compliance by the originating lender of such
loan, the Depositor, the FHA Claims Administrator, the Servicer, any
subservicer and the Transferor with the FHA Regulations in originating and
servicing such Title I Mortgage Loan or Title I Contract, and limits on the
aggregate insurance coverage available in the Depositor's FHA Reserve. For
example, the FHA Regulations provide that, prior to originating a Title I
Mortgage Loan or Title I Contract, a Title I lender must exercise prudence
and diligence in determining whether the borrower and any co-maker or
co-signer is solvent and an acceptable credit risk with a reasonable ability
to make payments on the loan. Although the related Transferor will represent
and warrant that the Title I Mortgage Loans and Title I Contracts have been
originated and serviced in compliance with all FHA Regulations, these
regulations are susceptible to substantial interpretation. Failure to comply
with all FHA Regulations may result in a denial of FHA Claims, and there can
be no assurance that the FHA's enforcement of the FHA Regulations will not
become stricter in the future. SEE "Certain Legal Aspects of the Mortgage
Assets -- The Title I Program -- General" herein.
Because the Trust Fund is not eligible to hold an FHA contract of
insurance under the Title I Program, the FHA will not recognize the Trust
Fund or the Certificateholders as the owners of the Title I Mortgage Loans or
Title I Contracts, or any portion thereof, entitled to submit FHA Claims.
Accordingly, the Trust Fund and the Certificateholders will have no direct
right to receive insurance payments from the FHA. The Depositor will
contract with the Servicer (or another person specified in the Prospectus
Supplement) to serve as the Administrator for FHA Claims (the "FHA Claims
Administrator") pursuant to an FHA claims administration agreement (the "FHA
Claims Administration Agreement"), which will provide for the FHA Claims
Administrator to handle all aspects of administering, processing and
submitting FHA Claims with respect to the Title I Mortgage Loans or Title I
Contracts, in the name and on behalf of the Depositor. The
Certificateholders will be dependent on the FHA Claims Administrator to (i)
make claims on the Title I Mortgage Loans or Title I Contracts in accordance
with FHA Regulations and (ii) remit all FHA Insurance proceeds received from
the FHA in accordance with the related Pooling and Servicing Agreement. The
Certificateholders' rights relating to the receipt of payment from and the
administration, processing and submission of FHA Claims by the Depositor or
any FHA Claims Administrator are limited and governed by the related Pooling
and Servicing Agreement and the FHA Claims Administration Agreement and these
functions are obligations of the Depositor and the FHA Claims Administrator,
not the FHA. SEE "Certain Legal Aspects of the Mortgage Assets -- The Title I
Program -- Claims Procedures under Title I"
herein.
LIMITED NATURE OF RATINGS
Any rating assigned by a Rating Agency to a Class of Offered
Certificates will reflect only its assessment of the likelihood that holders
of such Offered Certificates will receive distributions to which such
Certificateholders are entitled under the related Pooling and Servicing
Agreement. Such rating will not constitute an assessment of the likelihood
that principal prepayments on the Underlying Loans will be made, the degree
to which the rate of such prepayments might differ from that originally
anticipated or the likelihood of early optional termination of the related
Trust Fund. Furthermore, such rating will not address the possibility that
prepayment of the Underlying Loans at a higher or lower rate than anticipated
by an investor may cause such investor to experience a lower than anticipated
yield or that an investor that purchases an Offered Certificate at a
significant premium might fail to recover its initial investment under
certain prepayment scenarios. Hence, a rating assigned by a Rating Agency
does not guarantee or ensure the realization of any anticipated yield on a
Class of Offered Certificates.
The amount, type and nature of Credit Enhancement, if any, provided with
respect to a Series of Certificates will be determined on the basis of
criteria established by each Rating Agency rating a Class of Certificates of
such Series. Those criteria are sometimes based upon an actuarial analysis
of the behavior of similar types of loans in a larger group. However, there
can be no assurance that the historical data supporting any such actuarial
analysis will accurately reflect future experience, or that the data derived
from a large pool of similar types of loans will accurately predict the
delinquency, default or loss experience of any particular pool of Underlying
Loans. In other cases, such criteria may be based upon determination of the
values of the Mortgaged Properties that provide security for the Underlying
Loans. However, no assurance can be given that those values will not decline
in the future. As a result, the Credit Enhancement required in respect of the
Offered Certificates of any Series may be insufficient to fully protect the
holders thereof from losses on the related Mortgage Asset Pool. SEE "Credit
Enhancement" herein.
ADVERSE TAX CONSEQUENCES
** 6 ORIGINAL ISSUE DISCOUNT. All of the Compound Interest Certificates
and Principal Only Certificates will be, and certain of the other
Certificates may be, issued with original issue discount for federal income
tax purposes. A Holder
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of a Certificate issued with original issue discount will be required to
include original issue discount in ordinary gross income for federal income
tax purposes as it accrues, in advance of receipt of the cash, or a portion
of the cash, attributable to such income. Accrued but unpaid interest on the
Compound Interest Certificates generally will be treated as original issue
discount for this purpose. At certain rapid Mortgage Asset prepayment rates,
original issue discount may accrue on certain Classes of Certificates,
including certain variable rate Regular Certificates, that may never be
received as cash, resulting in a subsequent loss on such Certificates. SEE
"Certain Federal Income Tax Consequences -- Federal Income Tax Consequences
for REMIC Certificates -- Taxation of Regular Certificates -- Original Issue
Discount" and "Certain Federal Income Tax Consequences -- Federal Income Tax
Consequences for Certificates as to Which No REMIC Election Is Made --
Standard Certificates -- Premium and Discount -- Original Issue Discount" and
"-- Stripped Certificates -- Taxation of Stripped Certificates -- Original
Issue Discount."
** 7 RESIDUAL CERTIFICATES. An election may be made to treat all or any
portion of any Trust Fund as a REMIC for federal income tax purposes.
Holders ("RESIDUAL HOLDERS") of Certificates representing the residual
interests in the related REMIC ("RESIDUAL CERTIFICATES") must report on their
federal income tax returns their pro rata share of REMIC taxable income or
loss. All or a portion of the REMIC taxable income reportable by Residual
Holders may be treated as such holders' "excess inclusion" subject to special
rules for federal income tax purposes. The REMIC taxable income, and
possibly the tax liabilities of the Residual Holders, may exceed the cash
distributions on the Residual Certificates during certain periods. Residual
Holders who are individuals may be subject to limitations on the
deductibility of servicing fees on the related Mortgage Assets and other
REMIC administrative expenses. Hence, Residual Holders may experience an
after-tax return that is significantly lower than would be anticipated based
upon the stated interest rate, if any, of their Residual Certificates. SEE
"Certain Federal Income Tax Consequences -- Federal Income Tax Consequences
for REMIC Certificates -- Taxation of Residual Certificates."
CERTAIN FACTORS AFFECTING DELINQUENCIES, FORECLOSURES AND LOSSES ON
UNDERLYING LOANS
GENERAL. The payment performance of the Offered Certificates of any
Series will be directly related to the payment performance of the Underlying
Loans included in the related Trust Fund. Set forth below is a discussion of
certain factors that will affect the full and timely payment of the
Underlying Loans included in any Trust Fund.
GEOGRAPHIC CONCENTRATION. Certain geographic regions of the United
States from time to time will experience weaker regional economic conditions
and housing markets, and, consequently, will experience higher rates of loss
and delinquency on mortgage loans generally. Any concentration of the
Underlying Loans in such a region may present risk considerations in addition
to those generally present for similar mortgage-backed or asset-backed
securities without such concentration.
DECLINE IN VALUE OF THE UNDERLYING ASSET. An investment in Certificates
secured by or evidencing an interest in a Mortgage Pool may be affected by,
among other things, a decline in one-to-four family residential property
values. No assurance can be given that values of the Mortgaged Properties
have remained or will remain at the levels existing on the dates of
origination of the related Mortgage Loans. If the residential real estate
market should experience an overall decline in property values such that the
outstanding balances of the Mortgage Loans in a particular Mortgage Pool, and
any other financing on the Mortgaged Properties, become equal to or greater
than the value of the Mortgaged Properties, the actual rates of
delinquencies, defaults and losses could be higher than those now generally
experienced with respect to similar types of loans within the mortgage
lending industry. To the extent that such losses are not covered by
applicable insurance policies, if any, or by any Credit Enhancement as
described in the related Prospectus Supplement, Holders of Certificates
secured by or evidencing interests in such Mortgage Pool will bear all risk
of loss resulting from defaults by Borrowers and will have to look primarily
to the value of the related Mortgaged Properties for recovery of the
outstanding principal and unpaid interest of the defaulted Mortgage Loans.
SEE "Assets Securing or Underlying the Certificates -- Mortgage Loans."
An investment in Certificates secured by or evidencing interests in
Contracts may be affected by, among other things, a downturn in regional or
local economic conditions. These regional or local economic conditions are
often volatile, and historically have affected the delinquency, loan loss and
repossession experience of Contracts. To the extent that losses on Contracts
are not covered by applicable insurance policies, if any, or by any Credit
Enhancement, Holders of the Certificates secured by or evidencing interests
in such Contracts will bear all risk of loss resulting from default by
borrowers and will have to look primarily to the value of the underlying
asset for recovery of the outstanding principal and unpaid interest of the
defaulted Contracts. SEE "Assets Securing or Underlying the Certificates --
Contracts."
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LIMITATIONS ON REALIZATIONS OF JUNIOR LIENS. The primary risk with
respect to defaulted Mortgage Loans secured by junior liens is the
possibility that adequate funds will not be received in connection with a
foreclosure of the related Mortgaged Property to satisfy fully both the
senior lien(s) and the Mortgage Loan and that other insurance providing for
reimbursement for losses from such default (i.e., the FHA Insurance Amount
for a Title I Mortgage Loan) is not available. The claims of the senior
lienholder(s) will be satisfied in full out of proceeds of the liquidation of
the Mortgaged Property, if such proceeds are sufficient, before the related
Trust Fund as the junior lienholder receives any payments in respect of the
defaulted Mortgage Loan. If the Servicer or a Subservicer, if any, were to
foreclose on any Mortgage Loan, it would do so subject to any related senior
lien(s). In order for the Mortgage Loan to be paid in full at such sale, a
bidder at the foreclosure sale of such Mortgage Loan would have to both bid
an amount sufficient to pay off all sums due under the Mortgage Loan and the
senior lien(s) or purchase the Mortgaged Property subject to the senior
lien(s). If proceeds from a foreclosure and liquidation of the related
Mortgaged Property are insufficient to satisfy the costs of foreclosure and
liquidation and the amounts owed under the loans secured by the senior
lien(s) and the Mortgage Loan in the aggregate, the Trust Fund, as the junior
lienholder, will bear (i) the risk of delay in distributions while a
deficiency judgment (which may not be available in certain jurisdictions)
against the borrower is obtained and realized and (ii) the risk of loss if
the deficiency judgment is not obtained or realized. Any such delays or
losses will be borne by the Certificates of a Series to the extent that such
delays or losses are not otherwise covered by amounts available from any
Credit Enhancement provided for such Certificates, as specified in the
related Prospectus Supplement. SEE "Certain Legal Aspects of the Mortgage
Loans -- Foreclosure -- Junior Liens" herein.
** 8 CERTAIN LEGAL CONSIDERATIONS OF MORTGAGE LOANS AND CONTRACTS.
Applicable state laws generally regulate interest rates and other charges
that may be assessed on borrowers, require certain disclosures to borrowers,
and may require licensing of the Depositor, the Trustee, the Servicer, the
Administrator, if any, the Master Servicer, if any, and any Subservicer. In
addition, most states have other laws, public policies and general principles
of equity relating to the protection of consumers and the prevention of
unfair and deceptive practices which may apply to the origination, servicing
and collection of the Mortgage Loans and Contracts. The Mortgage Loans and
Contracts also may be subject to federal laws, including, if applicable, the
following: (i) the federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding the
terms of the Mortgage Loans and Contracts; (ii) the Real Estate Settlement
Procedures Act and Regulation X promulgated thereunder, which require certain
disclosures to the borrowers regarding the settlement and servicing of the
Mortgage Loans and Contracts; (iii) the Equal Credit Opportunity Act and
Regulation B promulgated thereunder, which prohibit discrimination on the
basis of age, race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under the Consumer
Credit Protection Act; (iv) the Fair Credit Reporting Act, which regulates
the use and reporting of information related to the borrower's credit
experience; (v) the Federal Trade Commission Preservation of Consumers'
Claims and Defenses Rule, 16 C.F.R. Part 433, regarding the preservation of a
consumer's rights; (vi) the Fair Housing Act, 42 U.S.C. 3601 ET SEQ.,
relating to the creation and governance of the Title I Program; (vii) the
Home Ownership and Equity Protection Act; and (viii) the Soldiers' and
Sailors' Civil Relief Act of 1940, as amended (the "RELIEF ACT"). SEE
"Certain Legal Aspects of the Mortgage Assets" herein. Federal and state
environmental laws and regulations may also impact the Servicer's or any
Subservicer's ability to realize value with respect to the Mortgaged
Properties. SEE "Certain Legal Aspects of the Mortgage Assets" herein.
** 9 Depending on the provisions of applicable law and the specific
facts and circumstances involved, violations of these laws, policies and
principles may limit the ability of the Servicer or any Subservicer to
collect all or part of the principal of or interest on the Mortgage Loans and
Contracts, may entitle the borrower to a refund of amounts previously paid,
and, in addition, could subject the Servicer or any Subservicer to damages
and administrative sanctions. Further, violations of state law can affect
the insurability of the Title I Mortgage Loans and Title I Contracts under
FHA Regulations. SEE "Certain Legal Aspects of the Mortgage Assets -- The
Title I Program." If the Servicer or any Subservicer is unable to collect
all or part of the principal or interest on any Mortgage Loan or Contract
because of a violation of the aforementioned laws, public policies or general
principles of equity, distributions from the Trust Fund may be delayed or the
Trust Fund may be unable to make all distributions owed to the
Certificateholders to the extent any related losses are not otherwise covered
by amounts available from any Credit Enhancement provided for the Series of
Certificates. Furthermore, depending upon whether damages and sanctions are
assessed against the Servicer, the Master Servicer, if any, or any
Subservicer, such violations may materially impact the financial ability of
the Master Servicer, if any, the Servicer or Subservicer to continue to act
in such capacity.
** 10 To the extent specified in the related Prospectus Supplement, the
related Transferor or the Depositor will be required to repurchase or replace
any Mortgage Loan or Contract which, at the time of origination, did not
comply with applicable federal and state laws or regulations.
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RISKS ASSOCIATED WITH CERTAIN MORTGAGE ASSETS
NO HAZARD INSURANCE FOR TITLE I MORTGAGE LOANS. With respect to any
Title I Mortgage Loans, the FHA Regulations do not require that a borrower
obtain title or fire and casualty insurance as a condition to obtaining a
property improvement loan. With respect to both manufactured home contracts
that are Title I Contracts and property improvement loans that are Title I
Mortgage Loans, if the related Mortgage Property is located in a flood hazard
area, however, flood insurance in an amount at least equal to the loan amount
is required. In addition, the FHA Regulations do not require that the
borrower obtain insurance against physical damage arising from earth movement
(including earthquakes, landslides and mudflows) as a condition to obtaining
a property improvement loan insured under the Title I Program. Accordingly,
if a Mortgaged Property that secures a Title I Mortgage Loan suffers any
uninsured hazard or casualty losses, holders of any Offered Certificates
secured in whole or in part by Title I Mortgage Loans may bear the risk of
loss resulting from a default by the borrower to the extent such losses are
not recovered by foreclosure on the defaulted loans or from any FHA Claims
payments. Such loss may be otherwise covered by amounts available from the
credit enhancement provided for the Offered Certificates, as specified in
the related Prospectus Supplement.
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CONTRACTS SECURED BY MANUFACTURED HOMES. The Secured Contracts will be
secured by security interests in Manufactured Homes that are not considered
to be real property because they are not permanently affixed to real estate.
Perfection of security interests in such Manufactured Homes and enforcement of
rights to realize upon the value of such 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, the Servicer of a Contract will not
amend any certificate of title to change the lienholder specified therein from
such Servicer to the Trustee and will not deliver any certificate of title to
such Trustee or note thereon the Trustee's interest. Consequently, in some
states, in the absence of such an amendment, the assignment to such 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 such Trustee, the assignment of the security
interest in the Manufactured Home may not be effective against creditors of
the Servicer or a trustee in bankruptcy of such servicer. If any related
Credit Enhancement is exhausted and a Contract is in default, then recovery
of amounts due on such Contracts is dependent on repossession and resale of
the Manufactured Home securing such Contract. Certain other factors may limit
the ability of the Holders to realize upon the Manufactured Homes or may limit
the amount realized to less than the amount due.
UNSECURED CONTRACTS. The obligations of the borrower under any
Unsecured Contract included in the related Trust Fund will not be secured by
an interest in the related real estate or otherwise, and the Trust Fund, as
the owner of such Contract, will be a general unsecured creditor as to such
obligations. As a consequence, in the event of a default under an Unsecured
Contract, the related Trust Fund will have recourse only against the
borrower's assets generally, along with all other general unsecured creditors
of the borrower. In a bankruptcy or insolvency proceeding relating to an
borrower on an Unsecured Contract, the obligations of the borrower under
such Unsecured Contract may be discharged in their entirety, notwithstanding
the fact that the portion of such borrower's assets made available to the
related Trust Fund as a general unsecured creditor to pay amounts due and
owing thereunder are insufficient to pay all such amounts. A borrower on an
Unsecured Contract may not demonstrate the same degree of concern over
performance of the borrower's obligations under such Unsecured Contract as
if such obligations were secured by a single family residence owned by such
Borrower.
CONSUMER PROTECTION LAWS RELATED TO CONTRACTS. Numerous Federal and
state consumer protection laws impose requirements on lending under
conditional sales contracts, installment 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 a Trustee as an assignee of
Contracts. Each Transferor of Contracts will warrant that each Contract
complies with all requirements of law and with respect to any Secured
Contract will make certain warranties relating to the validity, subsistence,
perfection and priority of the security interest in each Manufactured Home
securing such Contract. A breach of any such warranty that materially
adversely affects any Contract would create an obligation of the Transferor to
repurchase or replace such Contract unless such breach is cured.
RELIANCE ON MANAGEMENT OF TIMESHARE UNITS. 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.
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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 Borrowers are
obligated to make payments under their Mortgage Loans 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 Borrowers whose timeshare units
are affected.
Recharacterization of Sale of Mortgage Assets as Borrowing
The Depositor will agree in the Pooling and Servicing Agreement that the
transfer of the Mortgage Assets to the Trust Fund is intended as a valid sale
and transfer of the Mortgage Assets to the Trustee for the benefit of the
Certificateholders. However, if the Mortgage Assets are held to be property
of the Depositor or if for any reason the Pooling and Servicing Agreement is
held to create a security interest in the Mortgage Assets, the Depositor will
agree in the Pooling and Servicing Agreement that such transfer shall be
treated as the grant of a security interest in the Mortgage Assets to the
Trust Fund. Also, the Depositor will warrant that if the transfer of the
Mortgage Assets by it is deemed to be a grant of a security interest in the
Mortgage Assets, the Trustee will have a perfected first-priority security
interest therein. The Depositor is required to take all actions that are
required under law to protect the Trust Fund's security interest in the
Mortgage Assets. If the transfer of the Mortgage Assets to the Trust Fund is
deemed to create a security interest therein, a tax or government lien on
property of the Depositor arising before the Mortgage Assets came into
existence may have priority over the Trusts Fund's interest in such Mortgage
Assets.
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DESCRIPTION OF THE CERTIFICATES
GENERAL
The following summaries describe certain features common to each Series.
Such summaries do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all of the provisions of the
Pooling and Servicing Agreement and the Prospectus Supplement relating to
each Series. When particular provisions or terms used or referred to in a
Pooling and Servicing Agreement are referred to herein, such provisions or
terms shall be as used or referred to in such Pooling and Servicing Agreement.
The Certificates will not be insured or guaranteed by GNMA, FNMA, FHLMC,
any governmental entity or, to the extent specified in the related
Prospectus Supplement, any other person. To the extent specified in the
related Prospectus Supplement, the Depositor's only obligations with respect
to a Series will be to obtain certain representations and warranties from
each Transferor and to assign to the related Trustee the Depositor's rights
with respect thereto, and its obligations pursuant to certain representations
and warranties made by it.
To the extent specified in the related Prospectus Supplement, the
Mortgage Assets relating to a Series, other than the Agency Securities and
the Title I Mortgage Loans and Title I Contracts, will not be insured or
guaranteed by any
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governmental entity or, any other person. With respect to a Series for which
the related Trust Fund includes Mortgage Loans or Contracts, to the extent
that delinquent payments on or losses in respect of defaulted Mortgage Loans
or Contracts, are not paid from any applicable Credit Enhancement, such
delinquencies may result in delays in distributions to the Holders of one or
more Classes of such Series, and such losses will be borne by the Holders of
one or more Classes of such Series. To the extent specified in the related
Prospectus Supplement, the Servicer will have no obligation to advance such
delinquencies.
In addition, with respect to a Series for which the related Trust Fund
includes Mortgage Assets, late payments on such Mortgage Assets may result in
delays in distributions to the Holders of one or more Classes of such Series,
and losses on such Mortgage Assets will be borne by the Holders of one or
more Classes of such Series, to the extent such late payments and losses are
not advanced or paid from any applicable Credit Enhancement.
THE CERTIFICATES - GENERAL
The Certificates will be issued in Series pursuant to separate Pooling
and Servicing Agreements (each, a "POOLING AND SERVICING AGREEMENT") between
the Depositor, the Servicer, the Administrator, if any, the Master Servicer,
if any, and the related Trustee named in the Prospectus Supplement. A form
of Pooling and Servicing Agreement has been filed as an Exhibit to the
Registration Statement of which this Prospectus forms a part. The Pooling
and Servicing Agreement relating to a Series of Certificates will be filed as
an Exhibit to a Report on Form 8-K to be filed with the Commission within 15
days following the issuance of such Series of Certificates.
The "Issuer" with respect to a Series of Certificates will be the
related Trust Fund established by the Depositor pursuant to the related
Pooling and Servicing Agreement. Each Series of Certificates will be
entitled to distributions only from the Assets included in the related Trust
Fund and any other assets pledged or otherwise available for the benefit of
the Holders of such Series as specified in the related Prospectus Supplement.
Accordingly, the investment characteristics of a Series of Certificates will
be determined by the Assets included in the related Trust Fund. The
Certificates of a Series will not represent obligations of the Depositor, the
Servicer, any Administrator, any Master Servicer, the Trustee or any
affiliate thereof.
FORM OF CERTIFICATES; TRANSFER AND EXCHANGE
As specified in the related Prospectus Supplement, the Certificates of
each Series will be issued either in book entry form or fully registered
certificated form in the minimum denominations for each Class specified in
the related Prospectus Supplement. To the extent specified in the Prospectus
Supplement, the original Principal Balance of each Certificate will equal the
aggregate distributions allocable to principal to which such Certificate is
entitled. To the extent specified in the related Prospectus Supplement,
distributions allocable to interest on each Certificate of a Series that is
not entitled to distributions allocable to principal will be calculated based
on the Notional Principal Balance of such Certificate. The "Notional
Principal Balance" of a Certificate will be a notional amount assigned to
such certificate and will not evidence an interest in or entitlement to
distributions allocable to principal, but will be used solely for convenience
in expressing the calculation of interest and for certain other purposes.
Except as described below under "Book Entry Registration" with respect
to Book Entry Certificates, the Certificates of each Series will be
transferable and exchangeable on a register to be maintained at the corporate
trust office of the related Trustee or such other office or agency maintained
for such purposes by the Trustee. To the extent specified in the Prospectus
Supplement with respect to a Series, under the related Pooling and Servicing
Agreement, the Trustee will be appointed initially as the "REGISTRAR" for
such Series for purposes of maintaining books and records of the ownership
and transfer of the Certificates of such Series. To the extent specified in
the Prospectus Supplement with respect to a Series, no service change will be
made for any registration of transfer or exchange of Certificates of such
Series, 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 a Class of Certificates
entitled only to a specified percentage of distributions of either interest
or principal or a notional amount of either interest or principal on the
related Mortgage Assets or a Class of Certificates entitled to receive
distributions of interest and principal on the Mortgage Assets only after
distributions to other Classes or after the occurrence of certain specified
events by or on behalf of any employee benefit plan or other retirement
arrangement (including individual retirement accounts and annuities, Keogh
plans and collective investment funds in which such plans, accounts or
arrangements are invested) subject to provisions of ERISA or the Code, may
result in "PROHIBITED TRANSACTIONS" within the meaning of ERISA and the Code.
SEE "ERISA Considerations." To
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the extent specified in the related Prospectus Supplement, transfer of
Certificates of such a Class will not be registered unless the transferee (i)
executes a representation letter stating that it is not, and is not
purchasing on behalf of, any such plan, account or arrangement or (ii)
provides an opinion of counsel satisfactory to the related Trustee and the
Depositor that the purchase of Certificates of such a Class by or on behalf
of such plan, account or arrangement is permissible under applicable law and
will not subject the related Trustee, the Servicer, the Administrator, if
any, the Master Servicer, if any, or the Depositor to any obligation or
liability in addition to those undertaken in the Pooling and Servicing
Agreement.
REMIC ELECTION
As to each Series, one or more elections may be made to treat all or
specified portions of the related Trust Fund as a REMIC for federal income
tax purposes. The related Prospectus Supplement will specify whether a REMIC
election is to be made. Alternatively, the Pooling and Servicing Agreement
for a Series may provide that a REMIC election may be made at the discretion
of the Depositor, the Servicer, the Administrator, if any, the Master
Servicer, if any, or another entity and may only be made if certain
conditions are satisfied. 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 Holders of such Series 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 or more of the Classes of such
Series will be designated as evidencing the "residual interests" in the
related REMIC or REMICs, as defined in the Code. All other Classes of such
Series will constitute "regular interests" in the related REMIC or REMICs, as
defined in the Code. As to each Series with respect to which a REMIC
election is to be made, the Servicer, the Administrator, if any, the related
Trustee, a Residual Holder 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, to the extent
provided in the related Prospectus Supplement, will be entitled to
reimbursement for any such payment from the assets of the related Trust Fund
or, if applicable, from any Residual Holder.
CLASSES OF CERTIFICATES
Each Series will be issued in one or more Classes. If specified in the
Prospectus Supplement, one or more Classes of a Series may evidence
beneficial ownership interests in separate groups of Assets included in the
related Trust Fund or otherwise available for the benefit of such Series.
The Certificates of a Series will have an aggregate original principal
balance as specified in the related Prospectus Supplement. The original
principal balance of the Certificates of a Series and the Certificate
Interest Rate on the Classes of such Certificates will be determined in the
manner specified in the Prospectus Supplement.
Each Class of Certificates that is entitled to distributions allocable
to interest will bear interest at the applicable Certificate Interest Rate,
which may be a fixed rate (which may be zero) or, in the case of Variable
Interest Certificates, may be a rate that is subject to change from time to
time (a) in accordance with a schedule, (b) in reference to an index, or (c)
otherwise in each case as specified in the related Prospectus Supplement.
Notwithstanding the foregoing, if specified in the related Prospectus
Supplement, one or more Classes of a Series may be entitled to receive
distributions of interest only to the extent of amounts available to make
such distributions. One or more Classes of Certificates may provide for
interest that accrues, but is not currently payable ("COMPOUND INTEREST
CERTIFICATES"). With respect to any Class of Compound Interest Certificates,
if specified in the related Prospectus Supplement, any interest that has
accrued but is not paid on a given Distribution Date will be added to the
aggregate principal balance of such Class on that Distribution Date.
A Series may include one or more Classes entitled only to distributions
(i) allocable to interest ("INTEREST ONLY CERTIFICATES"), (ii) allocable to
principal ("PRINCIPAL ONLY CERTIFICATES"), and allocable as between scheduled
payments of principal and Principal Prepayments, as defined below under
"Distributions of Principal and Interest" or (iii) allocable to both
principal (and allocable as between scheduled payments of principal and
Principal Prepayments) and interest. A Series may include one or more
classes as to which distributions will be allocated (i) on the basis of
collections from designated portions of the Assets included in the related
Trust Fund, (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 related Prospectus Supplement. The timing and amounts of such
distributions may vary among Classes, over time or otherwise, in each case as
specified in the related Prospectus Supplement.
A Series of Certificates may include one or more Classes of Scheduled
Amortization Certificates and Companion Certificates. "SCHEDULED
AMORTIZATION CERTIFICATES" are Certificates with respect to which
distributions of principal are to be made in specified amounts on specified
Distribution Dates, to the extent of funds available on such Distribution
Date.
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"COMPANION CERTIFICATES" are Certificates which receive distributions 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 distributions on Scheduled
Amortization Certificates on such Distribution Date. Because of the manner of
application of distributions of principal to Companion Certificates, the
weighted average lives of Companion Certificates of a Series may be expected
to be more sensitive to the actual rate of prepayments on the Mortgage Assets
in the related Trust Fund than will the Scheduled Amortization Certificates
of such Series.
One or more Series of Certificates may constitute a Series of "SPECIAL
ALLOCATION CERTIFICATES" which may include Senior Certificates, Subordinated
Certificates, Priority Certificates and Non-Priority Certificates. As more
fully described in the related Prospectus Supplement for a Series of Special
Allocation Certificates, Special Allocation Certificates are Certificates for
which the timing and/or priority of distributions of principal and/or
interest may favor one or more Classes of such Certificates over one or more
other Classes of such Certificates. Such timing and/or priority may be
modified or reordered upon the occurrence of one or more specified events.
To the extent specified in the related Prospectus Supplement for a Series of
Special Allocation Certificates, losses on the Assets included in the related
Trust Fund 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 of such Series before the balance,
if any, of such proceeds are applied to one or more other Classes within such
Series. For example, Special Allocation Certificates in a Series may be
comprised of one or more Classes of Senior Certificates having a priority in
right to distributions of principal and interest over one or more Classes of
Subordinated Certificates, to the extent described in the related Prospectus
Supplement, as a form of Credit Enhancement. SEE "Credit Enhancement --
Subordination". Typically, Subordinated Certificates of a Series will carry
a rating by the rating agencies rating the Certificates of such Series lower
than that of the Senior Certificates of such Series. In addition, one or
more Classes of Certificates of a Series ("PRIORITY CERTIFICATES") may be
entitled to a priority of distributions of principal or interest from Assets
included in the related Trust Fund over another Class of Certificates of such
Series ("NON-PRIORITY CERTIFICATES"), but only after the exhaustion of other
Credit Enhancement applicable to such Series. Priority Certificates and
Non-Priority Certificates nonetheless may be within the same rating category.
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
GENERAL. Distributions of principal and interest on the Certificates of
a Series will be made by the related Trustee, to the extent of funds
available therefor, on the related Distribution Date. Distributions will be
made to the persons in whose names the Certificates of such Series are
registered at the close of business on the dates specified in the related
Prospectus Supplement (each, a "RECORD DATE"). With respect to Certificates
other than Book Entry Certificates, distributions will be made by check or
money order mailed to Certificateholders of such Series at their addresses
appearing in the books and records maintained by or on behalf of the Issuer
of such Series or, if specified in the related Prospectus Supplement, in the
case of Certificates that are of a certain minimum denomination as specified
in the related Prospectus Supplement, upon written request by a Holder of
such Series, by wire transfer or by such other means as are agreed upon with
such Certificateholder; provided, however, that the final distribution in
retirement of a Series (other than Book Entry Certificates) will be made only
upon presentation and surrender of such Certificates at the office or agency
of the related Trustee specified in the notice to Certificateholders of such
final distribution. With respect to Book Entry Certificates, such
distributions will be made as described below under "Book Entry Registration"
and in the related Prospectus Supplement.
To the extent specified in the related Prospectus Supplement,
distributions allocable to principal and interest on the Certificates of a
Series will be made by the related Trustee out of, and only to the extent of,
funds in a separate account established and maintained under the related
Pooling and Servicing Agreement for the benefit of Certificateholders of such
Series (the "CERTIFICATE ACCOUNT"), including any funds transferred from any
related Reserve Fund or otherwise applicable accounts maintained by the
Trustee. As between Certificates of different Classes of a Series and as
between distributions of principal (and, if applicable, between distributions
of Principal Prepayments) and interest, distributions made on any
Distribution Date will be applied as specified in the related Prospectus
Supplement. To the extent specified in the related Prospectus Supplement,
distributions to any Class of Certificates will be made pro rata to all
Certificateholders of that Class. If specified in the related Prospectus
Supplement, the amounts received by the Trustee as described below under
"Assets Securing or Underlying the Certificates" will be invested in the
Permitted Investments specified herein and in the related Prospectus
Supplement, and all income or other gain from such investments will be
deposited in the related Certificate Account and will be available to make
distributions on the Certificates of the applicable Series on the next
succeeding Distribution Date in the manner specified in the related
Prospectus Supplement.
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DISTRIBUTIONS OF INTEREST. Each Class of a Series (other than a Class of
Principal Only Certificates) will accrue interest at the applicable
Certificate Interest Rate. One or more Classes may be entitled to receive
distributions of interest only to the extent of amounts available to make
such distributions. Interest on each Class will accrue during the related
Due Period and will be distributed on the related Distribution Date.
Interest on all Certificates which bear or receive interest, other than
Compound Interest Certificates, will be distributed on the Distribution Dates
specified in the related Prospectus Supplement. However, failure to
distribute interest on a current basis may not necessarily be an Event of
Default with respect to a particular Series or Class of Certificates.
Interest on any Class of Compound Interest Certificates or similar securities
will not be distributed currently, but will accrue and the amount of the
interest so accrued will be added to the principal thereof on each
Distribution Date until the date specified in the related Prospectus
Supplement. Principal Only Certificates will not accrue, and will not be
entitled to receive, any interest. Upon maturity or earlier repurchase of
the Certificates of any Class, interest will be paid to the date specified in
the related Prospectus Supplement.
Each payment of interest on each Class of Certificates (or addition to
principal of a Class of Compound Interest Certificates) on a Distribution
Date will include all interest accrued during the related Due Period. If the
Due Period for a Series ends on a date other than a Distribution Date for
such Series, the yield realized by the Holders of such Certificates may be
lower than the yield that would result if the Due Period ended on such
Distribution Date. Additionally, if specified in the related Prospectus
Supplement, interest accrued for a Due Period for one or more Classes may be
calculated on the assumption that principal distributions (and additions to
principal of the Certificates), and allocations of losses on the Mortgage
Assets (if specified in the related Prospectus Supplement), are made on the
first day of the preceding Due Period and not on the Distribution Date for
such preceding Due Period when actually made or added. Such method would
produce a lower effective yield than if interest were calculated on the basis
of the actual principal amount outstanding.
A Series may include one or more Classes of Variable Interest Rate
Certificates. With respect to each Class of Variable Interest Certificates
of a Series, the related Prospectus Supplement will set forth: (i) the
initial Certificate Interest Rate (or the manner of determining the initial
Certificate Interest Rate); (ii) the formula, index or other method by which
the Certificate Interest Rate will be determined from time to time; (iii) the
periodic intervals at which such determination will be made; (iv) the Maximum
Variable Interest Rate, if any, and the Minimum Variable Interest Rate; and
(v) any other terms relevant to such Class of Certificates.
DISTRIBUTIONS OF PRINCIPAL. Principal distributions on the Certificates of
a Series will be made from amounts available therefor on each Distribution
Date in an aggregate amount determined as set forth in the related Prospectus
Supplement and will be allocated among the respective Classes of a Series of
Certificates at the times, in the manner and in the priority set forth in the
related Prospectus Supplement.
Except with respect to Compound Interest Certificates and Interest Only
Certificates or similar securities, unless specified otherwise in the related
Prospectus Supplement, on each Distribution Date principal distributions will
be made on the Certificates of a Series in an aggregate amount determined in
the related Prospectus Supplement. If a Series of Certificates has a Class
of Compound Interest Certificates, additional principal payments on the
Certificates of such Series will be made on each Distribution Date in an
amount equal to the interest accrued, but not then distributable, on such
Class of Compound Interest Certificates for the related Due Period.
If specified in the related Prospectus Supplement, on any Distribution
Date on which the principal balance of the Mortgage Assets relating to a
Series is reduced due to losses on such Mortgage Assets, (i) the amount of
such losses will be allocated first, to reduce the aggregate outstanding
principal balance of the Subordinate Certificates of such Series (or other
subordination, if any,) and, thereafter, to reduce the aggregate outstanding
principal balance of the remaining Certificates of such Series in the
priority and manner specified in such Prospectus Supplement until the
aggregate outstanding principal balance of each Class of such Certificates of
such Series so specified has been reduced to zero or paid in full, thus
reducing the amount of principal distributable on each such Class of
Certificates or (ii) such losses may be allocated in any other manner set
forth in the related Prospectus Supplement. To the extent specified in the
related Prospectus Supplement, such reductions of principal of a Class or
Classes of Certificates will be allocated to the Holders of the Certificates
of such Class or Classes pro rata in the proportion which the outstanding
principal of each Certificate of such Class or Classes bears to the aggregate
outstanding principal balance of all Certificates of such Class.
If provided in the related Prospectus Supplement, one or more Classes of
Senior Certificates of a Series will 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") in the percentages and under
the circumstances or for the
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periods specified in the Prospectus Supplement. To the extent provided in
the related Prospectus Supplement, any such allocation of principal
prepayments to such Class or Classes will have the effect of accelerating the
amortization of such Senior Certificates while increasing the interests
evidenced by the Subordinated Certificates in rights to the benefit of the
Assets in the related Trust Fund. Increasing the interests of the
Subordinated Certificates relative to that of the Senior Certificates is
intended to preserve the availability of the subordination credit enhancement
provided to the Priority Certificates by the Subordinated Certificates. SEE
"Credit Enhancement -- Subordination."
UNSCHEDULED DISTRIBUTIONS. If specified in the related Prospectus
Supplement, the Certificates of a Series will 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, the related Trustee will be required to make such
unscheduled distributions on the Certificates of a Series on the date and in
the amount specified in the related Prospectus Supplement if, due to
substantial payments of principal (including Principal Prepayments) on the
related Mortgage Assets, low rates then available for reinvestment of such
payments or both, the Trustee determines, based on the assumptions specified
in the related Pooling and Servicing Agreement, that the amount anticipated
to be on deposit in the Certificate Account for such Series on the next
related Distribution Date, together with, if applicable, any amounts
available to be withdrawn from any related Reserve Fund or from any other
Credit Enhancement provided for such Series, may be insufficient to make
required distributions on the Certificates of such Series on such
Distribution Date. To the extent specified in the related Prospectus
Supplement, the amount of any such unscheduled distribution that is allocable
to principal will not exceed the amount that would otherwise have been
required to be distributed as principal on the Certificates of such Series on
the next Distribution Date. To the extent specified in the related
Prospectus Supplement, all unscheduled distributions will include interest at
the applicable Certificate Interest Rate (if any) on the amount of the
unscheduled distribution allocable to principal for the period and to the
date specified in such Prospectus Supplement.
To the extent specified in the related Prospectus Supplement, all
distributions allocable to principal in any unscheduled distribution made on
the Certificates of a Series will be made in the same priority and manner as
distributions of principal on such Certificates would have been made on the
next Distribution Date, and with respect to Certificates of the same Class,
unscheduled distributions of principal will be made on a pro rata basis.
Notice of any unscheduled distribution will be given by the Trustee prior to
the date of such distribution.
TERMINATION
The obligations created by the Pooling and Servicing Agreement for each
Series of Certificates will terminate following (i) the final payment or
other liquidation of the last Mortgage Asset subject thereto or the
disposition of all property acquired upon foreclosure of any Mortgage Loan
subject thereto and (ii) the payment (or provision for payment) to the
Certificateholders of that Series of all amounts required to be paid to them
pursuant to such Pooling and Servicing Agreement. Written notice of
termination of a Pooling and Servicing Agreement will be given to each
Certificateholder of the related Series, and the final distribution will be
made only upon presentation and surrender of the Certificates of such Series
at the location to be specified in the notice of termination.
If specified in the related Prospectus Supplement, a Series of
Certificates may be subject to optional early termination through the
repurchase of the Mortgage Assets in the related Trust Fund by the party or
parties specified therein, under the circumstances and in the manner set
forth therein. If provided in the related Prospectus Supplement upon the
reduction of the Class Principal Balance of a specified Class or Classes of
Certificates by a specified percentage or amount or upon a specified date, a
party designated therein may be authorized or required to repurchase or to
solicit bids for the purchase of the Mortgage Assets of the related Trust
Fund, or of a sufficient portion of such Mortgage Assets to retire such class
or classes, under the circumstances and in the manner set forth therein. If
a REMIC election will be made with respect to a Series of Certificates, there
may be additional conditions to the termination of the related Trust Fund
which will be set forth in the related Pooling and Servicing Agreement for
such Series of Certificates.
BOOK ENTRY REGISTRATION
If the Prospectus Supplement for a Series so provides, Certificates of any
Class of such Series may be issued in book entry form ("BOOK ENTRY
CERTIFICATES") and held in the form of a single certificate issued in the
name of a Clearing Agency ("CLEARING AGENCY") registered with the Securities
and Exchange Commission or its nominee. Transfers and pledges of Book Entry
Certificates may be made only through entries on the books of the Clearing
Agency in the name of brokers, dealers, banks and other organizations
eligible to maintain accounts with the Clearing Agency ("CLEARING AGENCY
PARTICIPANTS") or their nominees. Clearing Agency Participants may also be
Beneficial Owners (as defined below) of Book Entry Certificates.
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Purchasers and other Beneficial Owners of Book Entry Certificates
("BENEFICIAL OWNERS") may not hold Book Entry Certificates directly, but may
hold, transfer or pledge their ownership interest in the Book Entry
Certificates only through Clearing Agency Participants. Additionally,
Beneficial Owners will receive all distributions of principal and interest
with respect to Book Entry Certificates, and, if applicable, may request
repurchase of Book Entry Certificates only through the Clearing Agency and
the Clearing Agency Participants. Beneficial Owners will not be registered
holders of Certificates or be entitled to receive definitive certificates
representing their ownership interest in the Certificates except under the
limited circumstances, if any, described in the related Prospectus
Supplement. SEE "Risk Factors -- Limited Liquidity and Fluctuation in Value
from Market Condition -- Book Entry Registration."
If Certificates of a Series are issued as Book Entry Certificates, the
Clearing Agency will be required to make book entry transfers among Clearing
Agency Participants, to receive and transmit distributions of principal and
interest with respect to the Certificates of such Series, and to receive and
transmit requests for repurchase with respect to such Certificates. Clearing
Agency Participants with whom Beneficial Owners have accounts with respect to
such Book Entry Certificates will be similarly required to make book entry
transfers and receive and transmit distributions and repurchase requests on
behalf of their respective Beneficial Owners. Accordingly, although
Beneficial Owners will not be registered holders of Certificates and will not
possess physical certificates, a method will be provided whereby Beneficial
Owners may receive distributions, transfer their interests, and submit
repurchase requests.
MUTILATED, DESTROYED, LOST OR STOLEN CERTIFICATES
To the extent specified in the related Prospectus Supplement, (i) any
mutilated Certificate is surrendered to the Certificate Registrar, or the
Trustee receives evidence to its satisfaction of the destruction, loss or
theft of any Certificate, and (ii) there is delivered to the Depositor, the
Trustee and the Certificate Registrar such security or indemnity as may be
required by each of them to hold each of them harmless, then, in the absence
of notice to the Depositor, the Trustee and the Certificate Registrar that
such Certificate has been acquired by a bona fide purchaser, the Trustee
shall execute, deliver and authenticate, in exchange for or in lieu of any
such mutilated, destroyed, lost or stolen Certificate, a new Certificate of
like tenor and Percentage Interest, but bearing a number not
contemporaneously outstanding. Upon the issuance of any such new
Certificate, the Depositor and the Trustee may require the payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed
in relation thereto and any other expenses connected therewith. Any such
duplicate Certificate shall constitute complete and indefeasible evidence of
ownership in the Trust Fund, as if originally issued, whether or not the
mutilated, destroyed, lost or stolen Certificate shall be found at any time.
ASSETS SECURING OR UNDERLYING THE CERTIFICATES
GENERAL
Each Series of Certificates will represent a beneficial interest in the
Assets included in the related Trust Fund and transferred to the related
Trustee by the Depositor. Such Assets may include (i) Mortgage Assets and
payments or distributions thereon (subject, if specified in the Prospectus
Supplement, to certain exclusions); (ii) if specified in the Prospectus
Supplement, reinvestment income on such payments or distributions; (iii) with
respect to a Trust Fund 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 and certain rights of the
Administrator, if any, and the Servicer under any policies required to be
maintained in respect of the related Mortgage Assets; and (iv) if specified
in the Prospectus Supplement, one or more forms of Credit Enhancement. The
primary Assets of any Trust Fund will consist of Mortgage Assets.
With respect to a Series, the Depositor will acquire the Mortgage Assets
in the open market or in privately negotiated transactions from one or more
entities, and each such entity from whom the Depositor so acquires a
significant portion of the Mortgage Assets (individually or collectively, the
"Transferor") will be described in the related Prospectus Supplement,
including a description of any affiliation between the Transferor and the
Depositor. To the extent specified in the related Prospectus Supplement, the
Mortgage Assets will have been originated or acquired by the Transferor in
one of four ways: (i) the indirect origination and purchase of retail
installment sales contracts from a network of retail dealers or independent
contractors that professionally install property improvements ("indirect
originations"); (ii) the origination of loans directly to consumers,
including solicitations through direct mail and telemarketing ("direct
originations"); (iii) the wholesale purchase of loans, on a flow basis,
originated by other unaffiliated lenders, as correspondents ("correspondent
originations"); or (iv) the purchase, on a bulk basis, of loan portfolios
originated by other unaffiliated lenders ("portfolio acquisitions"). In
acquiring the Mortgage Assets from a Transferor the Depositor will rely on
the representations and warranties made by the Transferor with respect to
such Mortgage Assets. For a summary description of the expected
representations and warranties with respect to such Mortgage Assets, SEE "The
Pooling and Servicing Agreement --Assignment of Mortgage Assets" herein. As
further described in the related Prospectus Supplement for a Series, the
Transferor will be obligated to repurchase or replace any Mortgage Assets
that, subject to the lapse of any applicable cure period, are in breach of a
representation or warranty made by the Transferor and such breach has a
material and adverse affect on the value of such Mortgage Assets or the
interest of Certificateholders therein. To the extent that the Depositor has
any obligation to repurchase or replace any Mortgage Assets for a material
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breach of any representations or warranties made by the Depositor, the
Depositor is not expected to have the financial capability to repurchase or
replace such defective Mortgage Assets, but rather the Depositor will be
relying on the related Transferor of such defective Mortgage Assets to
repurchase or replace them. SEE "The Depositor" herein.
The following is a brief description of the Mortgage Assets expected to be
included in the Trust Funds. If specific information respecting the Mortgage
Assets is not known at the time a Series is initially offered, more general
information of the nature described below will be provided in the related
Prospectus Supplement, and specific information will be set forth in a report
on Form 8-K to be filed with the Securities and Exchange Commission within
fifteen days after the initial issuance of such Series. A copy of the related
Pooling and Servicing Agreement with respect to each Series will be attached
to the Form 8-K and will be available for inspection at the corporate trust
office of the related Trustee specified in the related Prospectus Supplement.
A schedule of the Mortgage Assets relating to each Series, will be attached
to the related Pooling and Servicing Agreement delivered to the Trustee upon
delivery of such Series.
MORTGAGE LOANS
The Mortgage Loans will be evidenced by promissory notes, retail
installment sales contracts or other evidences of indebtedness (the
"MORTGAGE NOTES") and will be secured by mortgages, deeds of trust or other
similar security instruments (the "MORTGAGES") creating a lien or security
interest on single family (one-to-four unit) residences, units in planned
unit developments, units in condominium developments, townhomes and
Manufactured Homes (as defined herein) (the "MORTGAGED PROPERTIES") located
in various states. If specified in the Prospectus Supplement, the Mortgage
Loans may include cooperative apartment or manufactured housing loans
("COOPERATIVE 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 units in such Cooperatives. To the extent
specified in the related Prospectus Supplement, all or a portion of the
Mortgages will be junior liens on the related Mortgaged Properties, and the
related superior liens will not be included in the Mortgage Loan Pool.
Certain of the Mortgage Loans may be partially insured to the extent
described in the related Prospectus Supplement (and subject to the conditions
described herein and in the related Prospectus Supplement) by the FHA under
the Title I Program (the "Title I Mortgage Loans"). To the extent specified
in the related Prospectus Supplement, the Mortgage Loans will have scheduled
monthly payment dates throughout a month, and no Mortgage Loan will provide
for deferred interest or negative amortization, and no commercial or
multifamily loans will be included in any Mortgage Loan Pool.
The payment terms of the Mortgage Loans to be included in a Trust Fund for
a Series or 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 is 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 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 loan over its term, may be calculated on the basis of an
amortization schedule that is significantly 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 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 loan or may decline over time, and may be
prohibited for the life of the loan or for certain periods ("lockout
periods"). Certain 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 loans may permit
prepayments without payment of a fee
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unless the prepayment occurs during specified time periods. The 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 Depositor.
With respect to a Series for which the related Trust Fund 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 of such Mortgage Loans,
the years of origination, geographic dispersion and original principal
balances and the loan-to-value ratios of such Mortgage Loans.
AGENCY SECURITIES
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA). GNMA is a wholly-owned
corporate instrumentality of the United States within the United States
Department of Housing and Urban Development. Section 306(g) of Title III of
the National Housing Act of 1934, as amended (the "HOUSING ACT"), authorizes
GNMA to guarantee the timely payment of the principal of and interest on
certificates which represent an interest in a pool of mortgage loans insured
by the Federal Housing Administration ("FHA LOANS"), or guaranteed by the
Farmers Home Administration ("FmHA LOANS") or partially guaranteed by the
Veterans' Administration ("VA LOANS").
Section 306(g) of the Housing Act provides that "the full faith and credit
of the United States is pledged to the payment of all amounts which may be
required to be paid under any guarantee under this subsection." In order to
meet its obligations under any such guarantee, GNMA may, under Section 306(d)
of the Housing Act, borrow from the United States Treasury in an amount which
is at any time sufficient to enable GNMA, with no limitations as to amount,
to perform its obligations under its guarantee.
GNMA CERTIFICATES. Each GNMA Certificate relating to a series (which may
be issued under either the GNMA I program or the GNMA II program, as referred
to by GNMA) will be a "fully modified pass-through" mortgage-backed
certificate issued and serviced by a mortgage banking company or other
financial concern ("GNMA ISSUER") approved by GNMA or approved by FNMA as a
seller-servicer of FHA Loans, FmHA Loans and/or VA Loans. Each GNMA
Certificate will represent a fractional undivided interest in a pool of
mortgage loans which may include FHA Loans, FmHA Loans and/or VA Loans. Each
such mortgage loan is secured by a one- to four-family residential property.
Each such GNMA Certificate will provide for the payment by or on behalf of
the GNMA Issuer to the registered holder of such GNMA Certificate of
scheduled monthly payments of principal and interest equal to the registered
holder's proportionate interest in the aggregate amount of the monthly
principal and interest payment on each FHA Loan, FmHA Loan or VA Loan
underlying such GNMA Certificate, less the applicable servicing and guarantee
fee which together equal the difference between the interest on the FHA Loan,
FmHA Loan or VA Loan and the pass-through rate on the GNMA Certificate. In
addition, each payment will include proportionate pass-through payments of
any prepayments of principal on the FHA Loans, FmHA Loans or VA Loans
underlying such GNMA Certificate and liquidation proceeds in the event of a
foreclosure or other disposition of any such FHA Loans, FmHA Loans or VA
Loans.
The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the
full faith and credit of the United States.
Each such GNMA Certificate will have an original maturity of not more than
30 years (but may have an original maturity of substantially less than 30
years). GNMA will approve the issuance of each such GNMA Certificate in
accordance with a guarantee agreement (a "GUARANTY AGREEMENT") between GNMA
and the GNMA Issuer. Pursuant to its Guaranty Agreement, a GNMA Issuer will
be required to advance its own funds in order to make timely payments of all
amounts due on the GNMA Certificate, even if the payments received by the
GNMA Issuer on the mortgage loans underlying each such GNMA Certificate are
less than the amounts due on such GNMA Certificate.
If a GNMA Issuer is unable to make payments on a GNMA Certificate as such
payments become due, it is required promptly to notify GNMA and request GNMA
to make such payments. Upon such notification and request, GNMA will make
such payments directly to the registered holder of the GNMA Certificate. In
the event no payment is made by a GNMA Issuer and the GNMA Issuer fails to
notify and request GNMA to make such payment, the holder of the GNMA
Certificate will have recourse only against GNMA to obtain such payment. In
the case of GNMA Certificates issued in definitive form, the Trustee, as
registered holder of the GNMA Certificates, will have the right to proceed
directly against GNMA under the terms of the Guaranty Agreements relating to
such GNMA Certificates for any amounts that are not paid
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when due. In the case of GNMA Certificates issued in book-entry form, The
Participants Trust Corporation ("PTC"), or its nominee, will have the right
to proceed against GNMA in such event.
All mortgage loans underlying a particular GNMA I Certificate must have the
same interest rate (except for pools of mortgage loans secured by
manufactured homes) over the term of the loan. The interest rate on each
GNMA I Certificate will equal the interest rate on the mortgage loans
included in the pool of mortgage loans underlying such GNMA I Certificate,
less one-half percentage point per annum of the unpaid principal balance of
the mortgage loans.
Mortgage loans underlying a particular GNMA II Certificate may have per
annum interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points lower than the
highest interest rate on the mortgage loans included in the pool of mortgage
loans underlying such GNMA II Certificate (except for pools of mortgage loans
secured by manufactured homes).
Regular monthly installment payments on each GNMA Certificate relating to a
series will be comprised of interest due as specified on such GNMA
Certificate plus the scheduled principal payments on the FHA Loans of VA
Loans underlying such GNMA Certificate due on the first day of the month in
which the scheduled monthly installment on such GNMA Certificate is due. Such
regular monthly installments on each such GNMA Certificate are required to be
paid to the Trustee as registered holder by the 15th day of each month in the
case of a GNMA I Certificate and are required to be mailed to the Trustee by
the 20th day of each month in the case of a GNMA II Certificate. Any
principal prepayments on any FHA Loans, FmHA Loans or VA Loans underlying a
GNMA Certificate relating to a series or any other early recovery of
principal on such loan will be passed through to the Trustee as the
registered holder of such GNMA Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or by
"buydown" mortgage loans for which funds will have been provided (and
deposited into escrow accounts) for application to the payment of a portion
of the borrowers' monthly payments during the early years of such mortgage
loan. Payments due the registered holders of GNMA Certificates backed by
pools containing "buydown" mortgage loans will be computed in the same manner
as payments derived from non-"buydown" GNMA Certificates and will include
amounts to be collected from both the borrower and the related escrow
account. The graduated payment mortgage loans will provide for graduated
interest payments that, during the early years of such mortgage loans, will
be less than the amount of stated interest on such mortgage loans. The
interest not so paid will be added to the principal of such graduated payment
mortgage loans and, together with interest thereon, will be paid in
subsequent years. The obligations of GNMA and of a GNMA Issuer will be the
same irrespective of whether the GNMA Certificates relating to a series of
Certificates are backed by graduated payment mortgage loans or "buydown"
mortgage loans. No statistics comparable to the FHA's prepayment experience
on level payment, non-"buydown" mortgage loans are available in respect of
graduated payment or "buydown" mortgages. GNMA Certificates included in the
Trust Fund for a Series may be held in book-entry form.
If specified in the related Prospectus Supplement, GNMA Certificates
included in the Trust Fund for a Series may be held on deposit at PTC, a
limited purpose trust company organized under the banking law of the State of
New York. PTC operates a private sector, industry-owned depository and
settlement facility for the book-entry transfer of interests in GNMA
Certificates. Distributions of principal of and interest on each GNMA
Certificate held through PTC will be credited by PTC to the PTC participant
on whose account the GNMA Certificate is credited.
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA). FNMA is a federally
chartered and privately owned corporation organized and existing under the
Federal National Mortgage Association Charter Act (the "CHARTER ACT"). FNMA
was originally established in 1938 as a United States government agency to
provide supplemental liquidity to the mortgage market and was transformed
into a stockholder-owned and privately-managed corporation by legislation
enacted in 1968.
FNMA provides funds to the mortgage market primarily by purchasing mortgage
loans from lenders, thereby replenishing their funds for additional lending.
FNMA acquires funds to purchase mortgage loans from many capital market
investors that may not ordinarily invest in mortgages, thereby expanding the
total amount of funds available for housing. Operating nationwide, FNMA
helps to redistribute mortgage funds from capital surplus to capital-short
areas.
FNMA CERTIFICATES. FNMA Certificates are Guaranteed Mortgage Pass-Through
Certificates representing fractional undivided interests in a pool of
mortgage loans formed by FNMA. Each mortgage loan must meet the applicable
standards of the FNMA purchase program. Mortgage loans comprising a pool are
either provided by FNMA from its own portfolio or purchased pursuant to the
criteria of the FNMA purchase program.
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Mortgage loans underlying FNMA Certificates relating to a series will
consist of conventional mortgage loans, FHA Loans or VA Loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a FNMA Certificate are expected to be between either 8 to 15
years or 20 to 30 years. The original maturities of substantially all of the
fixed rate level payment FHA Loans or VA Loans are expected to be 30 years.
Mortgage loans underlying a FNMA Certificate may have annual interest rates
that vary by as much as two percentage points from each other. The rate of
interest payable on a FNMA Certificate is equal to the lowest interest rate
of any mortgage loan in the related pool, less a specified minimum annual
percentage representing servicing compensation and FNMA's guaranty fee. Thus,
the annual interest rates on the mortgage loans underlying a FNMA Certificate
will generally be between 50 basis points and 250 points greater than the
annual FNMA Certificate pass-through rate. If specified in the related
Prospectus Supplement, FNMA Certificates included in the Trust Fund with
respect to a Series may be backed by adjustable rate mortgages.
Regular monthly installment payments on each FNMA Certificate will be
comprised of interest due as specified by such FNMA Certificate plus the
scheduled principal payments on the Mortgage Loans underlying such FNMA
Certificate due during the period beginning on the second day of the month
prior to the month in which the scheduled monthly installment on such FNMA
Certificate is due and ending on the first day of such month in which the
scheduled monthly installment on such FNMA Certificate is due. Such regular
monthly installments on each such FNMA Certificate will be distributed to the
holder of record on the 25th day of each month. Any principal prepayments on
the mortgage loans underlying any FNMA Certificate included in the Trust Fund
with respect to a Series or any other early recovery of principal on such
mortgage loans will be passed through to the holder of record of such FNMA
Certificate on the 25th day of the month next following such prepayment or
recovery and, in turn, a portion of such amounts will be paid or distributed
to Holders of such Series, secured thereby, as additional principal payments.
FNMA guarantees to each registered holder of a FNMA Certificate that it
will distribute amounts representing such holder's proportionate share of
scheduled principal and interest payments at the applicable pass-through rate
provided for by such FNMA Certificate on the underlying mortgage loans,
whether or not received, and such holder's proportionate share of the full
principal amount of any foreclosed or other finally liquidated mortgage loan,
whether or not such principal amount is actually recovered. The obligations
of FNMA under its guarantees are obligations solely of FNMA and are not
backed by, nor entitled to, the full faith and credit of the United States.
Although the Secretary of the Treasury of the United States has discretionary
authority to lend FNMA up to $2.25 billion outstanding at any time, neither
the United States nor any agency thereof is obligated to finance FNMA's
operations or to assist FNMA in any other manner. If FNMA were unable to
satisfy its obligations, distributions to holders of FNMA Certificates would
consist solely of payments and other recoveries on the underlying mortgage
loans and, accordingly, monthly distributions to holders of FNMA Certificates
would be affected by delinquent payments and defaults on such mortgage loans.
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC). FHLMC is a corporate
instrumentality of the United States created pursuant to Title III of the
Emergency Home Finance Act of 1970, as amended (the "FHLMC ACT"). The common
stock of FHLMC is owned by the Federal Home Loan Banks. FHLMC was
established primarily for the purpose of increasing the availability of
mortgage credit for the financing of urgently needed housing. It seeks to
provide an enhanced degree of liquidity for residential mortgage investments
primarily by assisting in the development of secondary markets for
conventional mortgages. The principal activity of FHLMC currently consists
of the purchase of first lien conventional mortgage loans or participation
interests in such mortgage loans and the sale of the mortgage loans or
participations so purchased in the form of mortgage securities, primarily
FHLMC Certificates. FHLMC is confined to purchasing, so far as practicable,
mortgage loans that it deems to be of such quality, type and class as to meet
generally the purchase standards imposed by private institutional mortgage
investors.
FHLMC CERTIFICATES. Each FHLMC Certificate represents an undivided
interest in a pool of mortgage loans that may consist of first lien
conventional loans, FHA Loans or VA Loans (a "FHLMC CERTIFICATE GROUP").
FHLMC Certificates are sold under the terms of a Mortgage Participation
Certificate Agreement. A FHLMC Certificate may be issued under either
FHLMC's Cash Program or Guarantor Program.
To the extent described in the related Prospectus Supplement, mortgage
loans underlying the FHLMC Certificates relating to a series will consist of
mortgage loans with original terms to maturity of between 10 and 30 years.
Each such mortgage loan must meet the applicable standards set forth in FHLMC
Act. A FHLMC Certificate group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and/or
participations comprising another
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FHLMC Certificate group. Under the Guarantor Program any such FHLMC
Certificate group may include only whole loans or participation interests in
whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest on the underlying mortgage loans to the extent of
the applicable Certificate rate on the registered holder's pro rata share of
the unpaid principal balance outstanding on the underlying mortgage loans in
the FHLMC Certificate group represented by such FHLMC Certificate, whether or
not received. FHLMC also guarantees to each registered holder of a FHLMC
Certificate collection by such holder of all principal on the underlying
mortgage loans, without any offset or deduction, to the extent of such
holder's pro rata share thereof, but does not, except if and to the extent
specified in the Prospectus Supplement for a Series, guarantee the timely
payment of scheduled principal. Under FHLMC's Gold PC Program, FHLMC
guarantees the timely payment of principal based on the difference between
the pool factor published in the month preceding the month of distribution
and the pool factor published in such month of distribution. Pursuant to its
guarantees, FHLMC indemnifies holders of FHLMC Certificates against any
diminution in principal by reason of charges for property repairs,
maintenance and foreclosure. FHLMC may remit the amount due on account of
its guarantee of collection of principal at any time after default on an
underlying mortgage loan, but not later than (i) 30 days following
foreclosure sale, (ii) 30 days following payment of the claim by any mortgage
insurer, or (iii) 30 days following the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the borrower for accelerated payment of
principal. In taking actions regarding the collection of principal after
default on the mortgage loans underlying FHLMC Certificates, including the
timing of demand for acceleration, FHLMC reserves the right to exercise its
judgment with respect to the mortgage loans in the same manner as for
mortgage loans which it has purchased but not sold. The length of time
necessary for FHLMC to determine that a mortgage loan should be accelerated
varies with the particular circumstances of each borrower, and FHLMC has not
adopted standards which require that the demand be made within any specified
period.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the
United States or any Federal Home Loan Bank. The obligations of FHLMC under
its guarantee are obligations solely of FHLMC and are not backed by, nor
entitled to, the full faith and credit of the United States. If FHLMC were
unable to satisfy such obligations, distributions to holders of FHLMC
Certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders
of FHLMC Certificates would be affected by delinquent payments and defaults
on such mortgage loans.
In addition to FHLMC's guarantees of timely payment of interest and
ultimate collection of principal, FHLMC guarantees with respect to FHLMC
Certificates representing certain qualifying mortgage loans the timely
payment by each borrower of the monthly principal scheduled to be paid under
the amortization schedule applicable to each such mortgage loan ("SCHEDULED
PRINCIPAL"). Servicers of the mortgage loans comprising these FHLMC
Certificates are required to pay Scheduled Principal to FHLMC whether or not
received from the borrowers. FHLMC, in turn, guarantees to pay Scheduled
Principal to each registered holder of such FHLMC Certificates whether or not
received from the servicers. FHLMC monthly payments of Scheduled Principal
are computed based upon the servicer's monthly report to FHLMC of the amount
of Scheduled Principal due to be paid on the related mortgage loans. The
Prospectus Supplement for each Series for which the related Trust Fund
includes FHLMC Certificates will set forth the nature of FHLMC's guarantee
with respect to scheduled principal payments on the mortgage loans in the
pools represented by such FHLMC Certificates.
Requests for registration of ownership of FHLMC Certificates made on or
before the last business day of a month are made effective as of the first
day of that month. With respect to FHLMC Certificates sold by FHLMC on or
after January 2, 1985, a Federal Reserve Bank which maintains book-entry
accounts with respect thereto will make payments of interest and principal
each month to holders in accordance with the holders' instructions. The
first payment to a holder of a FHLMC Certificate will normally be received by
the 15th day of the second month following the month in which the purchaser
became recognized as the holder of such FHLMC Certificate. Thereafter,
payments will normally be received by the 15th day of each month.
A FHLMC Certificate may be issued under programs created by FHLMC,
including its Cash Program or Guarantor Program. Under FHLMC's Cash Program,
the pooled mortgage loans underlying a FHLMC Certificate are purchased for
cash from a number of sellers. With respect to FHLMC Certificate Pools
formed prior to June 1, 1987, under the Cash Program, there is no limitation
on the amount by which interest rates on the mortgage loans underlying a
FHLMC Certificate may exceed the interest rate on the FHLMC Certificate.
Under such program, FHLMC purchases groups of whole mortgage loans at
specified percentages of their unpaid principal balances, adjusted for
accrued or prepaid interest, which, when applied to the interest rate of the
mortgage loans purchased, results in the yield (expressed as a percentage)
required by FHLMC.
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The required yield, which includes a minimum servicing fee retained by the
servicer, is calculated using the outstanding principal balance of the
mortgage loans, an assumed term and a prepayment period as determined by
FHLMC. No mortgage loan is purchased by FHLMC at greater than 100% of its
outstanding principal balance. Thus, the range of interest rates on the
mortgage loans in a FHLMC Certificate Pool formed prior to June 1987 under
the Cash Program will vary since mortgage loans are purchased and identified
to a FHLMC Certificate Pool based upon their yield to FHLMC rather than on
the interest rates on the mortgage loans. With respect to FHLMC Certificate
Pools formed on or after June 1, 1987, the range of interest rates on the
mortgage loans and participations in a FHLMC Certificate Pool which is
comprised of 15- or 30-year fixed-rate single family mortgage loans bought by
FHLMC under the Cash Program will be restricted to one percentage point. In
addition, the minimum interest rate on any mortgage loan in a FHLMC
Certificate Pool will be greater than or equal to the annual pass-through
rate on the related FHLMC Certificate, and the maximum interest rate will not
be more than two percentage points above such pass-through rate.
Under FHLMC's Guarantor Program, the mortgage loans underlying a FHLMC
Certificate are purchased from a single seller in exchange for such FHLMC
Certificate. The interest rate on a FHLMC Certificate under such program is
established based upon the lowest interest rate on the underlying mortgage
loans, minus a minimum servicing fee and the amount of FHLMC's management and
guaranty income as agreed upon between the seller and FHLMC. Under the
Guarantor Program, the range between the lowest and highest annual interest
rates on the mortgage loans in a FHLMC Certificate Pool may not exceed two
percentage points. For some FHLMC Certificates issued pursuant to purchase
contracts under the Guarantor Program on or after September 1, 1987, the
range of the interest rates on the mortgage loans in a FHLMC Certificate Pool
will not exceed one percentage point.
STRIPPED AGENCY SECURITIES. Agency Securities may consist of one or more
stripped mortgage-backed securities, each as described herein and in the
related Prospectus Supplement. Each such Agency Security will represent an
undivided interest in all or part of either the principal distributions (but
not the interest distributions) or the interest distributions (but not the
principal distributions), or in some specified portion of the principal and
interest distributions (but not all of such distributions) on certain GNMA
Certificates, FNMA Certificates, FHLMC Certificates, or other Agency
Securities. The underlying securities will be held under a trust agreement
by GNMA, FNMA or FHLMC each as trustee, or by another trustee named in the
related Prospectus Supplement. FHLMC, FNMA or GNMA will guarantee each
stripped Agency Security to the same extent as such entity guarantees the
underlying securities backing such stripped Agency Security, to the extent
specified in the related Prospectus Supplement.
OTHER AGENCY SECURITIES. If specified in the related Prospectus
Supplement, a Trust Fund may include other mortgage pass-through or
participation certificates issued or guaranteed by GNMA, FNMA or FHLMC,
including but not limited to FNMA Guaranteed REMIC Pass-Through Certificates
and FHLMC Multiclass Mortgage Participation Certificates. The
characteristics of any such mortgage pass-through or participation
certificates will be described in such Prospectus Supplement. If specified,
a combination of different types of Agency Securities may be included in a
Trust Fund.
CONTRACTS
As specified in the related Prospectus Supplement for a Series,
"Contracts" may include: (i) loans evidenced by conditional sales contracts
and installments sales or loan agreements, including loans secured by new or
used Manufactured Homes (as defined herein) that are not considered to be
interests in real property because such Manufactured Homes are not
permantently affixed to real estate ("SECURED CONTRACTS"), and (ii)
unsecured loans for Manufactured Homes and unsecured loans for property
improvement, debt consolidation and/or home equity purposes (such unsecured
loans are collectively, the "UNSECURED CONTRACTS"). To the extent described
in the related Prospectus Supplement, certain Contracts that are secured by
Manufactured Homes and Unsecured Contracts will be conventional (i.e., not
insured or guaranteed by a governmental agency) loan contracts (the
"CONVENTIONAL CONTRACTS") , while other Contracts that are secured by
Manufactured Homes or that are unsecured loans for Manufactured Homes or
property improvements will be partially insured by the FHA under the Title I
Program (the "TITLE I CONTRACTS"). To the extent specified in the related
Prospectus Supplement, the Contracts included in the Trust Fund with respect
to a Series will be fully amortizing and will bear interest at a fixed annual
percentage rate ("APR"). The Secured Contracts differ from Mortgage Loans in
that the Secured Contracts are not secured by interests in real property, but
rather by interests in Manufactured Homes that are not permanently affixed to
real estate. In addition, the Contracts differ from the Mortgage Loans in
that they are generally originated by a network of retail dealers or
independent contractors that professionally install property improvements,
rather than by financial institutions or other traditional mortgage lenders;
provided that Mortgage Loans that constitute retail installment sales
contracts may also have been originated by such retail dealers or independent
contractors.
While the Unsecured Contracts are not secured by a security interest in
any real or personal property, such contracts are still subject to the same
underwriting criteria as the Mortgage Loans and the Secured Contracts. For
example, in underwriting an Unsecured Contract, the Transferor will consider
the borrower's ability to pay the related debt as well as the value of real
or personal property owned by the borrower which could be the subject of a
junior lien in favor of the Transferor; however, because the Unsecured
Contracts generally have smaller principal amounts than the Mortgage Loans or
the Secured Contracts, a junior lien with respect to such real or personal
property will not be obtained because the costs associated with obtaining and
perfecting such a junior lien will not justify the benefits provided by such a
lien, including any realization from the enforcement of such lien.
The Manufactured Homes securing the Secured Contracts consist of
manufactured homes within the meaning of 42 United States Code, Section
5402(6), which defines a "MANUFACTURED HOME" as "a structure, transportable
in one or more sections, which in the traveling mode, is eight body feet or
more in width or forty body feet or more in length, or, when erected on site,
is three hundred twenty or more square feet, and which is built on a
permanent chassis and designed to be used as a dwelling with or without
permanent foundation when connected to the required utilities, and includes
the plumbing, heating, air-conditioning, and electrical systems contained
therein; except that such term shall include any structure which
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meets all the requires of this paragraph except the size requirements and
with respect to which the manufacturer voluntarily files a certification
required by the Secretary of Housing and Urban Development and complies with
the standards established under this chapter." Moreover, if an election is
made to treat a Trust Fund including Secured Contracts as a REMIC as
described in "Certain Federal Income Tax Consequences -- Certain Income Tax
Consequences for REMIC Certificates," the related Manufactured Homes will
have a minimum of 400 square feet of living space and a minimum width in
excess of 102 inches.
To the extent specified in the Prospectus Supplement with respect to a
Series for which the related Trust Fund includes Secured Contracts, for
purposes of calculating the loan-to-value ratio of a Secured Contract
relating to a new Manufactured Home, the "COLLATERAL VALUE" is no greater
than the sum of a fixed percentage of the list price of the unit actually
billed by the manufacturer to the dealer (exclusive of freight to the dealer
site) including "accessories" identified in the invoice (the "MANUFACTURER'S
INVOICE PRICE"), plus the actual cost of any accessories purchased from the
dealer, a delivery and set-up allowance, depending on the size of the unit
and the cost of state and local taxes, filing fees and up to three years
prepaid hazard insurance premiums. To the extent specified in the related
Prospectus Supplement, the Collateral Value of a used Manufactured Home is
the least of the sales price, the appraised value, and the National
Automobile Dealer's Association book value plus prepaid taxes and hazard
insurance premiums. The appraised value of a Manufactured Home is based upon
the age and condition of the manufactured housing unit and the quality and
condition of the mobile home park in which it is situated, if applicable.
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 APRs on the Contracts; the Contract 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; and the original
maturities of the Contracts and the last maturity date of any Contract.
ADDITIONS, SUBSTITUTION AND WITHDRAWAL OF ASSETS
With respect to a Series, as described in the related Prospectus
Supplement, the related Transferor or the Depositor may, subsequent to the
issuance of a Series, (i) deliver additional Assets to the related Trust
Fund, (ii) withdraw Assets previously included in a Trust Fund for such
Series and substitute comparable assets therefor or (iii) withdraw Assets
previously included in a Reserve Fund for such Series. Assets may be added
to the Trust Fund for a Series subsequent to the issuance of such Series in
the manner described under "Pre-Funding Arrangements" below. In addition,
Assets may be withdrawn from or substituted in the Trust Fund for a Series
for the following reasons, (a) curing any breaches of representations and
warranties with respect to such Assets, (b) curing certain immaterial
irregularities with respect to such Assets that do not constitute a breach of
such representations and warranties, or (c) achieving certain targeted or
desired Mortgage Asset Pool characteristics with respect to the Assets of a
particular Series, including without limitation those characteristics that
accommodate the request of a Rating Agency, the Underwriters or a third party
provider of Credit Enhancement. Any such additions, withdrawals or
substitutions of Assets by the related Transferor or the Depositor will be
subject to the applicable limitations, requirements and conditions provided
in the related Pooling and Servicing Agreement (and described in the related
Prospectus Supplement) for such Series.
PRE-FUNDING ARRANGEMENTS
To the extent provided in the related Prospectus Supplement for a Series,
the related Pooling and Servicing Agreement will provide for a commitment by
the related Trust Fund to subsequently purchase additional Mortgage Assets
("SUBSEQUENT MORTGAGE ASSETS") from the Depositor following the date on which
the Trust Fund is established and the related Certificates are issued (a
"PRE-FUNDING ARRANGEMENT"). With respect to a Series, the Pre-Funding
Arrangement will require that any Subsequent Mortgage Assets transferred to
the Trust Fund conform to the requirements and conditions provided in the
related Pooling and Servicing Agreement. SEE "The Pooling and Servicing
Agreement -- Conveyance of Subsequent Mortgage Assets." If a Pre-Funding
Arrangement is utilized in connection with the issuance of the Series of
Certificates, on the closing date for the issuance of such Series the related
Trustee will be required to deposit in a segregated account (a "PRE-FUNDING
ACCOUNT") all or a portion of the proceeds received by the Trustee in
connection with the sale of one or more Classes of Certificates of such
Series; and subsequently, the Trust Fund will acquire Subsequent Mortgage
Assets from the Depositor in exchange for the release of money from the
Pre-Funding Account for such Series. In addition, the Pre-Funding
Arrangement will be limited to a specified period, not to exceed three
months; during which any transfers of Subsequent Mortgage Assets must occur
and to a maximum deposit to the related Pre-Funding Account of no more than
thirty-five percent (35%) of the aggregate proceeds received from the sale of
all Classes of Certificates of such Series.
If all of the funds originally deposited in the such Pre-Funding
Account are not used by the end of such specified period, then any remaining
amount of such funds will be applied as a mandatory prepayment of a Class or
Classes of Certificates as specified in the related Prospectus Supplement.
Although it is intended that the principal amount of Subsequent Mortgage
Assets transferred to the Trust Fund after the closing date for the issuance
of any particular Series will require application of substantially all of the
Pre-Funding Account, and it is not anticipated that there will be any
material amount of principal distributions from amounts remaining on deposit
in the Pre-Funding Account in reduction of the principal balances of any
Certificates, no assurance can be given that such a distribution with
respect to the Certificates will not occur on the Distribution Date following
the Due Period in which the Pre-Funding Arrangement ends. In any event, it
is unlikely that the Transferor will be able to deliver Subsequent Mortgage
Assets with aggregate principal balances that exactly equal the Pre-Funding
Account, and the portion of the Pre-Funding Account remaining at the end of
the Pre-Funding Arrangement, if any, will be distributed in reduction of the
principal balance of the Certificates of the related Series, as set forth in
related Prospectus Supplement.
As may be further specified in the related Prospectus Supplement, amounts
on deposit in the Pre-Funding Account will be invested in short-term debt
obligations of, or debt obligations guaranteed by, the United States,
repurchase agreements that satisfy the criteria specified in the related
Pooling and Servicing Agreement, certificates of deposit, time deposits and
bankers acceptances of any United States depositary institution or trust
company, FDIC insured deposits, including deposits with the Trustee,
commercial paper, debt obligations, and money market funds; provided such
investments are acceptable to each Rating Agency rating the Series of
Certificates at the time at which the investments are made (collectively
"PERMITTED INVESTMENTS"); and provided further that an investment in such
Permitted Investments will not require the Trust Fund for a Series to be
registered as an "investment company" under the Investment Company Act of
1940, as amended. Permitted Investments will consist of short term
investments that convert into cash or mature within a short period of time,
have minimal or no exposure to fluctuations in value as a result of market
changes in prevailing interest rates and are acceptable to each Rating Agency
rating the applicable Series of Certificates.
The utilization of a Pre-Funding Arrangement is intended to improve the
efficiency of the issuance of a Series of Certificates and the sale of the
Mortgage Assets to the related Trust Fund through the incremental delivery of
the Mortgage Assets on the closing date and during the three month period
following the closing date for such Series, which allows for a more even
accumulation of the Mortgage Assets by the Depositor and the related Transferor
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and the issuance of a larger principal amount of Certificates for such Series
than would be the case without a Pre-Funding Arrangement.
CREDIT ENHANCEMENT
GENERAL
Various forms of credit enhancement ("CREDIT ENHANCEMENT") may be provided
with respect to one or more Classes of a Series or with respect to the Assets
in the related Trust Fund. Credit Enhancement may be in the form of the
subordination of one or more Classes of such Series, the
overcollateralization of the Trust Fund with respect to a Series, the
establishment of one or more Reserve Funds, the use of a cross-support
feature, the use of a Mortgage Pool Insurance Policy, Certificate 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. To the extent specified in the related
Prospectus Supplement, any Credit Enhancement with respect to a Series will
not provide protection against all risks of loss and will not guarantee
repayment of the entire principal balance of the Certificates of such Series
and interest thereon. If losses occur which exceed the amount covered by such
Credit Enhancement or which are not covered by the Credit Enhancement,
Holders will bear their allocable share of deficiencies.
SUBORDINATION
If specified in the related Prospectus Supplement, distributions in
respect of scheduled principal, interest or any combination thereof that
otherwise would have been payable or distributable to one or more Classes of
a Series (the "SUBORDINATED CERTIFICATES") will instead be payable to one or
more other Classes of such Series (the "SENIOR CERTIFICATES") under the
circumstances and to the extent provided in such 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 Certificates and
thereafter by the various Classes of Senior Certificates, in each case under
the circumstances and subject to the limitations specified in the Prospectus
Supplement. The aggregate distributions in respect of delinquent payments or
distributions on the Mortgage Assets over the lives of the Certificates of a
Series or at any time, the aggregate losses in respect of defaulted Mortgage
Assets which must be borne by the Subordinated Certificates by virtue of
subordination and the amount of the distributions otherwise distributable to
the Subordinated Certificates that will be distributable to Holders of Senior
Certificates on any Distribution Date may be limited as specified in the
related Prospectus Supplement. If aggregate distributions in respect of
delinquent payments or distributions on the Mortgage Assets or aggregate
losses in respect of such Mortgage Assets were to exceed the total amounts
distributable and available for distribution to Holders of Subordinated
Certificates were to exceed the specified maximum amount, Holders of Senior
Certificates could experience losses on their Certificates.
In addition to or in lieu of the foregoing, if specified in the related
Prospectus Supplement, all or any portion of distributions otherwise
distributable to Holders of Subordinated Certificates on any Distribution
Date may instead be deposited into one or more Reserve Fund (as defined
below) established by the related Trustee. If specified in the related
Prospectus Supplement, such deposits may be made (i) on each Distribution
Date, (ii) on each Distribution Date for specified periods, or (iii) on each
Distribution Date until the balance in the Reserve Fund has reached a
specified amount and, following payments from the Reserve Fund to Holders of
Senior Certificates or otherwise, thereafter to the extent necessary to
restore the balance in the Reserve Fund to required levels, in each case as
specified in such Prospectus Supplement. If specified in the related
Prospectus Supplement, amounts on deposit in the Reserve Fund may be released
to the Depositor or the Holders of any Class of Certificates at the times and
under the circumstances specified in such Prospectus Supplement.
If specified in the related Prospectus Supplement, various Classes of
Senior Certificates and Subordinated Certificates may themselves be
subordinate in their right to receive certain distributions to other Classes
of Senior and Subordinated Certificates, respectively, through a
cross-support mechanism or otherwise.
As between Classes of Senior Certificates and as between Classes of
Subordinated Certificates, distributions may be allocated among such Classes
(i) in the order of their Assumed 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 related
Prospectus Supplement. As between Classes of Subordinated Certificates,
distributions to Holders of Senior Certificates on account of delinquencies
or losses and payments to any Reserve Fund will be allocated as specified in
the related Prospectus Supplement.
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OVERCOLLATERALIZATION
If provided in the related Prospectus Supplement, the aggregate principal
balance of the Mortgage Assets included in the Trust Fund may exceed the
aggregate original principal balance of the Certificates in a Series thereby
creating an "EXCESS SPREAD" on each Distribution Date. If provided in the
related Prospectus Supplement, such Excess Spread may be distributed to
holders of Senior Certificates to produce and maintain a specified level of
overcollateralization. With respect to a Series of Certificates, the
overcollateralization level may be fixed or may increase or decrease over
time, subject to certain floors, caps and triggers, as set forth in the
related Prospectus Supplement and the related Pooling and Servicing Agreement.
CROSS-SUPPORT
If specified in the related Prospectus Supplement, separate Classes of
related Series of Certificates may represent the beneficial ownership of or
be separately secured by, separate groups of Assets included in the Trust
Fund for a Series or otherwise available for the benefit of such
Certificates. In such case, Credit Enhancement may be provided by a
cross-support feature which may require that distributions be made with
respect to Certificates evidencing beneficial ownership of or secured by one
or more asset groups prior to distributions to Subordinated Certificates
evidencing a beneficial ownership interest in or secured by other asset
groups within the same Trust Fund. 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 Trust Funds for a separate Series of Certificates. If applicable,
the Prospectus Supplement will identify the Trust Funds 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
Trust Funds.
CERTIFICATE INSURANCE
If specified in the Prospectus Supplement, one or more Certificate Guaranty
Insurance Policies (each, a "CERTIFICATE GUARANTY POLICY") will be obtained.
Such Certificate Guaranty Policy with respect to a Series will, subject to
limitations described in the related Prospectus Supplement, provide to the
Holders of the insured Certificates of such Series a guarantee of payment of
any interest and/or principal payments due to such Holders on each
Distribution Date. The related Prospectus Supplement will describe the terms
of any Certificate Guaranty Policy and will set forth certain information
with respect to the Certificate Insurer.
POOL INSURANCE
With respect to a Series for which the related Trust Fund includes Mortgage
Loans (and, if specified in the related Prospectus Supplement, a Series for
which the related Trust Fund includes Contracts), in order to decrease the
likelihood that Holders of the Certificates of such Series will experience
losses in respect of such Mortgage Loans, if specified in the related
Prospectus Supplement, one or more mortgage pool insurance policies (each, a
"MORTGAGE POOL INSURANCE POLICY") will be obtained. 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
reported on Form 8-K and for the periods specified in the Prospectus
Supplement. To the extent specified in the related Prospectus Supplement,
the Servicer under the related Pooling and Servicing Agreement will agree to
use its best reasonable efforts to cause to be maintained in effect any such
Mortgage Pool Insurance Policy and to file claims thereunder to the issuer of
such Mortgage Pool Insurance Policy (the "POOL INSURER"). A Mortgage Pool
Insurance Policy, however, is not a blanket policy against loss, since 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. To the extent
specified in the related Prospectus Supplement, the Mortgage Pool Insurance
Policies, if any, will not cover losses 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.
SPECIAL HAZARD INSURANCE
With respect to a Series for which the related Trust Fund includes Mortgage
Loans (and, if specified in the related Prospectus Supplement, each Series
for which the related Trust Fund includes Contracts), in order to decrease
the likelihood
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that Holders of the Certificates of such Series will experience losses in
respect of such Mortgage Loans, if specified in the related Prospectus
Supplement, one or more Special Hazard Insurance Policies (each, a "SPECIAL
HAZARD INSURANCE POLICY") will be obtained. Such Special Hazard Insurance
Policy with respect to a Series will, subject to limitations described below
and in the related Prospectus Supplement, protect Holders of the Certificates
of such Series from (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 the 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.
The related Prospectus Supplement will describe the terms of any applicable
Special Hazard Insurance Policy and will set forth certain information with
respect to the related Special Hazard Insurer.
RESERVE FUNDS
If specified in the Prospectus Supplement with respect to a Series, assets
such as cash, U.S. Treasury securities, instruments evidencing ownership of
principal or interest payments thereon, letters of credit, demand notes,
certificates of deposit or a combination thereof in the aggregate amount
specified in such Prospectus Supplement will be deposited by the related
Transferor or the Depositor in one or more accounts (each, a "RESERVE FUND")
established and maintained with the related Trustee. Such cash and the
payments on such other assets will be used to enhance the likelihood of
timely distribution of principal of, and interest on, or, if specified in
the related Prospectus Supplement, to provide additional protection against
losses in respect of, the Assets in the related Trust Fund, to pay the
expenses of the related Trust Fund or for such other purposes specified in
such Prospectus Supplement. Whether or not the related Transferor or the
Depositor has any obligation to make such a deposit, certain amounts to which
the Holders of the Subordinated Certificates of such Series, if any, the
related Transferor or the Depositor would otherwise be entitled may instead
be deposited into the Reserve Fund from time to time and in the amounts as
specified in the related Prospectus Supplement. Any cash in any Reserve Fund
and the proceeds of any other instrument upon maturity will be invested in
Permitted Investments. If a letter of credit is deposited with the Trustee,
such letter of credit will be irrevocable. To the extent specified in the
Prospectus Supplement with respect to a Series, any instrument deposited
therein will name the related Trustee, in its capacity as trustee for the
Holders of the Certificates of such Series, as beneficiary and will be issued
by an entity acceptable to each rating agency that rates such Certificates.
Additional information with respect to such instruments deposited in the
Reserve Funds may be set forth in the Prospectus Supplement.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If specified in the Prospectus Supplement with respect to a Series, the
related Trust Fund may also include, or the Certificates of such Series may
also have the benefits of, assets such as insurance, guarantees, surety
bonds, letters of credit, guaranteed investment contracts, swap agreements,
option agreements or similar arrangements for the purpose of (i) maintaining
timely payments or providing additional protection against losses on the
Assets included in such Trust Fund, (ii) paying administrative expenses,
(iii) establishing a minimum reinvestment rate on the distributions made in
respect of such Assets, (iv) guaranteeing timely distribution of principal
and interest on the Certificates of such Series, or (v) for such other
purpose as is specified in such Prospectus Supplement. Such arrangements may
include agreements under which Holders of the Certificates of a Series are
entitled to receive amounts deposited in various accounts held by the related
Trustee upon the terms specified in the related Prospectus Supplement. Such
arrangements may be in lieu of any obligation of the Servicers or the
Administrator, if any, to advance delinquent installments in respect of the
Mortgage Loans. SEE "Servicing of Mortgage Loans and Contracts -- Advances".
SERVICING OF THE MORTGAGE LOANS AND CONTRACTS
Except as otherwise noted, the description set forth below of the servicing
of Mortgage Loans is applicable to Mortgage Loans included in the Trust Fund
with respect to a Series of Certificates.
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To the extent provided in the related Prospectus Supplement, with respect
to a Series of Certificates for which the related Trust Fund includes
Mortgage Loans or Contracts, the Mortgage Loans or Contracts included in the
Trust Fund for a Series of Certificates will be serviced either (i) by the
related Servicer as sole servicer, (ii) by the related Master Servicer as
administrator or master servicer, (iii) by one or more loan servicing
institutions as servicers or (iv) by another institution as master servicer.
If an institution other than the Servicer acts as the sole servicer or as the
master servicer for a Series, the Servicer may have no servicing obligations
with respect to such Series. Generally, the discussion in this section of the
Prospectus is applicable under circumstances when the Servicer is an
affiliate of the Depositor. If the Servicer is not an affiliate of the
Depositor, the discussion relating to the servicing of the Mortgage Loans and
Contracts as set forth below may be modified or superseded by any discussion
relating to the servicing of the Mortgage Loans and Contracts set forth in
the Prospectus Supplement.
To the extent specified in the related Prospectus Supplement, the Mortgage
Loans and Contracts will be serviced by one or more loan servicing
institutions, which may include the Servicer or a Subservicer, pursuant to a
subservicing agreement between each Subservicer and the Servicer (each, a
"SUBSERVICING AGREEMENT"), which may be entered into only with the prior
written consent of the Trustee and the Administrator, if any.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
When a Mortgaged Property has been or is about to be conveyed by the
borrower, the Servicer, on behalf of the Trustee, shall, to the extent it has
knowledge of such conveyance or prospective conveyance, enforce the rights of
the Trustee as the mortgagee of record to accelerate the maturity of the
related Mortgage Loan under any "due-on-sale" clause contained in the related
Mortgage or Note; provided, however, that the Servicer shall not exercise any
such right if the "due-on-sale" clause, in the reasonable belief of the
Servicer, is not enforceable under applicable law. In such event or in the
event the related Mortgage and Note do not contain a "due-on-sale" clause,
the Servicer shall 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 Note and, unless
prohibited by applicable law or the mortgage documents, the borrower remains
liable thereon. The Servicer is also authorized to enter into a substitution
of liability agreement with such person, pursuant to which the original
borrower is released from liability and such person is substituted as
borrower and becomes liable under the Note.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
With respect to any defaulted Mortgage Loan as to which no satisfactory
arrangements can be made for collection of delinquent payments or the cure of
any other event of default, the Servicer will take such action as it shall
deem to be in the best interest of the Certificateholders. Without limiting
the generality of the preceding sentence, the Servicer will, in accordance
with the servicing standard described above, (i) in the case of Title I
Mortgage Loans and Title I Contracts only, direct the Trustee (or any
Administrator) to submit an FHA Claim to the FHA, in accordance with FHA
Regulations, or (ii) in the case of Mortgage Loans and Contracts, take such
other action as the Servicer deems to be in the best interests of the
Certificateholders, which if no superior lien exists on the related Mortgaged
Property, could include a foreclosure upon such Mortgaged Property in the
name of the Trustee for the benefit of the Certificateholders, provided such
action was economically justified and would not affect the status of the
REMIC or cause a tax to be imposed upon the REMIC for federal income tax
purposes. Typically, however, the Servicer has chosen not to pursue
foreclosures of defaulted loans comparable to the Mortgage Loans and
Contracts due to the costs involved. In servicing mortgage loans and
contracts secured by junior liens in their portfolios, it will not be the
Servicer's or any Subservicer's practice to satisfy the senior mortgage(s) at
or prior to the foreclosure sale of the Mortgaged Property, or to advance
funds to keep the senior mortgage(s) current. In addition, if a defaulted
mortgage loan or contract (together with any senior lien indebtedness) has a
high loan-to-value ratio, then the Servicer will be less likely to foreclose
on the related mortgaged property, even if the Servicer has a first-lien
position for such mortgage loan or contract. In the event an FHA Claim is
rejected by the FHA due to circumstances that constitute a breach of the
Transferor's representations and warranties in the Pooling and Servicing
Agreement, the Transferor will be required to repurchase the related Title I
Mortgage Loan or Title I Contract at the purchase price and in the manner set
forth in the Pooling and Servicing Agreement.
In connection with any collection activities or foreclosure, the Servicer
is required to exercise collection and foreclosure procedures with the same
degree of care and skill in its exercise or use, as it would exercise or use
under the circumstances in the conduct of its own affairs.
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WAIVERS AND DEFERMENTS OF CERTAIN PAYMENTS
The Pooling and Servicing Agreement requires the Servicer to make
reasonable efforts to collect all payments called for under the terms and
provisions of the Mortgage Loans and the Contracts. Consistent with the
foregoing, the Servicer may at its own discretion waive any late payment
charge, assumption fee or any penalty interest in connection with the payment
of a Mortgage Loan or a Contract or any other fee or charge which the
Servicer would be entitled to retain as servicing compensation and may waive,
vary or modify any term of any Mortgage Loan or Contract or consent to the
postponement of strict compliance with any such term or in any matter grant
indulgence to any borrower, subject to the limitations set forth in the
Pooling and Servicing Agreement and the FHA Regulations, if applicable.
SUBSERVICERS
The Servicer is permitted under the Pooling and Servicing Agreement to
enter into servicing arrangements with subservicers meeting the requirements
of the Pooling and Servicing Agreement, provided that the Trustee gives
written consent thereto. Notwithstanding any subservicing arrangements, the
Servicer shall not be relieved of its obligations under the Pooling and
Servicing Agreement to the Trustee and the Certificateholders, and the
Servicer shall be obligated to the same extent and under the same terms and
conditions as if it alone were servicing and administering the Mortgage Loans
and the Contracts.
REMOVAL AND RESIGNATION OF SERVICER
To the extent specified in the Prospectus Supplement, the Trustee may
remove the Servicer upon the occurrence and continuation beyond the
applicable cure period of certain events described in the related Pooling and
Servicing Agreement. To the extent specified in the Prospectus Supplement,
the Servicer will not be permitted to resign from its obligations and duties
except by mutual consent of the Servicer, the Depositor, the Trustee and any
other persons so specified in the related Pooling and Servicing Agreement, or
upon the determination that the Servicer's duties are no longer permissible
under applicable law and such incapacity cannot be cured by the Servicer. No
such resignation shall become effective until a qualified successor has
assumed the Servicer's responsibilities and obligations. Upon removal or
resignation of the Servicer, a successor servicer will be appointed pursuant
to the terms and conditions set forth in the applicable Pooling and Servicing
Agreement.
ADVANCES
To the extent specified in the Prospectus Supplement, neither the
Servicer, nor any Subservicer on behalf of the Servicer, shall have any
obligation to advance its own funds for any delinquent scheduled payments of
principal and interest on any Mortgage Asset or to satisfy or keep current
the indebtedness secured by any Superior Liens on the related Mortgaged
Property. To the extent specified in the Prospectus Supplement, no costs
incurred by the Servicer or any Subservicer in respect of servicing advances
shall, for the purposes of distributions to Certificateholders, be added to
the amount owing under the related Mortgage Asset.
SERVICING PROCEDURES
To the extent specified in the related Prospectus Supplement, the Servicer
and each Subservicer will service the Mortgage Loans and Contracts pursuant
to written guidelines promulgated by the Depositor or the Servicer. The
Servicer will exercise its best reasonable efforts to insure that the
Subservicers service the Mortgage Loans and Contracts in compliance with such
guidelines and in a manner consistent with industry standards.
MORTGAGE LOANS. To the extent specified in the related Prospectus
Supplement, the Servicer and each Subservicer will be required to service and
administer the Mortgage Loans and will have full power and authority, acting
alone, to do any and all things in connection with such servicing and
administration which the Servicer may deem necessary or desirable and
consistent with the terms of the Pooling and Servicing Agreement. The
Servicer, in servicing and administering the Mortgage Loans, will be required
to employ or cause to be employed procedures (including collection,
foreclosure, liquidation and REO Property management and liquidation
procedures) and exercise the same care that it customarily employs and
exercises in servicing and administering loans of the same type as the
Mortgage Loans for its own account, all in accordance with accepted servicing
practices of prudent lending institutions and servicers of loans of the same
type as the Mortgage Loans and giving due consideration to the
Certificateholders' reliance on the Servicer. With respect to any Title I
Mortgage Loan, the foregoing servicing standard also shall include the
requirement that the Servicer will and
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will cause any Subservicer to, comply with FHA Regulations in servicing the
Title I Mortgage Loans so that the FHA Insurance remains in full force and
effect with respect to the Title I Mortgage Loans, except for good faith
disputes relating to FHA Regulations or such FHA Insurance, unless such
disputes would result in the termination or suspension of such FHA Insurance.
The Servicer will be required to maintain the facilities, procedures and
experienced personnel necessary to comply with such servicing standard and
the duties of the Servicer set forth in the Pooling and Servicing Agreement
relating to the servicing of the Mortgage Loans.
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 of liquidation of the Mortgage
Loan after the reimbursement to the Servicer of its expenses and after the
satisfaction of any Senior liens.
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 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 Code Section requires, among other
things, that at least 80% of the gross income of the corporation be derived
from its tenant-stockholders (as defined in Code Section 216(b)(2). 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 Code 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 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 under Code Section 216(b)(1), the likelihood that such a failure
would be permitted to continue over a period of years appears remote.
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. With respect to a Trust Fund that includes Contracts, pursuant
to the related Pooling and Servicing Agreement, the Servicer will service and
administer the Contracts assigned to the Trustee as more fully set forth
below. The Servicer, either directly or through Subservicers subject to
general supervision by the Servicer, will perform diligently all services and
duties specified in each Pooling and Servicing Agreement, in the same manner
as prudent lending institutions of property improvement and/or manufactured
housing installment sales contracts of the same type as the Contracts in
those jurisdictions where the related borrowers are located. The Servicer
will monitor the performance of each Subservicer, if any, and, unless the
related Prospectus Supplement states otherwise, will remain liable for the
servicing of the Contracts in accordance with the terms of the Pooling and
Servicing Agreement. The duties to be performed by the Servicer or the
Subservicer, if any, will include collection and remittance of principal and
interest payments, collection of insurance claims and, if necessary,
repossession.
ADMINISTRATION AND SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Mortgage Loan and Contract, the Servicer may receive
compensation with respect to each interest payment thereon in an amount
specified in the related Prospectus Supplement. As compensation for its
servicing duties, each Subservicer, if any, will be entitled to a monthly
servicing fee in the amount specified in the related Prospectus Supplement.
In addition to the primary compensation, each Servicer or Subservicer, if
any, will retain all assumption underwriting fees and late payment charges,
to the extent collected from Borrowers if provided in the related
Prospectus Supplement.
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The Servicer and any Subservicer will be entitled to reimbursement for
certain expenses incurred by it in connection with the liquidation of
defaulted Mortgage Loans and Contracts. No loss will be suffered on the
Certificates by reason of such expenses to the extent claims for such
expenses are paid directly under any applicable Mortgage Pool Insurance
Policy, a primary mortgage 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, or another form of Credit Enhancement, or claims are either not
made or not paid under such policies or Credit Enhancement, or if coverage
thereunder has ceased, a loss will occur on the Certificates of the affected
Series to the extent that the proceeds from the liquidation of a defaulted
Mortgage Loan or Contract, after reimbursement of the Servicer's and the
Subservicer's expenses, are less than the principal balance of such defaulted
Mortgage Loan or Contract.
THE POOLING AND SERVICING AGREEMENT
The following summaries describe certain provisions of the Pooling and
Servicing Agreement not described elsewhere in this Prospectus. Where
particular provisions or terms used in the Pooling and Servicing Agreements
are referred to, the actual provisions (including definitions of terms) are
incorporated by reference as a part of such summaries. The description set
forth below is subject to modification in the Prospectus Supplement for a
Series of Certificates to describe the terms and provisions of the particular
Pooling and Servicing Agreement relating to such Series of Certificates.
Generally, the discussion in this section of the Prospectus is applicable
under circumstances when the Servicer is an affiliate of the Depositor. If
the Servicer is not an affiliate of the Depositor, the discussion relating to
pooling and administration (or master servicing) as set forth below may be
modified or superseded by any discussion relating to the pooling and
administration (or master servicing) set forth in the Prospectus Supplement.
In addition, certain of the following summaries only apply to a Pooling and
Servicing Agreement relating to series of Certificates for which the related
Trust Fund includes Mortgage Loans or Contracts. Provisions of Pooling and
Servicing Agreements relating to series of Certificates for which the related
Trust Fund includes other types of Mortgage Assets will be summarized and
described in the related Prospectus Supplement.
ASSIGNMENT OF MORTGAGE ASSETS
ASSIGNMENT OF MORTGAGE LOANS. At the time of issuance of the Certificates
of a Series, the Depositor will assign the Mortgage Loans to the related
Trustee, together with all principal and interest (subject to exclusions or
adjustments specified in the related Prospectus Supplement received by the
Depositor on or with respect to such Mortgage Loans on or after the cut-off
date) other than principal and interest due and payable on or before the date
specified in the related Prospectus Supplement. The Trustee will,
concurrently with such assignment, execute, countersign and deliver the
Certificates to the Depositor in exchange for the Mortgage Loans. Each
Mortgage Loan will be identified in a schedule appearing as an exhibit to the
Pooling and Servicing Agreement.
In addition, as to each Mortgage Loan, the Depositor will deliver to the
Trustee or its custodian, as specified in the related Prospectus Supplement,
the Mortgage Note and Mortgage, any assumption and modification agreement, an
assignment of the Mortgage in recordable form, evidence of title insurance
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, as depositor, will cause to be delivered to the Trustee or its
custodian, as specified in the related Prospectus Supplement, the related
original Cooperative note endorsed to the order of the Trustee, 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 and a financing statement evidencing the
Trustee's security interest in each Cooperative Loan.
To the extent specified in the related Prospectus Supplement, in the
Pooling and Servicing Agreement the Depositor generally will represent and
warrant to the Trustee, among other things, that (i) the information with
respect to each Mortgage Loan set forth in the schedule of Mortgage Loans
attached thereto is true and correct in all material respects; (ii) at the
date of initial issuance of the Certificates, the Depositor has good and
marketable title to the Mortgage Loans included in the Trust Fund and such
other items comprising the corpus of the Trust Fund are free and clear of any
lien, mortgage, pledge, charge, security interest or other encumbrance; (iii)
at the date of initial issuance of the Certificates, no
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<PAGE>
Mortgage Loan is 30 or more days delinquent and there are no delinquent tax
or assessment liens against the property covered by the related Mortgage; and
(iv) each Mortgage Loan at the time it was made complied in all material
respects with applicable state and federal laws, including, without
limitation, consumer, usury, truth-in-lending, consumer credit protection,
equal credit opportunity and disclosure laws and with respect to any Title I
Mortgage Loans, the FHA Regulations.
In the event that the Depositor has acquired the Mortgage Loans for a
Series, if specified in the related Prospectus Supplement, the Depositor
may, in lieu of making the representations set forth in the preceding
paragraph, cause the entity from which such Mortgage Loans were acquired to
make such representations (other than those regarding the Depositor's title
to the Mortgage Loans, which will in all events be made by the Depositor), in
the sales agreement pursuant to which such Mortgage Loans are acquired, or if
such entity is acting as Servicer, in the Pooling and Servicing Agreement, or
if such entity is acting as a Subservicer, in its Subservicing Agreement. In
such event such representations, and the Depositor's rights against such
entity in the event of a breach thereof, will be assigned to the Trustee for
the benefit of the holders of the Certificates of such Series.
ASSIGNMENT OF CONTRACTS. The Depositor will cause the Contracts to be
assigned to the Trustee, together with principal and interest due on or with
respect to the Contracts after the date specified in the related Prospectus
Supplement. Each Contract will be identified in a loan schedule ("CONTRACT
LOAN SCHEDULE") appearing as an exhibit to the related Pooling and Servicing
Agreement.
In addition, with respect to each Contract for a Manufactured Home, the
Depositor will deliver or cause to be delivered to the Trustee, the original
Contract and copies of documents and instruments related to each Contract and
the security interest in the Manufactured Home securing each Contract. To
give notice of the right, title and interest of the Certificateholders to the
Contracts, the Depositor will cause a UCC-1 financing statement to be filed
identifying the Trustee as the secured party and identifying all Contracts as
collateral. To the extent specified in the related Prospectus Supplement,
the Contracts will not be stamped or otherwise marked to reflect their
assignment from the Depositor to the Trustee. Therefore, if a subsequent
purchaser were able to take physical possession of the Contracts without
notice of such assignment, the interest of the Holders of the Certificates of
the applicable Series in the Contracts could be defeated. SEE "Certain Legal
Aspects of the Mortgage Assets."
To the extent specified in the Prospectus Supplement, the Depositor will
provide limited representations and warranties to the Trustee concerning the
Contracts. Such representations and warranties will include: (i) that the
information with respect to each Contract set forth 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 and marketable
title to, and was sole owner of, each such Contract; and (iii) that there has
been no other sale by it of such Contract.
ASSIGNMENT OF AGENCY SECURITIES. With respect to each Series, to the
extent specified in the related Prospectus Supplement, the Depositor will
cause any Agency Securities included in the related Trust Fund to be
registered in the name of the Trustee. The Trustee (or its custodian as
specified in the related Prospectus Supplement) will have possession of any
certificated Agency Securities. To the extent specified in the related
Prospectus Supplement, the Trustee will not be in possession of or be
assignee of record of any underlying assets for an Agency Security. Each
Agency Security will be identified in a schedule appearing as an exhibit to
the related Pooling and Servicing Agreement. The Depositor will represent and
warrant to the Trustee, among other things, the information contained in such
schedule is true and correct and that immediately prior to the transfer of
the related securities to the Trustee, the Depositor had good and marketable
title to, and was the sole owner of, each such security.
CONVEYANCE OF SUBSEQUENT MORTGAGE ASSETS
With respect to a Series of Certificates for which a Pre-Funding
Arrangement is provided, in connection with any conveyance of Subsequent
Mortgage Assets to the related Trust Fund after the issuance of such Series,
the related Pooling and Servicing Agreement will require the Transferor and
Depositor to satisfy the following conditions, among others: (i) each
Subsequent Mortgage Asset purchased after the Closing Date must satisfy the
representations and warranties contained in the subsequent transfer agreement
to be entered into by the Transferor, the Trustee and the Depositor (the
"SUBSEQUENT TRANSFER AGREEMENT") and in the related Pooling and Servicing
Agreement; (ii) the Transferor will not select such Subsequent Mortgage
Assets in a manner that it believes is adverse to the interests of the
Certificateholders; (iii) as of the related cut-off date, all of the Mortgage
Assets in the Mortgage Asset Pool at that time, including the Subsequent
Mortgage Assets purchased after the closing date will satisfy the criteria
set forth in the related Pooling and Servicing Agreement; (iv) the Subsequent
Mortgage Assets will have been approved by any third party provider of Credit
Enhancement, if applicable; and (v) prior to the purchase of each Subsequent
Mortgage Asset the Trustee will perform an initial review of certain related
loan file documentation for such Mortgage Asset and issue an initial
certification for which the required documentation in such loan file has been
received with respect to each such Subsequent Mortgage Asset. The Subsequent
Mortgage Assets on an aggregate basis, will have characteristics similar to
the characteristics of the pool of Initial Mortgage Assets as described in
the related Prospectus Supplement. Each acquisition of any Subsequent
Mortgage Asset will be subject to the review by any third party provider of
Credit Enhancement, if applicable, the Rating Agencies and the Transferor's
accountants of the aggregate statistical characteristics of the related
Mortgage Asset Pool for compliance with the applicable statistical criteria
set forth in the related Pooling and Servicing Agreement.
REPURCHASE OR SUBSTITUTION OF MORTGAGE LOANS AND CONTRACTS
The Trustee (or its custodian as specified in the related Prospectus
Supplement) will review the documents delivered to it with respect to the
Mortgage Loans and Contracts included in the related Trust Fund. To the
extent specified in the related Prospectus Supplement, if any document is not
delivered or is found to be defective in any material respect and the
Depositor cannot deliver such document or cure such defect within 60 days
after notice thereof (which the Trustee will undertake to give within 45 days
of the delivery of such documents), and if any other party obligated to
deliver such document or cure such defect has not done so and has not
substituted or repurchased the affected Mortgage Loan or Contract, then the
Depositor will, not later than the Determination Date next succeeding the end
of such 60-day period (a) if provided in the Prospectus Supplement remove
the affected Mortgage Loan or Contract from the Trust Fund and substitute one
or more
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<PAGE>
other Mortgage Loans or Contracts therefor or (b) repurchase the Mortgage
Loan or Contract from the Trustee for a price equal to 100% of its principal
balance plus interest thereon as the date specified in the related Prospectus
Supplement, plus the amount of unreimbursed servicing advances made by the
Servicer or any Subservicer with respect to such Mortgage Loan. To the
extent specified in the related Prospectus Supplement, such purchase price
will be deposited in the Collection Account on such Determination Date and
such repurchase and, if applicable, substitution obligation will constitute
the sole remedy available to Holders of the Certificates of the applicable
Series or the Trustee against the Depositor for a material defect in a
document relating to a Mortgage Loan or Contract.
If the Prospectus Supplement for a Series of Certificates so provides, then
in lieu of agreeing to repurchase or substitute Mortgage Loans or Contracts
as described above, the Depositor may obtain such an agreement from the
entity which sold such Mortgage Loans or Contracts to the Depositor, which
agreement will be assigned to the Trustee for the benefit of the holders of
the Certificates of such series.
If a REMIC election is to be made with respect to all or a portion of a
Trust Fund, there may be federal income tax limitations on the right to
substitute Mortgage Loans or Contracts as described above.
EVIDENCE AS TO COMPLIANCE
The related Pooling and Servicing Agreement will provide that on or before
a specified date after the end of each of the Servicer's fiscal years
elapsing during the term of its appointment, beginning with the first fiscal
year ending after the Closing Date, the Servicer, at its expense, will
furnish to the Trustee and certain other Persons (i) an opinion by a firm of
independent certified public accountants on the financial position of the
Servicer at the end of the relevant fiscal year and the results of operations
and changes in financial position of the Servicer for such year then ended on
the basis of an examination conducted in accordance with generally accepted
auditing standards, and (ii) if the Servicer is then servicing any Mortgage
Loans, a statement from such independent certified public accountants to the
effect that based on an examination of certain specified documents and
records relating to the servicing of the Servicer's mortgage loan portfolio
conducted substantially in compliance with the audit program for mortgages
serviced for the United States Department of Housing and Urban Development
Mortgage Audit Standards, or the Uniform Single Audit Program for Mortgage
Bankers (the "APPLICABLE ACCOUNTING STANDARDS"), such firm is of the opinion
that such servicing has been conducted in compliance with the Applicable
Accounting Standards except for (a) such exceptions as such firm shall
believe to be immaterial and (b) such other exceptions as shall be set forth
in such statement.
LIST OF CERTIFICATEHOLDERS
[Upon written request of the Trustee, the Registrar for a Series of
Certificates will provide to the Trustee, within fifteen days after receipt
of such request, a list of the names and addresses of all Holders of record
of such Series as of the most recent Record Date for payment of distributions
to Holders of that Series. Upon written request of three or more Holders of
record of a Series of Certificates for purposes of communicating with other
Holders with respect to their rights under the Pooling and Servicing
Agreement for such Series, the Trustee will afford such Holders access during
business hours to the most recent list of Holders of that Series held by the
Trustee. With respect to Book Entry Certificates, the only named Holder on
the Certificate Register will be the Clearing Agency.]
The Pooling and Servicing Agreement will not provide for the holding of any
annual or other meetings of Holders of Certificates.
ADMINISTRATION OF THE CERTIFICATE ACCOUNT
The Pooling and Servicing Agreement with respect to a Series will require
that the Certificate Account be any of the following: (i) an account
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
long-term or short-term rating acceptable to each rating agency that rated
the Certificates; (ii) an account or accounts the deposits in which are fully
insured by either the Bank Insurance Fund (the "BIF"), the Federal Deposit
Insurance Corporation (the "FDIC") or the Savings Association Insurance Fund
(as successor to the Federal Savings and Loan Insurance Corporation) ("SAIF")
of the FDIC; (iii) a trust account (which shall be a "segregated trust
account") maintained with the corporate trust department of a federal or
state chartered depository institution or trust company with trust powers and
acting in its fiduciary capacity for the benefit of the Trustee which
depository institution or trust company will be required
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<PAGE>
to have capital and surplus of not less than the amount specified in the
related Pooling and Servicing Agreement; or (v) an account that will not
cause any rating agency rating the Certificates of such Series to downgrade
or withdraw its then-current rating assigned to the Certificates as evidenced
in writing by such rating agency. The instruments in which amounts in the
Certificate Account may be invested are limited to Permitted Investments. To
the extent specified in the related Prospectus Supplement, a Certificate
Account may be maintained as an interest bearing account, or the funds held
therein may be invested pending each succeeding Distribution Date in
Permitted Investments. To the extent specified in the related Prospectus
Supplement, the Depositor or the Trustee will be entitled to receive any such
interest or other income earned on funds in the Certificate Account as
additional compensation. To the extent specified in the related Prospectus
Supplement, the following payments and collections received subsequent to the
cut-off date will be deposited in the Certificate Account:
(i) all payments on account of scheduled principal;
(ii) all payments on account of interest accruing and collected on and
after the date specified in the related Prospectus Supplement, subject to
exclusions or adjustments described in such Prospectus Supplement;
(iii) all Liquidation Proceeds net of certain amounts reimbursed to the
Subservicers or the Servicer, as described in the related Pooling and
Servicing Agreement;
(iv) all Insurance Proceeds;
(v) all proceeds of any Mortgage Loan or Contract or property
acquired in respect thereof repurchased by the Servicer, the Depositor or the
Transferor or otherwise as described above or under "Termination" below;
(vi) all amounts, if any, required to be transferred to the
Certificate Account from any Credit Enhancement for the related Series; and
(vii) all other amounts required to be deposited in the Certificate
Account pursuant to the related Pooling and Servicing Agreement.
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution on the Certificates of a Series, to
the extent specified in the related Prospectus Supplement, the Trustee will
furnish to Holders of such Certificates a statement generally setting forth,
to the extent applicable to such Series, among other things:
(i) the aggregate amount of such distribution allocable to principal,
separately identifying the amount allocable to each Class;
(ii) the amount of such distribution allocable to interest, separately
identifying the amount allocable to each Class;
(iii) the aggregate principal balance of each Class of the Certificates
after giving effect to distributions on such Distribution Date;
(iv) if applicable, the aggregate principal balance of any Class
Certificates which are Compound Interest Certificates after giving effect to
any increase in such principal balance that results from the accrual of
interest that is not yet distributable thereon;
(v) if applicable, the amount otherwise distributable to Holders of
any Class of Certificates that was distributed to Holders of other Classes of
Certificates;
(vi) if any Class of Certificates has priority in the right to receive
Principal Prepayments, the amount of Principal Prepayments in respect of the
related Mortgage Assets;
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<PAGE>
(vii) certain performance information, including delinquency and
foreclosure information specified in the related Pooling and Servicing
Agreement;
(viii) the amount of coverage then remaining under any Credit
Enhancement; and
(ix) all other information required to be provided pursuant to the
related Pooling and Servicing Agreement.
The Servicer or the Trustee will also furnish annually customary
information deemed necessary for Holders of such Certificates to prepare
their tax returns.
EVENTS OF DEFAULT
"Events of Default" under the Pooling and Servicing Agreement with respect
to a Series will consist of (i) any failure by the Servicer to duly observe
or perform in any material respect any of its covenants or agreements in such
Pooling and Servicing Agreement materially affecting the rights of Holders of
the Certificates of such Series which continues unremedied for 60 days after
the giving of written notice of such failure to the Servicer by the Trustee
or to the Servicer or the Trustee by the Holders of such Certificates
evidencing interests aggregating not less than 25% of the affected Class of
Certificates; and (ii) certain events of insolvency, readjustment of debt,
marshaling of assets and liabilities or similar proceedings and certain
actions by the Servicer indicating its insolvency, reorganization or
inability to pay its obligations.
RIGHTS UPON EVENT OF DEFAULT
As long as an Event of Default under a Pooling and Servicing Agreement
remains unremedied by the Servicer, the Trustee, or Holders of Certificates
of each Class of Certificates affected thereby evidencing, as to each such
Class interests aggregating not less than 51%, may terminate all of the
rights and obligations of the Servicer under the Pooling and Servicing
Agreement, whereupon the Trustee, or a new Servicer appointed pursuant to the
Pooling and Servicing Agreement, will succeed to all the responsibilities,
duties and liabilities of the Servicer under the Pooling and Servicing
Agreement and will be entitled to similar compensation arrangements.
Notwithstanding its termination as Servicer, the Servicer will be entitled to
receive amounts earned by it under the Pooling and Servicing Agreement prior
to such termination. If at the time of any such termination the Servicer is
also servicing as the Administrator, the Servicer's status as Administrator
will be simultaneously terminated by the Trustee and the Servicer's
responsibilities as such shall be transferred to the successor servicer, if
such person is then qualified to so act), or to another successor
Administrator retained by the Trustee, or to the Trustee itself if a
successor Administrator cannot be retained in a timely manner. To the
extent provided in the related Prospectus Supplement, unless and until a
successor servicer is appointed, the Trustee will be required to fulfill the
duties of the Servicer.
No Holder of Certificates will have any right under the Pooling and
Servicing Agreement to institute any proceeding with respect to the Pooling
and Servicing Agreement, unless such Holder previously has given to the
Trustee written notice of default and unless the Holders of Certificates as
specified in the Prospectus Supplement have made written request to the
Trustee to institute such proceeding in its own name as Trustee thereunder
and have offered to the Trustee reasonable indemnity and the Trustee for 60
days has neglected or refused to institute any such proceedings. However, the
Trustee is under no obligation to exercise any of the trusts or powers vested
in it by the Pooling and Servicing 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 Holders, unless such Holders have offered to the Trustee reasonable
security or indemnity against the costs, expenses and liabilities which may
be incurred therein or thereby.
AMENDMENT
The Pooling and Servicing Agreement with respect to a Series may be amended
by the Depositor, the Servicer and the Trustee without the consent of the
Holder of the Certificates of such Series, to cure any error or ambiguity, to
correct or supplement any provision therein which may be defective or
inconsistent with any other provision therein or to add any other provisions
with respect to matters or questions arising under the Pooling and Servicing
Agreement provided that such action will not adversely affect in any material
respect the interests of any Holders of that Series. An amendment described
above shall not be deemed to adversely affect in any material respect the
interests of the Holders of that Series if either (a) an opinion of counsel
satisfactory to the Trustee is obtained to such effect, or (b) the person
requesting the amendment obtains a letter from each of the rating agencies
then rating the Certificates of that Series to the effect that the amendment,
if made,
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would not result in a downgrading or withdrawal of the rating then assigned
by it to such Certificates. Notwithstanding the foregoing, the Depositor, the
Servicer and the Trustee may amend each Pooling and Servicing Agreement
without the consent of the Holders of the Certificates of the relevant Series
in order to modify, eliminate or add to any of its provisions to such extent
as may be appropriate or necessary to maintain REMIC status of all or any
portion of any Trust Fund as to which a REMIC election has been made with
respect to the applicable Certificates or to avoid or minimize the risk of
the imposition of any tax on the Trust Fund created by such Pooling and
Servicing Agreement that would be a claim against the Trustee at any time
prior to final redemption of the Certificates, provided that the Trustee has
obtained the opinion of independent counsel to the effect that such action is
necessary or appropriate to maintain REMIC status or to avoid or minimize the
risk of the imposition of such a tax.
To the extent specified in the Prospectus Supplement, the Pooling and
Servicing Agreement may also be amended by the Depositor, the Servicer, and
the Trustee with the consent of the Holders of Certificates evidencing
interests aggregating in excess of 50% of the aggregate principal balance of
the Certificates of the applicable Series for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions
of such Pooling and Servicing Agreement or of modifying in any manner the
rights of Holders of Certificates of that Series; provided, however, that no
such amendment may (i) reduce in any manner the amount of, or delay the
timing of, collections of payments received on the related Mortgage Assets or
distributions which are required to be made on any Certificate without the
consent of the Holder of such Certificate, (ii) adversely affect in any
material respect the interests of the Holders of any Class of Certificates in
any manner other than as described in clause (i), without the consent of the
Holders of Certificates of 100% of such Class or (iii) reduce the aforesaid
percentage of Certificates of any Class required to consent to any such
amendment, without the consent of the Holders of 100% of the Certificates of
such Class then outstanding.
USE OF PROCEEDS
To the extent specified in an applicable Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of each
Series of Certificates will be applied to the simultaneous purchase of the
Mortgage Assets related to such Series or to reimburse the amounts previously
used to effect such a purchase, the costs of carrying such Mortgage Assets
until sale of the Certificates and other expenses connected with pooling the
Mortgage Assets and issuing the Certificates.
THE DEPOSITOR
FIRSTPLUS INVESTMENT CORPORATION (the "DEPOSITOR"), a Nevada corporation,
was incorporated in 1995 as a limited purpose finance corporation. All of the
outstanding capital stock of the Depositor is owned by RAC Financial Group,
Inc., the common stock of which is traded in the over-the-counter market on
the Nasdaq National Market. The Depositor maintains its principal office at
1250 Mockingbird Lane, Dallas, Texas 75247-4902, and its telephone number is
(214) 630-6006.
As a limited purpose finance corporation under the Rating Agency
guidelines, the business operations of the Depositor will be limited to
functions relating to the issuance of one or more Series of Certificates or
similar series of asset-backed or mortgage-backed securities, the acquisition
and resale of Mortgage Assets and other incidental activities related
thereto. The Depositor does not have, and is not expected in the future to
have, any significant assets. If the Depositor were required to repurchase a
Mortgage Asset included in the Trust Fund for a Series, its only sources of
funds to make such repurchase would be funds obtained from the enforcement of
a corresponding obligation, if any, on the part of the Transferor of such
Mortgage Asset or the related Servicer, as the case may be, or from a Reserve
Fund, if any, established to provide funds for such repurchases.
Neither the Depositor nor any of its affiliates will insure or guarantee
the Certificates of any Series or the Mortgage Assets backing any such
Series. SEE "Risk Factors -- Limited Assets of Trust Fund."
THE SERVICER AND THE TRANSFEROR
To the extent specified in the related Prospectus Supplement, the Servicer
with respect to any series of Certificates evidencing interests in Mortgage
Loans or Contracts may be FIRSTPLUS FINANCIAL, INC. ("FFI"), an affiliate of
the Depositor. In addition, to the extent specified in the related
Prospectus Supplement for a Series, the related Transferor of the Mortgage
Assets to the Depositor for such Series may also be FFI or an affiliate of
the Depositor. SEE "Assets Securing or Underlying the Certificates --
General" herein.
The delinquency and loss experience of FFI for the periods indicated is set
forth below. In the event that FFI is not the Servicer with respect to a
Series, or if an entity other than FFI acts as Servicer with respect to a
Series, the delinquency experience of such Servicer will be set forth in the
related Prospectus Supplement.
DELINQUENCY EXPERIENCE
----------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------
1994 1995 1996
------- ----------------------------------------- ----
DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31
------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
DELINQUENCY DATA:
Delinquencies in Serviced Loan
Portfolio (at period end) (1):
31-60 days.................... 3.7% 2.3% 1.7% 1.8%
61-90 days.................... 1.4 1.0 0.7 0.7
91 days and over.............. 3.2 3.3 1.9 2.2
------- ------- -------- -------- ------- -------
Total...................... 8.3% 6.6% 4.3% 4.7% 4.1% 4.2%
------- ------- -------- -------- ------- -------
------- ------- -------- -------- ------- -------
Serviced Loan Portfolio (at
period end) $60,850 $70,410 $177,358 $238,584
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
LOSS AND DEFAULT DATA:
Net Losses as a percentage of the average
Serviced Loan Portfolio (2)............... 0.39% 0.44% 0.04%
Defaults as a percentage of the average
Serviced Loan Portfolio (2)............... 2.04% 2.64% 0.69%
</TABLE>
(1) Delinquencies (as a percentage of the total serviced loan portfolio
balance) typically increase in November and December of each calendar year.
(2) The average serviced loan portfolio is calculated by adding the beginning
and ending balances for the fiscal year and dividing the sum by two.
While the preceding tables generally indicate that FFI is experiencing
declining delinquency, loss and default rates on its serviced loan portfolio
as a whole, such rates have been increasing on a pool-by-pool basis. Although
such increases to date have been within the parameters anticipated by FFI at
the time of the issuance of each Series of Certificates, there can be no
assurance that such rates will not continue to increase. Mortgage
Assets that will be conveyed to the depositor in connection with the issuance
of a Series of Certificates will generally possess reduced delinquency,
default and loss rates due to certain requirements of the Underwriters
and Rating Agencies for such Series. The overall decline in the delinquency
rates on the serviced loan portfolio is principally due to the increased
volume of loans originated by FFI. FFI calculates its delinquency and default
rates by dividing the amount of delinquent or defaulted loans in the
serviced loan portfolio by the total serviced loan portfolio. Since FFI and its
affiliates are originating higher volumes of new loans that, due to their lack
of seasoning, tend to have lower delinquency and default rates, FFI's overall
delinquency and default rates have decreased.
Because delinquencies and losses typically occur months or years after a
loan is originated, data relating to delinquencies and losses as a percentage
of the current portfolio can understate the risk of furture delinquencies,
losses or foreclosures. There is no assurance that the delinquency,
foreclosure and loss experience with respect to any of the Mortgage Assets or
with respect to any Mortgage Asset Pool will be comparable to the experience
reflected above for assets originated and serviced by FFI or its affiliates.
Because certain Mortgage Assets may have been underwritten pursuant to
standards that rely primarily on the value of the related Mortgaged
Properties rather than the creditworthiness of the related mortgagor, the
actual rates of delinquences, foreclosures and losses on such Mortgage Assets,
particularly in periods during which the value of the related Mortgage
Properties has declined, could be higher than those historically experienced
by the mortgage lending industry in general. In addition, the rate of
delinquencies, foreclosures and losses with respect to the Mortgage Assets will
also be affected by, among other things, interest rate fluctuations and
general and regional economic conditions. SEE "Risk Factors -- Certain
Factors Affecting Delinquencies, Foreclosures and Losses on Underlying
Loans".
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THE TRUSTEE
Any commercial bank or trust company serving as Trustee may have normal
banking relationships with the Depositor or the Servicer. In addition, the
Trustee will have the power and the responsibility for appointing co-trustees
or separate trustees of all or any part of the Trust Fund relating to a
particular Series of Certificates. In the event of such appointment, all
rights, powers, duties and obligations conferred or imposed upon the Trustee
by the Pooling and Servicing 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 applicable Pooling and Servicing Agreement, the related Certificates,
or of any Mortgage Loan, Agency Security, Contract or related document, and
will not be accountable for the use or application by the Depositor or an
Transferor of any funds paid to the Depositor or such Transferor in respect
of the Certificates or the related Assets, or amounts deposited in the
related Certificate Account or deposited into any other account for purposes
of making payments or distributions to Holders. If no Event of Default has
occurred, the Trustee will be required to perform only those duties
specifically required of it under the applicable Pooling and Servicing
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 applicable Pooling and Servicing Agreement.
The Trustee may resign at any time and the Depositor or the Servicer, as
applicable, may remove the Trustee if the Trustee ceases to be eligible to
continue as such under the applicable Pooling and Servicing Agreement, if the
Trustee becomes insolvent or in such other instances, if any, as are set
forth in the applicable Pooling and Servicing Agreement. Following any
resignation or removal of the Trustee, the Depositor or Servicer, as
applicable, will be obligated to appoint a successor Trustee. Any
resignation or removal of the Trustee and appointment of a successor Trustee
does not become effective until acceptance of the appointment by the
successor Trustee.
At any time, for the purpose of meeting any legal requirements of any
jurisdiction in which any part of the Trust Fund or property securing the
same may at the time be located, the Depositor and the Trustee acting jointly
shall have the power and shall execute and deliver all instruments to appoint
one or more Persons approved by the Trustee to act as co-trustee or
co-trustees, jointly with the Trustee, or separate trustee or separate
trustees, of all or any part of the Trust Fund, and to vest in such Person or
Persons, in such capacity, such title to the Trust Fund, or any part thereof,
and, subject to the provisions of the Pooling and Servicing Agreement, such
powers, duties, obligations, rights and trusts as the Depositor and the
Trustee may consider necessary or desirable.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS
The following discussion contains summaries of certain legal aspects of
residential mortgage loans which are general in nature. Because such legal
aspects are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect
the laws of any particular state, nor to encompass the laws of all states in
which the security for the Mortgage Loans is situated. The summaries are
qualified in their entirety by reference to the applicable federal and state
laws governing the Mortgage Loans.
In addition, the following discussion also contains a summary of the Title
I Program, which may be applicable to certain of the Mortgage Loans and
Contracts. With respect to each Series for which the related Trust Fund
includes Contracts, the related Prospectus Supplement will contain a
discussion of certain legal aspects of manufactured housing contracts.
GENERAL LEGAL CONSIDERATIONS
Applicable state laws generally regulate interest rates and other charges
that may be assessed on borrowers, require certain disclosures to borrowers,
and may require licensing of the Transferor, the Depositor, the Trustee, the
Administrator, the Servicer and any Subservicer. In addition, most states
have other laws, public policies and general principles of equity relating to
the protection of consumers and the prevention of unfair and deceptive
practices which may apply to the origination, servicing and collection of the
Mortgage Loans.
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The Mortgage Loans are also subject to federal laws, including: (i) the
federal Truth-in-Lending Act and Regulation Z promulgated thereunder, which
require certain disclosures to the borrowers regarding the terms of the
Mortgage Loans; (ii) the Real Estate Settlement Procedures Act and Regulation
X promulgated thereunder, which require certain disclosures to the borrowers
regarding the settlement and servicing of the Mortgage Loans; (iii) the Equal
Credit Opportunity Act and Regulation B promulgated thereunder, which
prohibit discrimination on the basis of age, race, color, sex, religion,
marital status, national origin, receipt of public assistance or the exercise
of any right under the Consumer Credit Protection Act; (iv) the Fair Credit
Reporting Act, which regulates the use and reporting of information related
to the borrower's credit experience; (v) the Federal Trade Commission
Preservation of Consumers' Claims and Defenses Rule, 16 C.F.R. Part 433,
regarding the preservation of a consumer's rights; (vi) the Fair Housing Act,
42 U.S.C. 3601 ET SEQ., relating to the creation and governance of the Title
I Program; (vii) the Home Ownership and Equity Protection Act; and (viii) if
applied, the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the
"RELIEF ACT").
MORTGAGES. The Mortgage Loans will be secured by either deeds of trust,
mortgages, deeds to secure debt or chattel mortgages, depending upon the
prevailing practice in the state in which the Mortgaged Property subject to a
Mortgage Loan is located. In some states, a mortgage creates a lien upon the
real property encumbered by the mortgage. In other states, the mortgage
conveys legal title to the property to the mortgagee subject to a condition
subsequent, i.e., the payment of the indebtedness secured thereby. There are
two parties to a mortgage, the borrower, who is the owner of the property
and usually the borrower, and the mortgagee, who is the lender. Under the
mortgage instrument, the borrower 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 has three parties, the owner of the property and usually the
borrower, called the trustor (similar to a borrower), a lender called the
beneficiary (similar to a mortgagee), 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, 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 applicable state law, the express provisions of the deed of trust
or mortgage, and, in some cases, with respect to deeds of trust, the
directions of the beneficiary. Some states use a security deed or deed to
secure debt which is similar to a deed of trust except that it has only two
parties: a grantor (similar to a borrower) and a grantee (similar to a
mortgagee). Mortgages, deeds of trust and deeds to secure debt generally are
not prior to liens for real estate taxes and assessments and other charges
imposed under governmental police powers. Priority with respect to
mortgages, deeds of trust and deeds to secure debt and other encumbrances
depends on their terms, the knowledge of the parties to such instrument and
generally on the order of recordation of the mortgage, deed of trust or the
deed to secure debt in the appropriate recording office.
COOPERATIVE LOANS. 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 borrower, 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 pool of Mortgage Loans 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
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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.
FORECLOSURE
MORTGAGES. Foreclosure of a mortgage is generally accomplished by judicial
action. Generally, the action is initiated by the service of legal pleadings
upon all parties having an interest of record 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 contested 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 a
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.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage. Foreclosure is
regulated by statutes and rules and is subject to the court's equitable
powers. Generally, a borrower is bound by the terms of the mortgage note
and the mortgage as made and cannot be relieved from his default if the
mortgagee has exercised his rights in a commercially reasonable manner.
However, since a foreclosure action historically was equitable in nature the
court may exercise equitable powers to relieve a borrower of a default and
deny the mortgagee foreclosure on proof that either the borrower's default
was neither willful nor in bad faith or the mortgagee's action established a
waiver, fraud, bad faith or oppressive or unconscionable conduct such as to
warrant a court of equity to refuse affirmative relief to the mortgagee.
Under certain circumstances a court of equity may relieve the borrower from
an entirely technical default where such default was not willful.
A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses or counterclaims are interposed, sometimes requiring up
to several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of
the parties' intent, if a court determines that the sale was for less than
reasonably equivalent value and such sale occurred while the borrower was
insolvent and within one year (or within the state statute of limitations if
the trustee in bankruptcy elects to proceed under state fraudulent conveyance
law) of the filing of bankruptcy. Similarly, a suit against the debtor on the
mortgage note may take several years and, generally, is a remedy alternative
to foreclosure, the mortgagee being precluded from pursuing both at the same
time.
In some states, mortgages may also be foreclosed by advertisement pursuant
to a power of sale provided in the mortgage. Foreclosure of a mortgage by
advertisement is essentially similar to foreclosure of a deed of trust by
nonjudicial power of sale.
Foreclosure of a deed of trust or a deed to secure debt is generally
accomplished by a non-judicial trustee's sale under a specific provision in
the deed of trust or deed to secure debt which authorizes the trustee to sell
the property upon default by the borrower under the terms of the note, deed
of trust or deed to secure debt. In some states, prior to such sale, the
trustee must record a notice of default and send a copy to the
borrower-trustor and to any person who has recorded a request for a copy of a
notice of default and notice of sale. In addition, in some states, prior to
such sale, the trustee must provide notice to any other individual having an
interest of record in the real property, including any junior lienholders.
In some states, 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 obligations, including attorney's and trustee's fees to the
extent allowed by applicable law. Certain states may require notices of sale
to be published periodically for a prescribed period in a specified manner
prior to the date of the trustee's sale. 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. In certain states,
foreclosure under a deed of trust may also be accomplished by judicial action
in the manner provided for foreclosure of mortgages.
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 generally a
public sale. Because of the difficulty a potential buyer at the sale might
have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
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proceedings, a third party may be unwilling to purchase the property at a
foreclosure sale. For these and other reasons, it is common for the lender
to purchase the property from the trustee, referee or other court officer for
an amount equal to the principal amount of the indebtedness secured by the
mortgage or deed of trust, plus accrued and unpaid interest and the expenses
of foreclosure. Generally, state law controls the amount of foreclosure
costs and expenses, including attorneys' and trustee's fees, which may be
recovered by a lender. In some states there is a statutory minimum purchase
price which the lender may offer for the property. Thereafter, subject to
the right of the borrower in some states to remain in possession during the
redemption period, the lender will assume ownership of the mortgaged property
and, therefore, the burdens of ownership, including the obligation to pay
taxes, obtain casualty insurance and to make 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 mitigated by
the receipt of any mortgage insurance proceeds.
A second mortgagee may not foreclose on the property securing a second
mortgage unless it forecloses subject to the first mortgage and any other
prior liens, in which case it must either pay the entire amount due on the
first mortgage and such other liens, prior to or at the time of the
foreclosure sale or undertake the obligation to make payments on the first
mortgage and such liens, in either event adding the amounts expended to the
balance due on the second loan, and may be subrogated to the rights of the
first mortgagee. In addition, in the event that the foreclosure of a second
mortgage triggers the enforcement of a "due-on-sale" clause, the second
mortgagee may be required to pay the full amount of the first mortgage to the
first mortgagee. Accordingly, with respect to those Mortgage Loans which are
second mortgage loans, if the lender purchases the property, the lender's
title will be subject to all senior liens and claims and certain governmental
liens.
The proceeds received by the referee or trustee from the sale are applied
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. Any remaining proceeds are generally payable to the holders
of junior mortgages or deeds of trust and other liens and claims in order of
their priority, whether or not the borrower is in default. Any additional
proceeds are generally payable to the borrower or trustor. The payment of
the proceeds to the holders of junior mortgages may occur in the foreclosure
action of the senior mortgagee; however, a junior lienholder whose rights in
the property are terminated pursuant to foreclosure by a senior lienholder
will not share in the proceeds from the subsequent disposition of the
property. Junior lienholders may also institute legal proceedings separate
from the foreclosure proceedings of the senior lienholders.
With respect to any Series for which a REMIC election is made, the REMIC
provisions of the Code and the Pooling and Servicing Agreement may require
the Servicer to hire an independent contractor to operate any REO Property.
The costs of such operation may be significantly greater than the cost of
direct operation by the Servicer.
Some states impose prohibitions or limitations on remedies available to the
mortgagee, including the right to recover the debt from the borrower. SEE
"Certain Legal Aspects of the Mortgage Loans--Anti-Deficiency Legislation and
Other Limitations on Lenders".
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 a borrower 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
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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. Certain of the Mortgage Loans, including the Title I
Mortgage Loans, may be secured by junior lien mortgages or deeds of trust.
Second mortgages or deeds of trust are generally junior to first mortgages or
deeds of trust held by other lenders, and third mortgages or deeds of trust
are generally junior to first and second mortgages or deeds of trust held by
other lenders, and so forth. The rights of the Certificateholders as the
holders of a junior deed of trust or a junior mortgage, are subordinate in
lien and in payment to those of the holder of the senior mortgage or deed of
trust, including the prior rights of the senior mortgagee or beneficiary to
receive and apply hazard insurance and condemnation proceeds and, upon
default of the borrower, to cause a foreclosure on the property. Upon
completion of the foreclosure proceedings by the holder of the senior
mortgage, the junior mortgagee's or junior beneficiary's lien will be
extinguished unless the junior mortgagee satisfies the defaulted senior loan
or asserts its subordinate interest in a property in foreclosure proceedings.
A junior mortgagee or beneficiary in some states may satisfy a defaulted
senior lien 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
mortgage or deed of trust to the contrary, no notice of default is required
to be given to a junior mortgagee or beneficiary. SEE "--Foreclosure" herein.
Furthermore, the terms of a junior mortgage or deed of trust are
subordinate to the terms of the senior mortgage or deed of trust. In the
event of a conflict between the terms of the senior mortgage or deed of trust
and the junior mortgage or deed of trust, the terms of the senior mortgage or
deed of trust will generally govern. Upon a failure of the borrower or
trustor to perform any of its obligations, the senior mortgagee or
beneficiary, subject to the terms of the senior mortgage or deed of trust,
may have the right to perform the obligation itself. Generally, all sums so
expended by the senior mortgagee or beneficiary become part of the
indebtedness secured by the senior mortgage or deed of trust. To the extent
a senior mortgagee expends such sums, such sums will generally have priority
over all sums due under the junior mortgage.
RIGHT OF REDEMPTION. The purposes of a foreclosure action are to enable
the mortgagee to realize upon its security and to bar the borrower, and all
persons who have an interest in the property which is subordinate to the
foreclosing mortgagee, from their "equity of redemption." The doctrine of
equity of redemption provides that, until the property covered by a mortgage
has been sold in accordance with a properly conducted foreclosure and
foreclosure sale, those having an interest which is subordinate to that of
the foreclosing mortgagee have an equity of redemption and may redeem the
property by paying the entire debt with interest. In addition, in some
states, when a foreclosure action has been commenced, the redeeming party
must pay certain costs of such action. Those having an equity of redemption
must generally be made parties and duly summoned to the foreclosure action in
order for their equity of redemption to be barred.
The equity of redemption which is a non-statutory right that must be
exercised prior to foreclosure sale should be distinguished from statutory
rights of redemption. In some states, after sale pursuant to a deed of trust
or foreclosure of a
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mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In some
states, statutory redemption may occur only upon payment of the foreclosure
sale price. 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 exercise of a right of redemption would defeat the
title of any purchaser subsequent to foreclosure or sale under a deed of
trust. Consequently, the practical effect of the redemption right is to
force the lender to maintain the property and pay the expenses of ownership
until the redemption period has expired.
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 is 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. In certain other states, the lender has the option of bringing
a personal action against the borrower on the debt without first exhausting
such security; however, in some of these states, the lender, following
judgment on such personal action, may be deemed to have elected a remedy and
may be precluded from exercising remedies with respect to the security.
Consequently, the practical effect of the election requirement, in those
states permitting such election, is that lenders will usually proceed against
the security first rather than 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, the Relief
Act 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 or forgiving all or a portion of the debt. Additionally,
a federal bankruptcy court in a Chapter 11 bankruptcy case may be able to
reduce 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; however,
the United States Supreme Court has recently eliminated such a risk in
Chapter 7 and Chapter 13 bankruptcy cases.
The Internal Revenue Code of 1986, as amended provides priority to certain
tax liens over the lien of a mortgage or deed of trust. In addition,
substantive requirements are imposed upon 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 and regulations. These federal laws impose specific
statutory liabilities upon lenders who originate mortgage loans and who fail
to comply with the provisions of the applicable laws. In some cases, this
liability may affect assignees of the Mortgage Loans.
ENFORCEABILITY OF CERTAIN PROVISIONS. Certain of the Mortgage Loans will
contain a debt-acceleration clause, which permits the lender to accelerate
the debt upon a monetary default of the borrower, after the applicable cure
period. Courts will generally enforce clauses providing for acceleration in
the event of a material payment default. However, courts, exercising equity
jurisdiction, may refuse to allow a lender to foreclose a mortgage or deed of
trust when an acceleration of the indebtedness would be inequitable or unjust
and the circumstances would render the acceleration unconscionable.
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Some courts have imposed general equitable principles to limit the remedies
available in connection with foreclosure. These equitable principles are
generally designed to relieve the borrower from the legal effect of his
defaults under the loan documents. For example, some courts have required
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 lenders' 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 lenders to foreclose if the default under the mortgage
instrument or deed of trust is not monetary, such as the borrower's failure
to adequately maintain the property or the borrower's execution of a second
mortgage or deed of trust affecting the property. The exercise by the court
of its equity powers will depend on the individual circumstances of each
case. Finally, some courts have been faced with the issue of whether federal
or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust receive notices
in addition to those prescribed statutorily. For the most part, these cases
have upheld the statutory 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 protection to the borrower.
Some of the Mortgage Loans may not restrict secondary financing, thereby
permitting the borrower to use the Mortgaged Property as security for one or
more additional loans. Where the borrower encumbers the Mortgaged Property
with one or more junior liens, the senior lender is subjected to additional
risk. First, the borrower may have difficulty servicing and repaying
multiple loans. Second, acts of the senior lender which prejudice the junior
lender or impair the junior lender's security may create a superior equity in
favor of the junior lender. For example, if the borrower and the senior
lender agree to an increase in the principal amount of or the interest rate
payable on the senior loan, the senior lender may lose its priority to the
extent any existing junior lender is harmed or the borrower is additionally
burdened. Third, if the borrower defaults on the senior loan and/or any
junior loan or loans, the existence of junior loans and actions taken by
junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. The
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceedings by the senior lender.
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made. In certain states, there are or may be specific limitations
upon the late charges which a lender may collect from a borrower for
delinquent payments. Late charges are typically retained by servicers as
additional servicing compensation.
A portion of the Mortgage Loans contain "due-on-sale" clauses. These
clauses permit the lender to accelerate the maturity of the loan if the
borrower sells, transfers or coveys the property. The enforceability of
these clauses has been 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 that prohibits 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.
Exempted from the general rule of enforceability of due-on-sale clauses
were mortgage loans (originated other than by federal savings and loan
associations and federal savings banks) that were made or assumed during the
period beginning on the date a state, by statute or final appellate court
decision having statewide effect, prohibited the exercise of due-on-sale
clauses and ending on October 15, 1982 ("WINDOW PERIOD LOANS"). However, this
exception applied only to transfers of property underlying Window Period
Loans occurring between October 15, 1982 and October 15, 1985 and does not
restrict enforcement of a due-on-sale clause in connection with current
transfers of property underlying Window Period Loans. Due-on-sale clauses
contained in mortgage loans originated by federal savings and loan
associations or federal savings banks are fully enforceable pursuant to
regulations of the Office of Thrift Supervision (the "OTS"), as successor to
the Federal Home Loan Bank Board which preempt state law restrictions on the
enforcement of due-on-sale clauses.
The Garn-St. Germain Act also sets forth nine instances in which a mortgage
lender covered by the Garn-St. Germain Act may not exercise a due-on-sale
clause, notwithstanding the fact that 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. The Garn-St. Germain Act also grants the Director of the
Office of Thrift Supervision (successor to the Federal Home Loan Bank Board)
authority to prescribe by regulation further instances in which a due-on-sale
clause may not be exercised upon the transfer of the property. To date no
such regulations have been issued. Regulations
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promulgated under the Garn-St. Germain Act also prohibit the imposition of a
prepayment penalty upon the acceleration of a loan pursuant to a
"due-on-sale" clause.
If interest rates were to rise above the interest rates on the Mortgage
Loans, then any inability of the Servicer or the subservicer to enforce
due-on-sale clauses may result in the Trust Fund containing a greater number
of Mortgage Loans bearing below-market interest rates than would otherwise be
the case, since a transferee of the property underlying a Mortgage Loan would
have a greater incentive in such circumstances to assume the seller's
Mortgage Loan. Any inability 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 failing to adequately maintain the
property or the borrower executing a second mortgage or deed of trust
affecting the property. Finally, some courts have been faced with the issue
of whether or not federal or state constitutional provisions reflecting due
process concerns for adequate notice require that borrowers under deeds of
trust or mortgages receive notices in addition to the statutorily-prescribed
minimum. For the most part, these cases have upheld the notice provisions as
being reasonable or have 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.
ADJUSTABLE RATE LOANS. The laws of certain states may provide that
mortgage notes relating to adjustable rate loans are not negotiable
instruments under the Uniform Commercial Code. In such event, the Trustee
will not be deemed to be a "holder in due course" within the meaning of the
Uniform Commercial Code and may take such a mortgage note subject to certain
restrictions on its ability to foreclose and to certain contractual defenses
available to a borrower.
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
Certificate Trustee, a PMBS Trustee, or a Trust Fund) to homeowners. In the
event that title to a property securing a Mortgage Loan in a pool of Mortgage
Loans was acquired by a Certificate Trustee, a PMBS Trustee, or a Trust Fund
and cleanup costs were incurred in respect of the property, the Holders of
the related Certificates might realize a loss if such costs were required to
be paid. In addition, the presence of certain environmental contamination,
including, but not limited to, lead-based paint, asbestos and leaking
underground storage tanks could result in the holders of the related
Certificates realizing a loss if associated costs were required to be paid.
The Depositor, the Administrator, the Underwriters, the Transferors, the
Servicers, and any of their respective affiliates (i) have not caused any
environmental site assessments or evaluations to be conducted with respect to
any properties securing the Mortgage Loans, (ii) are not required to make any
such assessments or evaluations and (iii) make no representations or
warranties and assume no liability with respect to the absence or effect of
hazardous wastes or hazardous substances on any property or any casualty
resulting from the presence or effect of hazardous wastes or hazardous
substances.
In the event that title to a Mortgaged Property is acquired by the Trust
Fund and cleanup costs are incurred in respect of such property, the
certificateholders might realize a loss if such costs are required to be
paid. In addition, the presence of certain environmental contamination,
including, but not limited to, lead-based paint, asbestos and leaking
underground storage tanks could result in the Certificateholders realizing a
loss if any associated remedial costs are required to be paid. The
Transferor, the Depositor, the Servicer, any subservicer and any of their
respective affiliates (i) have not caused any environmental site assessments
or evaluations to be conducted with respect to any Mortgaged Property, (ii)
are not required to make any such assessments or evaluations and (iii) make
no representations or warranties and assume no liability with
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respect to the absence or effect of hazardous wastes or hazardous substances
on any property or any casualty resulting from the presence or effect of
hazardous wastes or hazardous substances.
TRUTH IN LENDING ACT
In September 1994, the Reigle Community Development and Regulatory
Improvement Act of 1994 (the "REIGLE ACT") was enacted which incorporates the
Home Ownership and Equity Protection Act of 1994, and which adds certain
additional provisions to Regulation Z, the implementing regulation of the
Truth-in-Lending Act ("TILA"). These provisions impose additional disclosure
and other requirements on creditors with respect to non-purchase money
mortgage loans with high interest rates or high up-front fees and charges
("covered loans"). In general, mortgage loans within the purview of the
Reigle Act have annual percentage rates over 10% greater than the yield on
Treasury Securities of comparable maturity and/or fees and points which
exceed the greater of 8% of the total loan amount or $400. The provisions of
the Reigle Act apply on a mandatory basis to all mortgage loans originated on
or after October 1, 1995. These provisions can impose specific statutory
liabilities upon creditors who fail to comply with their provisions and may
affect the enforceability of the related loans. In addition, any assignee of
a creditor would generally be subject to all claims and defenses that the
consumer could assert against the creditor, including, without limitation,
the right to rescind the mortgage loan. A substantial majority of the loans
originated or purchased by the Transferor are covered by the Reigle Act.
The Reigle Act provisions impose additional disclosure requirements on
lenders originating covered loans and prohibit lenders from originating
covered loans that are underwritten solely on the basis of the borrower's
home equity without regard to the borrower's ability to repay the loan. The
Transferor believes that only a small portion of its loans originated in
fiscal 1994 and fiscal 1995 are of the type that, unless modified, would be
prohibited by the Reigle Act. As a result of the Reigle Act provisions, with
respect to all covered loans, the Transferor applies loan underwriting
criteria that take into consideration the borrower's ability to repay.
The Reigle Act provisions also prohibit lenders from including prepayment
fee clauses in covered loans to borrowers with debt-to-income ratios in
excess of 50% or covered loans used to refinance existing loans originated by
the same lender. The Transferor reported immaterial amounts of prepayment
fee revenues in fiscal 1993, 1994 and 1995, respectively. The Transferor
will continue to collect prepayment fees on loans originated prior to
effectiveness of the Reigle Act provisions and on non-covered loans, as well
as on covered loans in permitted circumstances following the effectiveness of
the Reigle Act provisions. The Reigle Act provisions impose other
restrictions on covered loans, including restrictions on balloon payments and
negative amortization features, which the Transferor does not believe will
have a material effect on its operations.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("TITLE V"), provides that state usury
limitations shall not apply to certain types of home improvement first
mortgage loans originated by certain lenders after March 31, 1980. A similar
federal statute was in effect with respect to mortgage loans made during the
first three months of 1980. The Office of Thrift Supervision is authorized
to issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized any state to reimpose
interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision which expressly rejects application of the federal
law. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V. Certain states have taken
action to reimpose interest rate limits and/or to limit discount points or
other charges.
A similar federal statute, adopted in 1976, provides federal usury
preemption with respect to Title I Mortgage Loans, such as the Title I
Mortgage Loans. This statute also permits states to reimpose interest rate
limits by passing legislation at any time after June 30, 1976. To date, no
state has enacted any reported statute to reimpose interest rate limits with
respect to any loans, mortgage or advance that is insured under Title I.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "RELIEF ACT"), a borrower who enters military
service after the origination of such borrower's Mortgage Loan (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
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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
or the subservicer to collect full amounts of interest on certain of the
Mortgage Loans. Any shortfall in interest collections resulting from the
application of the Relief Act or similar legislation, which would not be
recoverable from the related Mortgage Loans, would result in a reduction of
the amounts available for distribution to the holders of the Offered
Certificates, but the Offered Certificates would receive the full amount
otherwise distributable to such holders to the extent that amounts are
available from the credit enhancement provided for the Offered Certificates.
SEE "Risk Factors -- Limitations of Credit Enhancement" herein. In addition,
the Relief Act imposes limitations which would impair the ability of the
Servicer or subservicer 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 related Mortgaged Property in a timely
fashion.
THE TITLE I PROGRAM
GENERAL. Sections 1 and 2(a) of the National Housing Act of 1934, as
amended (the "ACT"), authorize the creation of the Federal Housing
Administration (which is an agency within the Untied States Department of
Housing and Urban Development; such agency and department are referred to
together herein as the "FHA") and the Title I Program. Certain of the
Mortgage Loans or Contracts contained in a Trust Fund maybe loans insured
under the Title I Program. FHA Regulations contain the requirements under
which approved Title I Lenders may obtain insurance against a portion of
losses incurred with respect to eligible loans that have been originated and
serviced in accordance with FHA Regulations, up to the amount of such Title I
Lender's FHA Reserve, as described below, and subject to the terms and
conditions established under the Act and FHA Regulations. While FHA
Regulations permit the Secretary of HUD, subject to statutory limitations, to
waive a Title I Lender's noncompliance with FHA Regulations if enforcement
would impose an injustice on the lender (provided the Title I Lender has
acted in good faith, is in substantial compliance with FHA Regulations and
has credited the borrower for any excess charges), in general, an insurance
claim against the FHA will be denied if the Title I loan to which it relates
does not strictly satisfy the requirements of the Act and FHA Regulations.
Unlike certain other government loan insurance programs, loans under the
Title I Program (other than loans in excess of $25,000) are not subject to
prior review by the FHA. Under the Title I Program, the FHA disburses
insurance proceeds with respect to defaulted loans for which insurance claims
have been filed by a Title I Lender prior to any review of such loans. A
Title I Lender is required to repurchase a Title I loan from the FHA that is
determined to be ineligible for insurance after insurance claim payments for
such loan have been paid to such lender. Under the FHA Regulations, if the
Title I Lender's obligation to repurchase the Title I loan is unsatisfied,
the FHA is permitted to offset the unsatisfied obligation against future
insurance claim payments owed by the FHA to such lender. FHA Regulations
permit the FHA to disallow an insurance claim with respect to any loan that
does not qualify for insurance for a period of up to two years after the
claim is made and to require the Title I Lender that has submitted the
insurance claim to repurchase the loan. Pursuant to a letter ruling issued
by the FHA in October 1994, the FHA has stated that, as a policy, the FHA
will strive to review all insurance claim submissions in a timely manner and
limit the period of time within which it will request the repurchase of a
loan to a period of one year after claim submission. The letter further
states, however, that the FHA may find it necessary with respect to some
claim submissions to apply the foregoing two-year incontestability provision
strictly.
The proceeds of loans under the Title I Program may be used only for
permitted purposes, including, but not limited to, the alteration, repair or
improvement of residential property, the purchase of a manufactured home or
lot (or cooperative interest therein) on which to place such home or the
purchase of both a manufactured home loan and the lot (or cooperative
interest therein) on which such home is placed. Title I Program loans may be
made directly to the owners of the property to be improved or purchased
("direct loans") or with the assistance of a dealer or home improvement
contractor that will have an interest in the proceeds of the loan ("dealer
loans").
Subject to certain limitations described below, eligible Title I loans are
insured by the FHA for 90% of an amount equal to the sum of (i) the net
unpaid principal amount and the uncollected interest earned to the date of
default, (ii) interest on the unpaid loan obligation from the date of default
to the date of the initial submission of the insurance claim, plus 15
calendar days (the total period not to exceed nine months) at a rate of 7%
per annum, (iii) uncollected court costs, (iv) title examination costs, (v)
fees for required inspections by the lenders or its agents, up to $75, and
(vi) effective July 5, 1995, origination fees up to a maximum of 5% of the
loan amount. However, the insurance coverage provided by the FHA is limited
to the extent of the balance in the Title I Lender's FHA Reserve maintained
by the FHA. Accordingly if sufficient
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insurance coverage is available in such FHA Reserve, then the Title I Lender
bears the risk of losses on a Title I loan for which a claim for
reimbursement is paid by the FHA of at least 10% of the unpaid principal,
uncollected interest earned to the date of default, interest from the date of
default to the date of the initial claim submission and certain expenses.
Under the Title I Program, the FHA maintains an FHA insurance coverage
reserve account (a "FHA RESERVE") for each Title I Lender. The amount in
each Title I Lender's FHA Reserve is a maximum of 10% of the amounts
disbursed, advanced or expended by a Title I Lender in originating or
purchasing eligible loans registered with the FHA for Title I Insurance, with
certain adjustments permitted or required by FHA Regulations. The balance of
such FHA Reserve is the maximum amount of insurance claims the FHA is
required to pay to the related Title I Lender. Mortgage loans to be insured
under the Title I Program will be registered for insurance by the FHA, and
the increase in Title I insurance coverage to which the Title I Lender is
entitled by reason of the reporting of such loans under the Title I Lender's
contract of insurance will be included in the FHA Reserve for the
originating Title I Lender following the receipt and acknowledgment by the
FHA of a transfer of note report on the prescribed form (the "TRANSFER
REPORT") pursuant to FHA Regulations.
Under the Title I Program the FHA will reduce the insurance coverage
available in a Title I Lender's FHA Reserve with the respect to loans insured
under such Title I Lender's contract of insurance by (i) the amount of FHA
Insurance claims approved for payment related to such loans, (ii) prior to
October 1, 1995, after a Title I Lender has held its Title I contract of
insurance for five years, the amount of the annual reduction (the "ANNUAL
REDUCTION") equal to 10% of the amount of insurance coverage contained in the
related FHA Reserve as of that date, and (iii) the amount of reduction of the
Title I Lender's FHA Reserve by reason of the sale, assignment or transfer of
loans registered under the Title I Lender's contract of insurance. Such
insurance coverage also may be reduced for any FHA insurance claims
previously disbursed to the Title I Lender that are subsequently rejected by
the FHA. On June 5, 1995, the FHA announced the elimination of Annual
Reductions, effective as of October 1, 1995.
Upon the receipt and acknowledgment by the FHA of a Transfer Report,
originations of new loans will increase a Title I Lender's insurance coverage
reserve account balance by 10% of the amount disbursed, advanced or expended
in originating such loans registered with the FHA for insurance under the
Title I Program. A Title I Lender is permitted to sell or otherwise transfer
loans reported for insurance under the Title I Program only to another Title
I Lender. Upon any such transfer, except a transfer with recourse or under a
guaranty or repurchase Agreement, the seller is required to file a Transfer
Report with the FHA reporting the transfer of such loans. Upon notification
and approval of such transfer, the FHA Reserve of the selling Title I Lender
is reduced, and the FHA Reserve of the purchasing Title I Lender is
increased, by an amount equal to the lesser of 10% of the actual purchase
price of the loans or the net unpaid principal balance of the loans, up to
the total amount of the selling Title I Lender's FHA Reserve. Thus, in the
event the selling Title I Lender's FHA Reserve was less than 10% of the
unpaid principal balance of its portfolio of loans reported for insurance
under the Title I Program prior to the sale, the seller's FHA Reserve may be
exhausted as the result of a sale of only a portion of its total portfolio,
with the result that its remaining Title I Program portfolio may be
ineligible for Title I Program benefits until the lender originates or
otherwise acquires additional loans reported for insurance under the Title I
Program. Accordingly, the insurance coverage reserves transferred to the
purchasing Title I Lender in such case will be less than 10% of the lesser of
the purchase price or the principal balance of the portfolio of loans
purchased, which may be the case with respect to the Transferor's purchase of
certain Title I Mortgage Loans and Title I Contracts from certain Title I
lenders and the transfer of the related insurance coverage from such lenders'
FHA Reserves. Additionally, pursuant to FHA Regulations, not more than
$5,000 in insurance coverage shall be transferred to or from a Title I
Lender's insurance coverage reserve account during any October 1 to September
30 fiscal year without the approval of the Secretary of HUD. Such HUD
approval is generally viewed as automatic, provided the formal requirements
for transfer are satisfied, but HUD does have the right under FHA Regulations
to withhold approval.
Unlike most other FHA insurance programs, the obligation of the FHA to
reimburse a Title I Lender for losses in the portfolio of insured loans held
by such Title I Lender is limited to the amount in an FHA Reserve maintained
on a lender-by-lender basis and not on a loan-by-loan basis. Except when to
do so would be in HUD's best interest, the FHA does not track or "earmark"
the loans within a Title I Lender's portfolio to determine whether a
reduction in such lender's FHA Reserve as the result of an insurance claim by
such lender are, in fact, attributable to the insured loan with respect to
which the claim was made. For this reason, if a Title I Lender is holding
insured loans as a fiduciary on behalf of multiple non-affiliated
beneficiaries, in order for such a lender to cause its FHA Reserve to be
reduced only by an amount to which a particular beneficiary is entitled by
reason of the insured loans beneficially held by it, the Title I Lender must
segregate or "earmark" its FHA Reserve on its own books and records according
to which beneficiary is entitled to what portion of the insurance coverage in
the Title I Lender's FHA Reserve as if the insurance coverage were not
commingled by the FHA in
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such FHA Reserve. If such Title I Lender continues to submit claims with
respect to loans held on behalf of a beneficiary whose portion of insurance
coverage in its FHA Reserve has been exhausted, the FHA will continue to
honor such claims until all insurance coverage in such Title I Lender's FHA
Reserve has been exhausted, even though such FHA Reserve may, in fact, be
held by the Title I Lender for the benefit of a different beneficiary than
the beneficiary of the insured loans to which the claims relate under a
separate contractual agreement. In addition, under certain FHA
administrative offset regulations, the FHA may offset an unsatisfied
obligation of a Title I Lender to repurchase loans that are determined to be
ineligible for insurance against future insurance claim payments owed by the
FHA to such lender. In the case of the related Trust Fund, if the Trustee
were to hold loans insured under the Depositor's FHA Reserve on behalf of
another trust fund, the FHA were to determine that insurance claims were paid
in respect of loans ineligible for insurance that related to such other trust
fund and the Trustee, on behalf of such other trust fund, was unable or
otherwise failed to repurchase the ineligible loans, then the FHA could
offset the amount of the repurchase obligation against insurance proceeds
payable with respect to one or more Title I Mortgage Loans or Title I
Contract included in the related Trust Fund. If the Trustee were unable to
recover the amount of such offset from the other trust fund, the Trust Fund
could experience a loss as a result.
Accordingly, claims paid to the Trustee (or the Administrator, if any) by
the FHA with respect to Title I loans insured under the Depositor's FHA
Reserve other than the Title I Mortgage Loans and Title I Contracts may
reduce the FHA Insurance Amount. In the Pooling and Servicing Agreement, the
Depositor and the Trustee (or the Administrator, if any) will agree not to
submit claims to the FHA with respect to Title I loans other than the Title I
Mortgage Loans and Title I Contracts if the effect thereof would be to reduce
the FHA Insurance Amount. The Depositor has committed to use its FHA
contract of insurance under the Title I Program only to report the record
ownership of loans transferred and assigned to the Trustee pursuant to the
Pooling and Servicing Agreement and similar pooling and servicing agreements
that may be entered into by the Depositor in the future.
On the final Transfer Date, such FHA Insurance Amount will be the maximum
amount of insurance coverage in the Depositor's FHA Reserve that will be
available for the submission of claims on the Title I Mortgage Loans, and
thereafter, such FHA Insurance Amount will be decreased as a result of
payments by the FHA in respect of FHA Claims submitted for the Title I
Mortgage Loans and Title I Contracts after the Transfer Dates and as a result
of the repurchase or substitution of Title I Mortgage Loans and Title I
Contracts by the Transferor. Except in connection with the conveyance to the
Trust Fund of any Subsequent Mortgage Loans that are Title I Mortgage Loans
and the substitution of Title I Mortgage Loans and Title I Contracts, the FHA
Insurance Amount for the Title I Mortgage Loans and Title I Contracts will
not be increased for any other Title I loans, either previously or
subsequently owned by the Depositor and reported for insurance in the
Depositor's FHA Reserve.
On the final Transfer Date, the amount of FHA insurance coverage that will
have been transferred from the Transferor's FHA Reserve to the Depositor's
FHA Reserve may be less than the maximum amount of insurance coverage
transferrable which would otherwise equal 10% of the unpaid principal balance
or the purchase price, if less. However, if individual Title I Mortgage
Loans and Title I Contracts are repurchased from the Trustee, on behalf of
the Trust Fund, by the Transferor, the Servicer and/or any Subservicer, then
with respect to any individual Title I Mortgage Loan or Title I Contract the
amount of FHA insurance coverage that will be transferred from the Trustee's
FHA Reserve, in all likelihood, will be the maximum amount of insurance
coverage of 10% of the unpaid principal balance or the purchase price, if
less, until such time as the Depositor's FHA Reserve has been reduced to a
balance which is less than such maximum amount. Accordingly, the transfer of
insurance coverage from the Depositor's FHA Reserve as the result of the
repurchase of Title I Mortgage Loans and Title I Contracts will cause a
disproportionately larger reduction to the FHA Insurance Amount for each
individual Title I Mortgage Loan and Title I Contract and if a significant
amount of Title I Mortgage Loans and Title I Contracts are repurchased, could
result in a substantial reduction of such FHA Insurance Amount and the
relative percentage of such FHA Insurance Amount to the principal balance of
the Title I Mortgage Loans and Title I Contracts remaining in the Trust Fund.
REQUIREMENTS FOR TITLE I PROPERTY IMPROVEMENT LOANS AND CONTRACTS. The
proceeds of loans originated under the Title I Program for property
improvements may be used only for improvements that substantially protect or
improve the basic habitability or utility of an eligible property. Although
Title I loans are available for several types of properties, the Title I
Mortgage Loans will include primarily one-to four-family property improvement
loans. FHA Regulations require that the borrower have at least a one-half
interest in (i) fee simple title to the real property to be improved with the
loan proceeds ("Secured Property"), (ii) a lease on the Secured Property for
a fixed term that expires no sooner than six months after the maturity date
of the property improvement loan or (iii) a properly recorded land
installment contract for the purchase of the Secured Property. Any Title I
property improvement loan originated after August 1994 in excess of $7,500
must be secured
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by a recorded lien on the improved property which is evidenced by a mortgage
or deed of trust executed by the borrower and all other owners in fee simple.
Prior to August 1994, any Title I property improvement loan in excess of
$5,000 was required to be secured by such a recorded lien.
The maximum principal amount of an eligible loan under the Title I Program,
must not exceed the actual cost of the project plus any authorized fees and
charges under the Title I Program as provided below; provided that such
maximum principal amount does not exceed $25,000 for a single family property
improvement loan. No single borrower is permitted to have more than an
aggregate of $25,000 in unpaid principal obligations with respect to Title I
loans without prior approval of HUD. Generally, the term of a Title I loan
that is a property improvement loan may not be less than six months nor
greater than 20 years and 32 days. A borrower may obtain multiple Title I
loans with respect to multiple properties (subject to the aforementioned
limit on loans to a single borrower), and a borrower may obtain more than one
Title I loan with respect to a single property, in each case as long as the
total outstanding balance of all Title I loans on the same property does not
exceed the maximum loan amount for the type of Title I loan thereon having
the highest permissible loan amount. If a property improvement loan (or
combination of loans on a single property) exceeds $15,000, and either (i)
the property is not owner occupied or (ii) the structure on the property was
completed within six months prior to the application for the loan, the
borrower is required to have equity in the property at least equal to the
loan amount. In all other cases, there is no requirement that the owner
contribute equity to the property other than fees and costs that may not be
added to the balance of the loan as described below.
Fees and charges that may be added to the balance of property improvement
loans include (i) architectural and engineering fees, (ii) building permit
costs, (iii) credit report costs, (vi) fees for required appraisals (if
applicable), (iv) title examination costs and (v) fees for required
inspections by the lender or its agent, up to $75. The Title I Lender is
entitled to recover the following fees and charges in connection with a
property improvement loan from the borrower as part of the borrower's initial
payment: (i) an origination fee not to exceed 1% of the loan amount, (ii)
discount points, however, after July 5, 1995, only to the extent a lender can
demonstrate a clear relationship between the charging of discount points and
some tangible benefit to the borrower such as a compensating decrease in the
interest rate being charged, (iii) recording fees, recording taxes, filing
fees and documentary stamp taxes, (iv) title insurance costs, (v) current
year tax and insurance escrow payments, (vi) fees necessary to establish the
validity of the lien, (vii) appraisal fees that are not eligible to be
financed, (viii) survey costs, (ix) handling charges for refinancing or
modification of an existing loan, up to $100, (x) fees for approving
assumption or preparing assumption agreements, not to exceed 5%, (xi) certain
fees of closing agents and (xii) such other items as may be specified by the
FHA. FHA Regulations prohibit the advancement of such fees and charges to
the borrower by any party to the transaction.
FHA Regulations distinguish between "direct loans" and "dealer loans." A
loan is a "dealer loan" if an approved dealer having a direct or indirect
financial interest in the transaction assists the borrower in obtaining the
loan. A loan made by the lender to the borrower without the assistance of
any party with a financial interest in the loan transaction (other than the
lender) is a "direct loan."
With respect to dealer loans, the dealer-contractor typically enters into a
consumer credit contract or note with the borrower and, after completion of
the financed improvements, assigns the contract or note to the Title I
Lender. The dealer-contractor presents the loan application to the Title I
Lender, receives the check or money order representing the loan proceeds and
may accompany the borrower to the institution for the purpose of receiving
payment. As a condition to the disbursement of the proceeds of a dealer
loan, the Title I Lender is required to obtain a completion certificate
signed by the borrower and the dealer certifying that the improvements have
been completed in accordance with the contract and that the borrower has
received no inducement from the dealer to enter into the transaction other
than discount points. The Title I Lender may enter into an agreement under
which the lender has full or partial recourse against the dealer for a period
of three years in the event the Title I Lender sustains losses with respect
to loans originated by such dealer and such loans do not satisfy FHA
Regulations. FHA Regulations require that each dealer meet certain net worth
and experience requirements and be approved by the FHA on an annual basis.
Any Title I Lender that makes dealer loans is required to supervise and
monitor the dealer's activities with respect to loans insured under the Title
I Program and to terminate a dealer's approval if the dealer does not
satisfactorily perform its contractual obligations or comply with Title I
Program requirements.
The note evidencing a property improvement loan insured under the Title I
Program is required to bear a genuine signature of the borrower and any
co-maker and co-signer, must be valid and enforceable, must be complete and
regular on its face and must have interest and principal stated separately.
The interest rate must be negotiated and agreed to by the borrower and the
lender and must be fixed for the term of the loan and recited in the note.
Interest on the Title I loan must
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accrue from the date of the loan and be calculated according to the actuarial
method, which allocates payments on the loan between principal and interest
such that a payment is applied first to accrued interest and any remainder is
subtracted from, or any deficiency is added to, the unpaid principal balance.
Principal and interest on the note is required to be payable in equal
installments at least monthly except where the borrower has irregular cash
flow. The first and last payments may vary in amount from the regular
installment amount but may not exceed 150% of the regular installment amount.
The first payment may be due no later than two months from the date of the
loan (i.e., the date upon which proceeds are disbursed by the lender). Late
charges may be assessed only after fifteen days and cannot exceed the lesser
of 5% of the installment, up to a maximum of $10 and must be billed as an
additional charge to the borrower. In lieu of late charges, the note may
provide for interest to accrue on late installments on a daily basis at the
note rate. The note must include a provision for acceleration of maturity,
at the option of the holder, upon a default by the borrower and a provision
permitting prepayment in part or in full without penalty. The Title I Lender
must assure that the note and all other documents evidencing the loan are in
compliance with applicable Federal, state and local laws.
A written but unrecorded modification agreement executed by the borrower
may be used in lieu of refinancing a delinquent or defaulted loan to reduce
or increase the installment payment, but not to increase the term or interest
rate. A written modification agreement may also be used to refinance a loan
in order to reduce the interest rate, provided the loan is current.
Alternatively, the lender may negotiate an informal repayment plan for the
borrower to cure a temporary delinquency within a short period of time by
sending a letter to the borrower reciting the terms of the agreement. The
lender may not release any party from liability under the note or any lien
securing an insured loan without prior FHA approval.
FHA Regulations do not require that the borrower obtain title or fire and
casualty insurance as a condition to obtaining loan, except with respect to
manufactured home loans. If the property is located in a flood hazard area,
however, flood insurance in an amount at least equal to the loan amount is
required at the date of loan disbursement. The Borrower is required to
maintain flood insurance of at least the unpaid balance of the loan (or the
value of the property if state law so limits the amount of flood insurance).
REQUIREMENTS FOR TITLE I MANUFACTURED HOME CONTRACTS. The maximum
principal amount for any Title I Contract for a Manufactured Home must not
exceed the sum of certain itemized amounts, which include a specified
percentage of the purchase price of the manufactured home depending on
whether it is a new or existing home; provided that such maximum amount does
not exceed the following loan amounts: (i) $48,600 for a new or existing
manufactured home purchase loan; (ii) $16,200 for a manufactured home lot
purchase; and (iii) $64,800 for a combination loan (i.e. a loan to purchase a
new or existing manufactured home and the lot for such home). Generally, the
term of a Title I Contract for a Manufacture Home may not be less than six
months nor greater than 20 years and 32 days, except that the maximum term of
a manufactured home lot loan is limited to 15 years and 32 days and the
maximum term of a multimodule manufactured home and lot in combination is
limited to 25 years and 32 days.
Borrower eligibility for a Title I Contract for a Manufactured Home
requires that the borrower become the owner of the property to be financed
with such loan and occupy the manufactured home as the borrower's principal
residence, except for a manufactured home lot loan which allows six months
from the date of the loan to occupy the home as the borrower's principal
residence. If a manufactured home is classified as realty, then ownership of
the home must be in fee simple, and also, the ownership of the manufactured
home lot must be in fee simple, except for a lot which consists of a share in
a cooperative association that owns and operates a manufactured home park.
The borrower's minimum cash down payment requirement to obtain financing
through a Title I Contract for a Manufactured Home is as follows: (i) at
least 5% of the first $5,000 and 10% of the balance of the purchase price of
a new manufactured home and at least 10% of the purchase price of an existing
manufactured home for a manufactured home purchase loan, or in lieu of a full
or partial cash down payment, the trade-in of the borrower's equity in an
existing manufactured home; (ii) at least 10% of the purchase price and
development costs of a lot for a manufactured home lot loan; and (iii) at
least 5% of the first $5,000 and 10% of the balance of the purchase price of
the manufactured home and lot for a combination loan.
Any manufactured home financed by a Title I Contract must be certified by
the manufacturer to have been constructed in compliance with the National
Manufactured Housing Construction and Safety Standards Act of 1974 (42 U.S.C.
Sections 5401-5426), so as to conform to all applicable Federal construction
and safety standards, and with respect to the purchase of a new manufactured
home, the manufacturer must furnish the borrower with a one year written
warranty on a HUD approved form which obligates the manufacturer to correct
any nonconformity with all applicable Federal construction
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and safety standards or any defects in materials or workmanship which become
evident within one year after the date of delivery. The regulations under the
Title I Program set forth certain additional requirements relating to the
construction, transportation and installation of any manufactured home and
standards for the manufactured homesite financed by any Title I Contract. The
proceeds from a Title I Contract for a Manufactured Home may be used as
follows: the purchase or refinancing of a manufactured home, a suitably
developed lot for a manufactured home already owned by the borrower or a
manufactured home and suitably developed lot for the home in combination; or
the refinancing of an existing manufactured home already owned by the
borrower in connection with the purchase of a manufactured home lot or an
existing lot already owned by the borrower in connection with the purchase of
a manufactured home. In addition, the proceeds for a Title I Contract for a
Manufactured Home which is a manufactured home purchase loan may be used for
the purchase, construction or installation of a garage, carport, patio or
other comparable appurtenance to the manufactured home, and the proceeds for
a Title I Contract for a Manufactured Home which is a combination loan may be
used for the purchase, construction or installation of a foundation, garage,
carport, patio or other comparable appurtenance to the manufactured home.
The proceeds from a Title I Contract for a Manufactured Home cannot be used
for the purchase of furniture or the financing of any items and activities
which are set forth on the list published by the Secretary of HUD as amended
from time to time.
Any Title I Contract for a Manufactured Home must be secured by a recorded
lien on the manufactured home (or lot or home and lot, as appropriate), its
furnishings, equipment, accessories and appurtenance, which lien must be a
first lien, superior to any other lien on the property which is evidenced by
a properly recorded financing statement, a properly recorded security
instrument executed by the borrower and any other owner of the property or
other acceptable instrument. With respect to any Title I Contract involving
a manufactured home purchase loan or combination loan and the sale of the
manufactured home by a dealer, the lender or its agent (other than a
manufactured home dealer) must conduct a site-of-placement inspection within
60 days after the date of the loan to verify that the terms and conditions of
the purchase contract have been met, the manufactured home and any options
and appurtenances included in the purchase price or financed with the loan
have been delivered and installed and the placement certificate executed by
the borrower and the dealer is in order.
TITLE I UNDERWRITING REQUIREMENTS. FHA Regulations require that, before
making a loan insured under the Title I Program, a Title I Lender exercise
prudence and diligence in determining whether the borrower and any co-maker
or co-signer is solvent and an acceptable credit risk with a reasonable
ability to make payments on the loan obligation. Prior to loan approval, the
Title I Lender is required to satisfy specified credit underwriting
requirements and to keep documentation supporting its credit determination.
As part of its credit underwriting, the Title I Lender must obtain the
following: (i) a dated credit application executed by the borrower, any
co-maker and any co-signer, (ii) written verification of current employment
and current income of the borrower and any co-maker or co-signer, (iii) a
consumer credit report stating the credit accounts and payment history of the
borrower and any co-maker or co-signer, (iv) on loans in excess of $5,000,
written evidence that the borrower is not over 30 days delinquent on any
senior lien instruments encumbering the improved property, (v) verification
whether the borrower is in default on any obligation owed to or insured or
guaranteed by the Federal Government and (vi) written verification of the
source of funds for any initial payment required of the borrower if such
payment is in excess of 5% of the loan. Before making a final credit
determination, the lender is required to conduct a face-to-face or telephone
interview with the borrower and any co-maker or co-signer to resolve any
discrepancies in the information on the credit application and to assure that
the information is accurate and complete. The Title I Lender's files must
contain, among other things, the note or other debt instrument, the lien
instrument and a copy of the property improvement contract (in the case of a
dealer loan) or a detailed written description of the work to be performed,
the materials to be furnished and the estimated cost (for a loan not
involving a dealer or contractor).
The Title I Lender is required to satisfy itself that the borrower's income
is adequate to make the payments required under the loan and to pay the
borrower's housing and other recurring expenses. The borrower's housing and
other recurring expenses generally may not exceed a maximum percentage of
gross income as published from time to time in the Federal Register. The
Title I Lender is required to document any compensating factors that support
the approval of the loan if such expense-to-income ratios are not satisfied.
A Title I Lender is prohibited from approving a loan under the Title I
Program without the approval of the FHA if the lender has knowledge that the
borrower is past due more than 30 days under the original terms of an
obligation owed to or insured or guaranteed by the Federal Government or the
borrower has made material misstatements of fact on applications for loans or
other assistance.
UNDER THE TITLE I PROGRAM, THE FHA DOES NOT REVIEW OR APPROVE FOR
QUALIFICATION FOR INSURANCE THE INDIVIDUAL LOAN INSURED THEREUNDER AT THE
TIME OF APPROVAL BY THE LENDING INSTITUTION (AS IS TYPICALLY THE CASE WITH
OTHER FEDERAL LOAN INSURANCE PROGRAMS). If, after a loan has been made and
reported for insurance under the Title I Program, a Title I Lender discovers
any material misstatement of fact or that the loan proceeds have been misused
by the borrower, dealer or
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any other party, such Title I Lender is required promptly to report such
finding to the FHA. In such case, provided that the validity of any lien on
the property has not been impaired, the insurance of the loan under the Title
I Program will not be affected unless such material misstatement of facts or
misuse of loan proceeds was caused by (or was knowingly sanctioned by) such
Title I Lender or its employees.
CLAIMS PROCEDURES UNDER TITLE I. The term "default" is defined under FHA
Regulations as the failure of the borrower to make any payment due under the
note for a period of 30 days after such payment is due. The "date of
default" is considered to be the date 30 days after the borrower's first
failure to make an installment payment on the note that is not covered by
subsequent payments applied to overdue installments in the order they became
due. When a loan reported for insurance under the Title I Program goes into
default, a Title I Lender is required to contact the borrower and any
co-maker and co-signer by telephone or in person to determine the reasons for
the default and to seek a cure. If such Title I Lender is not able to effect
a cure after diligent efforts, it may provide the borrower with a notice of
default stating that the loan will be accelerated in 30 days if the loan is
not brought current or the borrower does not enter into a loan modification
agreement or repayment plan. The notice of default must meet certain
requirements set forth in the FHA Regulations and must conform to applicable
state law provisions. Such Title I Lender is permitted to rescind the
acceleration of maturity of the loan only if the borrower brings the loan
current, executes a modification agreement or agrees to an acceptable
repayment plan.
Following acceleration of maturity of a secured property improvement loan,
a Title I Lender has the option to proceed against the security or make a
claim under its contract of insurance. If a Title I Lender chooses to
proceed against the Secured Property under a security instrument (or if it
accepts a voluntary conveyance or surrender of the Secured Property), (i) the
Title I Lender must proceed against the loan security by foreclosure and
acquire good, marketable title to the property securing the loan and (ii) the
Title I Lender must take all actions necessary under applicable law to
preserve its rights, if any, to obtain a deficiency judgment against the
borrower, provided however, the Title I Lender may still file an FHA
Insurance claim, but only with the prior approval of the Secretary of HUD.
If a Title I Lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file, certification of
compliance with applicable state and local laws in carrying out any
foreclosure or repossession, and where the borrower is in bankruptcy or
deceased, evidence that the lender has properly filed proofs of claims.
Generally, a Title I Lender must file its claim of insurance with the FHA not
later than nine months after the date of default. Concurrently with filing
the insurance claim, such Title I Lender is required to assign to the United
States of America it's entire interest in the note (or a judgment in lieu of
the note), in any securities held and in any claims filed in any legal
proceedings. If, at the time the note is assigned to the United States, the
Secretary of HUD has reason to believe that the note is not valid or
enforceable against the borrower, the FHA may deny the claim and reassign the
note to the Title I Lender. If either such defect is discovered after the
FHA has paid a claim, the FHA may require the Title I Lender to repurchase
the paid claim and to accept an assignment of the loan note. If the Title I
Lender subsequently obtains a valid and enforceable judgment against the
borrower, it may resubmit a new insurance claim with an assignment of the
judgment. The FHA may contest any insurance claim previously paid by it and
make a demand for repurchase of the loan with respect to which the claim was
paid at any time up to two years from the date the claim was certified for
payment and may do so thereafter in the event of fraud or misrepresentation
on the part of the Title I Lender.
A claim for reimbursement of loss with respect to a loan eligible for
insurance under the Title I Program is required to be made on an FHA-approved
form executed by a duly qualified officer of the Title I Lender and must be
accompanied by copies of certain relevant documents and documentation
specified in the FHA Regulations to support the claim. The Title I Lender is
required, among other things, to document its efforts to effect recourse
against any dealer in accordance with any recourse agreement with such
dealer. If the loan is subject to an unsatisfied dealer recourse agreement
claim, the Title I Lender is also required to assign its rights under such
recourse agreement. The FHA has the right to deny any claim for insurance in
whole or in part based upon a violation of the FHA Regulations unless a
waiver of compliance is granted. The Title I Lender is permitted to appeal
any such claim denial and resubmit the claim within six months of the date of
the claim denial, subject to a reprocessing fee. The Pooling and Servicing
Agreement provides that the Trustee (or the Administrator) shall submit an
FHA Claim with respect to any Title I Mortgage Loan or Title I Contract that
goes into default if the default cannot be cured.
If, as a result of the delay in the transfer of the FHA Insurance described
above, FHA Insurance is not available with respect to any defaulted Title I
Mortgage Loan or Title I Contract at the time it goes into default, then the
amount required to make interest payments to the Certificateholders with
respect to the principal amount thereof, until such FHA Insurance
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becomes available and a claim for insurance can be made, if at all, will be
paid from other amounts, if any, available in the Certificate Account.
NO RIGHTS OF CERTIFICATEHOLDERS AGAINST FHA. Because the Trust Fund and
the Certificateholders will not hold an FHA contract of insurance, the FHA
will not recognize the Trust Fund or the Certificateholders as the owners of
the Title I Mortgage Loans, Title I Contracts or any portion thereof,
entitled to submit FHA Claims to the FHA. Accordingly, the Trust Fund and
the Certificateholders will have no direct right to receive insurance
payments from the FHA. In the event the Trustee (or the Administrator, if
any) submits an FHA Claim to the FHA and the FHA approves payment of such FHA
Claim, the related FHA Insurance Proceeds will be payable only to the Trustee
or to the Administrator, if any, as agent and attorney-in-fact for the
Trustee. The Certificateholders' rights relating to the receipt of payment
from and the administration, processing and submissions of FHA Claims by the
Trustee or the Administrator, if any, are limited and governed by the related
Pooling and Servicing Agreement and FHA Claims Administration Agreement and
these functions are obligations of the Trustee and the Administrator, if any,
not the FHA.
LEGAL INVESTMENT MATTERS
To the extent specified in the related Prospectus Supplement, the
Certificates of a Series will not constitute "mortgage related securities"
under the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") because
a substantial number of the Mortgage Loans are secured by liens on real
estate that are not first liens, as required by SMMEA. Accordingly, many
institutions with legal authority to invest in "mortgage related securities"
may not be legally authorized to invest in the Offered Certificates.
Institutions whose investment activities are subject to legal investment
laws or regulations or review by certain regulatory authorities may be
subject to restrictions on investment in certain Classes of the Certificates.
Any financial institution which is subject to the jurisdiction of the
Comptroller of the Currency, the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation ("FDIC"), the Office of
Thrift Supervision ("OTS"), the National Credit Union Administration
("NCUA"), or other federal or state agencies with similar authority should
review any applicable rules, guidelines and regulations prior to purchasing
the Certificates. The Federal Financial Institutions Examination Council, for
example, has issued a Supervisory Policy Statement on Securities Activities
effective February 10, 1992 (the "POLICY STATEMENT"). The Policy Statement
has been adopted by the Comptroller of the Currency, the Federal Reserve
Board, the FDIC, the OTS, and the NCUA (with certain modifications), with
respect to the depository institutions that they regulate. The Policy
Statement prohibits depository institutions from investing in certain
"high-risk mortgage securities" (including securities such as certain Classes
of Certificates), except under limited circumstances, and sets forth certain
investment practices deemed to be unsuitable for regulated institutions. The
NCUA issued final regulations effective December 2, 1991 that restrict and in
some instances prohibit the investment by federal credit unions in certain
types of mortgage related securities.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not
limited to "prudent investor" provisions, percentage-of-assets limits and
provisions which may restrict or prohibit investment in securities which are
not "interest bearing" or "income paying", or in securities which are issued
in book-entry form.
Investors should consult their own legal advisors in determining whether
and to what extent the Certificates constitute legal investments for such
investors.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and Section 4975 of the Code impose 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 Section 4975 of the
Code 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
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standards of investment prudence and diversification, ERISA prohibits a broad
range of transactions ("PROHIBITED 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. Section 4975 of the Code provides
many requirements and prohibitions similar to those under ERISA and applies
excise taxes on persons engaged in Prohibited Transactions.
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, the "PLAN ASSET REGULATIONS") Under the Plan Asset
Regulations, 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. The Certificates of a
Series will be treated as "equity" for purposes of ERISA. Certain exceptions
to the regulation may apply in the case of a Plan's investment in the
Certificates that constitute "equity" investments, 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 or Agency
Securities may be deemed Plan assets of each Plan that purchases such
Certificates, an investment in such Certificates 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 Class Exemption 83-1 ("PTCE 83-1") exempts from
ERISA's prohibited transaction rules certain transactions relating to the
operation of residential mortgage pool investment trusts and the purchase,
sale and holding of "mortgage pool pass-through certificates" in the initial
issuance of such certificates. PTCE 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.
PTCE 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 certificateholders 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 pool 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 to the Mortgage Pool.
Although the Trustee for any series of Certificates will be unaffiliated
with the Depositor, there can be no assurance that the system of insurance or
subordination will meet the general or specific conditions referred to above.
In addition, the nature of a Trust Fund's assets or the characteristics of
one or more classes of the related series of Certificates may not be included
within the scope of PTCE 83-1 or any other class exemption under ERISA. The
Prospectus Supplement will provide additional information with respect to the
application of ERISA and the Code to the related Certificates.
Several underwriters of mortgage-backed securities have applied for and
obtained ERISA prohibited transactions exemptions which are in some respects
broader than PTCE 83-1. Such exemptions can only apply to mortgage-backed
securities which, among other conditions, are sold in an offering with
respect to which such underwriter serves as the sole or a managing
underwriter, or as a selling or placement agent. Several other underwriters
have applied for similar exemptions. If such an exemption might be applicable
to a Series of Certificates, the related Prospectus Supplement will refer to
such possibility.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold Certificates must make
its own determination as to whether the general and the specific conditions
of PTCE 83-1 have been satisfied, or as to the availability of any other
prohibited transaction exemptions. Each Plan fiduciary should also determine
whether, under the general fiduciary standards of investment prudence and
diversification, an investment in the Certificates is appropriate for the
Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
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Any Plan proposing to invest in Certificates should consult with its
counsel to confirm that such investment will not result in a Prohibited
Transaction and will satisfy the other requirements of ERISA and the Code.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of
Certificates of any Series, to the extent it relates to matters of law or
legal conclusions with respect thereto, represents the opinion of counsel to
the Depositor with respect to that Series on the material matters associated
with such consequences, subject to any qualifications set forth herein.
Counsel to the Depositor for each Series will be Andrews & Kurth L.L.P.
("COUNSEL TO THE DEPOSITOR"). In connection with each Series of
Certificates, Counsel to the Depositor will issue an opinion with respect to
the material tax aspects of such Series, and the Depositor will cause such
opinion to be timely filed with the Commission as an exhibit to a Form 8-K.
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 enactment of the Tax Reform Act of 1986 (the "1986 ACT"), the
Technical and Miscellaneous Revenue Act of 1988 ("TAMRA") and the Revenue
Reconciliation Act of 1993, as well as final Treasury regulations concerning
REMICs ("FINAL REMIC REGULATIONS") promulgated by the U.S. Department of the
Treasury on December 23, 1992. Investors should consult their own tax
advisors in determining the federal, state, local and any other tax
consequences to them of the purchase, ownership and disposition of
Certificates, particularly with respect to federal income tax changes
effected by the 1986 Act, TAMRA and the Final REMIC Regulations. The
Prospectus Supplement for each series of Certificates will discuss any
special tax consideration applicable to any Class or Classes of Certificates
of such Series, and the discussion below is qualified by any such discussion
in the related Prospectus Supplement.
For purposes of this discussion, where the applicable Prospectus Supplement
provides for a fixed retained yield with respect to the Mortgage Loans,
Agency Securities or Contracts underlying a Series of Certificates,
references to the Mortgage Loans, Agency Securities or Contracts will be
deemed to refer to that portion of the Mortgage Loans, Agency Securities or
Contracts held by the Trust Fund which does not include the fixed retained
yield.
FEDERAL INCOME TAX CONSEQUENCES FOR REMIC CERTIFICATES
GENERAL
With respect to a particular Series of Certificates, an election may be
made to treat the Trust Fund or one or more segregated pools of assets
therein as one or more REMICs within the meaning of Code Section 860D. A
Trust Fund or a portion or portions thereof as to which a REMIC election will
be made will be referred to as a "REMIC POOL." For purposes of this
discussion, Certificates of a Series as to which one or more REMIC elections
are made are referred to as "REMIC CERTIFICATES" and will consist of one or
more Classes of "REGULAR CERTIFICATES" and one Class of "RESIDUAL
CERTIFICATES" in the case of each REMIC Pool. Qualification as a REMIC
requires ongoing compliance with certain conditions. Upon the issuance of
each Series of REMIC Certificates, Counsel to the Depositor will give its
opinion generally to the effect that, assuming (i) the making of an
appropriate election, (ii) compliance with the Pooling and Servicing
Agreement, and (iii) continuing compliance with the applicable provisions of
the Code, as it may be amended from time to time, and any applicable Treasury
regulations adopted thereunder, each REMIC Pool will qualify as a REMIC.
The following general discussion of the anticipated federal income tax
consequences of the purchase, ownership and disposition of REMIC
Certificates, to the extent it relates to matters of law or legal conclusions
with respect thereto, represents the opinion of Counsel to the Depositor,
subject to any qualifications set forth herein. In addition, Counsel to the
Depositor has prepared or reviewed the statements in this Prospectus under
the heading "Certain Federal Income Tax Consequences - Federal Income Tax
Consequences for REMIC Certificates," and is of the opinion that such
statements are correct in all material respects. Such statements are
intended as an explanatory discussion of the possible effects of the
classification of any Trust Fund (or applicable portion thereof) as a REMIC
for federal income tax purposes on investors generally and of related tax
matters affecting investors generally, but do not purport to furnish
information in the level of detail or with the attention to an investor's
specific tax circumstances that would be provided by an investor's own tax
advisor. Accordingly, each investor is advised to consult its own tax
advisors with regard to the tax consequences to it of investing in REMIC
Certificates. With respect to each Series of REMIC Certificates, the Regular
Certificates will be considered to be "regular interests" in the REMIC Pool
and generally will be treated for federal income tax purposes as if they were
newly originated debt instruments, and the Residual Certificates will be
considered to be "residual interests" in the REMIC Pool. The Prospectus
Supplement for each Series of Certificates will indicate whether one or more
REMIC elections with respect to the related Trust Fund will be made, in which
event references to "REMIC" or "REMIC Pool" herein shall be deemed to refer
to each such REMIC
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Pool. For purposes of this discussion, to the extent specified herein or in
the applicable Prospectus Supplement, the term "Mortgage Loans" will be used
to refer to Mortgage Loans, Agency Securities and Contracts.
STATUS OF REMIC CERTIFICATES
REMIC Certificates held by a mutual savings bank or a domestic building and
loan association (a "THRIFT INSTITUTION") will constitute "qualifying real
property loans" within the meaning of Code Section 593(d)(1) in the same
proportion that the assets of the REMIC Pool would be so treated. REMIC
Certificates held by a domestic building and loan association will constitute
"a regular or residual interest in a REMIC" within the meaning of Code
Section 7701(a)(19)(C)(xi) in the same proportion that the assets of the
REMIC Pool would be treated as "loans . . . secured by an interest in real
property" within the meaning of Code Section 7701(a)(19)(C)(v) or as other
assets described in Code Section 7701(a)(19)(C). REMIC Certificates held by a
real estate investment trust (a "REIT") will constitute "real estate assets"
within the meaning of Code Section 856(c)(5)(A), and interest on the REMIC
Certificates will be considered "interest on obligations secured by mortgages
on real property or on interests in real property" within the meaning of Code
Section 856(c)(3)(B) in the same proportion that, for both purposes, the
assets of the REMIC Pool would be so treated. However, if at all times 95% or
more of the assets of the REMIC Pool constitute qualifying assets for Thrift
Institutions and REITs, the REMIC Certificates will be treated entirely as
qualifying assets for such entities (and the income will be treated entirely
as qualifying income). Moreover, the Final 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 Loans that are reinvested pending
distribution to holders of REMIC Certificates constitute qualifying assets
for such entities. Where two REMIC Pools are part of a tiered structure they
will be treated as one REMIC for purposes of the tests described above
respecting asset ownership of more or less than 95%. Notwithstanding the
foregoing, however, REMIC income received by a REIT owning a residual
interest in a REMIC Pool could be treated in part as non-qualifying REIT
income if the REMIC Pool holds Mortgage Loans with respect to which income is
contingent on borrower profits or property appreciation. In addition, if the
assets of the REMIC include buy-down Mortgage Loans, it is possible that the
percentage of such assets constituting "qualifying real property loans" or
"loans . . . secured by an interest in real property" for purposes of Code
Sections 593(d)(1) and 7701(a)(19)(C)(v), respectively, may be required to be
reduced by the amount of the related buy-down funds. REMIC Certificates held
by a regulated investment company will not constitute "Government securities"
within the meaning of Code Section 851(b)(4)(A)(i). REMIC Certificates held
by certain financial institutions will constitute an "evidence of
indebtedness" within the meaning of Code Section 582(c)(1). However, REMIC
Regular Certificates acquired by another REMIC on its Startup Day (as defined
below) in exchange for regular or residual interests in the REMIC will
constitute "qualified mortgages" within the meaning of Code Section
860G(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 "STARTUP DAY" (which
for purposes of this discussion is the date of issuance of the REMIC
Certificates) and at all times thereafter, may consist of assets other than
"qualified mortgages" and "permitted investments." The Final 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 for federal income tax purposes is uncertain. The
REMIC Pool might be entitled to treatment as a grantor trust under the rules
described in "Federal Income Tax Consequences for Certificates as to Which No
REMIC Election Is Made" herein. In that case, no entity-level tax would be
imposed on the REMIC Pool. Alternatively, the Regular Certificates may
continue to be treated as debt instruments for federal income tax purposes;
but the REMIC Pool could be treated as a taxable mortgage pool (a "TMP"). If
the REMIC Pool is treated as a TMP, any residual income of the REMIC Pool
(i.e. , income from the Mortgage Loans less interest and original issue
discount expense allocable to the Regular Certificates and any administrative
expenses of the REMIC Pool) would be subject to corporate income tax at the
REMIC Pool level. On the other hand, an entity with multiple classes of
ownership interests may be treated as a separate association taxable as a
corporation under Treasury regulations, and the Regular Certificates may be
treated as equity interests therein. The Code, however, authorizes the
Treasury Department to issue regulations that address situations where
failure to meet one or more of the
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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 1986 Act (the "COMMITTEE REPORT") indicates that the relief may be
accompanied by sanctions, such as the imposition of a corporate tax on all or
a portion of the REMIC Pool's income for the period of time in which the
requirements for REMIC status are not satisfied.
TAXATION OF REGULAR CERTIFICATES
GENERAL. Payments received by holders of Regular Certificates generally
should be accorded the same tax treatment under the Code as payments received
on ordinary taxable corporate debt instruments. In general, interest,
original issue discount and market discount on a Regular Certificate will be
treated as ordinary income to a holder of the Regular Certificate (the
"REGULAR CERTIFICATEHOLDER") as they accrue, and principal payments on a
Regular Certificate will be treated as a return of capital to the extent of
the Regular Certificateholder's basis in the Regular Certificate allocable
thereto. Regular Certificateholders must use the accrual method of accounting
with regard to Regular Certificates, regardless of the method of accounting
otherwise used by such Regular Certificateholders.
ORIGINAL ISSUE DISCOUNT. Regular Certificates may be issued with
"original issue discount" within the meaning of Code Section 1273(a). Holders
of any class of Regular Certificates having original issue discount generally
must include original issue discount in ordinary income for federal income
tax purposes as it accrues, in accordance with a constant interest method
that takes into account the compounding of interest, in advance of receipt of
the cash or a portion of the cash attributable to such income. Based in part
on Treasury regulations issued on January 27, 1994 under Code Sections 1271
through 1273 and 1275 (the "OID REGULATIONS") and in part on the provisions
of the 1986 Act, the Depositor anticipates that the amount of original issue
discount required to be included in a Regular Certificateholder's income in
any taxable year will be computed in a manner substantially as described
below. In general the OID Regulations apply to debt instruments issued on or
after April 4, 1994, except that taxpayers may rely on the OID Regulations
for debt instruments issued after December 21, 1992. Alternatively, proposed
Treasury regulations issued December 21, 1992 may be treated as authority for
debt instruments issued after December 21, 1992 and prior to April 4, 1994,
and proposed Treasury regulations issued in 1986 and 1991 may be treated as
authority upon for instruments issued before December 21, 1992. Regular
Certificateholders should be aware, however, that the OID Regulations either
do not address, or are subject to varying interpretations with regard to,
several issues relevant to securities, such as the Regular Certificates, that
are subject to prepayment. The 1986 Act requires that the amount and rate of
accrual or original issue discount be calculated based on a reasonable
assumed prepayment rate for the Mortgage Loans in a manner prescribed by
regulations not yet issued ("PREPAYMENT ASSUMPTION") and provides for
adjusting the amount and rate of accrual of such discount where the actual
prepayment rate differs from the Prepayment Assumption. The Committee Report
indicates that the regulations will require that the Prepayment Assumption be
the prepayment assumption that is used in determining the initial offering
price of such Certificates. The Prospectus Supplement for each Series of
such Certificates will specify the Prepayment Assumption determined by the
Depositor for the purposes of determining the amount and rate of accrual of
original issue discount. No representation is made that the Certificates will
prepay at the Prepayment Assumption or at any other rate. Moreover, the OID
Regulations include an anti-abuse rule allowing the Internal Revenue Service
("IRS") to apply or depart from the OID Regulations where necessary or
appropriate to ensure a reasonable tax result in light of the applicable
statutory provisions. A tax result will not be considered unreasonable under
the anti-abuse rule in the absence of a substantial effect on the present
value of a taxpayer's tax liability. Investors are advised to consult their
own tax advisors as to the discussion herein and the appropriate method for
reporting interest and original issue discount with respect to the Regular
Certificates.
Under the OID Regulations, each Regular Certificate (except to the extent
described below with respect to a Regular Certificate on which distributions
of principal are made in a single installment or upon an earlier distribution
by lot of a specified principal amount upon the request of a Regular
Certificateholder or by random lot (a "RETAIL CLASS CERTIFICATE")) will be
treated as a single installment obligation for purposes of determining the
original issue discount includible in a Regular Certificateholder's income.
The total amount of original issue discount on a Regular Certificate is the
excess of the "stated redemption price at maturity" of the Regular
Certificate over its "issue price." The issue price of a Regular Certificate
is the first price at which a substantial amount of Regular Certificates of
that class are first sold (other than to bond houses, brokers, underwriters
and wholesalers). Unless specified otherwise in the Prospectus Supplement,
the Depositor will determine original issue discount by including the amount
paid by an initial Regular Certificateholder for accrued interest that
relates to a period prior to the issue date of the Regular Certificate in the
issue price of a Regular Certificate and will include in the stated
redemption price at maturity any interest paid on the first Distribution Date
to the extent such interest is attributable to a period in excess of the
number of days between the issue date and such first Distribution Date. The
stated
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redemption price at maturity of a Regular Certificate always includes the
original principal amount of the Regular Certificate, but generally will not
include distributions of stated interest if such interest distributions
constitute "qualified stated interest." Under the OID Regulations, qualified
stated interest generally means stated interest that is unconditionally
payable in cash or in property (other than debt instruments of the issuer),
or that will be constructively received, at least annually at a single fixed
rate. Special rules apply for variable rate Regular Certificates as described
below. Any stated interest in excess of the qualified stated interest is
included in the stated redemption price at maturity. If the amount of
original issue discount is "de minimis" as described below, the amount of
original issue discount is treated as zero, and all stated interest is
treated as qualified stated interest. Distributions of interest on Regular
Certificates with respect to which deferred interest will accrue may not
constitute qualified stated interest, in which case the stated redemption
price at maturity of such Regular Certificates includes all distributions of
interest as well as principal thereon. Moreover, if the interval between the
issue date and the first Distribution Date on a Regular Certificate is longer
than the interval between subsequent Distribution Dates (and interest paid on
the first Distribution Date is less than would have been earned if the stated
interest rate were applied to outstanding principal during each day in such
interval), the stated interest distributions on such Regular Certificate
technically do not constitute qualified stated interest. The OID Regulations
provide that in such case a special rule, applying solely for the purpose of
determining whether original issue discount is de minimis, provides that the
interest shortfall for the long first period (i.e., the interest that would
have been earned if interest had been paid on the first Distribution Date for
each day the Regular Certificate was outstanding) is treated as original
issue discount assuming the stated interest would otherwise be qualified
stated interest. Also in such case the stated redemption price at maturity is
treated as equal to the issue price plus the greater of the amount of
foregone interest or the excess, if any, of the Certificate's stated
principal amount over its issue price. The OID Regulations indicate that all
interest on a long first period Regular Certificate that is issued with
non-de minimis original issue discount will be included in the Regular
Certificate's stated redemption price at maturity. Regular Certificateholders
should consult their own tax advisors to determine the issue price and stated
redemption price at maturity of a Regular Certificate.
Under a de minimis rule, original issue discount on a Regular Certificate
will be considered to be zero if such original issue discount is less than
0.25% of the stated redemption price at maturity of the Regular Certificate
multiplied by the weighted average maturity of the Regular Certificate. For
this purpose, the weighted average maturity of the Regular Certificate is
computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled
to be made by a fraction, the numerator of which is the amount of each
distribution included in the stated redemption price at maturity of the
Regular Certificate and the denominator of which is the stated redemption
price at maturity of the Regular Certificate. Although currently unclear, it
appears that the schedule of such distributions should be determined in
accordance with the Prepayment Assumption. In addition, if the original issue
discount is de minimis all stated interest (including stated interest that
would otherwise be treated as original issue discount) is treated as
qualified stated interest. Unless the Holder of a Regular Certificate elects
to accrue all discount under a constant yield to maturity method, as
described below, the holder of a debt instrument includes any de minimis
original issue discount in income pro rata as capital gain recognized on
retirement of the Regular Certificate as stated principal payments are
received. If a subsequent Holder of a Regular Certificate issued with de
minimis original issue discount purchases the Regular Certificate at a
premium, the subsequent Holder does not include any original issue discount
in income. If a subsequent Holder purchases such Regular Certificate at a
discount all discount is reported as market discount, as described below.
Of the total amount of original issue discount on a Regular Certificate,
the Regular Certificateholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the
original issue discount on the Regular Certificate accrued during an accrual
period for each day on which he holds the Regular Certificate, including the
date of purchase but excluding the date of disposition. Although not free
from doubt, the Depositor intends to treat the monthly period ending on the
day before each Distribution Date as the accrual period, rather than the
monthly period corresponding to the prior calendar month. With respect to
each Regular Certificate, a calculation will be made of the original issue
discount that accrues during each successive full accrual period (or shorter
period from the date of original issue) that ends on the day before the
related Distribution Date for the Regular Certificate. The original issue
discount accruing in a full accrual period would be the excess, if any, of
(i) the sum of (a) the present value of all of the remaining distributions to
be made on the Regular Certificate as of the end of that accrual period that
are included in the Regular Certificate's stated redemption price at maturity
and (b) the distributions made on the Regular Certificate during the accrual
period that are included in the Regular Certificate's stated redemption price
at maturity, over (ii) the adjusted issue price of the Regular Certificate at
the beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence is calculated based on
(i) the yield to maturity of the Regular Certificate at the issue date giving
the effect to the Prepayment Assumption, (ii) events (including actual
prepayments) that have occurred prior to the end of the accrual period
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and (iii) the Prepayment Assumption. The effect of these rules is to adjust
the rate of original issue discount accrual to correspond to the actual
prepayment experience. For these purposes, the adjusted issue price of a
Regular Certificate at the beginning of any accrual period equals the issue
price of the Regular Certificate, increased by the aggregate amount of
original issue discount with respect to the Regular Certificate that accrued
in all prior accrual periods and reduced by the amount of distributions
included in the Regular Certificate's stated redemption price at maturity
that were made on the Regular Certificate in such prior periods. 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. With respect to an initial accrual period shorter than a full accrual
period, the daily portions of original issue discount must be determined
using a reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Certificateholder
generally will increase to take into account prepayments on the Regular
Certificates as a result of prepayments on the Mortgage Loans 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. To
the extent specified in the applicable Prospectus Supplement, an increase in
prepayments on the Mortgage Loans with respect to a Series of Regular
Certificates can result in both a change in the priority of principal
payments with respect to certain Classes of Regular Certificates and either
an increase or decrease in the daily portions of original issue discount with
respect to such Regular Certificates.
In the case of a Retail Class Certificate, the yield to maturity of such
Certificate will be determined based upon the anticipated payment
characteristics of the Class as a whole under the Prepayment Assumption. In
general, the original issue discount accruing on each Retail Class
Certificate in a full accrual period would be its allocable share of the
original issue discount with respect to the entire Class, as determined in
accordance with the preceding paragraph. However, in the case of a
distribution of the entire principal amount of any Retail Class Certificate
(or portion thereof), (a) the remaining unaccrued original issue discount
allocable to such Certificate (or to such portion) will accrue at the time of
such distribution, and (b) the accrual of original issue discount allocable
to each remaining Certificate of such Class (or the remaining principal
amount of a Retail Class Certificate after a distribution in reduction of a
portion of its principal amount has been received) will be adjusted by
reducing the present value of the remaining payments on such Class and the
adjusted issue price of such Class to the extent attributable to the portion
of the principal amount thereof that was distributed.
A subsequent holder of a Certificate issued with original issue discount
who purchases the Certificate at a cost less than the remaining stated
redemption price at maturity will also be required to include in gross income
the sum of the daily portions of original issue discount on the Certificate.
In computing the daily portions of original issue discount for a subsequent
purchaser (as well as an initial purchaser who purchases a Certificate at a
price higher than the issue price but less than the stated redemption price
at maturity), however, the daily portion for any day is reduced by the amount
that would be the daily portion for such day (computed in accordance with the
rules set forth above) multiplied by a fraction, the numerator of which is
the amount, if any, by which the price paid by such purchaser for the Regular
Certificate exceeds the excess of (i) the sum of its issue price and the
aggregate amount of original issue discount that would have been includible
in the gross income of an original holder of the Regular Certificate who
purchased the Regular Certificate at its issue price, over (ii) the amount of
any prior distributions included in the stated redemption price at maturity,
and the denominator of which is the sum of the daily portions for such
Regular Certificate (computed in accordance with the rules set forth above)
for all days beginning on the date after the date of purchase and ending on
the date on which the remaining principal amount of such Regular Certificate
is expected to be reduced to zero under the Prepayment Assumption.
Alternatively, such a subsequent holder may accrue original issue discount by
treating the purchase as a purchase at original issuance and applying the
constant yield to maturity method.
The OID Regulations provide that a holder that acquires a Regular
Certificate on or after April 4, 1994 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 such an election were made
with respect to a Regular Certificate with market discount, the Regular
Certificateholder would be deemed to have made an election to include in
income currently market discount with respect to all other debt instruments
having market discount that such Regular Certificateholder acquires during
the year of the election or thereafter. Similarly, a Regular
Certificateholder that makes this election for a Regular Certificate that is
acquired at a premium will be deemed to have made an election to amortize
bond premium with respect to all debt instruments having amortizable bond
premium that such Regular Certificateholder owns or acquires. The election to
accrue interest, discount and premium on a constant yield method with respect
to a Regular Certificate can not be revoked without the consent of the IRS.
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Regular Certificates may provide for interest based on a variable rate. The
OID Regulations provide special rules for variable rate instruments that meet
three requirements. First, the issue price must not exceed the noncontingent
principal payments by more than the lesser of (i) 1.5% of the product of the
noncontingent principal payments and the weighted average maturity or (ii)
15% of the 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 and a single
objective rate that is a qualified inverse floating rate, (iii) a single
fixed rate and one or more qualified floating rates; or (iv) a single
objective rate. Third, the instrument must provide that each qualified
floating rate or objective rate in effect during the term of the Regular
Certificate is set at a current value of that rate (one occurring in the
interval beginning three months before and ending one year after the rate is
first in effect on the Regular Certificate). If interest on a Regular
Certificate is stated at a fixed rate for an initial period of less than 1
year followed by a variable rate that is either a qualified floating rate or
an objective rate and the value of the variable rate on the issue date is
intended to approximate the fixed rate, the fixed rate and the variable rate
together constitute a single qualified floating rate or objective rate. 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 in the Regular Certificate's currency denomination. A multiple of a
qualified floating rate is not a qualified floating rate unless it is a rate
equal to (i) the product of a qualified floating rate as described in the
previous sentence and a positive number not greater than 1.35, or (ii) a
product described in (i) increased or decreased by a fixed rate. A variable
rate is not a qualified floating rate if it is subject to a cap, floor or a
restriction on the amount of increase or decrease in stated interest rate
(governor) unless: (i) the cap, floor or governor is fixed throughout the
Regular Certificate's term, (ii) the cap or floor is not reasonably expected
to cause the yield on the Regular Certificate to be significantly less or
more, respectively, than the expected yield without the cap or floor, or
(iii) the governor is not reasonably expected to cause the yield to be
significantly more or less than the expected yield without the governor. An
objective rate is a rate that is determined using a single fixed formula and
is based on (i) the yield or changes in price of actively traded personal
property, (ii) one or more qualified floating rates, (iii) a rate that would
be a qualified rate if the Regular Certificate were denominated in another
currency or (iv) a combination of such rates. An objective rate is a
qualified inverse floating rate if the rate is equal to a fixed rate minus a
qualified floating rate in which the variations of such rate can reasonably
be expected to inversely reflect contemporaneous variations in the cost of
newly borrowed funds. However, a variable rate is not an objective rate if it
is reasonably expected that the average value of the rate during the first
half of the Regular Certificate's term will be significantly less or greater
than the average value of the rate during the final half of the Regular
Certificate's term.
If a variable rate Regular Certificate provides for stated interest at a
single qualified floating rate or objective rate that is unconditionally
payable in cash or property at least annually (i) all stated interest is
qualified stated interest, (ii) the amount of original issue discount, if
any, is determined as if the Regular Certificate had a fixed rate equal to
(A) in the case of a qualified floating rate or qualified inverse floating
rate, the value on the issue date of the qualified floating rate or qualified
inverse floating rate or (B) in the case of any other objective rate, a fixed
rate that reflects the yield that is reasonably expected for the Regular
Certificate. If a variable rate Regular Certificate is not described in the
previous sentence, the Regular Certificate is treated as a fixed rate Regular
Certificate with a fixed rate substitute or substitutes equal to the value of
the qualified floating rates or qualified inverse floating rate at the date
of issue or, in the case of a Regular Certificate having an objective rate at
a fixed rate that reflects the yield reasonably expected for the Regular
Certificate. Qualified stated interest or original issue discount allocable
to an accrual period is adjusted to reflect differences in the interest
actually accrued or paid compared to the interest accrued or paid at the
fixed rate substitute. If a variable rate Regular Certificate provides for
stated interest either at one or more qualified floating rates or at a
qualified inverse floating rate and also provides for interest at an initial
fixed rate that is not intended to approximate the related floating rate or
is fixed for a period of one year or more, original issue discount is
determined as described in the previous two sentences except that the Regular
Certificate is treated as if it provided for a qualified floating rate or
qualified inverse floating rate, as applicable, rather than a fixed rate. The
substitute rate must be one such that the fair market value of the Regular
Certificate would be approximately the same as the fair market value of the
hypothetical certificate.
Under the OID Regulations, a variable rate Regular Certificate not
qualifying for treatment under the variable rate rules described above is
subject to the contingent payment rules. Proposed regulations dealing with
contingent payment debt obligations were issued December 15, 1994 (the
"PROPOSED REGULATIONS"), and replace former proposed regulations addressing
the same topic that were issued on April 8, 1986 (the "FORMER PROPOSED
REGULATIONS"), so that the former proposed regulations have been
retroactively withdrawn. The Proposed Regulations are proposed to be
effective for debt obligations issued on or after the date that is 60 days
following the promulgation of the regulations in final form. Because the
former proposed regulations never came into effect, however, the Proposed
Regulations provide the only regulatory guidance in this area and by their
terms do not apply to REMIC regular interests. However, the following
paragraph describes the applicable of the Proposed Regulations as a method
that may be considered reasonable.
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The Proposed Regulations apply a "noncontingent bond method" to a Regular
Certificate that is publicly traded or that is issued for cash or publicly
traded property. Under the noncontingent bond method, the Depositor is
required to construct a projected payment schedule for the Regular
Certificate consisting of all noncontingent payments and a projected amount
for each contingent payment. The Depositor is required to determine interest
expense, and a Regular Certificateholder is required to determine interest
income, according to the projected payment schedule formulated by the
Depositor. Interest generally is accrued under the noncontingent bond method
according to generally applicable rules of the OID Regulations as described
above. Adjustments in the Regular Certificate's issue price and the Regular
Certificateholder's basis are determined as if the projected payment schedule
were the actual payment schedule for the Regular Certificate. If the actual
amount of a contingent payment differs from the projected amount of the
payment, adjustments to interest accrual are generally taken into account at
the time the payment is made in order to reflect this difference. Gain or
loss recognized by a Regular Certificateholder on the sale, exchange, or
retirement of the Regular Certificate generally will be treated as interest
income or ordinary loss to the Regular Certificateholder. A loss will be
treated as ordinary, however, only up to the amount of the Regular
Certificateholder's total interest inclusions with respect to the Regular
Certificate that were not offset by previous adjustments. Any additional
loss generally will be a capital loss. Investors are urged to consult their
tax advisors as to the proper accrual of original issue discount (including
stated interest) on the Regular Certificates, including Regular Certificates
which may be subject to the contingent payment rules.
Although unclear at present, the Depositor intends to treat Certificates
bearing an interest rate that is a weighted average of the net interest rates
on the Mortgage Loans or the mortgage loans underlying the Mortgage Assets
as having qualified stated interest if the Mortgage Loans or the underlying
mortgage loans are adjustable rate mortgage loans. In such case, the
applicable index used to compute interest on the Mortgage Loans in effect on
the issue date (or possibly the pricing date) will be deemed to be in effect
beginning with the period in which the first weighted average adjustment date
occurring after the issue date occurs. If the Certificate interest rate for
one or more periods is less than it would be based upon the fully indexed
rate, the excess of the interest payments projected at the assumed index over
interest projected at such initial rate will be tested under the de minimis
rules as described above. Adjustments will be made in each accrual period
increasing or decreasing the amount of ordinary income reportable to reflect
the actual interest rate on the Certificates. It is possible, however, that
the IRS may treat some or all of the interest on Certificates with a weighted
average rate as taxable under the rules relating to obligations providing for
contingent payments. Such treatment may affect the timing of income accruals
on such Certificates.
It is not clear how income should be accrued with respect to Regular
Certificates issued at a significant premium and with respect to REMIC
Certificates, the payments on which consist primarily of a specified portion
of the interest payments on qualified mortgages held by the REMIC ("PREMIUM
REMIC REGULAR CERTIFICATES"). One method of income accrual would be to treat
the Premium REMIC Regular Certificate as a Certificate having qualified
stated interest purchased at a premium equal to the excess of the price paid
by such holder for the Premium REMIC Regular Certificate over its stated
principal amount. Under this approach, a holder would be entitled to
amortize such premium only if it has in effect an election under Section 171
of the Code with respect to all bonds held by such holder, as described
below. Alternatively, all of the income derived from a Premium REMIC Regular
Certificate could be reported as original issue discount by treating all
future payments under the Prepayment Assumption as fixed payments, in which
case the amount and rate of accrual of original issue discount would be
computed by treating the Premium REMIC Regular Certificate as a Certificate
which has no qualified stated interest, as described above. Finally, the IRS
could assert that the Premium REMIC Regular Certificates should be taxable
under the contingent payment rules governing securities issued with
contingent payments.
MARKET DISCOUNT. A purchaser of a Regular Certificate also may be subject
to the market discount rules of Code Sections 1276 through 1278. Under these
sections and the principles applied by the OID Regulations in the context of
original issue discount, "market discount" is the amount by which a
subsequent purchaser's initial basis in the Regular Certificate (i) is
exceeded by the stated redemption price at maturity of the Regular
Certificate or (ii) in the case of a Regular Certificate having original
issue discount, is exceeded by the sum of the issue price of such Regular
Certificate plus any original issue discount that would have previously
accrued thereon if held by an original Regular Certificateholder (who
purchased the Regular Certificate at its issue price), in either case less
any prior distributions included in the stated redemption price at maturity
of such Regular Certificate. Such purchaser generally will be required to
recognize accrued market discount as ordinary income as distributions
includible in the stated redemption price at maturity of such Regular
Certificate are received, in an amount not exceeding any such distribution.
That recognition rule would apply regardless of whether the purchaser is a
cash-basis or accrual-basis taxpayer. Such market discount would accrue in a
manner to be provided in Treasury regulations and should take into account
the Prepayment Assumption. The Committee Report 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
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allocable to the relevant period to the sum of the interest for such period
plus the remaining interest as of the end of such period, or in the case of a
Regular Certificate issued with original issue discount, in the ratio of
original issue discount accrued for the relevant period to the sum of the
original issue discount accrued for such period plus the remaining original
issue discount as of the end of such period. Such purchaser also generally
will be required to treat a portion of any gain on a sale or exchange of the
Regular Certificate as ordinary income to the extent of the market discount
accrued to the date of disposition under one of the foregoing methods, less
any accrued market discount previously reported as ordinary income as partial
distributions in reduction of the stated redemption price at maturity were
received. Such purchaser will be required to defer the deduction of a portion
of the excess of the interest paid or accrued on indebtedness incurred to
purchase or carry a Regular Certificate over the interest distributable
thereon. The deferred portion of such interest expense in any taxable year
generally will not exceed the accrued market discount on the Regular
Certificate for such year. Any such deferred interest expense is, in general,
allowed as a deduction not later than the year in which the related market
discount income is recognized or the Regular Certificate is disposed of. As
an alternative to the inclusion of market discount in income on the foregoing
basis, the Regular Certificateholder may elect to include market discount in
income currently as it accrues on all market discount instruments acquired by
such Regular Certificateholder in that taxable year or thereafter, in which
case the interest deferral rule will not apply. In Revenue Procedure 92-67,
the IRS set forth procedures for taxpayers (1) electing under Section 1278(b)
of the Code to include market discount in income currently, (2) electing
under rules of Section 1276(b) of the Code to use a constant interest rate to
determine accrued market discount on a security where the holder of the
security is required to determine the amount of accrued market discount at a
time prior to the holder's disposition of the security, and (3) requesting
consent to revoke an election under Section 1278(b) of the Code.
By analogy to the OID Regulations, market discount with respect to a
Regular Certificate will be considered to be zero if such market discount is
less than 0.25% of the remaining stated redemption price at maturity of such
Regular Certificate multiplied by the weighted average maturity of the
Regular Certificate (determined as described above under "Original Issue
Discount") remaining after the date of purchase. Treasury regulations
implementing the market discount rules have not yet been issued, and
therefore investors should consult their own tax advisors regarding the
application of these rules as well as the advisability of making any of the
elections with respect thereto.
PREMIUM. A Regular Certificate purchased at a cost greater than its
remaining stated redemption price at maturity generally is considered to be
purchased at a premium. If the Regular Certificateholder holds such Regular
Certificate as a "capital asset" within the meaning of Code Section 1221, the
Regular Certificateholder may elect under Code Section 171 to amortize such
premium under a constant yield method that reflects compounding based on the
interval between payments on the Regular Certificates. The Committee Report
indicates a Congressional intent that the same rules that apply to the
accrual of market discount on installment obligations will also apply to
amortizing bond premium under Code Section 171 on installment obligations
such as the Regular Certificates, although it is unclear whether the
alternatives to the constant interest method described above under "Market
Discount" are available. Except as otherwise provided in Treasury regulations
yet to be issued, such amortizable bond premium will be treated as an offset
to interest income on a Regular Certificate rather than as a separate
deduction item. This election, once made, applies to all taxable obligations
held by the taxpayer at the beginning of the first taxable year to which such
election applies and to all taxable debt obligations thereafter acquired and
is binding on such taxpayer in all subsequent years. Purchasers who pay a
premium for their Regular Certificates should consult their tax advisors
regarding the election to amortize premium and the method to be employed.
SALE OR EXCHANGE OF REGULAR CERTIFICATES. If a Regular Certificateholder
sells or exchanges a Regular Certificate, the Regular Certificateholder will
recognize gain or loss equal to the difference, if any, between the amount
received and his adjusted basis in the Regular Certificate. The adjusted
basis of a Regular Certificate generally will equal the cost of the Regular
Certificate to the seller, increased by any original issue discount or market
discount previously included in the seller's gross income with respect to the
Regular Certificate and reduced by amounts included in the stated redemption
price at maturity of the Regular Certificate that were previously received by
the seller and by any amortized premium.
Except as described in this paragraph, under "Original Issue Discount" and
under "Market Discount," any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate
as a capital asset will be capital gain or loss and will be long-term or
short-term depending on whether the Regular Certificate has been held for the
long-term capital gain holding period (currently more than one year). Gain
from the disposition of a Regular Certificate that might otherwise be capital
gain will be treated as ordinary income (i) if a Regular Certificate is held
as part of a "conversion transaction" as defined in Code Section 1258(c), up
to the amount of interest that would have accrued on the Regular
Certificateholder's net investment in the conversion transaction at 120% of
the appropriate applicable Federal
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rate under Code Section 1274(d) in effect at the time the taxpayer entered
into the transaction minus any amount previously treated as ordinary income
with respect to any prior disposition of property that was held as part of
such transaction, (ii) in the case of a non-corporate taxpayer, to the extent
such taxpayer has made an election under Code Section 163(d)(4) to have net
capital gains taxed as investment income at ordinary income rates, or (iii)
in the case of a Regular Certificate (issued by a REMIC) to the extent that
such gain does not exceed the excess, if any, of (a) the amount that would
have been includible in the gross income of the holder if his yield on such
Regular Certificate were 110% of the applicable Federal rate under Code
Section 1274(d) as of the date of purchase, over (b) the amount of income
actually includible in the gross income of such holder with respect to the
Regular Certificate. Although the legislative history to the 1986 Act
indicates that the portion of the gain from disposition of a Regular
Certificate that will be recharacterized as ordinary income under clause
(iii) is limited to the amount of original issue discount (if any) on the
Regular Certificate that was not previously includible in income, the
applicable Code provision contains no such limitation. In addition, gain or
loss recognized from the sale of a Regular Certificate by certain banks or
thrift institutions will be treated as ordinary income or loss pursuant to
Code Section 582(c). In the case of a Regular Certificate subject to the new
contingent payment rules issued on January 19, 1993 as described above under
"Original Issue Discount," any gain on the sale or exchange of such
Certificate is treated as interest income.
TAXATION OF RESIDUAL CERTIFICATES
TAXATION OF REMIC INCOME. Generally, the "daily portions" of REMIC taxable
income or net loss will be includible as ordinary income or loss in
determining the federal taxable income of holders of Residual Certificates
("RESIDUAL CERTIFICATEHOLDERS"), and will not be taxed separately to the
REMIC Pool. The daily portions of REMIC taxable income or net loss of a
Residual Certificateholder are determined by allocating the REMIC Pool's
taxable income or net loss for each calendar quarter ratably to each day in
such quarter and by allocating such daily portion among the Residual
Certificateholders in proportion to their respective holdings of Residual
Certificates in the REMIC Pool on such day. REMIC taxable income is generally
determined in the same manner as the taxable income of an individual using a
calendar year and the accrual method of accounting, except that (i) the
limitation on deductibility of investment interest expense and expenses for
the production of income do not apply, (ii) all bad loans will be deductible
as business bad debts and (iii) the limitation on the deductibility of
interest and expenses related to tax-exempt income will apply. REMIC taxable
income generally means the REMIC Pool's gross income, including interest,
original issue discount income and market discount income, if any, on the
Mortgage Loans, plus income on reinvestment of cash flows and reserve assets,
minus deductions, including interest and original issue discount expense on
the Regular Certificates, servicing fees on the Mortgage Loans and other
administrative expenses of the REMIC Pool, amortization of premium, if any,
with respect to the Mortgage Loans, and any tax imposed on the REMIC's income
from foreclosure property. The requirement that Residual Certificateholders
report their pro rata share of taxable income or net loss of the REMIC Pool
will continue until there are no Certificates of any Class of the related
Series outstanding.
The taxable income recognized by a Residual Certificateholder in any
taxable year will be affected by, among other factors, the relationship
between the timing of recognition of interest and original issue discount or
market discount income or amortization of premium with respect to the
Mortgage Loans, on the one hand, and the timing of deductions for interest
(including original issue discount) on the Regular Certificates, on the other
hand. Because of the way REMIC taxable income is calculated, a Residual
Certificateholder may recognize "phantom" income (i.e., income recognized
for tax purposes in excess of income as determined under financial accounting
or economic principles) which will be matched in later years by a
corresponding tax loss or reduction in taxable income, but which could lower
the yield to Residual Certificateholders due to the lower present value of
such loss or reduction. For example, if an interest in the Mortgage Loans is
acquired by the REMIC Pool at a discount, and one or more of such Mortgage
Loans is prepaid, the Residual Certificateholder may recognize taxable income
without being entitled to receive a corresponding amount of cash because (i)
the prepayment may be used in whole or in part to make distributions in
reduction of principal on the Regular Certificates and (ii) the discount
income on the Mortgage Loans which is includible in the REMIC's taxable
income may exceed the interest and discount deduction allowed to the REMIC
upon such distributions on the Regular Certificates. When there is more than
one class of Regular Certificates that distribute principal sequentially,
this mismatching of income and deductions is particularly likely to occur in
the early years following issuance of the Regular Certificates when
distributions in reduction of principal are being made in respect of earlier
maturing classes of Regular Certificates to the extent that such classes are
not issued with substantial discount. If taxable income attributable to such
a mismatching is realized, in general, losses would be allowed in later years
as distributions on the later classes of Regular Certificates are made.
Taxable income may also be greater in earlier years than in later years as a
result of the fact that interest expense deductions, expressed as a
percentage of the outstanding principal amount of such a Series of Regular
Certificates, may increase over time as distributions in reduction of
principal
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are made on the lower yielding classes of Regular Certificates, whereas
interest income with respect to any given Mortgage Loan will remain constant
over time as a percentage of the outstanding principal amount of that loan.
Consequently, Residual Certificateholders must have sufficient other sources
of cash to pay any federal, state or local income taxes due as a result of
such mismatching or unrelated deductions against which to offset such income.
Prospective investors should be aware, however, that a portion of such income
may be ineligible for offset by such investor's unrelated deductions. See the
discussion of "excess inclusions" below under "Limitations on Offset or
Exemption of REMIC Income; Excess Inclusions." The timing of such mismatching
of income and deductions described in this paragraph, if present with respect
to a Series of Certificates, may have a significant adverse effect upon the
Residual Certificateholder's after-tax rate of return. In addition, a
Residual Certificateholder's taxable income during certain periods may exceed
the income reflected by such Residual Certificateholder for such periods in
accordance with generally accepted accounting principles. Investors should
consult their own advisors concerning the proper tax and accounting treatment
of their investment in Residual Certificates.
BASIS AND LOSSES. The amount of any net loss of the REMIC Pool that may be
taken into account by the Residual Certificateholder is limited to the
adjusted basis of the Residual Certificate as of the close of the quarter (or
time of disposition of the Residual Certificate if earlier), determined
without taking into account the net loss for the quarter. The initial
adjusted basis of a purchaser of a Residual Certificate is the amount paid
for such Residual Certificate. Such adjusted basis will be increased by the
amount of taxable income of the REMIC Pool reportable by the Residual
Certificateholder and decreased by the amount of loss of the REMIC Pool
reportable by the Residual Certificateholder. A cash distribution from the
REMIC Pool also will reduce such adjusted basis (but not below zero). Any
loss that is disallowed on account of this limitation may be carried over
indefinitely with respect to the Residual Certificateholder as to whom such
loss was disallowed and may be used by such Residual Certificateholder only
to offset any income generated by the same REMIC Pool. The ability of a
Residual Certificateholder to deduct net losses with respect to a Residual
Certificate may be subject to additional limitations under the Code, as to
which Residual Certificateholders should consult their tax advisors.
A Residual Certificateholder will not be permitted to amortize directly the
cost of its Residual Certificate as an offset to its share of the taxable
income of the related REMIC Pool. However, such taxable income will not
include cash received by the REMIC Pool that represents a recovery of the
REMIC Pool's basis in its assets. Such recovery of basis by the REMIC Pool
will have the effect of amortization of the issue price of the Residual
Certificates over their life. However, in view of the possible acceleration
of the income of Residual Certificateholders described above under "Taxation
of REMIC Income," the period of time over which such issue price is
effectively amortized may be longer than the economic life of the Residual
Certificates.
If a Residual Certificate has a negative value, it is not clear whether its
issue price would be considered to be zero or such negative amount for
purposes of determining the REMIC Pool's basis in its assets. The Final REMIC
Regulations do not address whether residual interests could have a negative
basis and a negative issue price. The Depositor does not intend to treat a
Class of Residual Certificates as having a value of less than zero for
purposes of determining the bases of the related REMIC Pool in its assets.
Further, to the extent that the initial adjusted basis of a Residual
Certificateholder (other than an original holder) in the Residual Certificate
is greater that the corresponding portion of the REMIC Pool's basis in the
Mortgage Loans or the Mortgage Loans underlying the Agency Securities, the
Residual Certificateholder will not recover a portion of such basis until
termination of the REMIC Pool unless Treasury regulations yet to be issued
provide for periodic adjustments to the REMIC income otherwise reportable by
such holder. The Final REMIC Regulations do not so provide. SEE "Treatment of
Certain Items of REMIC Income and Expense -- Market Discount" below
regarding the basis of Mortgage Loans to the REMIC Pool and "Sale or Exchange
of a Residual Certificate" below regarding possible treatment of a loss upon
termination of the REMIC Pool as a capital loss.
TREATMENT OF CERTAIN ITEMS OF REMIC INCOME AND EXPENSE
ORIGINAL ISSUE DISCOUNT. Generally, the REMIC Pool's deductions for
original issue discount will be determined in the same manner as original
issue discount income on Regular Certificates as described above under
"Taxation of Regular Certificates --Original Issue Discount," without regard
to the de minimis rule described therein.
MARKET DISCOUNT. The REMIC Pool will have market discount income in
respect of Mortgage Loans if, in general, the basis of the REMIC Pool in such
Mortgage Loans is exceeded by their unpaid principal balances. The REMIC
Pool's basis in such Mortgage Loans is generally the fair market value of the
Mortgage Loans immediately after the transfer thereof
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to the REMIC Pool. The Final 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 Loans that have market
discount to which Code Section 1276 applies, the accrued portion of such
market discount would be recognized currently by the REMIC as an item of
ordinary income. Market discount income generally should accrue in the manner
described above under "Taxation of Regular Certificates -- Market Discount."
PREMIUM. Generally, if the basis of the REMIC Pool in the Mortgage Loans
exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired such Mortgage Loans at a premium equal to the
amount of such excess. As stated above, the REMIC Pool's basis in Mortgage
Loans is the fair market value of the Mortgage Loans, based on the aggregate
of the issue prices of the regular and residual interests in the REMIC Pool
immediately after the transfer thereof to the REMIC Pool. In a manner
analogous to the discussion above under "Taxation of Regular Certificates
- --Premium," a person that holds a Mortgage Loan as a capital asset under Code
Section 1221 may elect under Code Section 171 to amortize premium on Mortgage
Loans originated after September 27, 1985 under a constant yield method.
Amortizable bond premium will be treated as an offset to interest income on
the Mortgage Loans, rather than as a separate deduction item. Because
substantially all of the borrowers with respect to the Mortgage Loans are
expected to be individuals, Code Section 171 will not be available for
premium on Mortgage Loans originated on or prior to September 27, 1985.
Premium with respect to such Mortgage Loans may be deductible in accordance
with a reasonable method regularly employed by the holder thereof. The
allocation of such premium pro rata among principal payments should be
considered a reasonable method; however, the IRS may argue that such premium
should be allocated in a different manner, such as allocating such premium
entirely to the final payment of principal.
LIMITATIONS ON OFFSET OR EXEMPTION OF REMIC INCOME; EXCESS INCLUSIONS. A
portion of the income allocable to a Residual Certificate (referred to in the
Code as an "excess inclusion") for any calendar quarter, with an exception
discussed below for certain thrift institutions, will be subject to federal
income tax in all events. Thus, for example, an excess inclusion (i) cannot,
except as described below, be offset by any unrelated losses or loss
carryovers of a Residual Certificateholder, (ii) will be treated as
"unrelated business taxable income" within the meaning of Code Section 512 if
the Residual Certificateholder is a pension fund or any other organization
that is subject to tax only on its unrelated business taxable income and
(iii) is not eligible for any reduction in the rate of withholding tax in the
case of a Residual Certificateholder that is a foreign investor, as further
discussed in "Taxation of Certain Foreign Investors -- Residual Certificates"
below. Except as discussed below with respect to excess inclusions from
Residual Certificates without "significant value," this general rule does not
apply to thrift institutions to which Code Section 593 applies. For this
purpose a thrift institution and its qualified subsidiary are considered a
single corporation. A qualified subsidiary is one all of the stock of which,
and substantially all of the debt of which, is held by the thrift institution
and which is organized and operating exclusively in connection with the
organization and operation of one or more REMICs. Except in the case of a
thrift institution (including qualified subsidiaries) members of an
affiliated group are treated as one corporation for purposes of applying the
limitations on offset of excess inclusion income.
Except as discussed in the following paragraph, with respect to excess
inclusions from Residual Certificates without "significant value," for any
Residual Certificateholder, the excess inclusion for any calendar quarter is
the excess, if any, of (i) the income of such Residual Certificateholder for
that calendar quarter from its Residual Certificate, over (ii) the sum of the
"daily accruals" (as defined below) for all days during the calendar quarter
on which the Residual Certificateholder holds such Residual Certificate. For
this purpose, the daily accruals with respect to a Residual Certificate are
determined by allocating to each day in the calendar quarter its ratable
portion of the product of the "adjusted issue price" (as defined below) of
the Residual Certificate at the beginning of the calendar quarter and 120
percent of the "Federal long-term rate" in effect at the time the Residual
Certificate is issued. For this purpose, the "ADJUSTED ISSUE PRICE" of a
Residual Certificate at the beginning of any calendar quarter equals the
issue price of the Residual Certificate (adjusted for contributions),
increased by the amount of daily accruals for all prior quarters, and
decreased (but not below zero) by the aggregate amount of payments made on
the Residual Certificate before the beginning of such quarter. The Federal
long-term rate is an average of current yields on Treasury securities with a
remaining term of greater than nine years, computed and published monthly by
the IRS.
The Code provides that to the extent provided in regulations, as an
exception to the general rule described above, the entire amount of income
accruing on a Residual Certificate will be treated as an excess inclusion if
the Residual Certificates in the aggregate are considered not to have
significant value." The Treasury Department has not yet provided regulations
in this respect and the Final REMIC Regulations did not adopt this rule.
However, the exception from the excess inclusion rules applicable to thrift
institutions does not apply if the Residual Certificates do not have
significant value. Under
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the Final REMIC Regulations, the Residual Certificates will have significant
value if: (i) the aggregate of the issue prices of the Residual Certificates
is at least two percent of the aggregate of the issue prices of all Regular
Certificates and Residual Certificates in the REMIC and (ii) the anticipated
weighted average life of the Residual Certificates is at least 20 percent of
the REMIC's anticipated weighted average life based on the prepayment and
reinvestment assumptions used in pricing the transaction and any required or
permitted clean up calls or any required qualified liquidation. Although not
entirely clear, the Final REMIC Regulations indicate that the significant
value determination is made only on the Startup Day. The anticipated weighted
average life of a Residual Certificate with a principal balance and a market
rate of interest is computed by multiplying the amount of each expected
principal payment by the number of years (or fractions thereof) from the
Startup Day, adding these sums and dividing by the total principal expected
to be paid on such Residual Certificate based on the relevant prepayment
assumption and expected reinvestment income. The anticipated weighted average
life of a Residual Certificate with either no specified principal balance or
a principal balance and rights to interest payments disproportionate to such
principal balance, would be computed under the formula described above but
would include all payments expected on the Residual Certificate instead of
only the principal payments. The anticipated weighted average life of a REMIC
is a weighted average of the anticipated weighted average lives of all
classes of interests in the REMIC.
Under Treasury regulations to be promulgated, a portion of the dividends
paid by a REIT which owns a Residual Certificate are to be designated as
excess inclusions in an amount corresponding to the Residual Certificate's
allocable share of the excess inclusions. Similar rules apply in the case of
regulated investment companies, common trust funds and cooperatives. Thus,
investors in such entities which own a Residual Certificate will be subject
to the limitations on excess inclusions described above. The Final REMIC
Regulations do not provide guidance on this issue.
MARK TO MARKET RULES. Under IRS temporary regulations, a "negative value"
REMIC residual interest is not a security for purposes of the mark-to-market
rules under the Code. A negative value REMIC residual interest is a REMIC
residual interest whose present value of anticipated tax liabilities exceeds
the present value of the expected future distributions, as determined on the
date of acquisition of the REMIC residual interest. For purposes of the
temporary regulations, the present value of anticipated tax liabilities is
determined net of any anticipated tax savings associated with holding the
residual interest as the REMIC generates losses. It is possible that a
Residual Certificate may constitute a negative value REMIC residual interest.
Such temporary regulations provide the IRS with the authority to treat any
Residual Certificate having substantially the same economic effect as a
"negative value" residual interest as a "negative value" residual interest.
The IRS may also issue final regulations which may retroactively treat a
REMIC residual interest as a "negative value" REMIC residual interest. The
IRS has also issued proposed regulations that provide that all REMIC residual
interests are not considered securities for purposes of the mark-to-market
rules.
TAX-RELATED RESTRICTIONS ON TRANSFER OF RESIDUAL CERTIFICATES.
DISQUALIFIED ORGANIZATIONS. If legal title or beneficial interest in a
Residual Certificate is transferred to a Disqualified Organization (as
defined below), a tax would be imposed in an amount equal to the product of
(i) the present value of the total anticipated excess inclusions with respect
to such Residual Certificate for periods after the transfer and (ii) the
highest marginal federal income tax rate applicable to corporations. The
Final REMIC Regulations provide that the anticipated excess inclusions are
based on actual prepayment experience to the date of the transfer and
projected payments based on the Prepayment Assumption. The present value
discount rate equals the applicable Federal rate under Code Section 1274(d)
that would apply to a debt instrument that was issued on the date the
Disqualified Organization acquired the Residual Certificate and whose term
ended on the close of the last quarter in which excess inclusions were
expected to accrue with respect to the Residual Certificate. Such a tax
generally would be imposed on the transferor of the Residual Certificate,
except that where such transfer is through an agent (including a broker,
nominee, or other middleman) for a Disqualified Organization, the tax would
instead be imposed on such agent. However, a transferor of a Residual
Certificate would in no event be liable for such tax with respect to a
transfer if the transferee furnishes to the transferor an affidavit that the
transferee is not a Disqualified Organization and, as of the time of the
transfer, the transferor does not have actual knowledge that such affidavit
is false. The tax also may be waived by the Treasury Department if the
Disqualified Organization promptly disposes of the Residual Certificate and
the transferor pays income tax at the highest corporate rate on the excess
inclusions for the period the Residual Certificate is actually held by the
Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period such interest is held by such
Disqualified Organization, and (ii) the highest
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marginal federal corporate income tax rate. Such tax would be deductible from
the ordinary gross income of the Pass-Through Entity for the taxable year.
The Pass-Through Entity would not be liable for such tax if it has received
an affidavit from such record holder that (i) states under penalty of perjury
that it is not a Disqualified Organization or (ii) furnishes a social
security number and states under penalties of perjury that the social
security number is that of the transferee, provided that during the period
such person is the record holder of the Residual Certificate, the
Pass-Through Entity does not have actual knowledge that such affidavit is
false.
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 of 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 Pooling and Servicing Agreement with respect to a Series of
Certificates will provide that neither legal title nor beneficial interest in
a Residual Certificate may be transferred or registered unless (i) the
proposed transferee provides to the Depositor and the Trustee an affidavit to
the effect that such transferee is not a Disqualified Organization, is not
purchasing such Residual Certificates on behalf of a Disqualified
Organization (i.e., as a broker, nominee or middleman thereof) and is not an
entity that holds REMIC residual securities as nominee to facilitate the
clearance and settlement of such securities through electronic book-entry
changes in accounts of participating organizations and (ii) the transferor
provides a statement in writing to the Depositor and the Trustee that it has
no actual knowledge that such affidavit is false. Moreover, the Pooling and
Servicing Agreement will provide that any attempted or purported transfer in
violation of these transfer restrictions will be null and void and will vest
no rights in any purported transferee. Each Residual Certificate with respect
to a Series will bear a legend referring to such restrictions on transfer,
and each Residual Certificateholder will be deemed to have agreed, as a
condition of ownership thereof, to any amendments to the related Pooling and
Servicing 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 IRS 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. The Final REMIC Regulations would
disregard certain transfers of Residual Certificates, in which case the
transferor would continue to be treated as the owner of the Residual
Certificates and thus would continue to be subject to tax on its allocable
portion of the net income of the REMIC Pool. Under the Final REMIC
Regulations, a transfer of a "noneconomic residual interest" (defined below)
to a Residual Certificateholder (other than a Residual Certificateholder who
is not a United States Person, as defined below under "Foreign Investors") is
disregarded for all federal income tax purposes unless no significant purpose
of the transfer is to enable the transferor 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 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 transferee would be unwilling or unable to pay taxes due on its share of
the taxable income of the REMIC. Under the Final 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
transferee 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 Pooling and Servicing
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Agreement will require the transferee of a Residual Certificate to state as
part of the affidavit described above under the heading "Disqualified
Organizations" that such transferee (i) has historically paid its debts as
they come due, (ii) intends to continue to pay its debts as they come due in
the future, (iii) understands that, as the holder of a noneconomic Residual
Certificate, it may incur tax liabilities in excess of any cash flows
generated by the Residual Certificate, and (iv) intends to pay any and all
taxes associated with holding the Residual Certificate as they become due.
The transferor must have no reason to believe that such statement is untrue.
FOREIGN INVESTORS. The Final REMIC Regulations provide that the transfer
of a Residual Certificate that has "tax avoidance potential" to a "foreign
person" will be disregarded for all federal tax purposes. This rule appears
intended to apply to a transferee who is not a "United States Person" (as
defined below), unless such transferee's income is effectively connected with
the conduct of a trade or business within the United States. A Residual
Certificate is deemed to have tax avoidance potential unless, at the time of
the transfer, the transferor reasonably expects that, for each excess
inclusion, (i) the REMIC Pool will distribute to the transferee residual
interest holder an amount that will equal at least 30% of the excess
inclusions and (ii) that each such amount will be distributed at or after the
time at which the excess inclusion accrues and not later than the close of
the calendar year following the calendar year of accrual. If the Non-United
States Person transfers the Residual Certificate back to a United States
Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The Prospectus Supplement relating to a Series of Certificates may provide
that a Residual Certificate may not be purchased by or transferred to any
person that is not a United States Person or may describe the circumstances
and restrictions pursuant to which such a transfer may be made. The term
"UNITED STATES 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 United States federal income tax regardless of
the source of its income.
SALE OR EXCHANGE OF A RESIDUAL CERTIFICATE. Upon the sale or exchange of a
Residual Certificate, the Residual Certificateholder will recognize gain or
loss equal to the excess, if any, of the amount realized over the adjusted
basis (as described above under "Basis and Losses") of such Residual
Certificateholder in such Residual Certificate at the time of the sale or
exchange. In addition to reporting the taxable income of the REMIC Pool, a
Residual Certificateholder will have taxable income to the extent that any
cash distribution to him from the REMIC Pool exceeds such adjusted basis on
that Distribution Date or Payment Date. Such income will be treated as gain
from the sale or exchange of the Residual Certificate. It is possible that
the termination of the REMIC Pool may be treated as a sale or exchange of a
Residual Certificateholder's Residual Certificate, in which case, if the
Residual Certificateholder has an adjusted basis in his Residual Certificate
remaining when his interest in the REMIC Pool terminates, and if he holds
such Residual Certificate as a capital asset under Code Section 1221, then he
will recognize a capital loss at that time in the amount of such remaining
adjusted basis.
The Committee Report provides that, except as provided in Treasury
regulations yet to be issued, the wash sale rules of Code Section 1091 will
apply to dispositions of Residual Certificates. Consequently, losses on
dispositions of Residual Certificates will be disallowed where the seller of
the Residual Certificate, during the period beginning six months before the
sale or disposition of the Residual Certificate and ending six months after
such sale or disposition, acquires (or enters into any other transaction that
results in the application of Code Section 1091) any residual interest in any
REMIC or any interest in a "taxable mortgage pool" (such as a non-REMIC owner
trust) that is economically comparable to a Residual Certificate. In any
event, any loss realized by a Residual Certificateholder on the sale will not
be deductible, but, instead, will increase such Residual Certificateholder's
adjusted basis in the newly acquired assets.
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
PROHIBITED TRANSACTIONS. Net income from certain transactions by the REMIC
Pool, called prohibited transactions, will not be part of the calculation of
income or loss includible in the federal income tax returns of Residual
Certificateholders, but rather will be taxed directly to the REMIC Pool at a
100% rate. Prohibited transactions generally include (i) the disposition of a
qualified mortgage other than for (a) substitution within two years of the
Startup Day for a defective (including a defaulted) obligation (or repurchase
in lieu of substitution of a defective (including a defaulted) obligation at
any time) or for any qualified mortgage within three months of the Startup
Day, (b) foreclosure, default or imminent default of a qualified mortgage,
(c) bankruptcy or insolvency of the REMIC Pool 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,
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(iii) the receipt of compensation for services or (iv) the receipt of gain
from disposition of cash flow investments other than pursuant to a qualified
liquidation. Notwithstanding (i) and (iv), it is not a prohibited transaction
to sell REMIC Pool property to prevent a default on Regular Certificates as a
result of a default on qualified mortgages or to facilitate a clean-up call
(generally, an optional termination to save administrative costs when no more
than a small percentage of the Certificates is outstanding). The Final 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 borrower pursuant to the terms of a convertible
adjustable rate Mortgage Loan. Final REMIC Regulations also provide that the
modification of mortgage loans underlying pass-through certificates will not
be treated as a modification of the Agency Securities, provided that the
trust issuing the pass-through certificates was not created to avoid
prohibited transaction rules.
CONTRIBUTIONS TO THE REMIC POOL AFTER THE STARTUP DAY. In general, the
REMIC Pool will be subject to a tax at a 100% rate on the value of any
property contributed to the REMIC Pool after the Startup Day. Exceptions are
provided for cash contributions to the REMIC Pool (i) during the three months
following the Startup Day, (ii) made to a qualified reserve fund by a
Residual Certificateholder, (iii) in the nature of a guarantee, (iv) made to
facilitate a qualified liquidation or clean-up call and (v) as otherwise
permitted in Treasury regulations yet to be issued.
NET INCOME FROM FORECLOSURE PROPERTY. The REMIC Pool will be subject to
federal income tax at the highest corporate rate on "net income from
foreclosure property," determined by reference to the rules applicable to
real estate investment trusts. Generally, property acquired by the REMIC Pool
through foreclosure or deed in lieu of foreclosure would be treated as
"foreclosure property" for a period of two years, with possible extensions.
Net income from foreclosure property generally means (i) gain from the sale
of a foreclosure property that is inventory property and (ii) gross income
from foreclosure property other than qualifying rents and other qualifying
income for a real estate investment trust.
LIQUIDATION OF THE REMIC POOL
If a REMIC Pool and the Trustee adopt a plan of complete liquidation,
within the meaning of Code Section 860F(a)(4)(A)(i) and sell all of the REMIC
Pool's assets (other than cash) within a 90-day period beginning on the date
of the adoption of the plan of liquidation, any gain on the sale of its
assets will not result in a prohibited transaction tax, provided that the
REMIC Pool credits or distributes in liquidation all of the sale proceeds
plus its cash (other than amounts retained to meet claims against the REMIC
Pool) to holders of Regular Certificates and Residual Certificateholders
within the 90-day period.
ADMINISTRATIVE MATTERS
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes
in a manner similar to a partnership. The form for such income tax return is
Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return.
Treasury regulations provide that, except where there is a single Residual
Certificateholder for an entire taxable year, the REMIC Pool generally will
be subject to the procedural and administrative rules of the Code applicable
to partnerships, including the determination by the IRS of any adjustments
to, among other things, items of REMIC income, gain, loss, deduction or
credit in a unified administrative proceeding. Generally, the Depositor or
the Trustee will be obligated to act as "tax matters person," as defined in
applicable Treasury regulations, with respect to the REMIC Pool, in its
capacity as either Residual Certificateholder or agent of the Residual
Certificateholders. If the Code or applicable Treasury regulations do not
permit the Depositor or the Trustee to act as tax matters person in its
capacity as agent of the Residual Certificateholders, the Residual
Certificateholder chosen by the Residual Certificateholders or such other
person specified pursuant to Treasury regulations will be required to act as
tax matters person.
Treasury regulations provide that a holder of a Residual Certificate is not
required to treat items on its return consistently with their treatment on
the REMIC Pool's return if a holder owns 100% of the Residual Certificates
for the entire calendar year. Otherwise, each holder of a Residual
Certificate is required to treat items on its return consistently with their
treatment on the REMIC Pool's return, unless the holder of a Residual
Certificate either files a statement identifying the inconsistency or
establishes that the inconsistency resulted from incorrect information
received from the REMIC Pool. The IRS may assess a deficiency resulting from
a failure to comply with the consistency requirement without instituting an
administrative proceeding at the REMIC Pool level.
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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 $117,950 for 1996
and adjusted yearly for inflation ($58,975 for 1996 and adjusted yearly for
inflation, in the case of a married individual filing a separate return), or
(ii) 80% of the amount of itemized deductions otherwise allowable for such
year. In the case of a REMIC Pool, such deductions may include deductions
under Code Section 212 for servicing fees and all administrative and other
expenses relating to the REMIC Pool or any similar expenses allocated to the
REMIC Pool with respect to a regular interest it holds in another REMIC. Such
investors who hold REMIC Certificates either directly or indirectly through
certain pass-through entities may have their pro rata share of such expenses
allocated to them as additional gross income, but may be subject to such
limitation on deductions. In addition, such expenses are not deductible at
all for purposes of computing the alternative minimum tax, and may cause such
investors to be subject to significant additional tax liability. Treasury
regulations provide that the additional gross income and corresponding amount
of expenses generally are to be allocated entirely to the holders of Residual
Certificates in the case of a REMIC Pool that would not qualify as a fixed
investment trust in the absence of a REMIC election. However, such additional
gross income and limitation on deductions will apply to the allocable portion
of such expenses to holders of Regular Certificates, as well as holders of
Residual Certificates, where such Regular Certificates are issued in a manner
that is similar to pass-through certificates in a fixed investment trust. In
general, such allocable portion will be determined based on the ratio that a
REMIC Certificateholder's income, determined on a daily basis, bears to the
income of all holders of Regular Certificates and Residual Certificates with
respect to a REMIC Pool. As a result, individuals, estates or trusts holding
REMIC Certificates (either directly or indirectly through a grantor trust,
partnership, S corporation, REMIC, or certain other pass-through entities
described in the foregoing Treasury regulations) may have taxable income in
excess of the interest income at the pass-through rate or Bond interest rate
on Regular Certificates that are issued in a single class or otherwise
consistently with fixed investment trust status or in excess of cash
distributions for the related period on Residual Certificates.
TAXATION OF CERTAIN FOREIGN INVESTORS
REGULAR CERTIFICATES
Interest, including original issue discount, distributable to Regular
Certificateholders who are nonresident aliens, foreign corporations, or other
Non-United States 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-United States Person (i) is not a
"10-percent shareholders" 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 Section 1441 or 1442, with an
appropriate statement, signed under penalties of perjury, identifying the
beneficial owner and stating, among other things, that the beneficial owner
of the Regular Certificate is a Non-United States Person. If such statement,
or any other required statement, is not provided, 30% withholding will apply
unless reduced or eliminated pursuant to an applicable tax treaty or unless
the interest on the Regular Certificate is effectively connected with the
conduct of a trade or business within the United States by such Non-United
States Person. In the latter case, such Non-United States Person will be
subject to United States federal income tax at regular rates. Investors who
are Non-United States Persons should consult their own tax advisors regarding
the specific tax consequences to them of owning a Regular Certificate. The
term "NON-UNITED STATES PERSON" means any person who is not a United States
Person. Payments on Regular Certificates may subject a Non-United States
Person to United States federal income and withholding tax where such foreign
person also owns, actually or constructively, Residual Certificates issued by
the same REMIC, notwithstanding compliance with the certification
requirements discussed above.
RESIDUAL CERTIFICATES
The Committee Report indicates that amounts paid to Residual
Certificateholders who are Non-United States Persons are treated as interest
for purposes of the 30% (or lower treaty rate) United States withholding tax.
Treasury regulations provide that amounts distributed to Residual
Certificateholders qualify as "portfolio interest," subject to the conditions
described in "Regular Certificates" above, but only to the extent that (i)
the Mortgage Loans were issued after July 18, 1984 and (ii) the Trust Fund or
segregated pool of assets therein (as to which a separate REMIC election will
be made), to which the Residual Certificate relates, consists of obligations
issued in "registered form" within the meaning of Code Section
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163(f)(1). Generally, Mortgage Loans will not be, but certificated regular
interests in another REMIC Pool will be, considered obligations issued in
registered form. Furthermore, a Residual Certificateholder will not be
entitled to any exemption from the 30% withholding tax (or lower treaty rate)
to the extent of that portion of REMIC taxable income that constitutes an
"excess inclusion." SEE "Taxation of Residual Certificates -- Limitations on
Offset or Exemption of REMIC Income; Excess Inclusions." If the amounts paid
to Residual Certificateholders who are Non-United States Persons are
effectively connected with the conduct of a trade or business within the
United States by such Non-United States Persons, 30% (or lower treaty rate)
withholding will not apply. Instead, the amounts paid to such Non-United
States Persons will be subject to United States federal income tax at regular
rates. If 30% (or lower treaty rate) withholding is applicable, such amounts
generally will be taken into account for purposes of withholding only when
paid or otherwise distributed (or when the Residual Certificate is disposed
of) under rules similar to withholding upon disposition of debt instruments
that have original issue discount. SEE "Taxation of Residual Certificates --
Tax-Related Restrictions on Transfer of Residual Certificates -- Foreign
Investors" above concerning the disregard of certain transfers having "tax
avoidance potential." Investors who are Non-United States Persons should
consult their own tax advisors regarding the specific tax consequences to
them of owning Residual Certificates.
BACKUP WITHHOLDING
Distributions made on the Regular Certificates, and proceeds from the sale
of the Regular Certificates to or through certain brokers, may be subject to
a "backup" withholding tax under Code Section 3406 of 31% on "reportable
payments" (including interest distributions, original issue discount, and,
under certain circumstances, principal distributions) unless the Regular
Certificateholder complies with certain reporting and/or certification
procedures, including the provision of its taxpayer identification number to
the Trustee, its agent or the broker who effected the sale of the Regular
Certificate, or such Certificateholder is otherwise an exempt recipient under
applicable provisions of the Code. Any amounts to be withheld from
distribution on the Regular Certificates would be refunded by the IRS or
allowed as a credit against the Regular Certificateholder's federal income
tax liability.
REPORTING REQUIREMENTS
Reports of accrued interest and original issue discount will be made
annually to the IRS and to individuals, estates, non-exempt and
non-charitable trusts, and partnerships who are either holders of record of
Regular Certificates or beneficial owners who own Regular Certificates
through a broker or middleman as nominee. All brokers, nominees and all other
non-exempt holders of record of Regular Certificates (including corporations,
non-calendar year taxpayers, securities or commodities dealers, real estate
investment trusts, investment companies, common trust funds, thrift
institutions and charitable trusts) may request such information for any
calendar quarter by telephone or in writing by contacting the person
designated in IRS Publication 938 with respect to a particular Series of
Regular Certificates. Holders through nominees must request such information
from the nominee. Treasury regulations provide that information necessary to
compute the accrual of any market discount on the Regular Certificates must
also be furnished.
The IRS's Form 1066 has an accompanying Schedule Q, Quarterly Notice to
Residual Interest Holders of REMIC Taxable Income or Net Loss Allocation.
Treasury regulations require that Schedule Q be furnished by the REMIC Pool
to each Residual Certificateholder by the end of the month following the
close of each calendar quarter (41 days after the end of a quarter under
proposed Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual
Certificateholders, furnished annually, if applicable, to holders of Regular
Certificates, and filed annually with the IRS concerning Code Section 67
expenses (SEE "Limitations on Deduction of Certain Expenses" above) allocable
to such holders. Furthermore, under such regulations, information must be
furnished quarterly to Residual Certificateholders, furnished annually to
holders of Regular Certificates, and filed annually with the IRS concerning
the percentage of the REMIC Pool's assets meeting the qualified asset tests
described above under "Status of REMIC Certificates."
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FEDERAL INCOME TAX CONSEQUENCES FOR CERTIFICATES AS TO
WHICH NO REMIC ELECTION IS MADE
STANDARD CERTIFICATES
GENERAL
With respect a Series of Certificates issued under an Agreement for which
no election is made to treat the related Trust Fund (or a segregated pool of
assets therein) as a REMIC, Counsel to the Depositor will deliver its
opinion to the effect that, assuming compliance with all provisions of the
related Pooling and Servicing Agreement, the related Trust Fund will be
classified as a grantor trust under subpart E, Part 1 of subchapter J of
Chapter 1 of Subtitle A of the Code and not as an association taxable as a
corporation. The following general discussion of the anticipated federal
income tax consequences of the purchase, ownership and disposition of
Standard Certificates, to the extent it relates to matters of law or legal
conclusions with respect thereto, represents the opinion of Counsel to the
Depositor, subject to any qualifications set forth herein. In addition,
Counsel to the Depositor has prepared or reviewed the statements in this
Prospectus under the heading "Certain Federal Income Tax Consequences -
Federal Income Tax Consequences for Securities as to Which No REMIC Election
is Made - Standard Certificates," and is of the opinion that such statements
are correct in all material respects. Such statements are intended as an
explanatory discussion of the possible effects of the classification of any
Trust Fund as a grantor trust for federal income tax purposes on investors
generally and of related tax matters affecting investors generally, but do
not purport to furnish information in the level of detail or with the
attention to an investor's specific tax circumstances that would be provided
by an investor's own tax advisor. Accordingly, each investor is advised to
consult its own tax advisors with regard to the tax consequences to it of
investing in Standard Certificates. Where there is no fixed retained yield
with respect to the Mortgage Loans underlying the Certificates of such a
Series, and where such Certificates are not designated as "Stripped
Certificates," the holder of each such Certificates 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 Fund represented by his Certificate and will
be considered the beneficial owner of a pro rata undivided interest in each
of the Mortgage Loans, subject to the discussion below under "Premium and
Discount -- Recharacterization of Servicing Fees." Accordingly, the holder of
a Certificate 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 Loans represented by its Certificate, including interest at the
coupon rate on such Mortgage Loans, original issue discount (if any),
prepayment fees, assumption fees, and late payment charges received by the
Depositor or another service provider, in accordance with such
Certificateholder's method of accounting. A Certificateholder generally will
be able to deduct its share of servicing fees and all administrative and
other expenses of the Trust Fund in accordance with his method of accounting,
provided that such amounts are reasonable compensation for services rendered
to that Trust Fund. However, investors who are individuals, estates or trusts
who own Certificates, either directly or indirectly through certain
pass-through entities, will be subject to limitation with respect to certain
itemized deductions described in Code Section 67, including deductions under
Code Section 212 for servicing fees and all such administrative and other
expenses of the Trust Fund, 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
$117,950 for 1996, adjusted yearly for inflation ($58,975 for 1996,
adjusted yearly for inflation, in the case of a married individual filing a
separate return), or (ii) 80% of the amount of itemized deductions otherwise
allowable for such year. As a result such investors holding Certificates,
directly or indirectly through a pass-through entity, may have aggregate
taxable income in excess of the aggregate amount of cash received on such
Certificates with respect to interest at the pass-through rate on such
Certificates or discount thereon. In addition, such expenses are not
deductible at all for purposes of computing the alternative minimum tax, and
may cause such investors to be subject to significant additional tax
liability. Moreover, where there is fixed retained yield with respect to the
Mortgage Loans underlying a Series of Certificates or where the servicing
fees are in excess of reasonable servicing compensation, the transaction will
be subject to the application of the "stripped bond" and "stripped coupon"
rules of the Code, as described below under "Stripped Certificates" and
"Premium and Discount --Recharacterization of Servicing Fees," respectively.
TAX STATUS
To the extent disclosed in the related Prospectus Supplement, Counsel for
the Depositor will deliver its opinion with respect to Certificates
described under this subsection "Standard Certificates" that:
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1. A Certificate owned by a "domestic building and loan association"
within the meaning of Code Section 7701(a)(19) will be considered to
represent "loans . . . secured by an interest in real property" within the
meaning of Code Section 7701(a)(19)(C)(v), provided that the real property
securing the Mortgage Loans represented by that Certificate is of the type
described in such section of the Code.
2. A Certificate owned by a financial institution described in Code
Section 593(a) will be considered to represent "qualifying real property
loans" within the meaning of Code Section 593(d)(1), provided that the real
property securing the Mortgage Loans represented by that Certificate is of
the type described in such section of the Code.
3. A Certificate owned by a real estate investment trust will be
considered to represent "real estate assets" within the meaning of Code
Section 856(c)(5)(A) to the extent that the assets of the related Trust Fund
consist of qualified assets, and interest income on such assets will be
considered "interest on obligations secured by mortgages on real property"
within the meaning of Code Section 856(c)(3)(B).
4. A Certificate owned by a REMIC will be considered to represent an
"obligation (including any participation or certificate of beneficial
ownership therein) which is principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3)(A) to the extent that
the assets of the related Trust Fund consist of "qualified mortgages" within
the meaning of Code Section 860G(a)(3).
An issue arises as to whether buy-down Mortgage Loans may be characterized
in their entirety under the Code provisions cited in the immediately
preceding paragraph. Code Section 593(d)(1)(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 Loans as "qualifying real property loans" under Code
Section 593(d)(1) 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 "obligations . . . principally secured by an interest in
real property" under Code Section 860G(a)(3)(A), there is indirect authority
supporting treatment of an investment in a buy-down Mortgage Loan as entirely
secured by real property if the fair market value of the real property
securing the loan exceeds the principal amount of the loan at the time of
issuance or acquisition, as the case may be. There is no assurance that the
treatment described above is proper. Accordingly, Certificateholders are
urged to consult their own tax advisors concerning the effects of such
arrangements on the characterization of such Certificateholder's investment
for federal income tax purposes.
PREMIUM AND DISCOUNT
Certificateholders are advised to consult with their tax advisors as to the
federal income tax treatment of premium and discount arising either upon
initial acquisition of Certificates or thereafter.
PREMIUM. The treatment of premium incurred upon the purchase of a
Certificate will be determined generally as described above under "Federal
Income Tax Consequences for REMIC Certificates -- Taxation of Residual
Certificates --Treatment of Certain Items of REMIC Income and Expense --
Premium."
ORIGINAL ISSUE DISCOUNT. The IRS has stated in published rulings that, in
circumstances similar to those described herein, the original issue discount
rules will be applicable to a Certificateholder's interest in those Mortgage
Loans 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 borrowers (other than individuals) originated
after July 1, 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 for services
provided by the lender. It is generally not anticipated that adjustable rate
Mortgage Loans will be treated as issued with original issue discount.
However, the application of the OID Regulations to adjustable rate mortgage
loans with incentive interest rates or annual or lifetime interest rate caps
may result in original issue discount.
Original issue discount must generally be reported as ordinary gross income
as it accrues under a constant yield method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
However, Code Section 1272 provides for a reduction in the amount of original
issue discount includible in the income of a holder of
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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 Loans acquired by a Certificateholder are
purchased at a price equal to the then unpaid principal amount of such
Mortgage Loans, no original issue discount attributable to the difference
between the issue price and the original principal amount of such Mortgage
Loans (i.e., points) will be includible by such holder.
MARKET DISCOUNT. Certificateholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the Mortgage Loans will be determined
and will be reported as ordinary income generally in the manner described
above under "Federal Income Tax Consequences for REMIC Certificates --
Taxation of Residual Certificates -- Treatment of Certain Items of REMIC
Income and Expense -- Market Discount."
RECHARACTERIZATION OF SERVICING FEES. If the servicing fees paid to
Servicers were deemed to exceed reasonable servicing compensation, the amount
of such excess would be nondeductible under Code Section 162 or 212. In this
regard, there are no authoritative guidelines for federal income tax purposes
as to either the maximum amount of servicing compensation that may be
considered reasonable in the context of this or similar transactions or
whether, in the case of the Certificates, the reasonableness of servicing
compensation should be determined on a weighted average or loan-by-loan
basis. If a loan- by-loan basis is appropriate, the likelihood that such
amount would exceed reasonable servicing compensation as to some of the
Mortgage Loans would be increased. Recently issued IRS guidance indicates
that a servicing fee in excess of reasonable compensation ("EXCESS
SERVICING") will cause the Mortgage Loans 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 IRS's approach is upheld, a servicer that receives a
servicing fee in excess of such amounts would be viewed as retaining an
ownership interest in a portion of the interest payments on the Mortgage
Loans. Under the rules of Code Section 1286, the separation of ownership of
the right to receive some or all of the interest payments on an obligation
from the right to receive some or all of the principal payments on the
obligation would result in treatment of such Mortgage Loans as "stripped
coupons" and "stripped bonds." While Certificateholders would still be
treated as owners of beneficial interests in a grantor trust for federal
income tax purposes, the corpus of such trust could be viewed as excluding
the portion of the Mortgage Loans the ownership of which is attributed to a
servicer, or as including such portion as a second class of equitable
interest. Applicable Treasury regulations treat such an arrangement as a
fixed investment trust, since the multiple classes of trust interests should
be treated as merely facilitating direct investments in the trust assets and
the existence of multiple classes of ownership interests is incidental to
that purpose. In general, such a recharacterization should not have any
significant effect upon the timing or amount of income reported by a
Certificateholder, except that the income reported by a cash method holder
may be slightly accelerated. SEE "Stripped Certificates" below for a further
description of the federal income tax treatment of stripped bonds and
stripped coupons.
In the alternative, the amount, if any, by which the servicing fees paid to
the servicers are deemed to exceed reasonable compensation for servicing
could be treated as deferred payments of purchase price by the
Certificateholders to purchase an undivided interest in the Mortgage Loans.
In such event, the present value of such additional payments might be
included in the Certificateholder's basis in such undivided interests for
purposes of determining whether the Certificate was acquired at a discount,
at par, or at a premium. Under this alternative, Certificateholders may also
be entitled to a deduction for unstated interest with respect to each
deferred payment. The Internal Revenue Service may take the position that the
specific statutory provisions of Code Section 1286 described above override
the alternative described in this paragraph. Certificateholders are advised
to consult their tax advisors as to the proper treatment of the amounts paid
to the servicers as set forth herein as servicing compensation or under
either of the alternatives set forth above.
SALE OR EXCHANGE OF CERTIFICATES
Upon sale or exchange of a Certificate, a Certificateholder will recognize
gain or loss equal to the difference between the amount realized on the sale
and its aggregate adjusted basis in the Mortgage Loans and other assets
represented by the Certificate. In general, the aggregate adjusted basis will
equal the Certificateholder's cost for the Certificate, increased by the
amount of any income previously reported with respect to the Certificate and
decreased by the amount of any losses previously reported with respect to the
Certificate and the amount of any distributions received thereon. Except as
provided above with respect to market discount on any Mortgage Loans, and
except for certain financial institutions subject to the
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provisions of Code Section 582(c), any such gain or loss would be capital
gain or loss if the Certificate was held as a capital asset.
STRIPPED CERTIFICATES
GENERAL
The following general discussion of the anticipated federal income tax
consequences of the purchase, ownership and disposition of Stripped
Certificates, to the extent it relates to matters of law or legal conclusions
with respect thereto, represents the opinion of Counsel to the Depositor,
subject to any qualifications set forth herein. In addition, Counsel to the
Depositor has prepared or reviewed the statements in this Prospectus under
the heading "Certain Federal Income Tax Consequences - Federal Income Tax
Consequences for Securities as to Which No REMIC Election is Made - Stripped
Certificates," and is of the opinion that such statements are correct in all
material respects. Such statements are intended as an explanatory discussion
of the possible effects of the classification of any Trust Fund as a grantor
trust for federal income tax purposes on investors generally and of related
tax matters affecting investors generally, but do not purport to furnish
information in the level of detail or with the attention to an investor's
specific tax circumstances that would be provided by an investor's own tax
advisor. Accordingly, each investor is advised to consult its own tax
advisors with regard to the tax consequences to it of investing in Stripped
Certificates.
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the principal payments on an obligation from ownership
of the right to receive some or all of the interest payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of this discussion,
Certificates for which no REMIC election is made and that are subject to
those rules will be referred to as "Stripped Certificates." The Certificates
will be subject to those rules if (i) the Depositor or any of its affiliates
retains (for its own account or for purposes of resale), in the form of fixed
retained yield or otherwise, an ownership interest in a portion of the
payments on the Mortgage Loans, (ii) the Depositor, any of its affiliates or
a servicer is treated as having an ownership interest in the Mortgage Loans
to the extent it is paid (or retains) servicing compensation in an amount
greater than reasonable consideration for servicing the Mortgage Loans (SEE
"Standard Certificates -- Premium and Discount --Recharacterization of the
Servicing Fees" above) or (iii) Classes of Certificates are issued in two or
more Classes or subclasses representing the right to non-pro-rata percentages
of the interest and principal payments on the Mortgage Loans.
In general, a holder of a Stripped Certificate will be considered to own
"stripped bonds" with respect to its pro rata share of all or a portion of
the principal payments on each Mortgage Loan and/or "stripped coupons" with
respect to its pro rata share of all or a portion of the interest payments on
each Mortgage Loan, including the Stripped Certificate's allocable share of
the servicing fees paid, to the extent that such fees represent reasonable
compensation for services rendered. SEE discussion above under "Standard
Certificates -- Premium and Discount -- Recharacterization of Servicing
Fees." For this purpose the servicing fees will be allocated to the Stripped
Certificates in proportion to the respective offering price of each class (or
subclass) of Stripped Certificates. The holder of a Stripped Certificate
generally will be entitled to a deduction each year in respect of the
servicing fees, as described above under "Standard Certificates -- General,"
subject to the limitation described therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally as
a new obligation issued (i) on the date that the stripped interest is
purchased and (ii) at a price equal to its purchase price or, if more than
one stripped interest is purchased, the share of the purchase price allocable
to such stripped interest. Each stripped interest generally will have
original issue discount equal to the excess of its stated redemption price at
maturity (or, in the case of a stripped coupon, the amount payable on the due
date of such coupon) over its issue price. Although the treatment of Stripped
Certificates for federal income tax purposes is not clear in certain respects
at this time, particularly where such Stripped Certificates are issued with
respect to a Trust Fund containing variable-rate Mortgage Loans, the
Depositor has been advised by counsel that (i) the Trust Fund will be treated
as a grantor trust under subpart E, Part 1 of subchapter J of Chapter 1 of
Subtitle A of the Code and not as an association taxable as a corporation,
and (ii) each Stripped Certificate should be treated as a single installment
obligation for purposes of calculating original issue discount and gain or
loss on disposition. This treatment is based on the interrelationship of Code
Section 1286 and the regulations thereunder, Code Sections 1272 through 1275,
and the OID Regulations. While under Code Section 1286 computations with
respect to Stripped Certificates arguably should be made in one of the ways
described below under "Taxation of Stripped Certificates --Possible
Alternative Characterizations," the OID Regulations state, in general, that
all debt instruments issued in connection with the same transaction must be
treated
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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, final Treasury regulations issued December 28, 1992 support
the treatment of a Stripped Certificate as a single debt instrument issued on
the date it is originated for purposes of calculating any original issue
discount. The preamble to such regulations states that such regulations are
premised on the assumption that an aggregation approach is appropriate in
determining whether original issue discount on a stripped bond or stripped
coupon is de minimis. In addition, under these regulations, a Stripped
Certificate that represents a right to payments of both interest and
principal may be viewed either as issued with original issue discount or
market discount (as described below), at a de minimis original issue
discount, or, presumably, at a premium. The preamble to such regulations also
provide that such regulations are premised on the assumption that generally
the interest component of such a Stripped Certificate would be treated as
stated interest under the OID Regulations. Further, the regulations provide
that the purchaser of such a Stripped Certificate may be required to account
for any discount as market discount rather than original issue discount if
either (i) the initial discount with respect to the Stripped Certificate was
treated as zero under the de minimis rule or (ii) no more than 100 basis
points in excess of reasonable servicing is stripped off the related Mortgage
Loans. Any such market discount would be reportable as described above under
"Federal Income Tax Consequences for REMIC Certificates -- Taxation of
Regular Certificates -- Market Discount," without regard to the de minimis
rule therein.
STATUS OF STRIPPED CERTIFICATES
Even if Strip Certificates evidence an interest in a Trust Fund consisting
of Mortgage Loans that are "qualifying real property loans" within the
meaning of Code Section 593(d)(1), "real estate assets" within the meaning of
Code Section 856(c)(A), and "loans . . . secured by an interest in real
property" within the meaning of Code Section 7701(a)(19)(C)(v), and the
interest (including original issue discount) income on which is an "interest
on obligations secured by mortgages on real property" within the meaning of
Code Section 856(c)(3)(B), it is unclear whether the Strip Certificates, and
the income therefrom, will be so characterized. However, the policies
underlying such sections (namely, to encourage or require investments in
mortgage loans by thrift institutions and real estate investment trusts) may
suggest that such characterization is appropriate. Counsel to the Depositor
will not deliver any opinion on these questions. Prospective purchasers to
which such characterization of an investment in Strip Certificates in
material should consult their tax advisors regarding whether the Strip
Certificates, and the income therefrom, will be so characterized.
The Strip Certificates will be "obligations (including any participation or
Certificate of beneficial ownership therein) which . . . are principally
secured by an interest in real property" within the meaning of Section
860G(a)(3)(A) of the Code.
TAXATION OF STRIPPED CERTIFICATES
ORIGINAL ISSUE DISCOUNT. Except as described above under "General," each
Stripped Certificate will be considered to have been issued (i) on the date
that the stripped interest is purchased and (ii) at a price equal to its
purchase price or, if more than one stripped interest is purchased, the share
of the purchase price allocable to such stripped interest. Each stripped
interest generally will have original issue discount equal to the excess of
its stated redemption price at maturity (or, in the case of a stripped
coupon, the amount payable on the due date of such coupon) over its issue
price. Original issue discount with respect to a Stripped Certificate must be
included in ordinary income as it accrues, in accordance with a constant
yield method that takes into account the compounding of interest, which may
be prior to the receipt of the cash attributable to such income. Based in
part on the OID Regulations and the amendments to the original issue discount
sections of the Code made by the 1986 Act, counsel has advised the Depositor
that the amount of original issue discount required to be included in the
income of a holder of a Stripped Certificate (referred to in this discussion
as a "Stripped Certificateholder") in any taxable year likely will be
computed generally as described above under "Federal Income Tax Consequences
for REMIC Certificates -- Taxation of Regular Certificates -- Original Issue
Discount." However, with the apparent exception of a Stripped Certificate
issued with de minimis original issue discount, as described above under
"General," the issue price of a Stripped Certificate will be the purchase
price paid by each holder thereof, and the stated redemption price at
maturity will include the aggregate amount of the payments to be made on the
Stripped Certificate to such Stripped Certificateholder, presumable under the
Prepayment Assumption, other than amounts treated as qualified stated
interest.
If the Mortgage Loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Stripped Certificateholder's recognition
of original issue discount will be either accelerated or decelerated and the
amount of such
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original issue discount will be either increased or decreased depending on
the relative interests in principal and interest on each Mortgage Loan
represented by such Stripped Certificateholder's Stripped Certificate. While
the matter is not free from doubt, the holder of a Stripped Certificate
should be entitled in the year that it becomes certain (assuming no further
prepayments) that the holder will not recover a portion of its adjusted basis
in such Stripped Certificate to recognize an ordinary loss equal to such
portion of unrecoverable basis.
POSSIBLE ALTERNATIVE CHARACTERIZATIONS. As an alternative to the method
described above, the fact that some or all of the interest payments with
respect to the Stripped Certificates will not be made if the Mortgage Loans
are prepaid could lead to the interpretation that such interest payments are
"contingent" within the meaning of the OID Regulations. Under the rules of
the OID Regulations relating to contingent payments, a projected payment
schedule for the Stripped Certificates would be constructed by the Depositor.
Interest accrual and adjustments relating to the Stripped Certificates would
be determined under the general rules of the noncontingent bond method
described above. While not free from doubt, counsel for the Depositor
believes that uncertainty as to the payment of interest arising as a result
of the possibility of prepayment of the Mortgage Loans should not cause the
contingent payment rules under the OID Regulations to apply to interest with
respect to the Stripped Certificates.
SALE OR EXCHANGE OF STRIPPED CERTIFICATES. Sale or exchange of a Stripped
Certificate prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under "Federal Income Tax Consequences for REMIC Certificates --Taxation
of Regular Certificates -- Sale or Exchange of Regular Certificates." To the
extent that a subsequent purchaser's purchase price is exceeded by the
remaining payments on the Stripped Certificates, such subsequent purchaser
will be required for federal income tax purposes to accrue and report such
excess as if it were original issue discount in the manner described above.
It is not clear for this purpose whether the assumed prepayment rate that is
to be used in the case of a Stripped Certificateholder other than original
Stripped Certificateholder should be the Prepayment Assumption or a new rate
based on the circumstances at the date of subsequent purchase.
PURCHASE OF MORE THAN ONE CLASS OF STRIPPED CERTIFICATES. Where an
investor purchases more than one class of Stripped Certificates, it is
currently unclear whether for federal income tax purposes such classes of
Stripped Certificates should be treated separately or aggregated for purposes
of the rules described above.
Because of these possible varying characterizations of Stripped
Certificates and the resultant differing treatment of income recognition,
Stripped Certificateholders are urged to consult their own tax advisors
regarding the proper treatment of Stripped Certificates for federal income
tax purposes.
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Trustee will furnish, within a reasonable time after the end of each
calendar year, to each Certificateholder or Stripped Certificateholder at any
time during such year, such information (prepared on the basis described
above) as the Trustee deems to be necessary or desirable to enable such
Certificateholders to prepare their federal income tax returns. Such
information will include the amount of original issue discount accrued on
Certificates held by persons other than Certificateholders exempted from the
reporting requirements. The amounts required to be reported by the Trustee
may not be equal to the proper amount of original issue discount required to
be reported as taxable income by a Certificateholder, other than an original
Certificateholder. The Trustee will also file such original issue discount
information with the IRS. If a Certificateholder fails to supply an accurate
taxpayer identification number or if the Secretary of the Treasury determines
that a Certificateholder has not reported all interest and dividend income
required to be shown on his federal income tax return, 31% backup withholding
may be required in respect of any reportable payments, as described above
under "Federal Income Tax Consequences for REMIC Certificates -- Backup
Withholding."
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a Certificate evidences ownership in Mortgage Loans 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
to nonresident aliens, foreign corporations, or other Non-United States
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 recognized by the Certificateholder on the
sale or exchange of such a Certificate also will be subject to federal income
tax at the same rate.
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Treasury regulations provide that interest or original issue discount paid
by the Trustee or other withholding agent to a Non-United States Person
evidencing ownership interest in Mortgage Loans 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 "Federal Income Tax Consequences for REMIC Certificates --
Taxation of Certain Foreign Investors -- Regular Certificates."
STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences" herein, potential 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, potential investors should consult their own tax advisors with
respect to the various tax consequences of investment in the Offered
Certificates.
PLAN OF DISTRIBUTION
Certificates are being offered hereby in series through one or more
underwriters or groups of underwriters (the "UNDERWRITERS"). The related
Prospectus Supplement will set forth the terms of offering of a Series of
Certificates, including the public offering or purchase price of each Class
of Certificates of such Series being offered thereby or the method by which
such price will be determined and the net proceeds to the Depositor from the
sale of each such Class. Such Certificates will be acquired by the
Underwriters for their own account and may be resold from time to time in one
or more transactions including negotiated transactions, at fixed public
offering prices or at varying prices to be determined at the time of sale or
at the time of commitment therefor. The managing Underwriter or Underwriters
with respect to the offer and sale of a particular Series of Certificates
will be set forth on the cover of the Prospectus Supplement relating to such
Series and the members of the underwriting syndicate, if any, will be named
in such Prospectus Supplement.
In connection with the Sale of the Certificates, Underwriters may receive
compensation from the related Transferor or the Depositor or from purchasers
of the Certificates in the form of discounts, concessions or commissions.
Underwriters and dealers participating in the distribution of the
Certificates may be deemed to be Underwriters in connection with such
Certificates, and any discounts or commissions received by them from the
related Transferor or the Depositor and any profit on the resale of
Certificates by them may be deemed to be underwriting discounts and
commissions under the Securities Act. The Prospectus Supplement will
describe any such compensation paid by the related Transferor or the
Depositor.
It is anticipated that the underwriting agreement pertaining to the sale of
any Series of Certificates will provide that the obligations of the
Underwriters will be subject to certain conditions precedent, that the
Underwriters will be obligated to purchase all such Certificates if any are
purchased and that the related Transferor or the Depositor will indemnify the
underwriters against certain civil liabilities, including liabilities under
the Securities Act, as amended.
LEGAL MATTERS
The legality of the Certificates and certain federal income tax matters
will be passed upon for the Depositor by Andrews & Kurth L.L.P., Dallas,
Texas, and for the Underwriters by ____________________________________.
FINANCIAL INFORMATION AND ADDITIONAL INFORMATION
A new Trust Fund will be formed with respect to each Series of
Certificates. No Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related Series of
Certificates. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
Copies of the Registration Statement to which this Prospectus forms a part
and the exhibits thereto are on file at the offices of the Securities and
Exchange Commission in Washington, D.C., and may be obtained at rates
prescribed by the Commission upon request to the Commission and inspected,
without charge, at the offices of the Commission.
Copies of FHLMC's most recent Offering Circular for FHLMC Certificates,
FHLMC's Information Statement and most recent Supplement thereto and any
quarterly report made available by FHLMC can be obtained in writing or
calling
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FHLMC's Investor Relations Department at 8200 Jones Branch Drive, McLean,
Virginia 22102 (800-336-FMPC). The Depositor did not participate in the
preparation of FHLMC's Offering Circular, Information Statement or any
Supplement thereto or any such quarterly report.
Copies of FNMA's most recent Prospectus for FNMA Certificates and FNMA's
annual report and quarterly financial statements as well as other financial
information are available from the Vice President for Investor Relations of
FNMA, 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016 (202-752-7585). The
Depositor did not participate in the preparation of FNMA's Prospectus or any
such report, financial statement or other financial information.
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APPENDIX A
INDEX TO LOCATION OF PRINCIPAL TERMS
PAGE
----
"1986 Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . .63
"Act". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54
"Administrator". . . . . . . . . . . . . . . . . . . . . . . . . . 2
"Agency Securities". . . . . . . . . . . . . . . . . . . . . . .5, 6
"Annual Reduction" . . . . . . . . . . . . . . . . . . . . . . . .55
"Applicable Accounting Standards". . . . . . . . . . . . . . . . .41
"APR". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
"Assets" . . . . . . . . . . . . . . . . . . . . . . . . . . . .i, 5
"Assumed Final Distribution Date". . . . . . . . . . . . . . . . . 4
"Beneficial Owners". . . . . . . . . . . . . . . . . . . . . . 7, 25
"BIF". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
"Book Entry Certificates". . . . . . . . . . . . . . . . . . . 7, 24
"Call Risk". . . . . . . . . . . . . . . . . . . . . . . . . . . .13
"Certificate Account". . . . . . . . . . . . . . . . . . . . . . .22
"Certificate Guaranty Policy". . . . . . . . . . . . . . . . . . .34
"Certificate Interest Rate". . . . . . . . . . . . . . . . . . . . 2
"Certificateholders" . . . . . . . . . . . . . . . . . . . . . . . 8
"Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . i
"Charter Act". . . . . . . . . . . . . . . . . . . . . . . . . . .28
"Class". . . . . . . . . . . . . . . . . . . . . . . . . . . . .i, 1
"Clearing Agency Participants" . . . . . . . . . . . . . . . . 7, 24
"Clearing Agency". . . . . . . . . . . . . . . . . . . . . . . 7, 24
"Code" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
"Collateral Value" . . . . . . . . . . . . . . . . . . . . . . . .32
"Commission" . . . . . . . . . . . . . . . . . . . . . . . . . . iii
"Committee Report" . . . . . . . . . . . . . . . . . . . . . . . .65
"Companion Certificates" . . . . . . . . . . . . . . . . . . . . .22
"Compound Interest Certificates" . . . . . . . . . . . . . . . 1, 21
"Contract Loan Schedule" . . . . . . . . . . . . . . . . . . . . .40
"Contract Pool". . . . . . . . . . . . . . . . . . . . . . . . . . 5
"Contracts". . . . . . . . . . . . . . . . . . . . . . . i, 5, 6, 31
"Conventional Contracts" . . . . . . . . . . . . . . . . . . . 6, 31
"Conventional Mortgage Loans". . . . . . . . . . . . . . . . . . . 6
"Cooperative Loans". . . . . . . . . . . . . . . . . . . . . . . .26
"Cooperatives" . . . . . . . . . . . . . . . . . . . . . . . . 6, 26
"Credit Enhancement" . . . . . . . . . . . . . . i, 5, 7, 13, 14, 33
"Depositor". . . . . . . . . . . . . . . . . . . . . . . . .i, 2, 44
"Disqualified Organization". . . . . . . . . . . . . . . . . . . .75
"Distribution Date". . . . . . . . . . . . . . . . . . . . . . . . 2
"DOL". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62
"Due Period" . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"ERISA". . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 61
"Excess Servicing" . . . . . . . . . . . . . . . . . . . . . . . .82
"Excess Spread". . . . . . . . . . . . . . . . . . . . . . . . . .34
"Exchange Act" . . . . . . . . . . . . . . . . . . . . . . . . . iii
"Extension Risk" . . . . . . . . . . . . . . . . . . . . . . . . .13
"FDIC" . . . . . . . . . . . . . . . . . . . . . . . . . . . .41, 61
"FFI". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44
"FHA Claims Administration Agreement". . . . . . . . . . . . . . .15
"FHA Claims Administrator" . . . . . . . . . . . . . . . . . . . .15
"FHA Loans". . . . . . . . . . . . . . . . . . . . . . . . . . . .27
"FHA Reserve". . . . . . . . . . . . . . . . . . . . . . . . . . .55
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"FHLMC Act". . . . . . . . . . . . . . . . . . . . . . . . . . . .29
"FHLMC Certificate Group". . . . . . . . . . . . . . . . . . . . .29
"FHLMC Certificates" . . . . . . . . . . . . . . . . . . . . . . . 7
"FHLMC". . . . . . . . . . . . . . . . . . . . . . . . . . . . .i, 5
"Final REMIC Regulations". . . . . . . . . . . . . . . . . . . . .63
"FmHA Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . .27
"FNMA Certificates". . . . . . . . . . . . . . . . . . . . . . . . 7
"FNMA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . .i, 5
"Garn-St. Germain Act" . . . . . . . . . . . . . . . . . . . . . .51
"GNMA Certificates". . . . . . . . . . . . . . . . . . . . . . . . 6
"GNMA Issuer". . . . . . . . . . . . . . . . . . . . . . . . . . .27
"GNMA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . .i, 5
"Guaranty Agreement" . . . . . . . . . . . . . . . . . . . . . . .27
"Holders". . . . . . . . . . . . . . . . . . . . . . . . . . . .1, 8
"Housing Act". . . . . . . . . . . . . . . . . . . . . . . . . . .27
"improper knowledge" . . . . . . . . . . . . . . . . . . . . . . .75
"Interest Only Certificates" . . . . . . . . . . . . . . . . . 1, 21
"IRS". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65
"Issuer" . . . . . . . . . . . . . . . . . . . . . . . . . .i, 2, 20
"Manufacturer's Invoice Price" . . . . . . . . . . . . . . . . . .32
"Market Discount". . . . . . . . . . . . . . . . . . . . . . . . .72
"Master Servicer". . . . . . . . . . . . . . . . . . . . . . . . . 2
"Maximum Variable Interest Rate" . . . . . . . . . . . . . . . . . 3
"Minimum Variable Interest Rate" . . . . . . . . . . . . . . . . . 3
"Mortgage Asset Pool". . . . . . . . . . . . . . . . . . . . . . . i
"Mortgage Assets". . . . . . . . . . . . . . . . . . . . . . . . . i
"Mortgage Loans" . . . . . . . . . . . . . . . . . . . . . .i, 5, 64
"Mortgage Notes" . . . . . . . . . . . . . . . . . . . . . . . . .26
"Mortgage Pool Insurance Policy" . . . . . . . . . . . . . . . . .34
"Mortgage Pool". . . . . . . . . . . . . . . . . . . . . . . . . . 5
"Mortgage Rates" . . . . . . . . . . . . . . . . . . . . . . . . .27
"Mortgaged Properties" . . . . . . . . . . . . . . . . . . . . . .26
"Mortgages". . . . . . . . . . . . . . . . . . . . . . . . . . . .26
"NCUA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61
"noneconomic residual interest". . . . . . . . . . . . . . . . . .75
"Non-Priority Certificates". . . . . . . . . . . . . . . . . . . .22
"Non-United States Person" . . . . . . . . . . . . . . . . . . . .78
"Notional Principal Balance" . . . . . . . . . . . . . . . . . . .20
"Offered Certificates" . . . . . . . . . . . . . . . . . . . . . . i
"OID Regulations". . . . . . . . . . . . . . . . . . . . . . . . .65
"Original Issue Discount". . . . . . . . . . . . . . . . . . . . .65
"OTS". . . . . . . . . . . . . . . . . . . . . . . . . . . . .51, 61
"Parties in Interest". . . . . . . . . . . . . . . . . . . . . . .62
"Pass-Through Entity". . . . . . . . . . . . . . . . . . . . . . .75
"Plan Asset Regulations" . . . . . . . . . . . . . . . . . . . . .62
"Plans". . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61
"Policy Statement" . . . . . . . . . . . . . . . . . . . . . . . .61
"Pool Insurer" . . . . . . . . . . . . . . . . . . . . . . . . . .34
"Pooling and Servicing Agreement". . . . . . . . . . . . . . . 1, 20
"Premium REMIC . . . . . . . . . . . . . . . . . . . . . . . . . .69
"Prepayment Assumption". . . . . . . . . . . . . . . . . . . . . .65
"Pre-Funding Account". . . . . . . . . . . . . . . . . . . . . . .32
"Pre-Funding Arrangement". . . . . . . . . . . . . . . . . . . 7, 32
A-2
<PAGE>
"Principal Only Certificates". . . . . . . . . . . . . . . . . 1, 21
"Principal Prepayments". . . . . . . . . . . . . . . . . . . . . .23
"Priority Certificates". . . . . . . . . . . . . . . . . . . . . .22
"Prohibited Transactions". . . . . . . . . . . . . . . . . . .20, 62
"Proposed Regulations" . . . . . . . . . . . . . . . . . . . . . .68
"Prospectus Supplement". . . . . . . . . . . . . . . . . . . . . . i
"PTC". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
"Rating Agency". . . . . . . . . . . . . . . . . . . . . . . . . .10
"Record Date". . . . . . . . . . . . . . . . . . . . . . . . . . .22
"Registrar". . . . . . . . . . . . . . . . . . . . . . . . . . . .20
"Regular Certificateholder". . . . . . . . . . . . . . . . . .65, 71
"Regular Certificates" . . . . . . . . . . . . . . . . . . 8, 63, 78
"Reigle Act" . . . . . . . . . . . . . . . . . . . . . . . . . . .53
"REIT" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64
"Relief Act" . . . . . . . . . . . . . . . . . . . . . . .17, 46, 53
"REMIC Administrator". . . . . . . . . . . . . . . . . . . . . . iii
"REMIC Pool" . . . . . . . . . . . . . . . . . . . . . . . . . . .63
"REMIC". . . . . . . . . . . . . . . . . . . . . . . . . . ii, 8, 63
"Reports". . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
"Reserve Fund" . . . . . . . . . . . . . . . . . . . . . . . . . .35
"Residual Certificates". . . . . . . . . . . . . . . . . . 8, 16, 63
"Residual Holders" . . . . . . . . . . . . . . . . . . . . . . . .16
"Retail Class Certificate" . . . . . . . . . . . . . . . . . . . .65
"SAIF" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
"Scheduled Amortization Certificates". . . . . . . . . . . . . . .21
"Scheduled Principal". . . . . . . . . . . . . . . . . . . . . . .30
"Secured Contracts". . . . . . . . . . . . . . . . . . . . . . 6, 31
"Secured Property" . . . . . . . . . . . . . . . . . . . . . . . .56
"Securities Act" . . . . . . . . . . . . . . . . . . . . . . . . iii
"Senior Certificates". . . . . . . . . . . . . . . . . . . . . . .33
"Series" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
"Servicer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"SMMEA". . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 61
"Special Allocation Certificates". . . . . . . . . . . . . . . . .22
"Special Hazard Insurance Policy". . . . . . . . . . . . . . . . .35
"Startup Day". . . . . . . . . . . . . . . . . . . . . . . . . . .64
"Subordinated Certificates". . . . . . . . . . . . . . . . . . . .33
"Subsequent Mortgage Assets" . . . . . . . . . . . . . . . . . 7, 32
"Subservicing Agreement" . . . . . . . . . . . . . . . . . . . . .36
"TAMRA". . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63
"Thrift Institution" . . . . . . . . . . . . . . . . . . . . . . .64
"TILA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53
"Title I Contracts". . . . . . . . . . . . . . . . . . . . . . 6, 31
"Title I Mortgage Loans" . . . . . . . . . . . . . . . . . . . 6, 26
"Title V". . . . . . . . . . . . . . . . . . . . . . . . . . . . .53
"TMP". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64
"Transfer Report". . . . . . . . . . . . . . . . . . . . . . . . .55
"Transferor" . . . . . . . . . . . . . . . . . . . . . . . . . . .25
"Trust Fund" . . . . . . . . . . . . . . . . . . . . . . . . . .i, 1
"Trustee". . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"UCC". . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49
"Underlying Loans" . . . . . . . . . . . . . . . . . . . . . . . .12
"Underwriters" . . . . . . . . . . . . . . . . . . . . . . . . . .86
"United States Person" . . . . . . . . . . . . . . . . . . . . . .76
"Unsecured Contracts". . . . . . . . . . . . . . . . . . . . . 6, 31
A-3
<PAGE>
"VA Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
"Variable Interest Rate Certificates". . . . . . . . . . . . . . . 1
"Window Period Loans". . . . . . . . . . . . . . . . . . . . . . .51
A-4
<PAGE>
No dealer, salesman, or any other person has been authorized to give any
information or to make any representations other than those contained in this
ProspectusSsupplement and the accompanying Prospectus in connection with the
offer contained in this Prospectus Supplement and the accompanying Prospectus,
and, if given or made, such information or representations must not be relied
upon as having been authorized by the issuer, any affiliate of the Issuer or any
Underwriter. This Prospectus Supplement and the accompanying Prospectus shall
not constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby in any state to any person to who it is unlawful to
make such offer or solicitation in such state. The delivery of this Prospectus
Supplement and the accompanying Prospectus does not imply that the information
herein is correct as of any time subsequent to the date hereof.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
----
Summary of Prospectus Supplement.........................................
Risk Factors.............................................................
Use of Proceeds..........................................................
The Mortgage Loan Pool...................................................
The Guaranty Policy......................................................
FHA Insurance for Title I Mortgage Loans.................................
The Depositor............................................................
The Transferor and Servicer..............................................
Prepayment and Yield Considerations......................................
Description of the Certificates..........................................
Description of Book Entry Procedures.....................................
Certain Federal Income Tax Consequences..................................
ERISA Considerations.....................................................
Legal Investment.........................................................
Ratings..................................................................
Legal Matters............................................................
Underwriting.............................................................
PROSPECTUS
Prospectus Supplement....................................................
Available Information....................................................
Incorporation of Certain Documents by Reference..........................
Summary of Prospectus....................................................
Risk Factors.............................................................
Description of the Certificates..........................................
Assets Securing or Underlying the Certificates...........................
Credit Enhancement.......................................................
Servicing of the Mortgage Loans and Contracts............................
The Pooling and Servicing Agreement......................................
Use of Proceeds..........................................................
The Depositor............................................................
The Trustee..............................................................
Certain Legal Aspects of the Mortgage Assets.............................
Legal Investment Matters.................................................
ERISA Considerations.....................................................
Certain Federal Income Tax Consequences..................................
State Tax Consequences...................................................
Plan of Distribution.....................................................
Legal Matters............................................................
Financial Information and Additional Information.........................
$____________________
FIRSTPLUS INVESTMENT CORPORATION
ASSET-BACKED CERTIFICATES
SERIES 199__-__
PROSPECTUS SUPPLEMENT
[UNDERWRITER]
[_____________, 199__]
Until 90 days after the date of this Prospectus Supplement, all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus
Supplement and Prospectus. This obligation is in addition to the obligation of
dealers to deliver a Prospectus Supplement and Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED TO BE IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Estimated expenses in connection with the issuance and distribution of
the securities, other than underwriting discounts and commissions*, are as
follows:
<TABLE>
<S> <C>
Registration Fee -- Securities and Exchange Commission . . . . . . . . . $ 344,828
Printing and Engraving Expenses. . . . . . . . . . . . . . . . . . . . . $ 120,000
Accounting Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . $ 100,000
Legal Fees and Expenses. . . . . . . . . . . . . . . . . . . . . . . . . $ 600,000
Trustee Fees and Expenses. . . . . . . . . . . . . . . . . . . . . . . . $ 25,000
Blue Sky Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . $ 10,000
Rating Agency Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 375,000
Miscellaneous Expenses . . . . . . . . . . . . . . . . . . . . . . . . . $ 400,000
----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,974,828
----------
----------
</TABLE>
_____________
* To be provided for each Series of Certificates on the cover
page of the related Prospectus Supplement.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The form of Underwriting Agreement filed as Exhibit 1.1 hereto will
provide for indemnification of the officers and directors of Remodelers
Investment Corporation (the "COMPANY") and each person, if any, who controls
the Company within the meaning of Section 15 of the Securities Act of 1933 or
Section 20 of the Securities and Exchange Act of 1934 as follows:
(i) against any and all losses, liabilities, claims, damages and
expenses, joint or several, or actions in respect thereof, whatsoever
arising out of any untrue statements or omissions, or alleged untrue
statements or omissions made in the Registration Statement (or any
amendment or supplement thereto), or the Prospectus (or any amendment or
supplement thereto) in reliance upon and in conformity with written
information furnished to the Company by and with respect to the
Underwriter expressly for use in the Registration Statement (or any
amendment or supplement thereto) or the Prospectus (or any amendment or
supplement thereto);
(ii) against any and all loss, liability, claim, damage and
expense, joint or several, or actions in respect thereof, whatsoever to
the extent of the aggregate amount of any judgment rendered or the
aggregate amount paid in settlement of any litigation, or relating to any
investigation or proceeding by any governmental agency or body or third
party, commenced or threatened, or relating to any claim whatsoever, in
any such case based upon any such untrue statement or omission, or any
such alleged untrue statement or omission; and
(iii) against any and all expense whatsoever (including the fees
and disbursements of counsel) incurred in investigation, preparing for,
or defending against any litigation or investigation or proceeding by any
governmental agency or body or third party, commenced or threatened, or
any claim whatsoever based upon any such untrue statement or omission, or
any such alleged untrue statement or omission, to the extent that any such
expense is not paid under (i) or (ii) above.
The Articles of Incorporation and By-Laws of the Company (Exhibit 3.1
and 3.2, respectively) provide that the Company shall indemnify its officers
and directors and may, in the discretion of the Board of Directors, indemnify
its other employees and agents to the fullest extent permitted by Nevada
statutory and decisional law if any such person
II-1
<PAGE>
was or is a party, or is threatened to be made a party, to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative, arbitrative or investigative, by reason of the fact that such
person is or was a director, officer, employee or agent of the Company, or is
or was serving at the request of the Company as a director, officer, partner,
venturer, proprietor, trustee, employee or agent of another company,
partnership, joint venture, trust, limited liability company or other
enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number
- --------
<S> <C>
1.1 Form of Underwriting Agreement(1)
*3.1 Amended and Restated Articles of Incorporation of Remodelers
Investment Corporation, as amended
3.2 By-Laws(2)
4.1 Form of Pooling and Servicing Agreement(2)
5.1 Opinion of Andrews & Kurth L.L.P. regarding the legality of
the Certificates(1)
8.1 Opinion of Andrews & Kurth L.L.P. regarding tax matters(1)
10.1 Representative Form of Mortgage Note(1)
10.2 Representative Form of Mortgage(1)
10.3 Representative Form of Retail Installment Contract, Note and
Disclosure Statement(1)
10.4 Specimen of Certificate Insurance Policy(2)
10.5 Form of Subservicing Agreement(2)
10.6 Form of Loan Sale Agreement(2)
10.7 Form of Agreement with Clearing Agency(2)
23.1 Consent of Andrews & Kurth L.L.P.(1)
24.1 Power of Attorney(3)
*99.1 Form of Prospectus Supplement (filed with the Prospectus)
</TABLE>
___________________
* Filed herewith.
(1) Previously filed with the Commission as an exhibit to the Registrant's
Amendment No. 1 to Form S-3 Registration Statement (File No. 33-65373)
on April 23, 1996 and incorporated by reference herein.
(2) Previously filed with the Commission as an exhibit to the Registrant's
Form S-3 Registration Statement (file No. 33-65373) on December 22, 1995
and incorporated by reference herein.
(3) Previously filed, in part, with the Commission as an exhibit to the
Registrant's Form S-3 Registration Statement (File No. 33-65373) on
December 22, 1995 and, in part, as an exhibit to the Registrant's Amendment
No. 1 to Form S-3 Registration Statement (File No. 33-65373) on April 23,
1996 and incorporated by reference herein.
ITEM 17. UNDERTAKINGS
(a) The Company hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement: (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933 (the "SECURITIES ACT"); (ii) to reflect in the prospectus any
facts or events arising after
II-2
<PAGE>
the effective date of this Registration Statement (or the most recent
post-effective amendment hereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
this Registration Statement; (iii) to include any material information
with respect to the plan of distribution not previously disclosed in this
Registration Statement or any material change to such information in
this Registration Statement; provided, however, that no such
post-effective amendment shall be required in the information which would
be required by clauses (i) and (ii) is contained in periodic reports filed
by the Company pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 (the "EXCHANGE ACT") that are incorporated by
reference in this Registration Statement.
(2) That for the purpose of determining any liability under the
1933 Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) The Company hereby undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the Company's annual
report pursuant to section 13(a) or section 15(d) of the Exchange Act that is
incorporated by reference in the registration statement shall be deemed to be
a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise,
the Company has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of competent jurisdiction
the question whether such indemnification by it is against public policy as
expressed int he 1933 Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the 1933 Act, the Company certifies that
it has reasonable grounds to believe that it meets all of the requirements
for filling on Form S-3 and has duly caused this Amendment No. 3 to the
Registration Statement No. 33-65373 to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Dallas, State of Texas,
on the 22nd day of May, 1996.
REMODELERS INVESTMENT CORPORATION
By: /s/ Daniel T. Phillips
---------------------------------------
Daniel T. Phillips
President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 3 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- -----
<S> <C> <C>
/s/ Daniel T. Phillips Director and President May 22, 1996
- ------------------------------ (Principal Executive
Daniel T. Phillips Officer)
Ronald M. Mankoff* Director, Senior Vice May 22, 1996
- ------------------------------ President and Secretary
Ronald M. Mankoff
Larry G. Studinski* Director May 22, 1996
- ------------------------------
Larry G. Studinski
Eric C. Green* Executive Vice President, May 22, 1996
- ------------------------------ Treasurer (Principal
Eric C. Green Financial Officer and
Principal Accounting Officer)
*By: /s/ Daniel T. Phillips
-------------------------------
Daniel T. Phillips,
Attorney-in-Fact
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Numbered Page
- ------- -------------
<S> <C> <C>
1.1 Form of Underwriting Agreement(1)
*3.1 Amended and Restated Articles of Incorporation of Remodelers
Investment Corporation, as amended
3.2 By-Laws(2)
4.1 Form of Pooling and Servicing Agreement(2)
5.1 Opinion of Andrews & Kurth L.L.P. regarding the legality of
the Certificates(1)
8.1 Opinion of Andrews & Kurth L.L.P. regarding tax matters(1)
10.1 Representative Form of Mortgage Note(1)
10.2 Representative Form of Mortgage(1)
10.3 Representative Form of Retail Installment Contract, Note and
Disclosure Statement(1)
10.4 Specimen of Certificate Insurance Policy(2)
10.5 Form of Subservicing Agreement(2)
10.6 Form of Loan Sale Agreement(2)
10.7 Form of Agreement with Clearing Agency(2)
23.1 Consent of Andrews & Kurth L.L.P.(1)
24.1 Power of Attorney(3)
*99.1 Form of Prospectus Supplement (filed with the Prospectus)
</TABLE>
___________________
* Filed herewith.
(1) Previously filed with the Commission as an exhibit to the Registrant's
Amendment No. 1 to Form S-3 Registration Statement (File No. 33-65373)
on April 23, 1996 and incorporated by reference herein.
(2) Previously filed with the Commission as an exhibit to the Registrant's
Form S-3 Registration Statement (file No. 33-65373) on December 22, 1995
and incorporated by reference herein.
(3) Previously filed, in part, with the Commission as an exhibit to the
Registrant's Form S-3 Registration Statement (File No. 33-65373) on
December 22, 1995 and, in part, as an exhibit to the Registrant's Amendment
No. 1 to Form S-3 Registration Statement (File No. 33-65373) on April 23,
1996 and incorporated by reference herein.
