<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH, AND
DECLARED EFFECTIVE BY, THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
INFORMATION CONTAINED HEREIN IS COMPLETED AND FINALIZED. 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 JUNE 8, 1996
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 8, 1996)
$239,375,000 (APPROXIMATE)
[LOGO]
FIRSTPLUS INVESTMENT CORPORATION
(DEPOSITOR)
FIRSTPLUS FINANCIAL, INC.
(TRANSFEROR AND SERVICER)
FIRSTPLUS HOME LOAN TRUST 1996-2
The FIRSTPLUS Asset-Backed Certificates, Series 1996-2 will consist of the
following classes: (i) the Class A-1 Certificates, the Class A-2 Certificates,
the Class A-3 Certificates, the Class A-4 Certificates, the Class A-5
Certificates, the Class A-6 Certificates and the Class A-7 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 they each be rated "AAA" by Standard & Poor's,
a division of The McGraw-Hill Companies, Inc. ("Standard & Poor's") and "Aaa" by
Moody's Investors Service ("Moody's"). The Offered Certificates will be
unconditionally and irrevocably guaranteed to the extent described herein
pursuant to the terms of a financial guaranty insurance policy issued by
[LOGO]
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-17 AND "PREPAYMENT AND YIELD CONSIDERATIONS"
BEGINNING ON PAGE S-53 HEREIN, AND SEE "RISK FACTORS" BEGINNING ON PAGE 13 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.
<TABLE>
<CAPTION>
ORIGINAL CLASS
PRINCIPAL CERTIFICATE PRICE TO UNDERWRITING PROCEEDS TO
BALANCE INTEREST RATE PUBLIC (1) DISCOUNT DEPOSITOR (2)
<S> <C> <C> <C> <C> <C>
Class A-1 Certificates.......................
Class A-2 Certificates.......................
Class A-3 Certificates.......................
Class A-4 Certificates.......................
Class A-5 Certificates.......................
Class A-6 Certificates.......................
Class A-7 Certificates.......................
Total........................................
</TABLE>
(1) Plus accrued interest, if any, at the applicable rate from June 1, 1996.
(2) Before deducting expenses, estimated to be $ .
The Offered Certificates are offered subject to prior sale, when, as, and if
accepted by the Underwriters, and subject to the Underwriters' right to reject
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 June , 1996.
BEAR, STEARNS & CO. INC. BANC ONE CAPITAL CORPORATION
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS JUNE , 1996
<PAGE>
(COVER CONTINUED FROM PREVIOUS PAGE)
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.
The Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6 and
Class A-7 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, will equal
% of the sum of (i) the outstanding principal balances of the Initial Mortgage
Loans as of May 31, 1996 of approximately $169,108,856 and (ii) the amount
deposited into the Pre-Funding Account as described herein of approximately
$80,891,144.
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 June 1, 1996 (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 First
Trust of California, National Association, a national banking association, as
trustee (the "Trustee").
The Trust Fund will consist primarily of the following: (i) 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"); (ii) 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"); (iii) funds on deposit in the Pre-Funding
Account, the Capitalized Interest Account and the Certificate Account; and (iv)
certain other property. The Mortgage Loans will be secured by liens
(substantially all of which are junior liens) on the related real properties.
The Initial Mortgage Loans will include conventional (i.e., not insured or
guaranteed by a governmental agency) property improvement and/or debt
consolidation loans ("Conventional Mortgage Loans"), and 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"). The Title I Mortgage Loans are 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 covering 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 --
Limitations of Credit Enhancement -- Additional Limitations on FHA Insurance"
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 July 22, 1996 (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.
ii
<PAGE>
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), 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. Prospective 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 JUNE 8, 1996 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.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE OFFERED
CERTIFICATES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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>
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.
<TABLE>
<S> <C>
Issuer...................................... FIRSTPLUS Home Loan Trust 1996-2 (the "Trust
Fund").
Offered Certificates........................ The FIRSTPLUS Asset-Backed Certificates,
Series 1996-2 (the "Certificates"), of which
the following Classes are offered hereby:
$ Original Class Principal Balance of
Class A-1 Certificates with a % Certificate
Interest Rate and a Scheduled Final
Distribution Date in , 20 ;
$ Original Class Principal Balance of
Class A-2 Certificates with a % Certificate
Interest Rate and a Scheduled Final
Distribution Date in , 20 ;
$ Original Class Principal Balance of
Class A-3 Certificates with a % Certificate
Interest Rate and a Scheduled Final
Distribution Date in 20 ;
$ Original Class Principal Balance of
Class A-4 Certificates with a % Certificate
Interest Rate and a Scheduled Final
Distribution Date in 20 ; and
$ Original Class Principal Balance of
Class A-5 Certificates with a % Certificate
Interest Rate and a Scheduled Final
Distribution Date in 20 .
$ Original Class Principal Balance of
Class A-6 Certificates with a % Certificate
Interest Rate and a Scheduled Final
Distribution Date in 20 .
$ Original Class Principal Balance of
Class A-7 Certificates with a % Certificate
Interest Rate and a Scheduled Final
Distribution Date in 20 .
The Class A-1, Class A-2, Class A-3, Class
A-4, Class A-5, Class A-6 and Class A-7
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 "Scheduled Final Distribution Dates" for
each Class of Offered Certificates set forth
above represent
</TABLE>
S-1
<PAGE>
<TABLE>
<S> <C>
the final Distribution Dates and are based
upon the following assumptions: (i) the
aggregate Cut-Off Date Principal Balances of
the Subsequent Mortgage Loans conveyed to the
Trust Fund equals the Pre-Funding Account
Deposit, (ii) such Subsequent Mortgage Loans
are all delivered to the Trust Fund on the
Closing Date, (iii) the Mortgage Loans
amortize with no prepayments, delinquencies,
liquidations, substitutions or repurchases
thereof and (iv) 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 Scheduled 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").
Transferor.................................. FIRSTPLUS FINANCIAL, INC. ("FFI"), a Texas
corporation, as transferor of the Mortgage
Loans to the Depositor (in such capacity, the
"Transferor"). The Transferor is a
wholly-owned subsidiary of 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").
REMIC Administrator......................... FFI, performing the administrative functions
related to the REMIC (in such capacity, the
"REMIC Administrator").
Trustee..................................... First Trust of California, National
Association, a national banking association,
as the trustee (the "Trustee").
Custodian................................... Bank One, Texas, N.A., as the custodian or
such other entity as the Servicer, the Trustee
and the Certificate Insurer agree upon as
custodian (the "Custodian").
Description of Certificates................. The Certificates will represent an undivided
beneficial ownership interest in the Trust
Fund created pursuant to a Pooling and
Servicing Agreement dated as of June 1, 1996
(the "Pooling and Servicing Agreement")
between FIRSTPLUS INVESTMENT CORPORATION, as
Depositor, FIRSTPLUS FINANCIAL, INC., as
Transferor and Servicer, and First Trust of
California, National Association, as Trustee.
In addition to the Offered Certificates, the
Certificates also include the Class B
Certificates and
</TABLE>
S-2
<PAGE>
<TABLE>
<S> <C>
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"); (ii) 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) payments in
respect of the Mortgage Loans of interest and
principal received after May 31, 1996, 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 each term is defined
herein) until the end of the Funding Period;
(iv) the Guaranty Policy issued by the
Certificate Insurer; (v) the Certificate
Account; and (vi) certain other ancillary or
incidental funds, rights and properties
related to the foregoing. 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 Principal Balance 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 May 31, 1996, which is
expected to equal approximately $169,108,856.
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 $250,000,000.
Each of the Offered Certificates will be
insured under a Guaranty Policy issued by the
Certificate Insurer as described herein. SEE
"The Guaranty Policy" herein.
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
</TABLE>
S-3
<PAGE>
<TABLE>
<S> <C>
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 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 held
only in minimum denominations of $100,000 and
integral multiples of $1,000 in excess
thereof.
Closing Date................................ On or about June , 1996 ("Closing Date").
Cut-Off Date................................ May 31, 1996 for the Initial Mortgage Loans,
and the cut-off date specified in a Subsequent
Transfer Agreement for the Subsequent Mortgage
Loans (each, a "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 July 22, 1996 (each,
a "Distribution Date").
Due Period.................................. With respect to a Distribution Date, the
calendar month immediately preceding such
Distribution 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
GENERAL................................... 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.
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
</TABLE>
S-4
<PAGE>
<TABLE>
<S> <C>
be made as described herein (SEE "Description
of the Certificates --Distributions on the
Offered Certificates") 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. 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................................. On each Distribution Date (except as described
herein), the Principal Remittance Amount for
such Distribution Date will be distributable
to the Classes of Offered Certificates in
ascending order of their numerical
designations, such that no amounts will be
distributed to a Class of Offered Certificates
until the Class Principal Balance of each
Class having a lower numerical designation has
been reduced to zero. In addition, until the
Required Class A Overcollateralization Level
has been reached, the Offered Certificates
will be entitled to distributions of Excess
Spread, in reduction of their Class Principal
Balance, in sequential order as described
above, except that such amounts may be subject
to prior application to reimburse the Offered
Certificates for certain losses as described
herein. Additional amounts may also be
distributed in reduction of the Class
Principal Balances of the Offered Certificates
from funds remaining in the Pre-Funding
Account upon termination of the Funding
Period. As described herein, on certain
Distribution Dates on which an
Overcollateralization Stepdown Date occurs and
the Excess Overcollateralization Amount is
greater than zero, amounts in respect of the
Principal Remittance Amount otherwise
distributable on the Class A Certificates will
instead be distributable to the holders of the
Class R and Class B Certificates. SEE
"Description of the Certificates --
Distributions on the Offered Certificates"
herein.
Certain Prepayment and Yield The yield on the Offered Certificates of any
Considerations............................. 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) and interest payments on the
Mortgage Loans and (ii) the extent
</TABLE>
S-5
<PAGE>
<TABLE>
<S> <C>
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" and
"Prepayment and Yield Considerations" herein.
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 townhomes. 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"; to consolidate debt ("Conventional
Debt Consolidation Loans"); and to finance
property improvements and for other purposes,
in combination, which loans 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 6,436 loans, having an Initial
Pool Principal Balance of approximately
$169,108,856. SEE "The Mortgage Loan Pool"
herein. 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
</TABLE>
S-6
<PAGE>
<TABLE>
<S> <C>
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 replaced or added may not
exceed 5.0% of the Initial Pool Principal
Balance and so removed may not exceed
$6,500,000. 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. SEE "Risk
Factors -- Additional Factors Affecting
Delinquencies, Foreclosures and Losses on
Mortgage Loans" and "The Mortgage Loan Pool"
herein.
In addition to making additions and deletions
to the Mortgage Loan Pool prior to the Closing
Date as described above, 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 5%, without Certificate Insurer
approval, and 10%, with Certificate Insurer
approval, of the aggregate Cut-Off Date
Principal Balances of the Mortgage Loans; (2)
to repurchase any Mortgage Loan incident to
the foreclosure, default or imminent default
thereof at any time after the Closing Date;
and (3) to remove defaulted Mortgage Loans and
substitute Qualified Substitute Mortgage Loans
for a two year period following the Closing
Date. As used herein, a "Qualified Substitute
Mortgage Loan" will have characteristics that
are generally the same as or substantially
similar to the characteristics of the Mortgage
Loan which it replaces. All such repurchases
will result in accelerated payments of
principal to the related Class
</TABLE>
S-7
<PAGE>
<TABLE>
<S> <C>
or Classes of Certificates. SEE "The
Transferor and the Servicer -- Repurchase or
Substitution of Mortgage Loans" 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 $80,891,144 (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
benefit of the Certificateholders and the
Certificate Insurer, 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 decrease will not exceed
$6,500,000 and any such increase will not
exceed 5% 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 $25,000
and (ii) August 30, 1996, 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 and
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. 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 (net of reinvestment income
which will be transferred to the Capitalized
Interest Account) will be applied to reduce
the Class Principal Balance of each Class of
Offered Certificates, on a pro rata basis.
Although it is
</TABLE>
S-8
<PAGE>
<TABLE>
<S> <C>
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
balance of the Subsequent Mortgage Loans
transferred to the Trust Fund will be exactly
equal to the Pre-Funding Account Deposit, and
thus, the 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. 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"), as approved by the Rating
Agencies and the Certificate Insurer, to cover
the projected interest shortfall from amounts
in the Pre-Funding Account during the Funding
Period 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. Any amounts remaining in
the Capitalized Interest Account on any
Determination Date that are not required to
cover the interest shortfall for the related
Distribution Date and the anticipated interest
shortfall during the remainder of the Funding
Period as described herein will be distributed
to the Depositor, including any net
reinvestment income thereon. SEE "Description
of the Certificates -- Capitalized Interest
Account" herein.
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
features 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
</TABLE>
S-9
<PAGE>
<TABLE>
<S> <C>
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 MBIA
Insurance Corporation (the "Certificate
Insurer"), the principal operating subsidiary
of MBIA, Inc., a New York Stock
Exchange-listed company, 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. 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. For a description of the Certificate
Insurer, SEE "The Guaranty Policy" herein.
Class A Overcollateralization............... On the Closing Date, the "Initial Class A
Overcollateralization Level" 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 Level" will equal the
excess of the Pool Principal Balance over the
Class Principal Balance of all Classes of
Offered Certificates. As a result of the
application of Excess Spread in reduction of
the Class Principal Balances of the Class A
Certificates, the Class A
Overcollateralization Level is expected to
increase over time to the extent described
herein.
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 as described
</TABLE>
S-10
<PAGE>
<TABLE>
<S> <C>
herein. On the Closing Date, the Required
Class A Overcollateralization Level is
expected to be approximately $ , 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 generally until the Required
Class A Overcollateralization Level is
achieved. The Required Class A
Overcollateralization Level may also be
decreased in certain circumstances set forth
in the Pooling and Servicing Agreement,
resulting, most likely, in
overcollateralization at such time in an
excess of such required amount. Excess
overcollateralization may also result from the
occurrence of other factors, for example,
distributions of Excess Spread to the Class A
Certificateholders. If on any Distribution
Date identified in the Pooling and Servicing
Agreement as a "Overcollateralization Stepdown
Date" the Excess Overcollateralization Amount
(as defined below) exceeds zero, all or a
portion of the principal (up to the
Overcollateralization Reduction Amount) which
would otherwise be distributed to the Class A
Certificates will instead be distributed to
the holders of the Class R and Class B
Certificates as described herein, until the
Excess Overcollateralization Amount is reduced
to zero. In such circumstances, the rate of
principal payments distributed to the holders
of the Offered Certificates would be reduced
relative to the amortization of the Mortgage
Loans.
With respect to any Distribution Date, the
"Excess Overcollateralization Amount" is equal
to (x) the Class A Overcollateralization Level
on such Distribution Date after taking into
account all distributions to be made on such
Distribution Date (except for any
distributions of Overcollateralization
Reduction Amounts as described herein) minus
(y) the Required Class A Overcollateralization
Level. With respect to any Distribution Date
prior to an Overcollateralization Stepdown
Date, the "Overcollateralization Reduction
Amount" is zero; and with respect to any
Distribution Date on an Overcollateralization
Stepdown Date, the Overcollateralization
Reduction Amount is the lesser of (x) the
Excess Overcollateralization Amount on such
Distribution Date, or (y) the amount available
</TABLE>
S-11
<PAGE>
<TABLE>
<S> <C>
for distribution on account of principal with
respect to the Class A Certificates on such
Distribution Date. 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 attributable 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 Level. The
principal attributable to the Class R
Certificates, if any, will be equal to (a) the
Pool Principal Balance on such date minus (b)
the Class Principal Balances of the Class A
and Class B Certificates on such date. 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
on each Distribution Date will be subordinated
in the manner and 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. 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
</TABLE>
S-12
<PAGE>
<TABLE>
<S> <C>
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. Accordingly,
the Trust Fund and the Certificateholders will
have no direct right to receive insurance
payments from the FHA. SEE "Risk Factors --
Limitations of Credit Enhancement --
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 The Transferor will transfer the FHA insurance
Loans...................................... coverage for the Title I Mortgage Loans to the
Depositor for the benefit of the
Certificateholders and the Certificate
Insurer. 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
10% 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 -- Proposed Legislation affecting
FHA Insurance" herein. If the FHA Insurance
Amount so transferred is less than 10% of the
Cut-Off Date Principal Balances of the Title I
Mortgage Loans that
</TABLE>
S-13
<PAGE>
<TABLE>
<S> <C>
are actually conveyed to the Trust Fund, then
the amount of the Required Class A
Overcollateralization Level will be increased
by the amount of such shortfall, unless
otherwise directed by the Certificate Insurer.
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 the
Certificates and may subsequently include
insurance coverage in respect of other Title I
loans that are included in other series of
asset-backed certificates issued by the
Depositor (the "Additional Series"). The FHA
Insurance Amount for the Certificates 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 that
have been acknowledged by the FHA as having
been transferred to the Depositor 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 Certificates, 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.
FHA Claims Administrator.................... The Servicer will administer, process and
submit all FHA Claims in the name and on
behalf of the Depositor and record and monitor
the FHA Insurance Amount for the Title I
Mortgage Loans for the Depositor (in such
capacity, the Servicer, and any
</TABLE>
S-14
<PAGE>
<TABLE>
<S> <C>
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 and be entitled to a fee
(the "Servicing Fee"), payable monthly, as
described herein (see "Description of the
Certificates -- Servicing" herein). 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 responsible for paying
the fees of each Subservicer.
FHA Insurance Premium and Fees of On each Distribution Date, prior to
Certificate Insurer, Trustee, and distributions on the Certificates, amounts
Custodian.................................. 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 for the
first Due Period from the Closing Date. 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
</TABLE>
S-15
<PAGE>
<TABLE>
<S> <C>
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.
Optional Termination by Certificate On and after the date on which the Class A
Insurer.................................... Overcollateralization Level is zero, on any
Distribution Date on which Mortgage Loans with
aggregate Cut-Off Date Principal Balances
equal to or exceeding 17.5% or more of the sum
of (i) the Initial Pool Principal Balance and
(ii) the aggregate Cut-Off Date Principal
Balances of the Subsequent Mortgage Loans have
become Liquidated Mortgage Loans, the
Certificate Insurer may purchase all of the
Mortgage Loans and any related REO Properties
at a price equal to the Termination Price plus
any outstanding and unpaid fees and expenses
of the Trustee, the Custodian and the
Servicer.
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 they be rated
"AAA" by Standard & Poor's and "Aaa" 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"
herein and in the Prospectus.
Legal Investment............................ For a discussion of certain legal investment
considerations, SEE "Legal Investment Matters"
herein and in the Prospectus.
</TABLE>
S-16
<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 an 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 conditions 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 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 applicable thereto, all of the Mortgage Loans,
including the Subsequent Mortgage Loans to be conveyed by the Depositor as of
such Cut-Off Date, must 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 acquire additional mortgage loans that satisfy the eligibility
criteria for the transfer of Subsequent Mortgage Loans. The ability of the
Transferor to acquire additional mortgage loans may be affected by a variety of
social, economic and competitive factors, including prevailing interest rates,
unemployment levels, the rate of inflation, consumer perceptions of economic
conditions generally and the availability of mortgage loan financing and similar
types of consumer financing. 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.
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 an 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
S-17
<PAGE>
at a discount, an investor should consider the risk that a slower 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 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. On each Distribution
Date, until the Excess Overcollateralization Amount equals or exceeds zero, the
allocation of the Excess Spread for such Distribution Date as an additional
distribution of principal on the Offered Certificates will accelerate the
amortization of such Offered Certificates relative to the amortization of the
Mortgage Loans; however, on any Overcollateralization Stepdown Date, the
distribution of any Overcollateralization Reduction Amount to the holders of the
Class R and Class B Certificates, as described herein, can be expected to result
in a slower amortization of the Offered Certificates and may temporarily delay
principal distributions to the Offered Certificates on a Distribution Date.
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 yield. 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 limited acceleration of the
principal amortization of the Class A Certificates by application of 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
the additional credit enhancement will be adequate to cover the delays or
shortfalls in distributions to the holders of the Offered Certificates that
result from such higher delinquencies, defaults and losses. If the amounts
available from the additional credit enhancement are inadequate, the holders of
the Offered Certificates will bear the risk of any delays and losses resulting
from the 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 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 attributable to the Class R Certificates, if
any, and, second, to the Class Principal Balance of the Class B Certificates, in
each case reducing the Class A Overcollateralization Level. 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. SEE "The Guaranty Policy" herein.
S-18
<PAGE>
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 in available coverage 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, the
Title I Mortgage 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 on the 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
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 Certificates, 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, legislation
was 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 effect 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.
S-19
<PAGE>
LIMITATIONS ON RIGHTS OF 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 under the Pooling and
Servicing Agreement (the "Certificateholder Rights"), without any consent of
such holders; provided, however, that without the consent of each holder of an
Offered Certificate affected thereby, the Certificate Insurer shall not exercise
such Certificateholder Rights to amend the Pooling and Servicing Agreement in
any manner that would (i) reduce the amount of, or delay the timing of,
collections of payments on Mortgage Loans or distributions which are required to
be made on any Certificate, (ii) adversely affect in any material respect the
interests of the holders of any Class of Certificates, or (iii) alter the rights
of any such Certificateholder or Class of such Certificateholder to consent to
any such amendment. 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
Certificateholder Rights, or consent to the exercise of certain rights of the
Offered Certificateholders, in a manner that is adverse to the interests of one
or more holders of Offered Certificates. For example, under certain
circumstances the Certificate Insurer could exercise certain Certificateholder
Rights, 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
None of the Initial Mortgage Loans were 30 days or more late in their
scheduled monthly payments of principal and interest as of May 31, 1996;
however, approximately 60.01% of the Initial Pool Principal Balance consists of
Initial Mortgage Loans that have a first scheduled monthly payment due date
occurring after April 30, 1996; and therefore, it was not possible for such
Initial Mortgage Loans to have had a scheduled monthly payment that was 30 days
or more late as of May 31, 1996. The inclusion of 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 any delinquent Initial Mortgage Loans become
current after May 31, 1996, 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 the 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 the additional credit
enhancement if such delinquent payments or any liquidation proceeds are
subsequently collected from the 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, and in certain cases no consideration, in underwriting the
Mortgage Loans. SEE "The Transferor and Servicer -- Underwriting Criteria"
herein. In general, the credit quality of the Mortgage Loans is lower than 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
S-20
<PAGE>
typically secured by junior liens on Mortgaged Properties with relatively high
combined loan-to-value ratios and in some cases with no equity in the Mortgaged
Properties. 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 purchases from a network
of correspondent lenders. SEE "The Mortgage Loan Pool -- General" herein. All of
the Mortgage Loans that consist of portfolio acquisitions will have been re-
underwritten and reviewed only on a limited sample basis 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 such
loans may be of a different credit quality. 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 substantially similar to the FNMA or FHLMC required quality
control programs with respect to the underwriting and origination of such
Mortgage Loans. With respect to those Mortgage Loans acquired by the Transferor
that have not been re-underwritten 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, the Mortgage Loans that were (i) acquired by the
Transferor from third parties or (ii) not subject to an internal quality control
program at the time of origination, may subsequently be 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 may 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.
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,
the characteristics of the Initial Mortgage Loans and other information provided
herein, and not based on any prior delinquency experience and loan loss and
liquidation experience information set forth herein.
GEOGRAPHIC CONCENTRATION. Approximately 63.01% and 7.11% of the Initial
Pool Principal Balance will consist of Mortgage Loans that are secured by
Mortgaged Properties located in the States of California and Arizona,
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. 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,
S-21
<PAGE>
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. A majority of the
holders of the Offered Certificates 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 the 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 such 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 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
Underlying Loans -- 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
S-22
<PAGE>
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 any junior lien Mortgage Loan. SEE "Certain
Legal Aspects of the Mortgage Assets -- Foreclosure -- Junior Liens" in the
Prospectus.
NON-RECORDATION OF ASSIGNMENTS. Subject to confirmation by the Rating
Agencies that the ratings on the Offered Certificates will not be downgraded
(without regard to the Guaranty Policy) and to the approval of the Certificate
Insurer, the Transferor will not be required to record assignments to the
Trustee of the mortgages or deeds of trust (each, a "Mortgage") in the real
property records for the Mortgage Loans, but rather the Transferor, in its
capacity as the Servicer, will retain record title to such Mortgage on behalf of
the Trustee and Certificateholders. SEE "Description of the Certificates --
Assignment of Mortgage Loans" herein.
Although the recordation of the assignments of the Mortgage to the Trustee
is not necessary to effect a transfer of the Mortgage Loans to the Trustee, if
the Transferor or the Depositor were to make a sale, assignment, satisfaction or
discharge of any Mortgage Loan prior to recording the assignments to the
Trustee, the other parties to such sale, assignment, satisfaction or discharge
may have rights superior to those of the Trustee. In some states, in the absence
of such recordation of the assignments of the Mortgages, the transfer to the
Trustee of the Mortgage Loans may not be effective against certain creditors or
purchasers from the Transferor or a trustee in bankruptcy of the Transferor. If
such other parties, creditors or purchasers have rights to the Mortgage Loans
that are superior to those of the Trustee, then the holders of the Offered
Certificates could lose the right to future payments of principal and interest
from such Mortgage Loans 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.
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 Underlying Loans --
Certain Legal Considerations of Mortgage Loans and Contracts" 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 as of the
Closing Date for any Initial Mortgage Loan and as of the 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 -- Claims Procedures under Title I" 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 (i) the financial ability of the Servicer or Subservicer to
continue to act in such capacity or (ii) 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
S-23
<PAGE>
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 or the Certificate Insurer ("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, on behalf of the
Certificateholders and the Certificate Insurer, 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 Assets" in the Prospectus. In addition, the
Transferor is required to repurchase from the Trust Fund (i) 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 the related Subsequent Transfer Date (in the case of Subsequent
Mortgage Loans) or within such longer period as may be approved by the
Certificate Insurer, and (ii) 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 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 the Trust Fund 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 the Trust Fund, 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 Limitations -- 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 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.
S-24
<PAGE>
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 the 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.
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 townhomes (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 Mortgage Loans have scheduled monthly payment dates throughout a month. Each
Mortgage Loan bears interest computed on a simple interest basis at a fixed rate
of interest (the "Mortgage Loan Rate"). 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 the remaining 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 to finance property
improvements and for other purposes, in combination, which
S-25
<PAGE>
loans 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.
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 and
referrals from home improvement contractors ("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"). A substantial percentage of the Mortgage Loans will
have been underwritten, re-underwritten or reviewed to determine whether such
Mortgage Loans comply with the underwriting standards of the Transferor.
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 and the Certificate Insurer.
The Trust Fund will be entitled to all payments of interest and principal
received after (i) May 31, 1996 with respect to the Initial Mortgage Loans and
(ii) the related Cut-Off Date with respect to the Subsequent Mortgage Loans.
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 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 replaced or added cannot exceed 5% of the Initial Pool Principal
Balance and so removed may not exceed $6,500,000 and any such Initial Mortgage
Loans so added must be approved by the Certificate Insurer. 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 May 31, 1996, the
actual Mortgage Loan Pool may vary from the description below due to a number of
factors, including prepayments after May 31, 1996 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. A current report on Form 8-K containing a description of the
Mortgage Loans included in the final Mortgage Loan Pool as of the end of the
Funding Period will be filed with the Commission within fifteen days thereof.
After each transfer of Subsequent Mortgage Loans to the Trust Fund it is
expected that the Pool Principal Balance will consist of approximately 90%
Conventional Mortgage Loans and approximately 10% Title I Mortgage Loans.
The Initial Mortgage Loans included in the initial Mortgage Loan Pool will
consist of approximately 6,436 loans having an Initial Pool Principal Balance of
approximately $169,108,856. The Initial Mortgage Loans (by outstanding principal
balance) will have the characteristics set forth in the tables below.
S-26
<PAGE>
LOAN TYPE
<TABLE>
<CAPTION>
NUMBER PERCENT OF TOTAL
OF INITIAL AGGREGATE BY AGGREGATE
LOAN TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Conventional Mortgage Loans...................... 5,453 $ 149,236,322.44 88.25%
Title I Mortgage Loans........................... 983 19,872,533.32 11.75
----- ----------------- ------
Totals......................................... 6,436 $ 169,108,855.76 100.00%
----- ----------------- ------
----- ----------------- ------
</TABLE>
MORTGAGE LOAN RATE
<TABLE>
<CAPTION>
RANGE OF NUMBER PERCENT OF TOTAL
MORTGAGE LOAN OF INITIAL AGGREGATE BY AGGREGATE
RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
9.000 - 9.999 1 $ 14,700.80 0.01%
10.000 - 10.999 81 1,731,719.69 1.02
11.000 - 11.999 174 4,184,150.16 2.47
12.000 - 12.999 588 14,783,991.97 8.74
13.000 - 13.999 2,753 75,272,797.14 44.51
14.000 - 14.999 2,064 53,390,118.42 31.57
15.000 - 15.999 563 14,948,037.18 8.84
16.000 - 16.999 183 4,133,342.76 2.44
17.000 - 17.999 29 649,997.64 0.38
----- ----------------- ------
Totals......................................... 6,436 $ 169,108,855.76 100.00%
----- ----------------- ------
----- ----------------- ------
</TABLE>
The weighted average Mortgage Loan Rate of the Initial Mortgage Loans as of
May 31, 1996 was approximately 14.173% per annum.
S-27
<PAGE>
GEOGRAPHICAL CONCENTRATION
<TABLE>
<CAPTION>
PERCENT OF TOTAL
NUMBER OF INITIAL AGGREGATE BY AGGREGATE
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Alabama.................. 6 $ 114,381.97 0.07%
Arizona.................. 439 12,022,289.79 7.11
Arkansas................. 6 59,090.00 0.03
California............... 3,912 106,558,556.32 63.01
Colorado................. 314 7,932,652.65 4.69
Connecticut.............. 20 606,552.55 0.36
Delaware................. 1 13,400.00 0.01
Florida.................. 384 8,754,786.94 5.18
Georgia.................. 98 2,016,736.01 1.19
Idaho.................... 2 49,982.08 0.03
Illinois................. 12 315,212.49 0.19
Indiana.................. 3 43,329.44 0.03
Iowa..................... 5 118,788.30 0.07
Kansas................... 3 57,559.00 0.03
Kentucky................. 30 686,319.82 0.41
Louisiana................ 10 177,704.67 0.11
Maine.................... 1 16,711.30 0.01
Maryland................. 6 105,178.00 0.06
Michigan................. 1 14,612.68 0.01
Minnesota................ 15 314,479.05 0.19
Mississippi.............. 6 125,422.30 0.07
Missouri................. 11 218,058.22 0.13
Montana.................. 1 24,980.76 0.01
Nevada................... 376 9,775,367.92 5.78
New Hampshire............ 2 56,386.95 0.03
New Jersey............... 41 854,023.79 0.51
New Mexico............... 6 153,970.74 0.09
New York................. 34 740,910.58 0.44
North Carolina........... 49 1,286,880.67 0.76
Ohio..................... 10 158,088.58 0.09
Oklahoma................. 13 248,847.86 0.15
Oregon................... 86 2,193,749.65 1.30
Pennsylvania............. 14 250,768.95 0.15
Rhode Island............. 28 788,069.46 0.47
South Carolina........... 72 1,809,538.96 1.07
Tennessee................ 2 59,442.58 0.04
Texas.................... 58 908,208.68 0.54
Utah..................... 112 2,744,556.95 1.62
Virginia................. 16 472,650.02 0.28
Washington............... 225 6,142,780.73 3.63
West Virginia............ 1 7,725.00 0.00
Wisconsin................ 5 110,103.35 0.07
----- ----------------- ------
Totals................. 6,436 $ 169,108,855.76 100.00%
----- ----------------- ------
----- ----------------- ------
</TABLE>
S-28
<PAGE>
CUT-OFF DATE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
RANGE OF PERCENT OF TOTAL
CUT-OFF DATE NUMBER OF INITIAL AGGREGATE BY AGGREGATE
PRINCIPAL BALANCE ($) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
0.00 - 9,999.99.............. 100 $ 924,772.94 0.55%
10,000.00 - 19,999.99............. 1,149 18,647,653.14 11.03
20,000.00 - 29,999.99............. 3,746 93,518,185.53 55.30
30,000.00 - 39,999.99............. 971 34,538,213.57 20.42
40,000.00 - 49,999.99............. 381 16,954,590.45 10.03
50,000.00 - 59,999.99............. 88 4,453,677.00 2.63
70,000.00 - 79,999.99............. 1 71,763.13 0.04
----- ----------------- ------
Totals.......................... 6,436 $ 169,108,855.76 100.00%
----- ----------------- ------
----- ----------------- ------
</TABLE>
The average principal balance of the Initial Mortgage Loans as of May 31,
1996 was approximately $26,275.46.
ORIGINAL LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
RANGE OF PERCENT OF TOTAL
PRINCIPAL BALANCE NUMBER OF INITIAL AGGREGATE BY AGGREGATE
AT ORIGINATION($) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
0.00 - 9,999.99.............. 47 $ 406,821.65 0.24%
10,000.00 - 19,999.99............. 961 14,406,084.46 8.52
20,000.00 - 29,999.99............. 3,854 94,353,472.24 55.79
30,000.00 - 39,999.99............. 855 28,537,212.35 16.88
40,000.00 - 49,999.99............. 501 20,443,347.95 12.09
50,000.00 - 59,999.99............. 213 10,650,605.60 6.30
60,000.00 - 69,999.99............. 4 239,548.38 0.14
70,000.00 - 79,999.99............. 1 71,763.13 0.04
----- ----------------- ------
Total........................... 6,436 $ 169,108,855.76 100.00%
----- ----------------- ------
----- ----------------- ------
</TABLE>
The average principal balance of the Initial Mortgage Loans at origination
was approximately $26,400.82.
REMAINING TERM TO MATURITY
<TABLE>
<CAPTION>
RANGE OF PERCENT OF TOTAL
REMAINING TERM TO NUMBER OF INITIAL AGGREGATE BY AGGREGATE
MATURITY (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
30 - 59......................... 4 $ 49,484.20 0.03%
60 - 89......................... 2 33,300.00 0.02
90 - 119......................... 47 625,830.26 0.37
120 - 149......................... 98 1,443,650.77 0.85
150 - 179......................... 1,891 46,180,370.51 27.31
180 - 209......................... 532 13,719,215.53 8.11
210 - 239......................... 2,881 79,055,702.89 46.75
240 - 269......................... 981 28,001,301.60 16.56
----- ----------------- ------
Totals.......................... 6,436 $ 169,108,855.76 100.00%
----- ----------------- ------
----- ----------------- ------
</TABLE>
The weighted average remaining term to maturity of the Initial Mortgage
Loans as of May 31, 1996 was approximately 215 months.
S-29
<PAGE>
MONTHS SINCE ORIGINATION
<TABLE>
<CAPTION>
PERCENT OF
TOTAL BY
AGE NUMBER OF INITIAL AGGREGATE AGGREGATE
(IN MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
0 - 5........................... 6,035 $ 158,614,017.21 93.79%
6 - 11........................... 46 1,151,359.67 0.68
12 - 17........................... 50 1,254,387.21 0.74
18 - 23........................... 267 6,951,898.07 4.11
24 - 29........................... 35 1,059,639.16 0.63
30 - 35........................... 2 44,352.22 0.03
48 - 53........................... 1 33,202.22 0.02
----- ----------------- ------
Totals.......................... 6,436 $ 169,108,855.76 100.00%
----- ----------------- ------
----- ----------------- ------
</TABLE>
The weighted average age of the Initial Mortgage Loans as of May 31, 1996
was approximately two months.
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 "The Pooling and Servicing Agreement -- 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 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; (v) with respect to each such
Subsequent Mortgage Loan, either (a) the original principal balance of the
Mortgage Loan as of the date of origination thereof was less than 125% of the
value of the Mortgaged Property attributable to only the real property securing
such Mortgage Loan less the amount of all indebtedness secured by such Mortgaged
Property which is senior or pari passu with the lien of such Mortgage Loan; or
(b) substantially all of the proceeds of such Mortgage Loan were used to acquire
or to improve or protect an interest in real property that, at the date of
origination of such Mortgage Loan, was the only security therefor; (vi) the
aggregate outstanding principal balances of the Conventional Mortgage Loans as
of each Cut-Off Date will not represent more than 90% of the Pool Principal
Balance; and (vii) 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 interest rate of at least %,
in the case of Title I Mortgage Loans, and %, in the case of Conventional
Mortgage Loans; (b) will have a 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" herein.
S-30
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The FIRSTPLUS Asset-Backed Certificates, Series 1996-2 (the "Certificates")
will consist of the Class A-1, the Class A-2, the Class A-3, the Class A-4, the
Class A-5, the Class A-6, the Class A-7, the Class B and the Class R
Certificates (each, a "Class"). Only the Class A-1, Class A-2, Class A-3, Class
A-4, Class A-5, Class A-6 and Class A-7 Certificates (collectively, the "Class A
Certificates" or the "Offered Certificates") are offered hereby.
On the 20th day of each month, or, if such day is not a business day, the
first business day immediately following, commencing July 22, 1996, (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".
Beneficial ownership interests in each Class of Offered Certificates will be
held in minimum denominations of $100,000 and integral multiples of $1,000 in
excess thereof.
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 collected on the Mortgage Loans 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, including without
limitation, the payment to itself of the accrued and unpaid Servicing Fee. The
Collection Account may be maintained at any depository institution which
satisfies the requirements set forth in the definition of Eligible Account in
the Pooling and Servicing Agreement. Initially, the Collection Account will be
maintained with Bank One, Texas, N.A., an affiliate of Banc One Capital
Corporation, one of the Underwriters. On the business day prior to
S-31
<PAGE>
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
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
June of each year commencing in 1997 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
S-32
<PAGE>
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 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 attributable to the
amounts in the Pre-Funding Account, (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) in the
following order of priority:
(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 in the following order, (a) to the Trustee, an amount equal to
the Trustee Fee and (b), if applicable, to the Custodian, an amount equal to
the Custodian Fee;
(iv) then pro rata to the Class A 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 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, with respect to any Distribution Date occurring on an
Overcollateralization Stepdown Date and as a distribution from the Principal
Remittance Amount, to the Class R Certificateholders, until the Pool
Principal Balance is equal to the sum of the Class Principal Balances of all
Classes of Class A and Class B Certificates, an amount up to the
Overcollateralization Reduction Amount, if any, applicable to such
Distribution Date, and (B) to the Class B Certificateholders 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 up to the remaining
Overcollateralization Reduction Amount, if any, applicable to such
Distribution Date;
(vii) 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 up to the remaining
Principal Remittance Amount, if any, for such date and (B) the Principal
Carry-Forward Amount, if any, applicable to the Class A-1 Certificates;
(viii) 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 up to the remaining
Principal Remittance Amount, if any, for such date and (B) the Principal
Carry-Forward Amount, if any, applicable to the Class A-2 Certificates;
S-33
<PAGE>
(ix) 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 up to the remaining
Principal Remittance Amount, if any, for such date and (B) the Principal
Carry-Forward Amount, if any, applicable to the Class A-3 Certificates;
(x) 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 up to the remaining
Principal Remittance Amount, if any, for such date and (B) the Principal
Carry-Forward Amount, if any, applicable to the Class A-4 Certificates;
(xi) then to the Class A-5 Certificateholders, (A) to be applied to
reduce the Class Principal Balance of the Class A-5 Certificates until such
Class Principal Balance is reduced to zero, an amount up to the remaining
Principal Remittance Amount, if any, for such date and (B) the Principal
Carry-Forward Amount, if any, applicable to the Class A-5 Certificates;
(xii) then to the Class A-6 Certificateholders, (A) to be applied to
reduce the Class Principal Balance of the Class A-6 Certificates until such
Class Principal Balance is reduced to zero, an amount up to the remaining
Principal Remittance Amount, if any, for such date and (B) the Principal
Carry-Forward Amount, if any, applicable to the Class A-6 Certificates;
(xiii) then to the Class A-7 Certificateholders, (A) to be applied to
reduce the Class Principal Balance of the Class A-7 Certificates until such
Class Principal Balance is reduced to zero, an amount up to the remaining
Principal Remittance Amount, if any, for such date and (B) the Principal
Carry-Forward Amount, if any, applicable to the Class A-7 Certificates;
(xiv) then to the Certificate Insurer, reimbursement for any Guaranteed
Payments in respect of the Class A Certificates not previously reimbursed
and any other amounts that are owed to the Certificate Insurer under the
Insurance Agreement (the "Certificate Insurer Reimbursement Amount");
(xv) 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;
(xvi) 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 up to the remaining
Principal Remittance Amount, if any, for such date and (B) the Principal
Carry-Forward Amount, if any, applicable to the Class B Certificates;
(xvii) then to the extent of any remaining Amount Available, to the
Servicer (A) an amount equal to any voluntary Servicing Advances previously
made by the Servicer and not previously reimbursed, and (B) if FFI is the
Servicer, then an amount equal to the Excess Servicing Fee; and
(xviii) then the remaining balance, if any, of the Amount Available (the
"Excess Spread"), as follows:
(A) notwithstanding the amount of the Excess Overcollateralization
Amount, pro rata (based on the Class A Loss Reimbursement Amount prior to
such Distribution Date) to the holders of the Class A Certificates the
amount equal to the portion of the Excess Spread, if any, remaining after
all prior distributions until the Class A Loss Reimbursement Amount
attributable to the Class A Certificates is reduced to zero (which
distributions will not reduce the Class Principal Balance of such Class A
Certificates);
(B) until the Due Period in which the later of the final FHA Transfer
Date (as evidenced by the Trustee's receipt of the FHA Insurance Transfer
Certificate) and the end of the Funding Period occurs and thereafter
until the Excess Overcollateralization Amount exceeds zero, to the Class
A Certificateholders, as an additional distribution of principal in
accordance with the sequential priority scheme of clauses (vii), (viii),
(ix), (x), (xi), (xii) and (xiii) above, as applicable; and
(C) if the Excess Overcollateralization Amount exceeds zero, then (I)
to the Class B Certificateholders the amount equal to the portion of the
Excess Spread, if any, remaining after all prior
S-34
<PAGE>
distributions until the Class B Loss Reimbursement Amount is reduced to
zero (which distributions will not reduce the Class Principal Balance of
such Class B Certificates), and then (II) to the Class R
Certificateholders the amount equal to the portion of the Excess Spread,
if any, remaining after all prior distributions.
If the Amount Available is insufficient to distribute in full the amounts
described in items (v) and (vii) through (xiii) 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 A-5 Certificateholders, the Class A-6
Certificateholders, the Class A-7 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 under "Description of Book Entry Procedures" herein, 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 Certificates will be calculated on the basis of a 360 day year consisting of
twelve 30 day months at the respective Certificate Interest Rate for such Class
on the outstanding Class Principal Balance of such Class immediately prior to
such Distribution Date.
The "Principal Remittance Amount" on each Distribution Date will be equal to
the lesser of (A) the aggregate Class Principal Balance of the Class A 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 applied 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 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, and (v) upon the reduction of the Class A
Overcollateralization Level 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). Notwithstanding clause (B)(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 (B)(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-
S-35
<PAGE>
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 Level 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.
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 a 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 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
S-36
<PAGE>
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 in reduction thereof 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.
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 and any other amounts owed to the Certificate Insurer under
the Insurance Agreement 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. The "Insurance
Agreement" means the Insurance and Indemnification Agreement dated as of June 1,
1996 between the Certificate Insurer, the Depositor, FFI, as the Servicer, FHA
Claims Administrator and Transferor, RAC and the Trustee. In connection with
each Guaranteed Payment, the Trustee, as attorney-in-fact for the holder
thereof, will be required to assign to 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 Excess Spread, until the Certificate Insurer has been
distributed such Certificate Insurer Reimbursement Amount in full.
With respect to each Distribution Date and with respect to each Class of
Offered Certificates, the sum of (i) the Interest Remittance Amount applicable
to such Class, (ii) the Principal Remittance Amount, if any, applicable to such
Class, (iii) an amount representing 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, (iv) the Interest Carry-Forward Amount applicable to such Class,
and (iv) the Principal Carry-Forward Amount applicable to such Class,
constitutes the "Remittance Amount".
CLASS A OVERCOLLATERALIZATION
On the Closing Date, the "Initial Class A Overcollateralization Level" 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 Level" 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 Level by making additional
sequential distributions of principal to the Class A Certificateholders, in the
manner described herein.
S-37
<PAGE>
If on any Distribution Date, the Required Class A Overcollateralization
Level exceeds the Class A Overcollateralization Level, distributions of Excess
Spread, if any, will be made as an additional distribution of principal to the
holders of the Class A Certificates (subject to prior reimbursement of any Class
A Loss Reimbursement Amount), sequentially among the Classes of the Class A
Certificates in order of their respective Class designations. The distribution
of such Excess Spread is intended to accelerate the amortization of the Class
Principal Balances of all Classes of Class A Certificates, and thereby increase
the Class A Overcollateralization Level. 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 application of the Principal Remittance Amount to
the Class A Certificates before the Class B Certificates. On any Distribution
Date with respect to which the Excess Overcollateralization Amount is greater
than zero, all or a portion of the Excess Spread may be distributed to the
holders of the Class R Certificates (subject to prior reimbursement of any Class
A Loss Reimbursement Amount or any Class B Loss Reimbursement Amount) and not to
the Class A Certificates; therefore, ceasing the acceleration of the principal
amortization of the Class A Certificates in relation to the principal
amortization of the Mortgage Loan Pool, until such time as the Excess
Overcollateralization Amount is equal to or reduced below zero.
On any Distribution Date occurring on an Overcollateralization Stepdown
Date, the holders of the Class R and Class B Certificates, as applicable, will
be entitled to distributions of all or a portion of the Principal Remittance
Amount that would otherwise be distributed to the holders of the Class A
Certificates as described below. Such amount, the "Overcollateralization
Reduction Amount", with respect to any Distribution Date occurring on or after
an Overcollateralization Stepdown Date will equal the lesser of (x) the Excess
Overcollateralization Amount for such Distribution Date, or (y) the Principal
Remittance Amount and the Principal Carry-Forward Amount, if any, that would
otherwise be applicable to the Class A Certificates on such Distribution Date.
Prior to the occurrence of an Overcollateralization Stepdown Date, the
Overcollateralization Reduction Amount will equal zero. An
"Overcollateralization Stepdown Date" is any Distribution Date with respect to
which the Required Class A Overcollateralization Level is permitted to decrease
or "step down" pursuant to the terms of the Pooling and Servicing Agreement,
generally as a result of an improvement in the delinquency and default
experience of the Mortgage Loan Pool. The "Excess Overcollateralization Amount"
for any Distribution Date will equal the Class A Overcollateralization Level for
such Distribution Date minus the Required Class A Overcollateralization Level
for such Distribution Date.
While the distribution of Excess Spread to holders of the Class A
Certificates and the distribution of any Overcollateralization Reduction Amount
to holders of the Class R and Class B Certificates, as applicable, in the manner
specified above has been designed to produce and maintain a given
overcollateralization, there can be no assurance that Excess Spread will be
generated in sufficient amounts to ensure that such overcollateralization will
be achieved or maintained at all times. Net losses on Liquidated Mortgage Loans
will be allocated first to reduce the principal attributable to the Class R
Certificates, if any, and the Class Principal Balance of the Class B
Certificates, thereby reducing the 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 as determined by the Certificate Insurer and confirmed by the
Rating Agencies and as set forth in the Pooling and Servicing Agreement, then
the Required Class A Overcollateralization Level will increase. Likewise, if the
delinquency and default experience on the Mortgage Loans is lower than certain
levels as determined by the Certificate Insurer and confirmed by the Rating
Agencies and as set forth in the Pooling and Servicing Agreement, then under
certain circumstances the Required Class A Overcollateralization Level will
decrease.
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.
Following the termination of the Funding Period, the Required Title I OC Level
will be calculated based on certain
S-38
<PAGE>
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 Distribution Date occurring on the later of (i) the thirty-sixth
(36th) Distribution Date, or (ii) the Distribution 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.
SUBORDINATION AND ALLOCATION OF LOSSES
The rights of the holders of the Class B 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 interest and principal distributions to the
Class B and Class R Certificates.
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.
On each Distribution Date, with respect to any Mortgage Loans that became
Liquidated Mortgage Loans 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, the
Servicing Fees, the Excess 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, such Net Loan Losses 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; (ii) second, to reduce the Class Principal Balance of the Class B
Certificates, until such Class Principal Balance has been reduced to zero and
(iii) third, if the Class A Overcollateralization Level has been reduced to zero
and the Guaranty Policy is no longer in effect or the Certificate Insurer is not
able to make any Guaranteed Payment thereunder, to reduce the Class Principal
Balance of the Class A Certificates, pro rata, until such Class
S-39
<PAGE>
Principal Balances have been reduced to zero. If the Net Loan Losses occur after
the Class A Overcollateralization Level has been reduced to zero but while
Guaranteed Payments are available under the Guaranty Policy, as appropriate, the
full amount of the interest and principal distributions due the holders of such
Class A Certificates will be distributed to such holders to the extent that
sufficient funds are received from the Excess Spread and Guaranteed Payments
made under the Guaranty Policy.
If Net Loan Losses are allocated to reduce the Class Principal Balance of
the Class A or Class B Certificates and the corresponding amount of the accrued
and unpaid interest on such Certificates, then the Class A and Class B
Certificateholders may be reimbursed for such allocated Net Loan Losses, with
the Class A Certificateholders being reimbursed first, from any Excess Spread,
as defined under "-- Distributions on the Offered Certificates" (the "Class A
Loss Reimbursement Amount" with respect to the Class A Certificates, and the
"Class B Loss Reimbursement Amount" with respect to the Class B Certificates).
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Trustee will be required to forward to each
Certificateholder 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) the Excess Overcollateralization Amount and the
Overcollateralization Reduction Amount, if any, and if either such amount is
greater than zero, the amount to be distributed to the holders of the Class
R and Class B Certificates on such Distribution Date, including the amount
distributed from Excess Spread and the amount that would otherwise be
distributed as principal to the Class A Certificateholders;
(vii) the Servicing Fees, the Trustee Fees, the Custodian Fees, the
Certificate Guaranty Insurance Premium, the Excess Servicing 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 Level 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;
S-40
<PAGE>
(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 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.
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 in the name of the Trustee in recordable form,
intervening assignments of the Mortgage and assumption and modification
agreements (each, a "Trustee's Mortgage Loan File"). Subject to confirmation by
the Rating Agencies and to the approval of the Certificate Insurer, the
Transferor and the Depositor will not be required to record assignments to the
Trustee of the Mortgages in the real property records for the Mortgage Loans.
SEE "Risk Factors -- Additional Factors Affecting Deliquencies, Foreclosures and
Losses on Mortgage Loans -- Non-recordation of Assignments" herein. In such
circumstances, the Transferor and the Depositor will deliver to the Trustee the
assignments of the Mortgages in the name of the Trustee and in recordable form,
and the Transferor, in its capacity as the Servicer, will retain the record
title to such Mortgages under the applicable real property records, on behalf of
the Trustee and Certificateholders. In all other circumstances, pursuant to the
direction of the Rating Agencies or Certificate Insurer, assignments to the
Trustee of the Mortgages will be recorded in the real property records for those
states in which such recording is deemed necessary to protect the Trustee's
interest in the Mortgage Loans against the claims of certain creditors of the
Transferor or subsequent purchasers. In these circumstances, the Transferor and
the Depositor will deliver to the Trustee after recordation the assignments to
the Trustee of the Mortgages. In the event that, with respect to any Mortgage
Loan as to which recordation of the related assignment is recorded, 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
S-41
<PAGE>
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
$80,891,144 (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 decrease will not exceed $6,500,000 and any such increase will not
exceed 5.0% 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 $25,000,
and (ii) August 30, 1996, 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 10% Title I Mortgage Loans, and
approximately 90% 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, thereby reducing the weighted average lives of such
Certificates. SEE "Prepayment and Yield Considerations" herein.
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"), as approved by the Rating Agencies, to
cover the projected interest shortfall during the Funding Period 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 and the Class B Certificates that may arise
as a result of the
S-42
<PAGE>
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. On each
Distribution 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 projected
Interest Shortfall with respect to the July 1996 Distribution Date and the
August 1996 Distribution Date. If the Transferor and Depositor deliver
Subsequent Mortgage Loans on or prior to June 28, 1996, the Trustee may release
to the Depositor the portion of the Capitalized Interest Account Deposit which,
based on a recalculation of the Interest Shortfall, will not be needed for the
July 1996 or August 1996 Distribution Dates. Additionally, if the Transferor and
Depositor deliver Subsequent Mortgage Loan on or prior to July 31, 1996, the
Trustee may release to the Depositor the portion of the Capitalized Interest
Account Deposit which, based on a recalculation of the Interest Shortfall, will
not be needed on the August 1996 Distribution Date. On or before July 31, 1996,
the Depositor may deposit into the Capitalized Interest Account the Interest
Shortfall with respect to the September 1996 Distribution Date. The Depositor's
failure to make the required Interest Shortfall deposit on or before July 31,
1996 with respect to the September 1996 Distribution Date will cause the Funding
Period to end on July 31, 1996. 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, 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 a per annum percentage of the Pool Principal Balance
(as adjusted for Liquidated Mortgage Loans) as of the first day of the
immediately preceding Due Period divided by 12, which if FFI is the Servicer
such per annum percentage will equal 0.75% and if a person other than FFI is the
Servicer such per annum percentage will equal 1.00%. 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. Furthermore, if FFI is the Servicer, then FFI as
Servicer will be entitled to an Excess Servicing Fee, payable monthly on each
Distribution Date, equal to 0.25% per annum of the Pool Principal Balance (as
adjusted for Liquidated Mortgage Loans) as of the first day of the immediately
preceding Due Period divided by 12; provided, however, that the distribution of
such Excess Servicing Fee to FFI will be subordinate to all prior distributions
of the Amount Available, including the distributions of principal and interest
due on the Class A and Class B Certificates for a Distribution Date.
S-43
<PAGE>
THE TRUSTEE
First Trust of California, National Association, a national banking
association, 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: c/o First Trust national Association, 180 East 5th Street, St. Paul,
Minnesota 55101. The Trustee is a wholly-owned subsidiary of First Bank System,
which is a bank holding company headquartered in Minneapolis, Minnesota.
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. On and after the date on
which the Class A Overcollateralization Level is zero, on any Distribution Date
on which Mortgage Loans with aggregate Cut-Off Date Principal Balances equal to
or exceeding 17.5% or more of the sum of (i) the Initial Pool Principal Balance
and (ii) the aggregate Cut-Off Date Principal Balances of the Subsequent
Mortgage Loans have become Liquidated Mortgage Loans, the Certificate Insurer
may purchase all of the Mortgage Loans and any related REO Properties at a price
equal to the Termination Price plus any outstanding and unpaid fees and expenses
of the Trustee, 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.
RESTRICTIONS ON CERTIFICATEHOLDER RIGHTS
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 pursuant
to the Pooling and Servicing Agreement (the "Certificateholder Rights"), without
any consent of such Certificateholders; provided, however, that without the
consent of each holder of an Offered Certificate affected thereby, the
Certificate Insurer shall not exercise such Certificateholder Rights to amend
the Pooling and Servicing Agreement in any manner that would (i) reduce the
amount of, or delay the timing of, collections of payments on Mortgage Loans or
distributions which are required to be made on any Certificate, (ii) adversely
affect in any material respect the interests of the holders of any Class of
Certificates, or (iii) alter the rights of any such Certificateholder or Class
of such Certificateholder to consent to any such amendment.
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 supplied by MBIA Insurance Corporation (the "Certificate
Insurer") for inclusion in this Prospectus Supplement.
The Certificate Insurer, in consideration of the payment of the premium and
subject to the terms of the Certificate Guaranty Insurance Policy (the "Guaranty
Policy"), thereby unconditionally and irrevocably guarantees to any Owner that
an amount equal to each full and complete Guaranteed Payment will be
S-44
<PAGE>
received by the Trustee, or its successor, as trustee for the Owners, on behalf
of the Owners from the Certificate Insurer, for distribution by the Trustee to
each Owner of each Owner's proportionate share of the Guaranteed Payment. The
Certificate Insurer's obligations under the Guaranty Policy with respect to a
particular Guaranteed Payment will be discharged to the extent funds equal to
the applicable Guaranteed Payment are received 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, any REMIC
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 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
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 Owner relating to or arising under the Offered 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 such Owner 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 the Owner and not to any Owner
directly unless such Owner 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 Owner.
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 the
Distribution Date on which the related Interest Remittance Amount or Principal
Remittance Amount for the Offered Certificates is due or the second Business Day
following receipt in New York, New York on a Business Day by State Street Bank
and Trust Company, N.A., as Fiscal Agent for the Certificate Insurer or any
successor fiscal agent appointed by the Certificate Insurer (the "Fiscal
Agent"), of a Notice (as 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 due under the Guaranty Policy, unless otherwise stated
therein, will be disbursed by the Fiscal Agent to the Trustee on behalf of the
Owners by wire transfer of immediately available funds in the amount of the
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 Owners for any acts of the Fiscal Agent or
any failure of the Certificate Insurer to deposit or cause to be deposited
sufficient funds to make payments due under the Guaranty Policy.
As used in the 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 under the Pooling and Servicing Agreement
is located are authorized or obligated by law or executive order to close.
S-45
<PAGE>
"Deficiency Amount" means 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 after making all prior
distributions thereon. SEE "Description of the Certificates -- Distributions on
Offered Certificates" herein.
"Guaranteed Payment" means as of any Distribution Date, (i) any Deficiency
Amount and (ii) any Preference Amount.
"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.
"Owner" means each Holder (as defined in the Pooling and Servicing
Agreement) who, on the applicable Distribution Date is entitled under the terms
of the Offered Certificates to payment thereunder.
"Pooling and Servicing Agreement" means the Pooling and Servicing Agreement
dated as of June 1, 1996 between FIRSTPLUS FINANCIAL, INC., a Texas corporation,
as Transferor and Servicer, FIRSTPLUS INVESTMENT CORPORATION, as Depositor, and
First Trust of California, National Association, as Trustee, without regard to
any amendment or supplement thereto.
"Preference Amount" means any amount previously distributed to an Owner with
respect to an Offered Certificate that is recoverable and sought to be recovered
as a voidable preference by a trustee in bankruptcy pursuant to the United
States Bankruptcy Code (11 U.S.C.), as amended from time to time, in accordance
with a final nonappealable order of a court having competent jurisdiction.
Capitalized terms used in the Guaranty Policy and not otherwise defined in
the 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.
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 15th Floor, 61 Broadway, New York,
New York 10006, Attention: Municipal Registrar and Paying Agency, or such other
address as the Fiscal Agent 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, formerly known as Municipal Bond Investors
Assurance Corporation, is the principal operating subsidiary of MBIA, Inc., a
New York Stock Exchange-listed company. MBIA, Inc. is not obligated to pay the
debts of or claims against the Certificate Insurer. The Certificate Insurer is
domiciled in the State of New York and licensed to do business in all 50 states,
the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of
the Northern Mariana Islands, the Virgin Islands of the United States and the
Territory of Guam. The Certificate Insurer has one European branch in the
Republic of France.
All information regarding the Certificate Insurer, a wholly owned subsidiary
of MBIA, Inc., including the financial statements of the Certificate Insurer for
the year ended December 31, 1995, prepared in
S-46
<PAGE>
accordance with generally accepted accounting principles, included in the Annual
Report on Form 10-K of MBIA, Inc. for the year ended December 31, 1995, is
hereby incorporated by reference into this Prospectus Supplement and shall be
deemed to be a part hereof. Any statement contained in a document incorporated
by reference herein shall be modified or superseded for purposes of this
Prospectus Supplement to the extent that a subsequent statement contained herein
or in any other subsequently filed document modifies or supersedes such earlier
statement, which subsequent statement also is hereby incorporated by reference
herein and shall be deemed to be a part hereof, but only to the extent such
subsequent statement so modifies or supersedes such earlier statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute part of this Prospectus Supplement.
The tables below present selected financial information of the Certificate
Insurer determined in accordance with statutory accounting practices prescribed
or permitted by insurance regulatory authorities ("SAP") and generally accepted
accounting principles ("GAAP"):
<TABLE>
<CAPTION>
SAP
--------------------------
DECEMBER 31, MARCH 31,
1995 1996
------------- -----------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Admitted Assets............... $ 3,814 $ 3,989
Liabilities................... 2,540 2,672
Capital and Surplus........... 1,274 1,317
<CAPTION>
GAAP
--------------------------
DECEMBER 31, MARCH 31,
1995 1996
------------- -----------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Assets........................ $ 4,463 $ 4,548
Liabilities................... 1,937 2,006
Shareholder's Equity.......... 2,526 2,542
</TABLE>
Copies of the Certificate Insurer's 1995 year-end audited financial
statements prepared in accordance with statutory accounting practices are
available from the Certificate Insurer. The address of the Certificate Insurer
is 113 King Street, Armonk, New York 10504.
A copy of the Annual Report on Form 10-K of MBIA Inc. is available from the
Certificate Insurer or the Securities and Exchange Commission. The address of
the Certificate Insurer is 113 King Street, Armonk, New York 10504.
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". 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
Underwriters.
Moody's rates the claims paying ability of the Certificate Insurer "Aaa".
Standard & Poor's rates the claims paying ability of the Certificate Insurer
"AAA".
Fitch Investors Service, L.P. rates the claims paying ability of the
Certificate Insurer "AAA".
Each rating of the Certificate Insurer should be evaluated independently.
The ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Certificate Insurer and its ability to pay claims on its
policies of insurance. Any further explanation 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 reversed or withdrawn.
S-47
<PAGE>
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
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 the 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 -- Proposed
Legislation affecting FHA Insurance" herein, and "Certain Legal Aspects of the
Mortgage Assets -- The Title I Program" in the Prospectus.
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 attributable to
claims on the related Title I Loans. 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 10% 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 10% 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
the amount of such shortfall, unless otherwise directed by the Certificate
Insurer.
On the final Transfer Date, the 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. 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
S-48
<PAGE>
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, the
transfer of FHA reserve amounts could result in a substantial reduction of the
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.
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 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
FIRSTPLUS 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) property 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.
S-49
<PAGE>
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 will transfer the Mortgage Loans
to the Depositor (in such capacity, the "Transferor"). FFI also will service the
Mortgage Loans under the Pooling and Servicing Agreement (in such capacity, the
"Servicer"). FFI is a wholly-owned subsidiary of RAC and is primarily engaged in
the business of originating, purchasing, underwriting, selling and/or servicing
loans including home improvement and/or debt consolidation loans. The Transferor
presently maintains a staff of approximately 288 employees, including 30
experienced collectors responsible for delinquent and defaulted loans. As of
March 31, 1996, FFI administered and serviced approximately 31,873 loans
representing approximately $506.3 million in principal balance (including loans
subserviced by others).
In February 1996, RAC completed an initial public offering of its common
stock. As of March 31, 1996, the RAC Consolidated Financial Statements, as
unaudited, which included RAC and its subsidiaries, FFI and SFA: State Financial
Acceptance Corporation ("SFAC"), set forth total assets of $203,445,000, total
liabilities of $134,018,000 and total stockholders' equity of $69,427,000, and
for the six months ended March 31, 1996 set forth net income of $11,146,000.
Additionally, as of September 30, 1995, the RAC Consolidated Financial
Statements, as audited, which included RAC, FFI and SFAC, set forth total assets
of $51,036,644, total liabilities of $41,287,095 and total stockholders' equity
of $9,749,549, and for the fiscal year ended September 30, 1995 set forth net
income of $6,875,413. Additionally, as of September 30, 1995, the financial
statements of FFI, as audited, set forth total assets of $49,135,614, total
liabilities of $42,732,351, and total stockholder's equity of $6,403,263. 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 the 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 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, other than the Servicing Fees described herein, for
serving as FHA Claims Administrator on behalf of the Depositor and Trustee.
FFI also will be the REMIC Administrator under the Pooling and Servicing
Agreement and as such will be responsible for performing the following duties
(i) the generation of certain reports, (ii) the calculation of the amounts
related to the distributions to the Certificateholders and (iii) the
administration and compliance of the REMIC with federal and state tax laws. FFI
as REMIC Administrator may contract or
S-50
<PAGE>
subcontract the performance of any or all of these duties, but FFI will not be
relieved of its obligations to perform these duties. FFI will not be entitled to
any fees, other than the Servicing Fees described herein, for serving as the
REMIC Administrator.
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 underwriting requirements of the Transferor. The Transferor believes
that all Conventional Mortgage Loans underwritten by it will have been
underwritten pursuant to the Transferor's 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.
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.
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 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 Legal 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 or before
the Determination Date next succeeding the end of such 60 day period, to
repurchase such Defective Mortgage Loan at a price (the "Purchase Price") equal
to the Principal Balance of such Defective Mortgage Loan as of the date of
repurchase, plus all accrued and unpaid interest on such Defective Mortgage Loan
to and including the date of repurchase computed at the Mortgage Loan Rate. 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
S-51
<PAGE>
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 thereto), (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, (viii) is secured by a
Mortgage on Mortgaged Property, and (ix) has a related borrower with an equal or
better credit grade classification. The repurchase and/or substitution
obligation described above will constitute the sole remedy available to the
Certificateholders with respect to a Defective Mortgage Loan.
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 the Trust
Fund 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 the Trust Fund, 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
5.0%, without Certificate Insurer approval, and 10.0%, 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 Servicer has substantially increased the volume of
Title I loans and conventional junior lien loans that its has originated,
purchased, sold and/or serviced, and thus, the Servicer has 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 its 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 in the Prospectus
may not be indicative of the
S-52
<PAGE>
performance of the Mortgage Loans included in the Mortgage Loan Pool. SEE "The
Servicer and the Transferor" in the Prospectus for delinquency and default
experience with respect to the loans serviced by FFI through March 31, 1996.
A substantial portion of the Servicer's entire loan servicing portfolio
consisted of loans securitized by the Servicer in its capacity as the Transferor
and sold to 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 May 31, 1996, none
of the trusts had loan delinquency or loss experience (as set forth in the table
contained in the Prospectus under "The Servicer and the Transferor") 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 interest computed on a simple interest basis 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 month following such 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. 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 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 May 31, 1996 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, the rate at
which Excess Spread is distributed to holders of the Offered Certificates as
described herein, and the extent to which any Overcollateralization Reduction
Amount is paid to the holders of the Class R 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
S-53
<PAGE>
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 at such time that the Class A Overcollateralization Level has been
reduced 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. These
factors may include changes in borrowers' housing needs, job transfers,
unemployment, 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.
Distributions of principal to holders of the Offered Certificates at a
faster rate than anticipated 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 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 at such time that the Class A
Overcollateralization Level has been reduced 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
S-54
<PAGE>
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. The Class B Certificateholders will
bear a greater risk of losses than holders of the Class A Certificates; and the
Class R Certificateholders 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. Given these characteristics,
the Mortgage Loans may experience a higher rate of prepayment than first-lien
mortgage loans.
EXCESS SPREAD AND OVERCOLLATERALIZATION REDUCTION AMOUNT 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. If on any Distribution Date, the Required
Class A Overcollateralization Level exceeds the Class A Overcollateralization
Level, any Excess Spread will be distributed as an additional distribution of
principal to the holders of the Offered Certificates, sequentially in order of
their respective numerical Class designations, subject to prior reimbursements
of any Class A Loss Reimbursement Amount. Once the Class A Overcollateralization
Level equals the Required Class A Overcollateralization Level for such
Distribution Date (i.e., the Excess Overcollateralization Amount equals or
exceeds zero), distributions of any Excess Spread to the Offered Certificates
will cease until such time as the Excess Overcollateralization Amount is less
than or equal to zero. If purchased at a premium or a discount, the yield to
maturity on an Offered Certificate will be affected
S-55
<PAGE>
by the rate at which Excess Spread is distributed to the holders of the Offered
Certificates 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 an Offered
Certificate at a discount, the actual yield to such investor will be lower than
such investor's anticipated yield. If the actual rate of Excess Spread
distributions is faster than the rate anticipated by an investor who purchases
an Offered Certificate at a premium, the actual yield to such investor will be
lower than such investor's anticipated yield. The 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.
An additional overcollateralization feature has been designed to limit the
accelerated amortization of the Offered Certificates as described in the
preceding paragraph. On each Distribution Date on an Overcollateralization
Stepdown Date and as to which the Excess Overcollateralization Amount is, or,
after taking into account all other distributions to be made on such
Distribution Date would be, greater than zero, amounts relating to principal
which would otherwise be distributed to the holders of the Offered Certificates
on such Distribution Date shall instead be distributed to the holders of the
Class R and Class B Certificates, as applicable, thereby reducing the rate of
and under certain circumstances delaying the principal amortization with respect
to the Offered Certificates, until the Excess Overcollateralization Amount is
reduced to zero. Again, if purchased at a premium or a discount, the yield to
maturity on an Offered Certificate will be affected by the extent to which any
Excess Overcollateralization Amount is paid to the holders of the Class R and
Class B Certificates in lieu of payment of principal to the holders of the
Offered Certificates. If the actual distributions of any Overcollateralization
Reduction Amount to the holders of the Class R and Class B Certificates occurs
sooner than anticipated by an investor who purchases an Offered Certificate at a
discount, the actual yield to such investor may be lower than such investor's
anticipated yield. If the actual distributions of any Overcollateralization
Reduction Amount to the holders of the Class R and Class B Certificates occurs
later than anticipated by an investor who purchases an Offered Certificate at a
premium, the actual yield to such investor may be lower than such investor's
anticipated yield. The amount of the Overcollateralization Reduction Amount, if
any, on any Distribution Date will be affected by the Required Class A
Overcollateralization Level, which is affected by the actual default and
delinquency experience of the Mortgage Loan Pool.
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
S-56
<PAGE>
the Transferor or the Depositor), the rate at which Excess Spread is distributed
to holders of the Offered Certificates as described herein, and the extent to
which any Overcollateralization Reduction Amount is paid to the holders of the
Class R 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. 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 S-58
through S-61, the following assumptions (the "Modeling Assumptions") have been
made.
(i) 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 on June 1, 1996, and no delinquencies or losses occur on
such mortgage loans;
(ii) 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;
(iii) all scheduled payments of interest and principal have been made
through the applicable Cut-Off Date;
(iv) the mortgage loans in the Mortgage Loan Pool prepay monthly at the
specified percentages of CPR and no optional termination of the Certificates
occurs;
(v) prepayments include 30 days of interest thereon;
(vi) the Closing Date for the Certificates is June , 1996 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 July 1996;
(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 Excess
Servicing Fee, which additional fees in the aggregate equal % ( basis
points) on a per annum basis;
(xi) all of the Pre-Funding Account Deposit is used to acquire
Subsequent Mortgage Loans on August 30, 1996, and prior to that date, the
Pre-Funding Account Deposit accrues interest at % per annum;
(xii) no reinvestment income from any Trust Fund account is earned and
available for distribution; and
(xiii) the Mortgage Loan Pool consists of Mortgage Loans having the
following characteristics:
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-57
<PAGE>
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF CPR (1)
<TABLE>
<CAPTION>
CLASS A-1
----------------------------------------------------------------
DISTRIBUTION DATE 0% 5% 10% 14% 20% 25%
- ------------------------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <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:...............................................
<CAPTION>
CLASS A-2
-----------------------------------------------------
DISTRIBUTION DATE 30% 0% 5% 10% 14% 20%
- ------------------------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <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:...............................................
<CAPTION>
DISTRIBUTION DATE 25% 30%
- ------------------------------------------------------------- --------- ---------
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-58
<PAGE>
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF CPR (1)
<TABLE>
<CAPTION>
CLASS A-3
----------------------------------------------------------------
DISTRIBUTION DATE 0% 5% 10% 14% 20% 25%
- ------------------------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <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:...............................................
<CAPTION>
CLASS A-4
-----------------------------------------------------
DISTRIBUTION DATE 30% 0% 5% 10% 14% 20%
- ------------------------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <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:...............................................
<CAPTION>
DISTRIBUTION DATE 25% 30%
- ------------------------------------------------------------- --------- ---------
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-59
<PAGE>
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF CPR (1)
<TABLE>
<CAPTION>
CLASS A-5
----------------------------------------------------------------
DISTRIBUTION DATE 0% 5% 10% 14% 20% 25%
- ------------------------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <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:...............................................
<CAPTION>
CLASS A-6
-----------------------------------------------------
DISTRIBUTION DATE 30% 0% 5% 10% 14% 20%
- ------------------------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <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:...............................................
<CAPTION>
DISTRIBUTION DATE 25% 30%
- ------------------------------------------------------------- --------- ---------
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-60
<PAGE>
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF CPR (1)
<TABLE>
<CAPTION>
CLASS A-7
---------------------------------------------------------------------------
DISTRIBUTION DATE 0% 5% 10% 14% 20% 25% 30%
- ----------------------------------------------- --------- --------- --------- --------- --------- --------- ---------
<S> <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:.................................
<CAPTION>
DISTRIBUTION DATE
- -----------------------------------------------
<S> <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:.................................
<CAPTION>
DISTRIBUTION DATE
- -----------------------------------------------
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-61
<PAGE>
DESCRIPTION OF BOOK ENTRY PROCEDURES
Each of the Class A 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 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, other than
the Pre-Funding Account and the Capitalized Interest Account, as a REMIC for
federal income tax purposes. The Class A and Class B Certificates will be
regular interests in, and the Class R Certificates will constitute the residual
interest in, such REMIC.
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 that or any other rate.
S-62
<PAGE>
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 entity 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.
The DOL has granted to each of the Underwriters an individual administrative
exemption (the "Exemptions"), from certain of the prohibited transaction rules
of ERISA and the related excise tax provisions of Section 4975 of the Code with
respect to the initial purchase, the holding and the subsequent resale by ERISA
Plans of certificates that represent interests in asset-backed pass-through
trusts that consist of certain receivables, loans and other obligations and that
meet the conditions and requirements set forth in the Exemptions. The
receivables covered by the Exemptions include mortgage loans such as the
Mortgage Loans. The Exemptions should apply to the acquisition, holding and
resale of the Class A Certificates (the "ERISA Eligible Certificates") by an
ERISA Plan, provided that certain conditions (certain of which are described
below) are met.
The Exemptions cover only certificates evidencing an interest in a trust
consisting of obligations that bear interest or are purchased at a discount and
which are secured, such as mortgages secured by single family, commercial or
multifamily real property. Among the other conditions which must be satisfied
for the Exemptions to apply to the ERISA Eligible Certificates are the
following:
(i) the acquisition of the ERISA Eligible Certificates by an ERISA Plan
is on terms (including the price for the ERISA Eligible Certificates) that
are at least as favorable to the ERISA Plan as they would be in an
arm's-length transaction with an unrelated party;
(ii) the rights and interests evidenced by the ERISA Eligible
Certificates acquired by the ERISA Plan are not subordinated to the rights
and interests evidenced by other certificates of the trust;
(iii) the ERISA Eligible Certificates acquired by the ERISA Plan have
received a rating at the time of such acquisition that is in one of the
three highest generic rating categories from any of Standard & Poor's,
Moody's, Duff & Phelps or Fitch Investors Service, Inc.;
(iv) the Trustee is not an affiliate of any member of the Restricted
Group (as defined below);
(v) the sum of all payments made to and retained by the Underwriters in
connection with the distribution of the ERISA Eligible Certificates
represents not more than reasonable compensation for acting as Underwriters
with respect to the ERISA Eligible Certificates; the sum of all payments
made to and retained by the Depositor pursuant to the sale of the Mortgage
Loans to the Trust Fund represents not more than the fair market value of
such Mortgage Loans; the sum of all payments made to and retained by the
Servicer represents not more than reasonable compensation for the Servicer's
services and reimbursement of the Servicer's reasonable expenses in
connection therewith; and
(vi) the ERISA Plan investing in the ERISA Eligible Certificates is an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the 1933 Act.
S-63
<PAGE>
The Trust Fund must also meet the following requirements:
(i) the corpus of the Trust Fund must consist solely of assets of the
type that have been included in other investment pools;
(ii) certificates in such other investment pools must have been rated in
one of the three highest rating categories of Standard & Poor's, Moody's,
Fitch Investors Service, Inc. or Duff & Phelps for at least one year prior
to the ERISA Plans acquisition of certificates; and
(iii) certificates evidencing interests in such other investment pools
must have been purchased by investors other than ERISA Plans for at least
one year prior to any ERISA Plan's acquisition of certificates.
Moreover, the Exemptions generally provide relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the ERISA Plan fiduciary causes an ERISA Plan to acquire certificates in a trust
in which the fiduciary (or its affiliate) is an obligor on the receivables held
in the trust only if, among other requirements: (i) in the case of the
acquisition of ERISA Eligible Certificates in connection with the initial
issuance, at least 50% of the ERISA Eligible Certificates are acquired by
persons independent of the Restricted Group (as defined below); (ii) such
fiduciary (or its affiliate) is an obligor with respect to five percent or less
of the fair market value of the obligations contained in the trust; (iii) the
ERISA Plan's investment in ERISA Eligible Certificates does not exceed 25% of
all of the ERISA Eligible Certificates outstanding at the time of the
acquisition and (iv) immediately after acquisition, no more than 25% of the
assets of the ERISA Plan are invested in certificates representing an interest
in one or more trusts containing assets sold or serviced by the same entity. The
Exemptions do not apply to ERISA Plans sponsored by the Servicer, any
subservicer, the Depositor, the Underwriters, the Trustee, any insurer of any of
the Certificates or the Mortgage Loans in the Trust Fund, any obligor with
respect to Mortgage Loans included in the Trust Fund constituting more than 5%
of the aggregate unamortized principal balance of the assets in the Trust Fund,
or any affiliate of such parties (collectively, the "Restricted Group"). As of
the date hereof, no single Mortgage Loan is included or anticipated to be
included in the Trust Fund that constitutes more than 5% of the aggregate
unamortized principal balance of the assets of the Trust Fund.
Under the terms of the Regulations, if the Trust Fund were deemed to hold
ERISA Plan assets by reason of an ERISA Plan's investment in an Offered
Certificate, such ERISA Plan assets would include an undivided interest in the
Mortgage Loans, and any other assets held by the Trust Fund. In such an event
and if no exemption is available, the Depositor, the Servicer, the FHA Claims
Administrator, the Transferor or the Trustee and other persons, in providing
services with respect to the Mortgage Loans may be subject to the fiduciary
responsibility provisions of Title I of ERISA and be subject to the prohibited
transaction provisions of Section 4975 of the Code with respect to transactions
involving the Mortgage Loans unless such transactions are subject to a statutory
or administrative exemption. Additionally, if the Trust Fund were deemed to hold
ERISA Plan assets and if no exemption is available, each Certificateholder may
be subject to the fiduciary responsibility provisions of Title I of ERISA with
respect to its right to consent or withhold consent to amendments to the Pooling
and Servicing Agreement.
It is believed that the Exemptions will apply to the acquisitions and
holding of Class A Certificates by ERISA Plans, provided the Subsequent Mortgage
Loans are identified as of the Closing Date, and that all conditions of the
Exemptions as they relate to the acquisition and holding by ERISA Plans of Class
A Certificates other than those within the control of the investors will be met.
In addition, the Depositor, the Servicer, the Transferor and the Trustee or
certain of their affiliates are considered to be Parties in Interest or
fiduciaries with respect to many Plans. An investment by such a Plan in Offered
Certificates may be a prohibited transaction under ERISA and the Code unless
such investment is subject to a statutory or administrative exemption.
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 Exemptions 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.
S-64
<PAGE>
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 Certificates will be rated "AAA" by
Standard & Poor's and "Aaa" 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 assigned to the Class A Certificates will be
based primarily on the claims-paying ability of the Certificate Insurer.
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.
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.
S-65
<PAGE>
EXPERTS
The Annual Report on Form 10-K of MBIA Inc. for the year ended December 31,
1995 incorporated by reference into this Prospectus Supplement has been audited
by Coopers & Lybrand L.L.P., independent accountants, as set forth in their
report thereon and is incorporated by reference herein in reliance upon the
authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters will be passed upon for the Transferor by Andrews &
Kurth L.L.P., Dallas, Texas, and for the Underwriters by Brown & Wood,
Washington, D.C. 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 Kutak Rock, Omaha, Nebraska.
UNDERWRITING
The Depositor and its parent have entered into an Underwriting Agreement
with Bear, Stearns & Co. Inc. and Banc One Capital Corporation (the
"Underwriters"). Such Underwriters have severally agreed, subject to the terms
of the Underwriting Agreement, to purchase the respective amounts of
Certificates set forth opposite their names.
<TABLE>
<CAPTION>
CLASS CLASS CLASS CLASS CLASS CLASS CLASS
UNDERWRITER A-1 A-2 A-3 A-4 A-5 A-6 A-7
- ------------------------------------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Bear, Stearns & Co. Inc..............
Banc One Capital Corporation.........
</TABLE>
In the Underwriting Agreement, the several Underwriters have agreed, subject
to the terms and conditions set forth therein, to purchase all the Certificates
offered hereby if any Certificates are purchased. In the event of default by any
Underwriter, the Underwriting Agreement provides that, in certain circumstances,
purchase commitments of the nondefaulting Underwriter may be increased or the
Underwriting Agreement may be terminated.
The Company has been advised by the Underwriters that they propose initially
to offer the Classes of Certificates offered hereby to the public at the
respective offering prices set forth on the cover page hereof and to certain
dealers at such price less a concession not in excess of the respective amounts
set forth in the table below (expressed as a percentage of Certificate Principal
Balance). The Underwriters may allow and such dealers may reallow a discount not
in excess of the respective amounts set forth in the table below to certain
other dealers.
<TABLE>
<CAPTION>
SELLING REALLOWANCE
CLASS CONCESSION DISCOUNT
- -------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
A-1................................................................. % %
A-2.................................................................
A-3.................................................................
A-4.................................................................
A-5.................................................................
A-6.................................................................
A-7.................................................................
</TABLE>
After the initial public offering, such prices and discounts may be changed.
The Depositor and the Transferor will indemnify the Underwriters against
certain civil liabilities, including liabilities under the Securities Act or
contribute to payments the Underwriters may be required to make in respect
thereof.
Affiliates of Banc One Capital Corporation have several business
relationships with the Transferor and Servicer and its affiliates, including its
parent, RAC. Bank One, Texas, N.A., an affiliate of Banc One Capital
Corporation, provides certain home improvement and/or debt consolidation loan
warehouse financing to
S-66
<PAGE>
the Transferor. SEE "Use of Proceeds" herein. Bank One, Texas, N.A. may act as
the Custodian of the Trustee's Mortgage Loan Files and will hold the Collection
Account into which the Servicer will deposit remittances on the Mortgage Loans,
pursuant to the Pooling and Servicing Agreement. Two other affiliates of Banc
One Capital Corporation have provided certain debt and equity financing to RAC
and its subsidiaries. Such affiliates hold 1,956,467 shares of non-voting common
stock of RAC representing approximately 72.9% of RAC's outstanding shares of
non-voting common stock and approximately 20.1% of RAC's outstanding shares of
voting and non-voting common stock, combined. The Underwriters or affiliates of
the Underwriters, also rendered certain services to RAC in connection with the
initial public offering of RAC's common stock. Daniel J. Jessee, a Vice Chairman
of Banc One Capital Corporation, and Sheldon I. Stein, a Senior Managing
Director of Bear, Stearns & Co. Inc., are each a director of RAC.
S-67
<PAGE>
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL TERMS
<TABLE>
<CAPTION>
PAGE
---------------
<S> <C>
"Additional Series" ....................................................... S-14
"Amount Available" ........................................................ S-33
"Assumed Pool Principal Balance" ........................................... S-3
"Available Remittance Amount" ............................................. S-32
"Beneficial Owner" ................................................... S-3, S-62
"Book Entry Certificates" ................................................. S-62
"Book Entry Termination" .................................................. S-62
"Capitalized Interest Account" ....................................... S-9, S-42
"Capitalized Interest Account Deposit" ............................... S-9, S-42
"Certificate Account" ..................................................... S-32
"Certificate Guaranty Insurance Premium" .................................. S-15
"Certificate Insurer" ............................................... S-10, S-44
"Certificate Insurer Default" ............................................. S-44
"Certificate Insurer Reimbursement Amount" .......................... S-34, S-37
"Certificateholder Rights" .......................................... S-20, S-44
"Certificates" ....................................................... S-1, S-31
"Class" ................................................................... S-31
"Class A Certificates" ............................................... S-1, S-31
"Class A Overcollateralization Level" ............................... S-10, S-37
"Class A Loss Reimbursement Amount".........................................S-40
"Class B Certificates" ....................................................... i
"Class B Loss Reimbursement Amount" ....................................... S-40
"Class Principal Balance" ................................................. S-36
"Class R Certificates" ....................................................... i
"Closing Date" ............................................................. S-4
"Collection Account" ...................................................... S-31
"Conventional Combination Loans" ..................................... S-6, S-26
"Conventional Debt Consolidation Loans" .............................. S-6, S-25
"Conventional Home Improvement Loans" ................................ S-6, S-25
"Conventional Mortgage Loans" ........................................ S-6, S-25
"Credit Support Reduction Date" ........................................... S-39
"Custodian" ................................................................ S-2
"Custodian Fee".............................................................S-15
"Cut-Off Date Principal Balance" ........................................... S-3
"Cut-Off Date" ........................................................ S-3, S-4
"Defective Mortgage Loan" ................................................. S-24
"Deficiency Amount" ....................................................... S-46
"Definitive Certificates" ................................................. S-62
"Deleted Mortgage Loan" ................................................... S-52
"Depositor" .......................................................... S-2, S-49
"Determination Date" ................................................. S-4, S-32
"Distribution Date" .................................................. S-4, S-31
"DTC" ................................................................ S-4, S-62
"DTC Participants" ........................................................ S-62
"Due Period" ............................................................... S-4
"ERISA" ................................................................... S-63
"ERISA Plan" .............................................................. S-63
"Excess Overcollateralization Amount".................................S-11, S-38
</TABLE>
A-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------------
<S> <C>
"Excess Spread" ........................................................... S-34
"FFI" ................................................................ S-2, S-50
"FHA" ....................................................................... ii
"FHA Claims Administrator" ................................................ S-15
"FHA Insurance Amount" .................................................... S-13
"FHA Insurance Premium Account" ........................................... S-32
"FHA Insurance Premium Deposit Amount" .............................. S-15, S-32
"FHA Insurance Proceeds" .................................................. S-36
"FHA Regulations" ......................................................... S-12
"FHA Reserve" ............................................................. S-12
"Fiscal Agent" ............................................................ S-45
"Funding Period" ..................................................... S-8, S-42
"Guaranteed Payments" ..................................................... S-46
"Guaranty Policy" ................................................... S-10, S-44
"HUD" ................................................................. ii, S-19
"Initial Class A Overcollateralization Level" ....................... S-10, S-37
"Initial Mortgage Loans" ................................................... S-3
"Initial Pool Principal Balance" ........................................... S-3
"Insurance Agreement" ..................................................... S-37
"Insurance Proceeds" ...................................................... S-36
"Interest Carry-Forward Amount" ........................................... S-37
"Interest Remittance Amount" .............................................. S-35
"Interest Shortfall" ...................................................... S-42
"Liquidated Mortgage Loan" ................................................ S-36
"Modeling Assumptions" .................................................... S-57
"Moody's" .................................................................... i
"Mortgage Loan Pool" ................................................. S-6, S-25
"Mortgage Loan Rate" ................................................ S-25, S-53
"Mortgage Loan Schedule" .................................................. S-41
"Mortgage Loans" ........................................................... S-3
"Mortgaged Properties" .................................................... S-25
"Mortgage" ..................................................... S-6, S-23, S-25
"Net Liquidation Proceeds" ................................................ S-36
"Net Loan Losses" ......................................................... S-39
"Notes" .............................................................. S-6, S-25
"Notice" .................................................................. S-46
"Offered Certificates" ............................................... S-1, S-31
"Overcollateralization Reduction Amount" ............................ S-11, S-38
"Overcollateralization Stepdown Date" ..................................... S-38
"Pool Principal Balance" ................................................... S-3
"Pooling and Servicing Agreement" ...................................... ii, S-2
"Preference Amount" ....................................................... S-46
"Pre-Funding Account" ................................................ S-8, S-42
"Pre-Funding Account Deposit" ........................................ S-8, S-42
"Principal Balance" ........................................................ S-3
"Principal Carry-Forward Amount" .......................................... S-37
"Principal Remittance Amount" ............................................. S-35
"Purchase Price" .......................................................... S-51
"Qualified Substitute Mortgage Loan" ................................. S-7, S-52
"RAC" ...................................................................... S-2
"Rating Agencies" ......................................................... S-16
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------------
<S> <C>
"Record Date" ........................................................ S-4, S-31
"Released Mortgaged Property Proceeds" .................................... S-36
"REMIC" ..................................................................... ii
"REMIC Administrator" ...................................................... S-2
"Remittance Amount" ....................................................... S-37
"Required Class A Overcollateralization Level" ............................ S-38
"Scheduled Final Distribution Dates" ....................................... S-1
"Senior Certificates" ...................................................... S-1
"Servicer" ........................................................... S-2, S-50
"Servicing Fee" ........................................................... S-15
"SMMEA" ................................................................... S-65
"Standard & Poor's" .......................................................... i
"Subordinated Certificates" ................................................ S-3
"Subsequent Mortgage Loans" ................................................ S-3
"Subsequent Transfer Date" ................................................. S-8
"Subservicer" ............................................................. S-15
"Termination Price" ....................................................... S-15
"Title I Lenders" ......................................................... S-12
"Title I Mortgage Loans" ............................................. S-6, S-25
"Title I Program" ......................................................... S-12
"Transfer Date" ........................................................... S-13
"Transferor" ......................................................... S-2, S-50
"Trust Fund" ............................................................... S-1
"Trustee" .................................................................. S-2
"Trustee's Mortgage Loan File" ............................................ S-41
"Underwriters" ............................................................ S-66
</TABLE>
A-3
<PAGE>
PROSPECTUS
ASSET-BACKED CERTIFICATES
(ISSUABLE IN SERIES)
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 retail 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 retail
installment sales or installment 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 unsecured loans for
Manufactured Homes, home improvement, debt consolidation and/or home equity
purposes ("Unsecured Contracts" and, together with the Secured Contracts, 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 the ultimate or timely distributions of proceeds from the Mortgage Assets to
Certificateholders 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 13 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.
THE DATE OF THIS PROSPECTUS IS JUNE 8, 1996.
<PAGE>
(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.
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.
ii
<PAGE>
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 reference into
any such document). Requests for such copies should be directed, on behalf of
FIRSTPLUS INVESTMENT CORPORATION, to Jeffrey Luth at Morgan Walke, 380 Lexington
Avenue, 50th Floor, New York, New York 10168, (212) 850-5600.
iii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROSPECTUS SUPPLEMENT...................................................................................... ii
AVAILABLE INFORMATION...................................................................................... iii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................................................ iii
TABLE OF CONTENTS.......................................................................................... iv
SUMMARY OF PROSPECTUS...................................................................................... 1
RISK FACTORS............................................................................................... 13
Limited Liquidity and Fluctuation in Value from Market Conditions........................................ 13
Limited Assets of Trust Fund............................................................................. 14
Effect of Prepayments on Average Life.................................................................... 14
Effect of Prepayments on Yield........................................................................... 16
Limitations of Credit Enhancement........................................................................ 16
Limited Nature of Ratings................................................................................ 18
Adverse Tax Consequences................................................................................. 18
Certain Factors Affecting Delinquencies, Foreclosures and Losses on Underlying Loans..................... 19
Risks Associated with Certain Mortgage Assets............................................................ 21
DESCRIPTION OF THE CERTIFICATES............................................................................ 22
General.................................................................................................. 22
The Certificates -- General.............................................................................. 23
Form of Certificates; Transfer and Exchange.............................................................. 23
REMIC Election........................................................................................... 24
Classes of Certificates.................................................................................. 24
Distributions of Principal and Interest.................................................................. 25
Termination.............................................................................................. 28
Book Entry Registration.................................................................................. 28
Mutilated, Destroyed, Lost or Stolen Certificates........................................................ 29
ASSETS SECURING OR UNDERLYING THE CERTIFICATES............................................................. 29
General.................................................................................................. 29
Mortgage Loans........................................................................................... 30
Agency Securities........................................................................................ 31
Contracts................................................................................................ 36
Additions, Substitution and Withdrawal of Assets......................................................... 37
Pre-Funding Arrangements................................................................................. 38
CREDIT ENHANCEMENT......................................................................................... 39
General.................................................................................................. 39
Subordination............................................................................................ 39
Overcollateralization.................................................................................... 40
Cross-Support............................................................................................ 40
Certificate Insurance.................................................................................... 40
Pool Insurance........................................................................................... 40
Special Hazard Insurance................................................................................. 41
Reserve Funds............................................................................................ 41
Other Insurance, Guarantees and Similar Instruments or Agreements........................................ 42
SERVICING OF THE MORTGAGE LOANS AND CONTRACTS.............................................................. 42
Enforcement of Due-on-Sale Clauses....................................................................... 42
Realization Upon Defaulted Mortgage Loans................................................................ 42
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
Waivers and Deferments of Certain Payments............................................................... 43
<S> <C>
Subservicers............................................................................................. 43
Removal and Resignation of Servicer...................................................................... 43
Advances................................................................................................. 44
Servicing Procedures..................................................................................... 44
Administration and Servicing Compensation and Payment of Expenses........................................ 45
THE POOLING AND SERVICING AGREEMENT........................................................................ 46
Assignment of Mortgage Assets............................................................................ 46
Conveyance of Subsequent Mortgage Assets................................................................. 47
Repurchase or Substitution of Mortgage Loans and Contracts............................................... 48
Evidence as to Compliance................................................................................ 48
List of Certificateholders............................................................................... 49
Administration of the Certificate Account................................................................ 49
Reports to Certificateholders............................................................................ 50
Events of Default........................................................................................ 50
Rights Upon Event of Default............................................................................. 50
Amendment................................................................................................ 51
USE OF PROCEEDS............................................................................................ 52
THE DEPOSITOR.............................................................................................. 52
THE SERVICER AND THE TRANSFEROR............................................................................ 52
THE TRUSTEE................................................................................................ 54
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS............................................................... 54
General Legal Considerations............................................................................. 55
Foreclosure.............................................................................................. 56
Truth in Lending Act..................................................................................... 63
Applicability of Usury Laws.............................................................................. 63
Soldiers' and Sailors' Civil Relief Act.................................................................. 64
The Title I Program...................................................................................... 64
LEGAL INVESTMENT MATTERS................................................................................... 73
ERISA CONSIDERATIONS....................................................................................... 73
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................................................... 75
Federal Income Tax Consequences for REMIC Certificates................................................... 75
Federal Income Tax Consequences for Certificates as to Which No REMIC Election Is Made................... 95
STATE TAX CONSEQUENCES..................................................................................... 101
PLAN OF DISTRIBUTION....................................................................................... 101
LEGAL MATTERS.............................................................................................. 102
FINANCIAL INFORMATION AND ADDITIONAL INFORMATION........................................................... 102
APPENDIX A -- INDEX TO LOCATION OF PRINCIPAL TERMS......................................................... 103
</TABLE>
v
<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.
<TABLE>
<S> <C>
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
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
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 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
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
(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 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
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
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 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
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
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."
Scheduled Final Distribution Date........... The "Scheduled 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 Scheduled 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
Assets 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
Scheduled Final Distribution Date of the
Certificates as a result of the application of
prepayments and the
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
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 Loans 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 retail
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 retail installment sales or
installment 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
unsecured loans for Manufactured Homes or for
home improvement, debt consolidation and/or
home equity purposes ("Unsecured Contracts"
and, together with the Secured Contracts, the
"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
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Certificates may also have the benefits of,
certain rights and other ancillary or
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.
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 retail installment
sales and 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
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
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 retail
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
improvement, 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) 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
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
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
Arrangements" 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
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Agency") registered with the Securities and
Exchange Commission, or its nominee. Transfers
and pledges of Book Entry Certificates may be
made only through entries on the books of the
Clearing Agency in the name of brokers,
dealers, banks and other organizations
eligible to maintain accounts with the
Clearing Agency ("Clearing Agency
Participants") or their nominees. Transfers
and pledges by purchasers and other beneficial
owners of Book Entry Certificates ("Beneficial
Owners") other than Clearing Agency
Participants may be effected only through
Clearing Agency Participants. Beneficial
Owners will receive 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 Conditions -- 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
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
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 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 aftertax 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
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
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.
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."
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").
</TABLE>
12
<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.
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
13
<PAGE>
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 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
14
<PAGE>
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 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.
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
15
<PAGE>
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.
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
16
<PAGE>
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.
LIMITATIONS ON FHA INSURANCE. 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.
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
17
<PAGE>
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
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 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."
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
18
<PAGE>
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-tofour 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."
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
19
<PAGE>
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 Assets -- Foreclosure -- Junior Liens"
herein.
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.
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.
20
<PAGE>
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.
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.
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 retail 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
21
<PAGE>
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. 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.
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
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
22
<PAGE>
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
23
<PAGE>
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 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
24
<PAGE>
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. "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
25
<PAGE>
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.
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.
26
<PAGE>
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 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.
27
<PAGE>
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 ans 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.
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 Conditions -- 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
28
<PAGE>
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 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"). 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
29
<PAGE>
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.
30
<PAGE>
(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 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 sellerservicer 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.
31
<PAGE>
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 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
32
<PAGE>
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.
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.
33
<PAGE>
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 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
34
<PAGE>
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. 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
35
<PAGE>
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 retail 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 and 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 an interest in real property, but
rather by an interest in a Manufactured Home that is not permanently affixed to
real estate. In addition, the Contracts differ from Mortgage Loans in that they
are generally originated by a network of independent contractors or dealers that
professionally install property improvements, rather than by financial
institutions or other traditional mortgage lenders.
While the Unsecured Contracts are not secured by a security interest in any
related 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
36
<PAGE>
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 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 -- Federal 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 requests of a Rating Agency, the
Underwriters or a third party provider of Credit Enhancement. Any such
additions, withdrawals or substitutions of Assets by
37
<PAGE>
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. 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 time 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 Pooling and Servicing
Agreement, certificates of deposit, time deposits and bankers acceptances of any
United States depository 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
38
<PAGE>
date for such Series, which allows for a more even accumulation of the Mortgage
Assets by the Depositor and the related Transferor 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.
39
<PAGE>
As between Classes of Senior Certificates and as between Classes of
Subordinated Certificates, distributions may be allocated among such Classes (i)
in the order of their Scheduled Final Distribution Dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in the 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.
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
40
<PAGE>
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 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.
41
<PAGE>
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.
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
42
<PAGE>
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.
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.
43
<PAGE>
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 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
44
<PAGE>
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, the
Servicer will service and administer the Contracts assigned to the Trustee
pursuant to the related Pooling and Servicing Agreement. 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.
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.
45
<PAGE>
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 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
46
<PAGE>
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.
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 PreFunding Arrangement
is provided, in connection with any conveyance of Subsequent Mortgage Assets to
the 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
47
<PAGE>
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 Assets 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 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
48
<PAGE>
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 longterm 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 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 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;
49
<PAGE>
(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;
(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
50
<PAGE>
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, 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.
51
<PAGE>
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 3733
Howard Hughes Parkway, Suite 300N, Las Vegas, Nevada 89109, and its telephone
number is (702) 892-3772.
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. SEE"Assets Securing or Underlying the
Certificates -- General".
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.
52
<PAGE>
Delinquency Experience
<TABLE>
<CAPTION>
AS OF
--------------------------------------------------------------------------------
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% 1.5% 1.4%
61-90 days................. 1.4 1.0 0.7 0.7 0.5 0.6
91 days and over........... 3.2 3.3 1.9 2.2 2.1 2.2
----------- ----------- ------------ ------------ ------------ ------------
Total.................... 8.3% 6.6% 4.3% 4.7% 4.1% 4.2%
----------- ----------- ------------ ------------ ------------ ------------
----------- ----------- ------------ ------------ ------------ ------------
Serviced Loan Portfolio at
period end (dollars in
thousands).................. $ 60,850 $ 70,410 $ 177,358 $ 238,584 $ 387,343 $506,287
</TABLE>
Loss Experience
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <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 future 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
53
<PAGE>
the value of the related Mortgaged Properties rather than the creditworthiness
of the related mortgagor, the actual rates of delinquencies, 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".
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 cotrustee 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 cotrustees, 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.
54
<PAGE>
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.
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
55
<PAGE>
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 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 tenantstockholder 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-
56
<PAGE>
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 borrowertrustor 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 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.
57
<PAGE>
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 Assets -- Foreclosure -- 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 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
58
<PAGE>
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 "-- Foreclosure -- 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 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
59
<PAGE>
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.
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
60
<PAGE>
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-onsale 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-onsale 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-onsale 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.
61
<PAGE>
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 intrafamily 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 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
62
<PAGE>
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 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
63
<PAGE>
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 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 may be 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
64
<PAGE>
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 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.
65
<PAGE>
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 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.
66
<PAGE>
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 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
67
<PAGE>
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
dealercontractor 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 accrue from the date of the loan and be calculated
68
<PAGE>
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.
69
<PAGE>
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 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 faceto-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
70
<PAGE>
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 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
71
<PAGE>
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 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.
72
<PAGE>
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 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
73
<PAGE>
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 passthrough 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.
74
<PAGE>
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
75
<PAGE>
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 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
76
<PAGE>
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 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
77
<PAGE>
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 antiabuse 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 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.
78
<PAGE>
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 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
79
<PAGE>
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.
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
80
<PAGE>
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.
81
<PAGE>
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.
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.
82
<PAGE>
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
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
83
<PAGE>
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 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 noncorporate 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
84
<PAGE>
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 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 "-- Treatment of Certain Items of REMIC Income and
Expense -- 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
85
<PAGE>
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 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
86
<PAGE>
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 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
87
<PAGE>
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 markto-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.
88
<PAGE>
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
PassThrough Entity during the period such interest is held by such Disqualified
Organization, and (ii) the highest marginal federal corporate income tax rate.
Such tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for
such tax if it has received an affidavit from such record holder that (i) states
under penalty of perjury that it is not a Disqualified Organization or (ii)
furnishes a social security number and states under penalties of perjury that
the social security number is that of the transferee, provided that during the
period such person is the record holder of the Residual Certificate, the Pass-
Through Entity does not have actual knowledge that such affidavit is false.
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
89
<PAGE>
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 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.
90
<PAGE>
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, (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
91
<PAGE>
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.
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 passthrough 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
92
<PAGE>
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 NonUnited 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 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 "-- Treatment of
Certain Items of REMIC Income and Expense -- 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 "-- 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.
93
<PAGE>
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, nonexempt 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, noncalendar 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."
94
<PAGE>
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
95
<PAGE>
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:
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 buydown 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 -- 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
96
<PAGE>
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 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 -- 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.
97
<PAGE>
In the alternative, the amount, if any, by which the servicing fees paid to
the servicers are deemed to exceed reasonable compensation for servicing could
be treated as deferred payments of purchase price by the 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 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 Certificates 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 "-- 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
98
<PAGE>
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. SEEdiscussion above under "--
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 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
99
<PAGE>
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 "obligation[s] (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 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
100
<PAGE>
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.
Treasury regulations provide that interest or original issue discount paid
by the Trustee or other withholding agent to a NonUnited 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
101
<PAGE>
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 Brown & Wood, Washington D.C.
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
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.
102
<PAGE>
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL TERMS
<TABLE>
<CAPTION>
PAGE
---------------
<S> <C>
"1986 Act" .................................................................. 75
"Act" ....................................................................... 64
"Administrator" .............................................................. 2
"Agency Securities" ....................................................... i, 6
"Annual Reduction" .......................................................... 65
"Applicable Accounting Standards" ........................................... 49
"APR" ....................................................................... 36
"Assets" .................................................................. i, 7
"Beneficial Owners" ..................................................... 10, 28
"BIF" ....................................................................... 49
"Book Entry Certificates" ................................................ 9, 28
"Book Entry Registration" ............................................... 23, 26
"Call Risk" ................................................................. 15
"Certificate Account" ....................................................... 26
"Certificate Guaranty Policy" ............................................... 40
"Certificate Interest Rate" .................................................. 3
"Certificateholders" ..................................................... 1, 10
"Certificates" ............................................................... i
"Charter Act" ............................................................... 33
"Class" ................................................................... i, 1
"Clearing Agency" ....................................................... 10, 28
"Clearing Agency Participants" .......................................... 10, 28
"Code" ...................................................................... 10
"Collateral Value" .......................................................... 37
"Commission" ............................................................... iii
"Committee Report" .......................................................... 77
"Companion Certificates" .................................................... 25
"Compound Interest Certificates" ......................................... 1, 24
"Contract Loan Schedule" .................................................... 47
"Contract Pool" .............................................................. 6
"Contracts" ........................................................... i, 8, 36
"Conventional Contracts" ................................................. 8, 36
"Conventional Mortgage Loans" ................................................ 7
"Cooperative Loans" ......................................................... 30
"Cooperatives" ........................................................... 7, 30
"Credit Enhancement" .................................................. 7, 9, 39
"Depositor" ........................................................... i, 2, 52
"Disqualified Organization" ................................................. 89
"Distribution Date" .......................................................... 3
"DOL" ....................................................................... 73
"Due Period" ................................................................. 3
"ERISA" ................................................................. 12, 73
"Excess Spread" ............................................................. 40
"Exchange Act" ............................................................. iii
"Extension Risk" ............................................................ 15
"FDIC" .................................................................. 49, 73
"FFI" ....................................................................... 52
"FHA" ....................................................................... 64
</TABLE>
103
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------------
<S> <C>
"FHA Claims Administration Agreement" ....................................... 17
"FHA Claims Administrator" .................................................. 17
"FHA Loans" ................................................................. 31
"FHA Reserve" ............................................................... 65
"FHLMC" ................................................................... i, 6
"FHLMC Act" ................................................................. 34
"FHLMC Certificate Group" ................................................... 34
"FHLMC Certificates" ......................................................... 8
"Final REMIC Regulations" ................................................... 75
"FmHA Loans" ................................................................ 31
"FNMA" .................................................................... i, 6
"FNMA Certificates" .......................................................... 8
"Garn-St. Germain Act" ...................................................... 61
"GNMA" .................................................................... i, 6
"GNMA Certificates" .......................................................... 8
"GNMA Issuer" ............................................................... 31
"Guaranty Agreement" ........................................................ 32
"Holders" ................................................................ 1, 10
"Housing Act" ............................................................... 31
"Interest Only Certificates" ............................................. 1, 24
"IRS" ....................................................................... 78
"Issuer" .................................................................. i, 2
"Manufactured Home" ......................................................... 37
"Manufacturer's Invoice Price" .............................................. 37
"Master Servicer" ............................................................ 3
"Maximum Variable Interest Rate" ............................................. 4
"Minimum Variable Interest Rate" ............................................. 4
"Mortgage Asset Pool" ........................................................ i
"Mortgage Assets" ............................................................ i
"Mortgage Loans" ................................................... i, 6, 7, 76
"Mortgage Notes" ............................................................ 38
"Mortgage Pool" .............................................................. 6
"Mortgage Pool Insurance Policy" ............................................ 40
"Mortgage Rates" ............................................................ 31
"Mortgaged Properties" ...................................................... 30
"Mortgages" ................................................................. 30
"NCUA" ...................................................................... 73
"Non-Priority Certificates" ................................................. 25
"Non-United States Person" .................................................. 93
"Notional Principal Balance" ................................................ 23
"Offered Certificates" ....................................................... i
"OID Regulations" ........................................................... 77
"OTS" ................................................................... 61, 73
"Pass-Through Entity" ....................................................... 89
"Permitted Investments" ..................................................... 38
"Plan Asset Regulations" .................................................... 73
"Plans" ..................................................................... 73
"Policy Statement" .......................................................... 73
"Pool Insurer" .............................................................. 40
"Pooling and Servicing Agreement" ........................................ 1, 23
"Premium REMIC Regular Certificate" ......................................... 82
</TABLE>
104
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------------
<S> <C>
"Prepayment Assumption" ..................................................... 77
"Pre-Funding Account" ....................................................... 38
"Pre-Funding Arrangement" ................................................ 9, 38
"Principal Only Certificates" ............................................ 1, 24
"Principal Prepayments" ..................................................... 27
"Priority Certificates" ..................................................... 25
"Proposed Regulations" ...................................................... 81
"Prospectus Supplement" ...................................................... i
"PTC" ....................................................................... 32
"Rating Agency" ............................................................. 12
"Record Date" ............................................................... 25
"Registrar" ................................................................. 23
"Regular Certificates" .................................................. 10, 75
"Reigle Act" ................................................................ 63
"REIT" ...................................................................... 76
"Relief Act" ............................................................ 20, 64
"REMIC" ............................................................. ii, 10, 76
"REMIC Administrator" ....................................................... ii
"REMIC Certificates" ........................................................ 75
"REMIC Pool" ............................................................ 75, 76
"Reports" .................................................................. iii
"Reserve Fund" .............................................................. 41
"Residual Certificates" ............................................. 10, 18, 75
"Residual Holders" .......................................................... 18
"Retail Class Certificate" .................................................. 78
"SAIF" ...................................................................... 49
"Scheduled Amortization Certificates" ....................................... 25
"Scheduled Final Distribution Date" .......................................... 5
"Scheduled Principal" ....................................................... 35
"Securied Contracts" ............................................... i, 6, 8, 36
"Secured Property" .......................................................... 67
"Securities Act" ........................................................... iii
"Senior Certificates" ....................................................... 39
"Series" ..................................................................... i
"Servicer" ................................................................... 2
"SMMEA" ................................................................. 12, 73
"Special Allocation Certificates" ........................................... 25
"Special Hazard Insurance Policy" ........................................... 41
"Subordinated Certificates" ................................................. 39
"Subsequent Mortgage Assets" ............................................. 9, 38
"Subsequent Transfer Agreement" ............................................. 48
"Subservicing Agreement" .................................................... 42
"TAMRA" ..................................................................... 75
"Thrift Institution" ........................................................ 76
"TILA" ...................................................................... 63
"Title I Contracts" ...................................................... 8, 36
"Title I Mortgage Loans" ................................................. 8, 30
"Title V" ................................................................... 63
"TMP" ....................................................................... 77
"Transfer Report" ........................................................... 65
"Transferor" ................................................................ 29
</TABLE>
105
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------------
<S> <C>
"Trust Fund" .............................................................. i, 1
"Trustee" .................................................................... 3
"UCC" ................................... .................................. 58
"Underlying Loans" .......................................................... 14
"Underwriters" ............................................................. 101
"United States Person" ...................................................... 90
"Unsecured Contracts" ................................................. i, 8, 36
"VA Loans" .................................................................. 31
"Variable Interest Rate Certificates" ........................................ 1
"Window Period Loans" ....................................................... 61
</TABLE>
106
<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
PROSPECTUS SUPPLEMENT 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 DEPOSITOR, ANY AFFILIATE OF THE DEPOSITOR
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
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT PAGE
- --------------------------------------------------------------- -----------
<S> <C>
Summary of Prospectus Supplement............................... S-1
Risk Factors................................................... S-17
Use of Proceeds................................................ S-25
The Mortgage Loan Pool......................................... S-25
Description of the Certificates................................ S-31
The Guaranty Policy............................................ S-44
FHA Insurance for Title I Mortgage Loans....................... S-48
The Depositor.................................................. S-49
The Transferor and Servicer.................................... S-50
Prepayment and Yield Considerations............................ S-53
Description of Book Entry Procedures........................... S-62
Certain Federal Income Tax Consequences........................ S-62
ERISA Considerations........................................... S-63
Legal Investment............................................... S-65
Ratings........................................................ S-65
Experts........................................................ S-66
Legal Matters.................................................. S-66
Underwriting................................................... S-66
Appendix A..................................................... A-1
PROSPECTUS
- ----------------------------------------------------------------------------
Prospectus Supplement.......................................... ii
Available Information.......................................... iii
Incorporation of Certain Documents by Reference................ iii
Table of Contents.............................................. iv
Summary of Prospectus.......................................... 1
Risk Factors................................................... 13
Description of the Certificates................................ 22
Assets Securing or Underlying the Certificates................. 29
Credit Enhancement............................................. 39
Servicing of the Mortgage Loans and Contracts.................. 42
The Pooling and Servicing Agreement............................ 46
Use of Proceeds................................................ 52
The Depositor.................................................. 52
The Servicer and the Transferor................................ 52
The Trustee.................................................... 54
Certain Legal Aspects of the Mortgage Assets................... 54
Legal Investment Matters....................................... 73
ERISA Considerations........................................... 73
Certain Federal Income Tax Consequences........................ 75
State Tax Consequences......................................... 101
Plan of Distribution........................................... 101
Legal Matters.................................................. 102
Financial Information and Additional Information............... 102
Appendix A..................................................... 103
</TABLE>
------------------------------
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.
$239,375,000
(APPROXIMATE)
FIRSTPLUS HOME LOAN TRUST 1996-2
[LOGO]
FIRSTPLUS
INVESTMENT CORPORATION
(DEPOSITOR)
FIRSTPLUS FINANCIAL, INC.
(TRANSFEROR AND SERVICER)
---------------------
PROSPECTUS SUPPLEMENT
---------------------
BEAR, STEARNS & CO. INC.
BANC ONE CAPITAL CORPORATION
JUNE , 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
