<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 19, 1996
REGISTRATION NO. 33-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
FIRSTPLUS HOME IMPROVEMENT LOAN TRUSTS
(Issuer with respect to the Securities)
FIRSTPLUS INVESTMENT CORPORATION
(Originator of the Trusts described herein)
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
NEVADA 75-2596063
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
---------------------
3773 HOWARD HUGHES PARKWAY, SUITE 300N MICHAEL ORENDORF
LAS VEGAS, NEVADA 89109 C/O FIRSTPLUS INVESTMENT CORPORATION
(702) 892-3772 3773 HOWARD HUGHES PARKWAY, SUITE 300N
(Address, including zip code, and LAS VEGAS, NEVADA 89109
telephone number, including area (702) 892-3772
code, of Originator's principal (Name, address, including zip code,
executive offices) and telephone number, including
area code, of agent for service
with respect to the Registrant)
----------------------
COPIES TO:
RONALD M. MANKOFF, ESQ. MICHAEL B. THIMMIG, ESQ.
1250 MOCKINGBIRD LANE ANDREWS & KURTH L.L.P.
DALLAS, TEXAS 75247-4902 4400 THANKSGIVING TOWER
(214) 630-6006 DALLAS, TEXAS 75201
(214) 979-4400
</TABLE>
----------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to a dividend or interest reinvestment plan, please check the
following box. [ ]
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box.[x]
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration number of the earlier effective registration
statement for the same offering. [ ]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=======================================================================================================================
Proposed Maximum Proposed Amount of
Proposed Title of Amount to Be Offering Price Per Maximum Aggregate Registration
Securities to be Registered Registered Unit(1) Offering Price (1) Fee
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset Backed Securities $1,000,000 100% $1,000,000 $344.83
=======================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee on
the basis of the proposed maximum offering price per unit.
---------------------
THIS REGISTRATION STATEMENT SHALL HEREAFTER BECOME EFFECTIVE IN
ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED.
================================================================================
<PAGE> 2
INTRODUCTORY NOTE
This Registration Statement contains (i) a form of Prospectus relating
to the offering of one or more series of Asset Backed Bonds and/or Asset Backed
Certificates by various trusts created from time to time by FIRSTPLUS INVESTMENT
CORPORATION, (ii) a form of Prospectus Supplement relating to the offering by
FIRSTPLUS Home Loan Trust 199_-__of a particular series of Asset Backed Bonds
and Asset Backed Certificates described therein, (iii) a form of Prospectus
relating to the offering of one or more series of Asset Backed Certificates by
FIRSTPLUS INVESTMENT CORPORATION and certain trusts, all of the beneficial
ownership interest in which is owned by FIRSTPLUS INVESTMENT CORPORATION, and
(iv) a form of Prospectus Supplement relating to the offering by FIRSTPLUS Home
Loan Asset-Backed Certificates, Trust 199_-__ of a particular series of Asset
Backed Certificates described therein. Each form of Prospectus Supplement
relates only to the securities described therein and is an illustrative form
which may be used, among others, by FIRSTPLUS INVESTMENT CORPORATION and
affiliated trusts to offer Asset Backed Bonds and/or Asset Backed Certificates
from time to time under this Registration Statement.
<PAGE> 3
***************************************************************************
* *
* Information contained herein is subject to completion or amendment. *
* A registration statement relating to these securities has been filed *
* with the Securities and Exchange Commission. These securities may *
* not be sold nor may offers to buy be accepted prior to the time the *
* registration statement becomes effective. This Prospectus Supplement *
* and the accompanying 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 jurisdiction in which such offer, *
* solicitation or sale would be unlawful prior to the registration or *
* qualification under the securities laws of any such jurisdiction. *
* *
***************************************************************************
SUBJECT TO COMPLETION, DATED AUGUST 19, 1996
PROSPECTUS SUPPLEMENT
(To Prospectus dated _________, 1996)
$_____________
FIRSTPLUS HOME LOAN OWNER TRUST 199_-__
FIRSTPLUS INVESTMENT CORPORATION,
SELLER
FIRSTPLUS FINANCIAL, INC.
TRANSFEROR AND SERVICER
The FIRSTPLUS HOME LOAN OWNER TRUST 199_-__ (the "Trust") will be
governed by a Trust Agreement, to be dated as of ___________, 199__ (the
"Trust Agreement"), among FIRSTPLUS INVESTMENT CORPORATION (the "Seller") and
______________, as owner trustee (the "Owner Trustee"). The Trust will issue
$___________ aggregate principal amount of Class A-1 ___% Asset Backed Bonds
(the "Class A-1 Bonds"), $_____________ aggregate principal amount of Class A-2
___% Asset Backed Bonds (the "Class A-2 Bonds") and $_____________ aggregate
principal amount of Class A-3 ___% Asset Backed Bonds (the "Class A-3 Bonds"
and, together with the Class A-1 Bonds and the Class A-2 Bonds, the "Bonds")
pursuant to an Indenture to be dated as of
BEFORE PURCHASING ANY OFFERED SECURITIES, PROSPECTIVE INVESTORS SHOULD
REVIEW THE INFORMATION SET FORTH HEREIN AND IN THE PROSPECTUS, SEE "RISK
FACTORS" AND "PREPAYMENT AND YIELD CONSIDERATIONS" HERE, AND SEE "RISK FACTORS"
IN THE PROSPECTUS.
(continued on next page)
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 Certificate Price to Underwriting Proceeds to
Principal Balance Interest Public (1) Discount Depositor (2)
<S> <C> <C> <C> <C> <C>
Class A-1 Bonds $____________ _____% _____% _____% _____%
Class A-2 Bonds $____________ _____% _____% _____% _____%
Class A-3 Bonds $____________ _____% _____% _____% _____%
Class B Certificates $____________ _____% _____% _____% _____%
Total $____________ $__________ $__________ $__________
</TABLE>
(1) Plus accrued interest, if any, at the applicable rate from __________,
199___.
(2) Before deducting expenses, estimated to be $____________.
The Offered Securities are offered by the Underwriters when, as and if
issued and accepted by the Underwriters and subject to their right to reject
orders in whole or in part. It is expected that delivery of the Offered
Securities will be made in book-entry form only through the Same Day Funds
Settlement System of The Depository Trust Company, Cedel Bank, societe anonyme
and the Euroclear System on or about ___________, 19__ against payment therefor
in immediately available funds.
[UNDERWRITERS]
The date of this Prospectus Supplement is _____________, 199__.
<PAGE> 4
(Continued from preceding page)
_________, 19__ (the "Indenture"), between the Trust and ____________, as
Indenture Trustee (the "Indenture Trustee"). The Trust will also issue
$___________ aggregate principal amount of ___% Asset Backed Certificates (the
"Class B Certificates" and, together with the Bonds, the "Offered Securities")
pursuant to the Trust Agreement. The Trust will also issue a residual
certificate (the "Residual Certificate") which represents a residual interest
in the assets of the Trust remaining after the aggregate principal balances of
the Offered Securities have been reduced to zero. The Residual Certificate is
not being offered hereby.
For capitalized terms used but not defined herein, see the "Index of
Terms" included as Appendix A to both this Prospectus Supplement and the
Prospectus.
The assets of the Trust will primarily include a pool of home loans
(the "Home Loan Pool") consisting of (1) secured loans ("Secured Loans"), which
will be secured by either (i) mortgages, deeds of trust or other similar
security instruments (the "Mortgages") or (ii) security instruments creating a
lien on personal property such as home appliances or furnishings; and (2)
unsecured loans ("Unsecured Loans" and, together with the Secured Loans, the
"Home Loans"), which will not be secured by any interest in real or personal
property. Substantially all of the Mortgages for the Secured Loans will be
junior (i.e., second, third, etc.) in priority to one or more senior liens on
the related mortgaged properties ("Mortgaged Properties"), which will consist
primarily of owner occupied single family residences. All of the Home Loans
will be conventional loans (i.e., not insured or guaranteed by a governmental
agency) ("Conventional Loans"). The Home Loans will consist of loans for which
the related proceeds were used to finance (i) property improvements, (ii) the
acquisition of personal property such as home appliances or furnishings, or
(iii) property improvements and for other purposes, in combination, which
loans are marketed by the Transferor under the name "BusterPlus(TM) Loans".
The Bonds will be secured by the assets of the Trust pursuant to the
Indenture. Interest on all Classes of Bonds will accrue at the fixed per annum
interest rates specified above. Interest on the Bonds will generally be
distributable to the Bondholders on the 20th day of each month (or, if such day
is not a Business Day, the next succeeding Business Day), beginning ____, 199__
(each, a "Distribution Date"). Principal of the Bonds will be payable on each
Distribution Date to the extent described herein, except that no principal will
be paid on the Class A-2 Bonds until the Class A-1 Bonds have been paid in full
and no principal will be paid on the Class A-3 Bonds until the Class A-2 Bonds
have been paid in full.
The Class B Certificates will represent undivided ownership interests
in the Trust. Interest, to the extent of the Pass Through Rate specified
above, will be distributed to the Class B Certificateholders on each
Distribution Date. Principal, to the extent described herein, will be
distributed to the Class B Certificateholders on each Distribution Date after
the Distribution Date on which the Class A-3 Bonds have been paid in full.
Distributions of principal and interest on the Class B Certificates will be
subordinated in priority to payments due on the Bonds as described herein.
Each Class of Offered Securities will be payable in full on the
applicable final scheduled Distribution Date as set forth herein. However,
payment in full of a Class of Offered Securities could occur earlier than such
dates as described herein. In addition, the Bonds will be subject to
redemption in whole, but not in part, and the Class B Certificates will be
subject to prepayment in whole, but not in part, on any Distribution Date on
which the Servicer exercises its option to purchase the Home Loans. On any
Distribution Date after which the outstanding principal balance of the Home
Loans (the "Pool Principal Balance") is less than 10% of the sum of the Pool
Principal Balance of the Initial Home Loans and Subsequent Home Loans conveyed
to the Trust as of the respective Cut-off Dates (the "Initial Pool Principal
Balance"), the Servicer may, at its option, effect an early retirement and
termination of the Offered Securities by paying to the Trust an amount equal to
the then outstanding principal balance of the Offered Securities plus accrued
interest thereon.
The yield to maturity on the Offered Securities will depend on (i) the
rate and timing of principal reductions of the outstanding principal balances
of the Offered Securities from the receipt of payments of principal and
interest on and other principal reductions of the Home 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 outstanding
principal balances of the Offered Securities 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 Securities by the holders thereof.
Prospective investors should carefully consider the associated risks. See "Risk
Factors" and "Prepayment and Yield Considerations" herein.
-ii-
<PAGE> 5
It is a condition to the issuance of the Bonds that they each be rated
"____" by Standard & Poor's, a division of The McGraw Hill Companies, Inc.
("Standard & Poor's") and "____" by Moody's Investors Service, Inc. ("Moody's"
and, together with Standard & Poor's, the "Rating Agencies"). It is a
condition to the issuance of the Class B Certificates that they be rated
"_____" by Standard & Poor's and "____" by Moody's. The Bonds will be
unconditionally and irrevocably guaranteed to the extent described herein
pursuant to the terms of a financial guaranty insurance policy (the "Guaranty
Policy") issued by __________________ (the "Bond Insurer"). The Class B
Certificates will not be so insured.
PROCEEDS OF THE ASSETS IN THE TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE
OFFERED SECURITIES. THE BONDS REPRESENT OBLIGATIONS OF, AND THE CLASS B
CERTIFICATES REPRESENT UNDIVIDED OWNERSHIP INTERESTS IN, THE TRUST ONLY AND DO
NOT REPRESENT OBLIGATIONS OF OR INTERESTS IN THE SELLER, THE TRANSFEROR, THE
SERVICER, THE INDENTURE TRUSTEE, THE OWNER TRUSTEE OR ANY OF THEIR RESPECTIVE
AFFILIATES. NONE OF THE BONDS, THE CLASS B CERTIFICATES OR THE MORTGAGE LOANS
ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY
THE SELLER OR THE TRANSFEROR OR ANY OF THEIR RESPECTIVE AFFILIATES OR ANY OTHER
PERSON, EXCEPT THAT THE BONDS WILL BE INSURED BY THE BOND INSURER UNDER THE
GUARANTY POLICY.
_____________________________________
THE OFFERED SECURITIES OFFERED BY THIS PROSPECTUS SUPPLEMENT WILL BE
PART OF A SEPARATE SERIES OF SECURITIES ISSUED BY THE TRUST ESTABLISHED BY THE
SELLER AND ARE BEING OFFERED PURSUANT TO THE SELLER'S PROSPECTUS DATED
__________, 199_ OF WHICH THIS PROSPECTUS SUPPLEMENT IS A PART AND WHICH
ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS IMPORTANT
INFORMATION REGARDING THIS OFFERING THAT IS NOT CONTAINED HEREIN, AND
PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL. SALES OF THE OFFERED SECURITIES 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 SECURITIES, 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
SECURITIES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
_____________________________________
-iii-
<PAGE> 6
AVAILABLE INFORMATION
The Seller has filed with the Securities and Exchange Commission (the
"Commission"), on behalf of the Trust, a Registration Statement on Form S-3
(together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended. This Prospectus
Supplement and the related Prospectus, which form a part of the Registration
Statement, omit certain information contained in such Registration Statement in
accordance with the rules and regulations of the Commission. The Registration
Statement can be inspected and copied at the Public Reference Room of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and the Commission's regional offices at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and Seven World Trade Center,
Suite 1300, New York, New York 10048. Copies of such information can be
obtained at prescribed rates from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding the Seller. The address
of such Web site is http://www.sec.gov.
REPORTS TO SECURITYHOLDERS
Unaudited monthly and annual reports concerning the Bonds and
Certificates will be sent by the Indenture Trustee and Owner Trustee,
respectively, to the Beneficial Owners of the Bonds and Certificates, as
applicable. So long as any Bond or 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 Bonds pursuant to the Indenture or such Certificates pursuant to
the Sale and Servicing Agreement, respectively. DTC will supply such reports to
Security Owners of any such Bonds or Certificates in accordance with its
procedures.
-iv-
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
REPORTS TO SECURITYHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
SUMMARY OF TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-13
Acquisition of Subsequent Home Loans from Pre-Funding Account . . . . . . . . . . . . . . . . . . . . . . S-13
Additional Effect of Prepayments on Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-14
Additional Credit Enhancement Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-14
Limitations on Rights of Securityholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-15
Delinquency Status of Initial Home Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-16
Additional Factors Affecting Delinquencies, Foreclosures and Losses on Home Loans . . . . . . . . . . . . S-16
Limitations on Repurchase or Replacement of Defective Home Loans by Transferor . . . . . . . . . . . . . . S-20
Limitations on Liquidity of Transferor and Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . S-20
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-21
DESCRIPTION OF THE TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-21
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-21
Capitalization of the Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-22
The Owner Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-22
THE HOME LOAN POOL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-22
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-22
Characteristics of Initial Home Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-23
Conveyance of Subsequent Home Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-27
THE SELLER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-27
THE TRANSFEROR AND SERVICER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-27
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-27
Underwriting Criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-28
Repurchase or Substitution of Home Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-29
Servicing Experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-30
PREPAYMENT AND YIELD CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-30
Excess Spread and Overcollateralization Reduction Amount Distributions . . . . . . . . . . . . . . . . . . S-33
Reinvestment Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-34
Scheduled Final Distribution Dates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-34
Weighted Average Life of the Offered Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-35
DESCRIPTION OF THE OFFERED SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-38
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-38
Collection Account and Distribution Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-38
Income from Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-39
Available Remittance Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-39
Distributions on the Offered Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-40
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-44
DESCRIPTION OF CREDIT ENHANCEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-45
The Guaranty Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-45
</TABLE>
-v-
<PAGE> 8
<TABLE>
<S> <C>
Subordination and Allocation of Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-49
The Reserve Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-49
Overcollateralization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-50
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-52
Sale and Assignment of the Home Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-52
Pre-Funding Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-53
Capitalized Interest Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-54
Fees and Expenses of the Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-55
Servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-55
Restrictions on Securityholder Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-56
The Owner Trustee and Indenture Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-56
Duties of the Owner Trustee and Indenture Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-57
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-58
The Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-58
The Class B Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-59
UNDERWRITING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-59
LEGAL INVESTMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-60
RATINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-60
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-61
LEGAL OPINIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-61
INDEX OF TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-62
</TABLE>
-vi-
<PAGE> 9
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the accompanying
Prospectus. Certain capitalized terms used herein may be defined elsewhere in
this Prospectus Supplement or in the Prospectus. See "Index of Terms"
included as an Appendix A to both this Prospectus Supplement and the
Prospectus. Capitalized terms that are used but not defined herein, will have
the meanings assigned to such terms in the Prospectus.
ISSUER . . . . . . . . . FIRSTPLUS Home Loan Owner Trust 199__-__ (the
"Trust" or the "Issuer"), a Delaware business
trust established pursuant to a trust agreement
(the "Trust Agreement") dated as of _____________,
199__, among the Seller and the Owner Trustee.
SELLER . . . . . . . . . FIRSTPLUS INVESTMENT CORPORATION (the "Seller"), a
Texas corporation, in its capacity as Seller of
the Home Loans to the Trust.
SERVICER AND TRANSFEROR . FIRSTPLUS FINANCIAL, INC. ("FFI" or the "Servicer"
or the "Transferor"), a Texas corporation, in its
capacity as Servicer and Transferor of the Home
Loans. FFI is a wholly owned subsidiary of RAC
Financial Group, Inc. ("RAC").
INDENTURE TRUSTEE . . . ___________________, as trustee under the
Indenture (the "Indenture Trustee").
OWNER TRUSTEE . . . . . ___________________, as trustee under the Trust
Agreement (the "Owner Trustee").
CLOSING DATE . . . . . . On or about ____________, 19__.
CUT-OFF DATE . . . . . . ____________, 19__ with respect to the Initial
Home Loans and, with respect to the Subsequent
Home Loans, the date specified as the cut-off date
in the applicable Subsequent Transfer Agreement
(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 in _________19__ (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 (each, a "Determination Date").
S-1
<PAGE> 10
RECORD DATE . . . . . . . The last business day of the month immediately
preceding the month in which each Distribution
Date occurs (each, a "Record Date").
THE BONDS . . . . . . . . The Trust will issue the Bonds pursuant to an
Indenture to be dated as of ____________, 199__
(as amended and supplemented from time to time, the
"Indenture"), between the Issuer and the Indenture
Trustee, as follows: (1) Class A-1 Asset Backed
Bonds (the "Class A-1 Bonds") in the aggregate
principal amount of $______________; (2) Class A-2
Asset Backed Bonds (the "Class A-2 Bonds") in the
aggregate principal amount of $_______________; and
(3) Class A-3 Asset Backed Bonds (the "Class A-3
Bonds") in the aggregate principal amount of
$___________. The Bonds will be secured by the
assets of the Trust pursuant to the Indenture. The
Bonds will be senior in right of payment to the
Class B Certificates and the Residual Certificates.
A. Interest . . . . . . The Interest Remittance Amount that the holders of
each Class of Bonds will be entitled to receive on
each Distribution Date will be equal to thirty
days' accrued interest at the respective Interest
Rate for such Class on the then outstanding Class
Principal Balance of such Class. Interest on the
Bonds will accrue on the basis of a 360-day year
consisting of twelve 30- day months. See
"Description of the Offered Securities --
Distributions on the Offered Securities" herein.
Interest will accrue on each Class of the Bonds
during each Due Period at the following interest
rates: (i) Class A-1 Bonds, ___% per annum (the
"Class A-1 Rate"); (ii) Class A-2 Bonds, ___% per
annum (the "Class A-2 Rate"); (iii) Class A-3
Bonds, ___% per annum (the "Class A-3 Rate" and,
together with the Class A-1 Rate and the Class A-2
Rate, the "Interest Rates").
B. Principal . . . . . . On each Distribution Date (except as described
herein), the Principal Remittance Amount for such
Distribution Date will be distributable to the
Classes of Bonds in ascending order of their
numerical designations, such that no amounts will
be distributed to a Class of Offered Bonds until
the Class Principal Balance of each Class having a
lower numerical designation has been reduced to
zero. In addition, until the Required
Overcollateralization Amount has been reached, the
Bonds will be entitled to distributions of Excess
Spread, in reduction of their respective Class
Principal Balances, in sequential order as
described above. Additional amounts may also be
distributed in reduction of the Class Principal
Balances of the Bonds 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
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<PAGE> 11
Date occurs and the Excess Overcollateralization
Amount is greater than zero, amounts in respect of
the Principal Remittance Amount otherwise
distributable on the Bonds will instead be
distributable to the holder of the Residual
Certificate. See "Description of the Offered
Securities -- Distributions on the Offered
Securities" herein.
The outstanding principal amount of the Class A-1
Bonds, to the extent not previously paid, will be
payable on _______, 199__ (the "Class A-1 Final
Scheduled Distribution Date"), the outstanding
principal amount of the Class A-2 Bonds, to the
extent not previously paid, will be payable on
__________, 199__ (the "Class A-2 Final Scheduled
Distribution Date") and the outstanding principal
amount of the Class A-3 Bonds, to the extent not
previously paid, will be payable on __________,
199__ (the "Class A-3 Final Scheduled Distribution
Date").
THE CLASS B CERTIFICATES The Trust will issue Class B Asset Backed
Certificates (the "Class B Certificates" and,
together with the Bonds, the "Offered Securities")
with an aggregate initial certificate principal
balance ("Original Certificate Principal Balance")
of $____________. On the Closing Date, the
Original Certificate Principal Balance of the
Class B Certificates will equal the excess of the
Assumed Pool Principal Balance over the sum of the
Class Principal Balance of all Classes of the
Bonds as of the Closing Date (the "Original Class
Principal Balance"). The Class B Certificates
will represent undivided ownership interests in
the Trust and will be issued pursuant to the Trust
Agreement. The Class B Certificates will be
subordinate in right of payment to the Bonds.
A. Interest . . . . . . The Interest Remittance Amount that the holders of
the Class B Certificates will be entitled to
receive on each Distribution Date will be equal to
thirty days' accrued interest at the Pass Through
Rate on the then outstanding Certificate Principal
Balance of the Class B Certificates. Interest in
respect of the Class B Certificates will accrue on
the basis of a 360-day year consisting of twelve
30-day months. See "Description of the Offered
Securities -- Distributions on the Offered
Securities" herein.
Interest on the Class B Certificates will accrue
during each Due Period at a rate equal to ____% per
annum (the "Pass Through Rate").
B. Principal . . . . . . On each Distribution Date after the Bonds have
been paid in full (except as described herein),
the Principal Remittance Amount for such
Distribution Date will be distributable to the
Class B Certificates. Until the Required
Overcollateralization Amount
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<PAGE> 12
has been reached, the Class B Certificates will be
entitled to distributions of Excess Spread, in
reduction of their Certificate Principal Balance
after the Bonds have been paid in full. Additional
amounts may also be distributed in reduction of
the Certificate Principal Balance of the Class B
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 B Certificates will instead be distributable
to the holder of the Residual Certificate. See
"Description of the Offered Securities --
Distributions on the Offered Securities" herein.
The outstanding principal amount, if any, of the
Class B Certificates will be payable in full on
__________, 199__ (the "Final Scheduled
Distribution Date").
THE RESIDUAL CERTIFICATE The Trust will also issue a residual certificate
(the "Residual Certificate") which represents a
residual interest in the assets of the Trust
remaining after the aggregate principal balances
of the Offered Securities have been reduced to
zero. The Residual Certificate is not being
offered hereby. The Residual Certificate will be
subordinate in right of payment to the Class B
Certificates and the Bonds.
FORM AND REGISTRATION OF THE
OFFERED SECURITIES . . The Offered Securities will initially be issued
only in book-entry form. Persons acquiring
beneficial ownership interests in the Offered
Securities ("Security Owners") will hold such
Offered Securities through The Depository Trust
Company ("DTC"), in the United States, or Cedel
Bank, societe anonyme ("Cedel") or the Euroclear
System ("Euroclear") in Europe. Transfers within
DTC, Cedel or Euroclear, as the case may be, will
be in accordance with the usual rules and
operating procedures of the relevant system. So
long as the Offered Securities are Book-Entry
Certificates, such Offered Securities will be
evidenced by one or more certificates registered
in the name of Cede & Co., as the nominee of DTC,
or Citibank N.A. or Morgan Guaranty Trust Company
of New York, the relevant depositaries of Cedel
and Euroclear, respectively, and each a
participating member of DTC. No Security Owner
will be entitled to receive a definitive
certificate representing such person's interest,
except in the event that Definitive Securities are
issued under the limited circumstances described
herein. See "Risk Factors--Book-Entry
Registration" herein and "Appendix B: Global
Clearance, Settlement and Tax Documentation
Procedures" and "Certain Information
S-4
<PAGE> 13
Regarding the Offered Securities--Book-Entry
Registration" in the Prospectus. Unless and until
Definitive Securities are issued, all references
herein to distributions, notices, reports and
statements and to actions by and effects upon the
related holders of the Offered Securities will
refer to the same actions and effects with respect
to DTC or Cede, Cedel or Euroclear as the case may
be, for the benefit of the related Security Owners
in accordance with DTC procedures.
ASSETS OF THE TRUST . . The assets of the Trust will primarily include a
pool of home loans (the "Home Loan Pool")
consisting of (1) secured loans ("Secured Loans"),
which will be secured by either (i) mortgages,
deeds of trust or other similar security
instruments (the "Mortgages") or (ii) security
instruments creating a lien on personal property
such as home appliances or furnishings; and (2)
unsecured loans ("Unsecured Loans" and, together
with the Secured Loans, the "Home Loans"), which
will not be secured by any interest in real or
personal property. The assets of the Trust will
also include (i) payments in respect of the Home
Loans of interest and principal received after the
applicable Cut-off Date; (ii) amounts on deposit
in the Pre-Funding Account and the Capitalized
Interest Account (as each term is defined herein)
until the expiration of the Funding Period (as
defined herein), (iii) the Guaranty Policy issued
by the Bond Insurer, (iv) [assets on deposit in
the Reserve Fund], (v) the Distribution Account;
and (vi) certain other ancillary or incidental
funds, rights and properties related to the
foregoing. See "Description of the
Trust--General" herein.
THE HOME LOANS . . . . . On the Closing Date, the Trust will purchase Home
Loans (the "Initial Home Loans") having an
aggregate principal balance of approximately
$___________ as of the Cut-off Date from the
Seller pursuant to a Sale and Servicing Agreement
to be dated as of ____________, 199__ (as amended
and supplemented from time to time, the "Sale and
Servicing Agreement"), among the Trust, the Seller
and the Servicer. In addition, on the Closing
Date, the Seller is expected to deposit
approximately $____________ into a pre-funding
account (the "Pre- Funding Account") for the
purchase of additional Home Loans (the "Subsequent
Home Loans") during the Funding Period (as
defined herein). The sum of the aggregate
principal balance of the Initial Home Loans and
the amount expected to be deposited into the
Pre-Funding Account on the Closing Date equals
$___________ (the "Assumed Pool Principal
Balance").
All of the Home Loans will be conventional loans
(i.e., not insured or guaranteed by a governmental
agency) ("Conventional Loans"). The Home Loans
will consist of loans for which the related
proceeds were used to finance (i) property
S-5
<PAGE> 14
improvements, (ii) the acquisition of personal
property such as home appliances or furnishings,
(iii) debt consolidation, (iv) the purchase or
refinancing of single family residential property,
or (v) a combination of property improvements,
debt consolidation and other consumer purposes,
which loans are marketed by the Transferor under
the name "BusterPlus(TM) Loans". Substantially
all of the Mortgages for the Secured Loans will be
junior (i.e., second, third, etc.) in priority to
one or more senior liens on the related mortgaged
properties ("Mortgaged Properties"), which will
consist primarily of owner occupied single family
residences. See "The Home Loan Pool" herein and
"Description of the Trust Property -- Home Loans"
in the Prospectus.
THE PRE-FUNDING ACCOUNT On the Closing Date, the Trust will direct that a
portion of the proceeds from the sale of the
Offered Securities in an amount equal to
approximately $________________ (the "Pre- Funding
Account Deposit"), be deposited into the
Pre-Funding Account maintained by the Indenture
Trustee for the purpose of purchasing the
Subsequent Home 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 Home Loans removed
from or added to, respectively, the Home Loan Pool
prior to the Closing Date as described herein,
provided that any such decrease will not exceed
$__________ and any such increase will not exceed
___% of the Initial Pool Principal Balance. See
"The Home Loan Pool" herein. During the period
from the Closing Date until the earlier of (i) the
date on which the amount in the Pre-Funding
Account is reduced to a de minimis amount and (ii)
_________, 199__ (the "Funding Period"), the
amount on deposit in the Pre-Funding Account will
be reduced by the amount used to purchase
Subsequent Home Loans in accordance with the terms
of the Sale and Servicing Agreement. Subsequent
Home 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 Bond Insurer. See "The Home Loan
Pool -- Conveyance of Subsequent Home Loans"
herein. Any date on which such Subsequent Home
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
will be applied to reduce the outstanding
principal balance of each Class of Bonds on a pro
rata basis. See "Risk Factors - Acquisition of
Subsequent Home Loans from Pre-Funding Account"
and "Description of
S-6
<PAGE> 15
the Transfer and Servicing Agreements --
Pre-Funding Account" herein.
CAPITALIZED INTEREST
ACCOUNT . . . . . . . On the Closing Date, at the direction of the
Seller an amount (the "Capitalized Interest
Account Deposit"), as approved by the Rating
Agencies and the Bond 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 Indenture Trustee (the
"Capitalized Interest Account") from a portion of
the proceeds from the sale of the Offered
Securities. 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 Seller,
including any net reinvestment income thereon. See
"Description of the Transfer and Servicing
Agreements -- Capitalized Interest Account"
herein.
CREDIT ENHANCEMENT . . . Credit enhancement with respect to the Bonds will
be provided primarily by the Guaranty Policy. As
further described herein, additional credit
enhancement with respect to the Bonds that will be
utilized prior to the Guaranty Policy will be
provided by (i) the subordination of the Class B
Certificates and Residual Certificates, (ii) [the
Reserve Fund and] (iii) the overcollateralization
from principal attributable to the Residual
Certificates. As further described herein, the
Class B Certificates will not be guaranteed by or
benefit from the Guaranty Policy, but will benefit
from (i) the subordination of the Residual
Certificates, [(ii) the Reserve Fund] and (iii)
the overcollateralization from principal
attributable to the Residual Certificates. See
"Risk Factors -- Additional Credit Enhancement
Limitations" herein.
THE GUARANTY POLICY . . . The Seller will obtain in the name of the
Indenture Trustee a Financial Guaranty Insurance
Policy (the "Guaranty Policy") from
[_____________________] (the "Bond Insurer"), the
principal operating subsidiary of
[______________], pursuant to which the Bond
Insurer will irrevocably and unconditionally
guaranty payment on each Distribution Date to the
Indenture Trustee, for the benefit of the
Bondholders, of the related Interest Remittance
Amount and the related Principal Remittance Amount
then payable on each Class of the Bonds. Only the
Bonds will be insured by the Guaranty Policy. The
Class B Certificates will not be guaranteed by or
benefit from such Guaranty Policy. The Bond
Insurer's obligation under the Guaranty Policy
will be discharged to the extent Guaranteed
Payments are received by the Indenture Trustee,
whether or not
S-7
<PAGE> 16
such Guaranteed Payments are properly applied by
the Indenture Trustee. See "Description of Credit
Enhancement -- 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
Bonds on any specified date. For a description of
the Bond Insurer, see "Description of Credit
Enhancement -- The Guaranty Policy" herein.
SUBORDINATION . . . . . . The rights of the holders of the Class B
Certificates to receive distributions of interest
and principal from amounts available in the
Distribution Account on each Distribution Date
will be subordinated to such rights of the holders
of the Bonds, and the rights of the holders of the
Residual Certificates to receive any distributions
from amounts available in the Distribution Account
will be subordinated to such rights of the holders
of the Bonds, and the rights of the holders of the
Class B Certificates. The subordination of the
Class B Certificates and Residual Certificates to
the Bonds is intended to enhance the likelihood of
regular receipt by the holders of the Bonds of the
full amount of interest and principal
distributions due to such holders and to afford
such holders protection against losses on the Home
Loans. The subordination of the Residual
Certificates to the Class B Certificates is
intended to enhance the likelihood of regular
receipt by the holders of the Class B Certificates
of the full amount of interest and principal
distributions due to such holders and to afford
such holders protection against losses on the Home
Loans. In addition, Net Loan Losses in respect of
the Home Loans will be allocated first to the
principal, if any, attributable to the Residual
Certificates until such principal has been reduced
to zero and then to the principal of the Class B
Certificates until the Certificate Principal
Balance of the Class B Certificates has been
reduced to zero. See "Description of Credit
Enhancement -- Subordination and Allocation of
Losses" herein.
RESERVE FUND . . . . . . [The Offered Securities will have the benefit of a
Reserve Fund that will be established by the
Seller with the Indenture Trustee from a portion
of the proceeds of the sale of the Offered
Securities. On the Closing Date, the assets on
deposit in the Reserve Fund will equal
$____________, or approximately ___% of the
Assumed Pool Principal Balance as of the Cut-off
Date (the "Reserve Fund Requirement") and will
consist of cash in the amount of $_________. ]
[The Reserve Fund Requirement will be subject to
reduction from time to time in accordance with the
provisions of the Indenture and any amounts in the
Reserve Fund in excess of the
S-8
<PAGE> 17
reduced Reserve Fund Requirement on a Distribution
Date will be released to the holder of the
Residual Certificate.]
OVERCOLLATERALIZATION . . As of each Determination Date occurring after
termination of the Funding Period, the
"Overcollateralization Amount" will equal the
excess of the Pool Principal Balance over the
aggregate outstanding principal balances of all
Classes of Offered Securities. On the Closing
Date, the Overcollateralization Amount will be
zero. As a result of the application of Excess
Spread in reduction of the outstanding principal
balances of the Offered Securities, the
Overcollateralization Amount is expected to
increase over time to the extent described herein.
On the Closing Date, the Required
Overcollateralization Amount is expected to be an
amount equal to approximately $____________, or
___% of the Assumed Pool Principal Balance and,
subject to certain floors, caps and triggers, the
Required Overcollateralization Amount may increase
or decrease over time as described herein. An
increase in the Required Overcollateralization
Amount will result if the delinquency or default
experience on the Home Loans exceeds certain
levels set forth in the Indenture. If such an
increase occurs, then to the extent that Excess
Spread is available, the principal amortization of
the Offered Securities would be accelerated by the
distribution of such Excess Spread to the holders
of the Offered Securities until the Required
Overcollateralization Amount is achieved.
The Required Overcollateralization Amount may also
be decreased in certain circumstances, resulting,
most likely, in overcollateralization at such time
in excess of such required amount. Excess
overcollateralization may also result from
distributions in reduction of the Class Principal
Balances of the Offered Securities. If on any
Distribution Date identified as an
"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
Offered Securities will instead be distributed to
the holders of the Residual 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
Securities would be reduced relative to the
amortization of the Home Loans.
With respect to any Distribution Date, the "Excess
Overcollateralization Amount" is equal to (x) the
Overcollateralization Amount on such Distribution
Date after
S-9
<PAGE> 18
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 Overcollateralization Amount. 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, and (y) the
amount available for distribution on account of
principal with respect to the Offered Securities
on such Distribution Date. See "Description of
Credit Enhancement -- Overcollateralization"
herein.
While the distribution of Excess Spread to holders
of the Offered Securities in the manner specified
above has been designed to produce and maintain a
given level of overcollateralization with respect
to the Offered Securities, 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
Home Loans will be allocated first to reduce the
principal attributable to the Residual
Certificates, if any, thereby reducing the
Overcollateralization Amount. See "Description of
Credit Enhancement -- Subordination and Allocation
of Losses" and "Risk Factors -- Additional Credit
Enhancement Limitations" herein.
SERVICING OF THE
HOME LOANS . . . . . . The Servicer will perform the loan servicing
functions with respect to the Home Loans pursuant
to the Sale and Servicing Agreement and shall be
entitled to receive a fee (the "Servicing Fee"),
payable monthly, as described herein (see
"Description of the Home Loans -- Servicing"
herein). The Servicer may have subcontracted its
servicing obligations and duties with respect to
certain Home Loans to certain unaffiliated lenders
from whom the Seller purchased such Home 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 Home
Loans. The Servicer will be responsible for paying
the fees of each Subservicer. Under certain
circumstances the Servicer may be entitled to an
Excess Servicing Fee as described herein.
FEES AND EXPENSES OF
THE TRUST . . . . . . . In addition to the Servicing Fee and the Excess
Servicing Fee, if any, on each Distribution Date,
prior to distributions on the Bonds, amounts
available in the Distribution Account will be
distributed to pay the following periodic fees:
(1) the Bond
S-10
<PAGE> 19
Insurer premium (the "Guaranty Insurance
Premium"); (2) the fees of the Indenture Trustee
(the "Indenture Trustee Fee"); (3) the fees of the
Owner Trustee (the "Owner Trustee Fee") and (4)
the fees of the Custodian (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
Transfer and Servicing Agreements -- Fees and
Expenses of the Trust" and "Description of the
Offered Securities -- Distributions on the Offered
Securities" herein.
OPTIONAL TERMINATION . . The Servicer may, at its option, effect an early
redemption or termination of the Offered
Securities on or after any Distribution Date on
which the Pool Principal Balance declines to 10%
or less of the Assumed Pool Principal Balance, in
which case (i) the Bondholders will receive an
amount in respect the Bonds equal to the then
outstanding Class Principal Balance of the Bonds,
plus accrued interest thereon at the applicable
Interest Rates, and (ii) the Class B
Certificateholders will receive an amount in
respect of the Class B Certificates equal to the
then outstanding Certificate Balance of the Class
B Certificates, plus accrued interest at the Pass
Through Rate. In connection with any such
optional termination, the Servicer will pay the
outstanding fees and expenses, if any, of the
Indenture Trustee, the Owner Trustee, the Bond
Insurer, the Custodian, and the Servicer. Under
certain circumstances as set forth in the
Indenture (i.e., based upon the default experience
of the Home Loans), the Bond Insurer may, at its
option, effect an early redemption of the Bonds.
TAX STATUS . . . . . . . In the opinion of Andrews & Kurth L.L.P. ("Tax
Counsel") for federal income tax purposes, the
Bonds will be characterized as debt, and the Trust
will not be characterized as an association (or a
publicly traded partnership) taxable as a
corporation. Each Bondholder, by the acceptance
of a Bond, will agree to treat the Bonds as
indebtedness, and each Class B Certificateholder,
by the acceptance of a Class B Certificate, will
agree to treat the Trust as a partnership in which
the Class B Certificateholders are partners for
federal income tax purposes. Alternative
characterizations of the Trust and the Class B
Certificates are possible, but would not result in
materially adverse tax consequences to Class B
Certificateholders. See "Certain Federal Income
Tax Consequences" in the Prospectus for additional
information concerning the application of federal
income tax laws to the Trust and the Offered
Securities.
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<PAGE> 20
ERISA CONSIDERATIONS . . Subject to the considerations discussed under
"ERISA Considerations" herein and in the
Prospectus the Bonds are eligible for purchase by
employee benefit plans.
The Class B Certificates may not be acquired by
any employee benefit plan subject to the Employee
Retirement Income Security Act of 1974, as amended
("ERISA") or Section 4975 of the Internal Revenue
Code of 1986, as amended (the "Code") or by an
individual retirement account. See "ERISA
Considerations" herein and in the Prospectus. Any
benefit plan fiduciary considering purchase of the
Class B Certificates should, among other things,
consult with its counsel in determining whether
all required conditions have been satisfied.
LEGAL INVESTMENT
CONSIDERATIONS . . . . For a discussion of certain legal investment
considerations, see "Legal Investment Matters"
herein and in the Prospectus.
RATINGS OF THE OFFERED
SECURITIES . . . . . . It is a condition to the issuance of the Bonds
that they be rated "_____" by Standard & Poor's, a
division of The McGraw Hill Companies, Inc.
("Standard & Poor's") and "_____" by Moody's
Investors Service, Inc. ("Moody's" and, together
with Standard & Poor's, the "Rating Agencies").
It is a condition to the issuance of the Class B
Certificates that they be rated "___" by Standard
& Poor's and "___" by Moody's. A security rating
does not address the frequency of principal
prepayments or the corresponding effect on yield
to holders of the Offered Securities. None of the
Seller, the Transferor, the Servicer, the
Indenture Trustee, the Owner Trustee, the Bond
Insurer or any other person is obligated to
maintain the rating on any Class of Offered
Securities.
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RISK FACTORS
Prospective investors in the Offered Securities should consider the
following risk factors (as well as the factors set forth under "Risk Factors"
in the Prospectus) in connection with the purchase of Bonds or Class B
Certificates. These factors are intended to identify the significant sources of
risk affecting an investment in the Offered Securities. Unless the context
indicates otherwise, any numerical or statistical information presented is
based upon the characteristics of the Initial Home Loans proposed to be
included in the Home Loan Pool as of the date of this Prospectus Supplement.
ACQUISITION OF SUBSEQUENT HOME LOANS FROM PRE-FUNDING ACCOUNT
VARIATION IN CREDIT QUALITY AND CHARACTERISTICS OF SUBSEQUENT HOME
LOANS. Any conveyance of Subsequent Home Loans is subject to the conditions
set forth in the Sale and Servicing Agreement, which conditions include among
others: (i) each Subsequent Home Loan must satisfy the representations and
warranties specified in the Sale and Servicing Agreement; (ii) the Transferor
will not select Subsequent Home Loans in a manner that it believes is adverse
to the interests of the holders of the Offered Securities and the Bond Insurer;
and (iii) as of each Cut-Off Date applicable thereto, all of the Home Loans,
including the Subsequent Home Loans to be conveyed to the Trust by the Seller
as of such Cut-Off Date, must satisfy certain aggregate statistical criteria
set forth in the Sale and Servicing Agreement. Although each Subsequent Home
Loan must satisfy the eligibility criteria referred to above at the time of its
transfer to the Trust, the Subsequent Home Loans may have been originated or
purchased by the Transferor using credit criteria different from those which
were applied to the Initial Home Loans and may be of a different credit quality
and have different loan characteristics from the Initial Home Loans. After the
transfer of the Subsequent Home Loans to the Trust, the aggregate statistical
characteristics of the Home Loan Pool may vary from those of the Initial Home
Loans as described herein. See "The Home Loan Pool -- Characteristics of
Initial Home Loans", and "-- Conveyance of Subsequent Home Loans" herein.
ABILITY OF SELLER TO ACQUIRE SUBSEQUENT HOME LOANS. The ability of
the Trust to acquire Subsequent Home Loans is dependent upon the ability of the
Transferor to acquire additional home loans that satisfy the eligibility
criteria for the transfer of Subsequent Home Loans. The ability of the
Transferor to acquire additional home 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 home loan financing and similar
types of consumer financing. The Transferor and the Seller 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 Home Loans.
EFFECT OF PREPAYMENT FROM PRE-FUNDING ACCOUNT. If the Pre-Funding
Account Deposit has not been fully applied to purchase Subsequent Home 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 Distribution Account and applied
to reduce the Class Principal Balance of the Offered Securities, on a
sequential basis. See "Prepayment and Yield Considerations" herein. Although no
assurances can be given, the Seller expects that the principal amount of the
Subsequent Home Loans sold to the Trust 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 Bonds from the
amount remaining in the Pre-Funding Account at the termination of the Funding
Period.
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ADDITIONAL EFFECT OF PREPAYMENTS ON YIELD
The extent to which the yield to maturity of an Offered Security 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 Home 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 Security purchased at
a discount, an investor should consider the risk that a slower than anticipated
rate of principal distributions to the holders of the Offered Securities
(including without limitation principal prepayments on the Home Loans) could
result in an actual yield to such investor that is lower than the anticipated
yield and, in the case of any Offered Security purchased at a premium, the risk
that a faster than anticipated rate of principal distributions to the holders
of the Offered Securities (including without limitation principal prepayments
on the Home 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 Securities will accelerate the amortization of the
Offered Securities relative to the amortization of the Home Loans; however, on
any Overcollateralization Stepdown Date, the distribution of any
Overcollateralization Reduction Amount to the holders of the Residual
Certificates, as described herein, can be expected to result in a slower
amortization of the Offered Securities and may temporarily delay principal
distributions to the holders of the Offered Securities on a Distribution Date.
Further, in the event that significant prepayments of principal distributions
are made to holders of the Offered Securities as a result of excessive
prepayments, liquidations, repurchases and purchases of the Home Loans or
distributions of Excess Spread or amounts remaining in the Pre-Funding Account,
there can be no assurance that holders of the Offered Securities 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 Bonds will be provided by the Guaranty Policy. Additional credit
enhancement with respect to the Bonds that will be utilized prior to the
Guaranty Policy will be provided by (i) the subordination of the Class B
Certificates and Residual Certificates, [(ii) the Reserve Fund], and (iii) the
overcollateralization from the principal attributable to the Residual
Certificates which results from the limited acceleration of the principal
amortization of the Offered Securities by the application of Excess Spread, as
described herein. The Class B Certificates will not be guaranteed by or
benefit form the Guaranty Policy, but will benefit from (i) the subordination
of the Residual Certificates, [(ii) the Reserve Fund and] (iii) the
overcollateralization from principal attributable to the Residual Certificates.
If the Home Loans experience higher rates of delinquencies, defaults and losses
(see "-- Additional Factors Affecting Delinquencies, Foreclosure, and Losses on
Home Loans" below) than initially anticipated in connection with the rating of
the Offered Securities, 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 Securities 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 Securities will bear the risk of any delays and losses resulting
from the delinquencies, defaults and losses on the Home Loans, unless with
respect to the Bonds such delays or losses are covered by the Guaranty Policy
and paid by the Bond Insurer as described herein.
While the distribution of Excess Spread to the holders of the Offered
Securities in the manner specified herein has been designed to produce and
maintain a given level of overcollateralization with
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respect to the Offered Securities, 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
Loan Losses will be allocated first to reduce the principal balance, if any,
attributable to the Residual Certificates, and then to reduce the Certificate
Principal Balance of the Class B Certificates. Any Net Loan Losses allocated
to the Certificate Principal Balance of the Class B Certificates will reduce
the Overcollateralization Amount with respect to the Offered Securities.
SUBORDINATION OF CLASS B CERTIFICATES. Distributions of interest and
principal on the Class B Certificates will be subordinated in priority of
payment to interest and principal due on the Bonds. Consequently, the Class B
Certificateholders may not receive any distributions for a Due Period until the
full amount of interest and principal on the Bonds on the related Distribution
Date has been distributed to the Bondholders. See "Description of Credit
Enhancement -- Subordination and Allocation of Losses" herein.
RATINGS OF BOND INSURER. The rating of the Bonds depends primarily on
an assessment by the Rating Agencies of the claims-paying ability of the Bond
Insurer. Any reduction in a rating assigned to the claims-paying ability of the
Bond Insurer below the rating initially given to the Bonds may result in a
reduction in the rating of the Bonds or any Class thereof. See "Description of
Credit Enhancement -- The Guaranty Policy" herein.
LIMITATIONS ON RIGHTS OF SECURITYHOLDERS
Prior to a Bond Insurer Default, the Bond Insurer will have the right
to exercise all rights, including voting rights, which the holders of the Bonds
are entitled to exercise under the Indenture (the "Bondholder Rights"), without
any consent of such holders; provided, however, that without the consent of
each holder of a Bond affected thereby, the Bond Insurer shall not exercise
such Bondholder Rights to amend the Indenture in any manner that would (i)
reduce the amount of, or delay the timing of, collections of payments on Home
Loans or distributions which are required to be made on any Bond, (ii)
adversely affect in any material respect the interests of the holders of any
Class of Bonds, or (iii) alter the rights of any such Bondholder to consent to
any such amendment. While the interests of the Bond Insurer will generally be
aligned with the Bondholders, in certain instances the Bond Insurer could
exercise the Bondholder Rights, or consent to the exercise of certain
Bondholder Rights, in a manner that is adverse to the interests of one or more
Bondholders. For example, under certain circumstances the Bond Insurer could
exercise certain Bondholder Rights, or refuse its consent to the exercise of
certain Bondholder Rights, in a manner that results in an unanticipated
prepayment of principal to the Bondholders when the prevailing market interest
rates at which such principal can be reinvested have declined. See "Prepayment
and Yield Considerations" herein.
Until the Bondholders have received all distributions of interest and
principal to which they are entitled and the Bond Insurer has been paid all
amounts owed to it under the Insurance Agreement, the rights of the Class B
Certificateholders, including voting rights, provided such holders under the
Sale and Servicing Agreement and the Trust Agreement will be subordinate to the
Bondholder Rights, and accordingly, the Class B Certificateholders will not be
entitled to exercise such rights. Notwithstanding such subordination, at all
times the Class B Certificateholders will retain their rights, and the exercise
of such rights will not be subordinate to the Bondholders or Bond Insurer, with
respect to an amendment of the Sale and Servicing Agreement or Trust Agreement
that would (i) reduce the amount of, or delay the timing of, collections of
payments on Home Loans or distributions which are required to be made on any
Class B Certificate, (ii) adversely affect in any material respect the
interests of the holders of any Class B
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<PAGE> 24
Certificate, or (iii) alter the rights of any such holder of a Class B
Certificate to consent to any such amendment.
DELINQUENCY STATUS OF INITIAL HOME LOANS
None of the Initial Home Loans were __ days or more late in their
scheduled monthly payments of principal and interest as of ________, 199_,
however, approximately ____% of the Initial Pool Principal Balance consists of
Initial Home Loans that have a first scheduled monthly payment due date
occurring after ________, 199__, and therefore, it was not possible for such
Initial Home Loans to have had a scheduled monthly payment that was ___ days or
more late as of ______, 199__. The inclusion of delinquent Initial Home Loans
in the Trust may adversely affect the rate of defaults and prepayments in
respect of the Home Loan Pool and the yield on the Offered Securities.
Furthermore, even if any delinquent Initial Home Loans become current after
__________, 199__, such Home 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 Home Loans, then the additional
credit enhancement available for the Offered Securities 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 Home Loans. See "-- Additional Credit Enhancement
Limitations -- Adequacy of Credit Enhancement" above.
ADDITIONAL FACTORS AFFECTING DELINQUENCIES, FORECLOSURES AND LOSSES ON HOME
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 Home Loans, and with respect
to any Secured Loans, the evaluation of the adequacy of the value of the
related Mortgaged Property or other secured property in relation to the Home
Loan, together with the amount of all liens senior to the lien of the Home Loan
(i.e., the "combined loan-to-value ratio"), is given less consideration, and in
certain cases no consideration, in underwriting the Home Loans. See "The
Transferor and Servicer -- Underwriting Criteria" herein. In general, the
credit quality of the Home Loans is lower than that of mortgage loans
conforming to the FNMA or FHLMC underwriting guidelines for first-lien, single
family mortgage loans. Accordingly, the Home 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
types of 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 Home Loans are likely to be more severe in
relation to the outstanding principal balance of such defaulted Home Loans,
because the costs incurred in the collection and liquidation of defaulted Home
Loans in relation to the smaller principal balances thereof are proportionately
higher than first-lien, single family mortgage loans, and because in the case
of Secured Loans such Home Loans are 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 the creditworthiness of the related borrower is the primary
consideration in the underwriting of the Home 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 by such borrower on the related Home Loan. Furthermore,
because the adequacy of the value of the related Mortgaged Property is given
less consideration in underwriting the Home Loan,
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no assurance can be given that in the case of Secured Loans any proceeds will
be recovered from the foreclosure or liquidation of the related Mortgaged
Property from a defaulted Home Loan.
ACQUISITIONS FROM THIRD PARTIES. A significant portion of the Home
Loans will have been acquired by the Transferor through purchases from a
network of correspondent lenders. See "The Home Loan Pool -- General" herein.
All of the Home 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 Home 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 lesser credit quality. In addition, the Transferor may have
acquired certain Home 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 Home
Loans. With respect to those Home 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 related seller or
originator in determining whether such Home Loans satisfy the representations
and warranties under the Sale and Servicing Agreement with respect thereto.
Accordingly, the Home 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 be in breach of the
applicable representations and warranties under the Sale and Servicing
Agreement, and if such breach materially and adversely affects the interests of
the holders of the Offered Securities or the Bond Insurer and cannot be cured
within the cure period, then such Home Loans may be deemed to be "Defective
Home Loans" and the Transferor may be required to repurchase such Defective
Home Loans, resulting in an unanticipated prepayment of principal to the
holders of the Offered Securities. See "-- Limitations on Repurchase or
Replacement of Defective Home Loans by Transferor" below.
LIMITED HISTORICAL DELINQUENCY AND LOSS INFORMATION. Since January
1995, the Servicer has substantially increased the volume of conventional home
loans, including additional types of home loans that it has originated,
purchased, sold and/or serviced, and thus, it has limited historical experience
with respect to the performance, including the delinquency and loss experience
and the rate of prepayments of these conventional home 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 under "The Transferor and Servicer --
Servicing Experience" herein may not be indicative of the performance of the
Home Loans included in the Home Loan Pool. Prospective investors should make
their investment determination based on the Home Loan underwriting criteria,
the availability of the Credit Enhancement described herein, the
characteristics of the Initial Home 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 ____% and ____% of the
Initial Pool Principal Balance will consist of Home Loans that either are
secured by Mortgaged Properties located or have the related borrowers residing
in the States of ________ and _______, respectively. Because of the relative
geographic concentration of the Home Loans within these States, delinquencies
and losses on the Home Loans may be higher than would be the case if the Home
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, accordingly,
the actual rates of delinquencies, defaults and losses on such Home Loans could
be higher than those currently experienced in the home lending and
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consumer finance industry for similar types of loans. In addition, with respect
to the Secured Loans in these States, 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 Secured Loans secured by Mortgaged
Properties located in the State of _________, the _________ residential real
estate market has experienced a sustained decline over the last several years.
In general, declines in the ___________ residential real estate market may
adversely affect the values of the Mortgaged Properties securing such Secured
Loans such that the principal balances of such Secured 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 ____________ Secured Loans could
be higher than those currently experienced in the home lending and consumer
finance industry in general.]
NO SERVICING ADVANCES. In the event of a delinquency or a default
with respect to a Home Loan, neither the Servicer nor any Subservicer will have
an obligation to advance scheduled monthly payments of principal and interest
with respect to such Home Loan. But, the Servicer or any Subservicer will make
reasonable and customary expense advances with respect to the Home Loans in
accordance with their servicing obligations. See "Description of the Transfer
and Servicing Agreements -- Servicing" herein.
DEPENDENCE ON SERVICER FOR SERVICING HOME LOANS. Pursuant to the Sale
and Servicing Agreement, the Servicer, or each Subservicer on behalf of the
Servicer, will perform the daily loan servicing functions for the Home Loans
that include, without limitation, the collection of payments from the Home
Loans, the remittance of funds from such collections to the Distribution
Account for distribution to the holders of the Offered Securities, the
bookkeeping and accounting for such collections and all other servicing
activities relating to the Home Loans, the preparation of the monthly servicing
and remittance reports pursuant to the Sale and Servicing Agreement and the
maintenance of all records and files pertaining to such servicing activities. A
majority of the holders of the Offered Securities or the Indenture Trustee,
with the consent of the Bond Insurer, or the Bond Insurer may remove the
Servicer upon the Servicer's failure to remedy an Event of Default under the
Sale and Servicing Agreement, in which event a successor servicer will be
appointed pursuant to the terms of the Sale and Servicing Agreement. Absent
such a transfer, the holders of the Offered Securities will be dependent upon
the Servicer to adequately and timely perform its servicing obligations and
remit to the Indenture Trustee the funds from the payments of principal and
interest received on the Home Loans, and with respect to Home 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
Home 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 Home Loans. The
principal and interest payments received on the Home Loans are the primary
source of funds for the distributions due to the holders of the Offered
Securities under the Sale and Servicing Agreement. Accordingly, the holders of
the Offered Securities 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 holders of the Offered Securities. See "The Transferor and
Servicer -- Servicing Experience" herein.
REALIZATION UPON DEFAULTED SECURED LOANS. Substantially all of the
Secured Loans are secured by junior liens, and the related senior liens are not
included in the Home Loan Pool. The primary risk to holders of Secured 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 Home Loan. See "Risk Factors --
Certain Factors Affecting Delinquencies, Foreclosures and
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Losses on Underlying Loans -- Limitations on Realization of Junior Liens" in
the Prospectus. In accordance with the loan servicing practices of the Servicer
and any Subservicer for home loans secured by junior liens in their respective
portfolios and as a result of the costs involved in realizing upon a defaulted
junior lien Secured Loan, neither the Servicer nor any Subservicer will (i)
pursue the foreclosure of a defaulted Secured 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 will
have no source of funds to satisfy the senior mortgage(s) or make payments due
to the senior mortgagee(s), and, therefore, holders of the Offered Securities
should not expect that any senior mortgage(s) will be kept current by the Trust
for the purpose of protecting any junior lien Secured 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 and to the approval of the Bond Insurer, with respect to any Secured
Loan, the Transferor will not be required to record assignments to the
Indenture Trustee of the Mortgages in the real property records for the Secured
Loans, but rather the Transferor, in its capacity as the Servicer, will retain
record title to such Mortgage on behalf of the Indenture Trustee and the
Bondholders. See "Description of the Transfer and Servicing Agreements -- Sale
and Assignment of Home Loans" herein.
Although the recordation of the assignments of the Mortgage in favor
of the Owner Trustee is not necessary to effect a transfer of the Secured Loans
to the Owner Trustee, if the Transferor or the Seller were to sell, assign,
satisfy or discharge any Secured Loan prior to recording the related assignment
in favor of the Owner Trustee, the other parties to such sale, assignment,
satisfaction or discharge may have rights superior to those of the Owner
Trustee. In some states, in the absence of such recordation of the assignments
of the Mortgages, the transfer to the Owner Trustee of the Secured 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 Secured Loans that are superior to those of the
Owner Trustee, then the holders of the Offered Securities could lose the right
to future payments of principal and interest from such Secured 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 Securities, including with respect to the Bonds, the Guaranty
Policy.
OTHER LEGAL CONSIDERATIONS. The underwriting, origination, servicing
and collection of the Home 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 Home Loans and Contracts" in the Prospectus.
The Transferor will be required to repurchase or replace any Home Loan which
did not comply with applicable state and federal laws and regulations as of the
Closing Date for any Initial Home Loan and as of the Subsequent Transfer Date
for any Subsequent Home Loan. See "-- Limitations on Repurchase or Replacement
of Defective Home 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 Home 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. If the Servicer or
any Subservicer is unable to collect all or part of the principal or interest
on any Home Loans because of a violation of the aforementioned laws, public
policies or general principles of equity, then the Trust may be delayed or
unable to make all distributions owed to the holders of the Offered Securities
to the extent any related losses are not otherwise covered by amounts available
from the credit enhancement provided for the Offered Securities, including,
with respect to the Bonds, the
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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 Home Loans if such violation
breaches a representation or warranty contained in the Sale and Servicing
Agreement.
LIMITATIONS ON REPURCHASE OR REPLACEMENT OF DEFECTIVE HOME LOANS BY TRANSFEROR
Pursuant to the Sale 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 Sale and Servicing Agreement
with respect to Defective Home Loans. If the Transferor cannot cure such
breach within a specified period of time, the Transferor is required to
repurchase such Defective Home Loans from the Trust or substitute other loans
for such Defective Home Loans. Although a significant portion of the Home
Loans will have been acquired from unaffiliated correspondent lenders, the
Transferor will make the representations and warranties for all such Home
Loans. To the extent that the Transferor has obtained any representations and
warranties from such unaffiliated correspondent lenders, the Transferor, and
the Indenture Trustee, on behalf of the Bondholders and the Bond Insurer, and
Owner Trustee, on behalf of the Class B Certificateholders, as the successors
to the Transferor's rights with respect thereto, will have an additional party
that is liable for the repurchase of any Home 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 "Description of the
Transfer and Servicing Agreements -- Sale and Assignment of Mortgage Assets" in
the Prospectus.
No assurance can be given that, at any particular time, the Transferor
will be capable, financially or otherwise, of repurchasing or replacing
Defective Home Loans in the manner described above, or that, at any particular
time, any unaffiliated lender from whom the Transferor obtained the Defective
Home Loans will be capable, financially or otherwise, of repurchasing any
Defective Home Loans from the Transferor. If the Transferor repurchases, or is
obligated to repurchase, defective home loans from any other series of bonds or
pass-through certificates, the financial ability of the Transferor to
repurchase Defective Home Loans from the Trust may be adversely affected. In
addition, other events relating to the Transferor and its home lending and
consumer finance operations can occur that would adversely affect the financial
ability of the Transferor to repurchase Defective Home Loans from the Trust,
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 Home Loan, and if applicable, such unaffiliated lender is
unable to repurchase or replace a Defective Home Loan it sold to the
Transferor, then the Servicer, on behalf of the Trust, will pursue other
customary and reasonable efforts, if any, to recover the maximum amount
possible with respect to such Defective Home Loan, and any resulting loss will
be borne by the holders of the Offered Securities to the extent that such loss
is not otherwise covered by amounts available from the credit enhancement
provided for the Offered Securities, including, with respect to the Bonds, 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 initial public offering of RAC in February 1996
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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 and the Transferor are
unable to arrange new or alternative methods of financing on favorable terms,
the Transferor may have to curtail its 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 Home Loans and to
repurchase any Defective Home Loans.
USE OF PROCEEDS
The proceeds from the sale of the Offered Securities, net of certain
expenses, will be used by the Seller as consideration for the purchase of the
Initial Home Loans from the Transferor and to fund the Pre-Funding Account
Deposit, the Capitalized Interest Account Deposit [and the Reserve Fund]. The
Transferor in turn will use all or a substantial portion of such proceeds from
the sale of the Initial Home 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 Home Loans and are secured by such
Initial Home Loans, and to replenish its working capital funds that were
previously used to originate or acquire the Home Loans not pledged under a
warehouse financing arrangement. See "Underwriting" herein.
DESCRIPTION OF THE TRUST
GENERAL
The Issuer, FIRSTPLUS Home Loan Owner Trust 199_ -__ , is a business
trust formed under the laws of the State of Delaware pursuant to the Trust
Agreement for the transactions described in this Prospectus Supplement. After
its formation, the Trust will not engage in any activity other than (i)
acquiring, holding and managing the Home Loans and the other assets of the
Trust and proceeds therefrom, (ii) issuing the Offered Securities, (iii) making
payments on the Offered Securities and (iv) engaging in other activities that
are necessary, suitable or convenient to accomplish the foregoing or are
incidental thereto or connected therewith.
The Class B Certificates represent an undivided ownership interest in
the Trust. The Residual Certificate will represent the residual interest in
the assets of the Trust after the aggregate principal balances of the Offered
Securities has been reduced to zero. It is expected that the Class B
Certificates will be sold to third party investors that are expected to be
unaffiliated with the Seller and the Transferor, the Servicer or the Trust and
the Residual Certificate will be retained by the Transferor. The Trust will
initially be capitalized with equity equal to the Certificate Principal Balance
of the Class B Certificates of $____________, [excluding amounts deposited in
the Reserve Fund]. Class B Certificates with an original Certificate Principal
Balance of $______________ will be sold to the Transferor and the remaining
Class B Certificates will be sold to third party investors that are expected to
be unaffiliated with the Seller, the Transferor, the Servicer or their
affiliates or the Trust. After the Closing Date, the Transferor may sell the
Class B Certificates and Residual Certificates acquired by it [and its interest
in distributions from the Reserve Fund] to a limited liability company or other
entity, which, in either case, will be directly or indirectly, an entity whose
equity will be initially owned by the Seller. [In the case of any such sale to
such entity, such entity will become the "Seller" for purposes of the events
described under "_____________________________" in the Prospectus and for other
purposes.] The equity of the Trust,
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together with the net proceeds from the sale of the Bonds, will be used by the
Trust to purchase the Initial Home Loans from the Seller pursuant to the Sale
and Servicing Agreement and to fund the Pre-Funding Account, the Capitalized
Interest Account [and the Reserve Fund].
The assets of the Trust will primarily include a Home Loan Pool
consisting of (1) Secured Loans which will be secured by either (i) Mortgages
or (ii) security instruments creating a lien on personal property such as home
appliances or furnishings; and (2) Unsecured Loans which will not be secured by
any interest in real or personal property. See "The Home Loan Pool" herein.
The assets of the Trust will also include (i) payments in respect of the Home
Loans of interest and principal received after the applicable Cut-off Date;
(ii) amounts on deposit in the Pre- Funding Account and the Capitalized
Interest Account until the expiration of the Funding Period, (iii) the Guaranty
Policy issued by the Bond Insurer; [(iv) amounts on deposit in the Reserve
Fund], (v) the Distribution Account; and (vi) certain other ancillary or
incidental funds, rights and properties related to the foregoing.
The Servicer will service the Home Loans pursuant to the Sale and
Servicing Agreement, the Administration Agreement and the Trust Agreement
(collectively with the Indenture, the "Transfer and Servicing Agreements") and
will be compensated for such services as described under "Description of the
Transfer and Servicing Agreements--Servicing" herein.
The Trust's principal offices are in _______________, in care of
______________, as Owner Trustee, at the address set forth below under "--The
Owner Trustee".
CAPITALIZATION OF THE TRUST
The following table illustrates the capitalization of the Trust as of
the Closing Date, as if the issuance and sale of the Offered Securities had
taken place on such date:
Class A-1 Bonds $________________
Class A-2 Bonds $________________
Class A-3 Bonds $________________
Class B Certificates $________________
Total $________________
THE OWNER TRUSTEE
___________________ is the Owner Trustee under the Trust Agreement.
_________________ is a _____________ and its principal offices are located at
______________________________. [The Transferor, the Seller and their
affiliates may maintain normal commercial banking relations with the Owner
Trustee and its affiliates.]
THE HOME LOAN POOL
GENERAL
The Home Loan Pool will consist of the collective pool of the Initial
Home Loans together with any Subsequent Home Loans conveyed to the Trust after
the Closing Date. All of the Home Loans will be Conventional Loans. The Home
Loans have scheduled monthly payment dates throughout a month.
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<PAGE> 31
Each Home Loan bears interest computed on a simple interest basis at a fixed
rate of interest (the "Home Loan Rate"). The Home Loans have scheduled monthly
payment dates throughout a month. No Home Loan provides for deferred interest
or negative amortization.
All of the Home Loans will be conventional loans (i.e., not insured or
guaranteed by a governmental agency) ("Conventional Loans"). The Home Loans
will consist of loans for which the related proceeds were used to finance (i)
property improvements, (ii) the acquisition of personal property such as home
appliances or furnishings, (iii) debt consolidation, (iv) the purchase or
refinancing of single family residential property, or (v) a combination of
property improvements, debt consolidation and other consumer purposes, which
loans are marketed by the Transferor under the name "BusterPlus(TM) Loans".
Substantially all of the Mortgages for the Secured Loans will be junior (i.e.,
second, third, etc.) in priority to one or more senior liens on the related
Mortgaged Properties, which will consist primarily of owner occupied single
family residences.
Generally, the Home 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 Home Loans
will have been underwritten, re-underwritten or reviewed to determine whether
such Home Loans comply with the underwriting standards of the Transferor.
For a description of the underwriting criteria applicable to the Home
Loans, see "The Transferor and Servicer -- Underwriting Criteria" herein. All
of the Home Loans will be acquired by the Transferor and sold by the Transferor
to the Seller, and pursuant to the Sale and Servicing Agreement, the Seller
will sell, convey, transfer and assign the Home Loans to the Indenture Trustee
for the benefit of the holders of the Offered Securities and the Bond Insurer.
The Trust will be entitled to all payments of interest and principal received
in respect of the Home Loans after (i) ________, 199_ Cut-off Date with
respect to the Initial Home Loans and (ii) the related Cut-off Date with
respect to the Subsequent Home Loans.
CHARACTERISTICS OF INITIAL HOME LOANS
The following is a brief description of certain terms of the Initial
Home Loans proposed to be included in the Home Loan Pool as of the date of this
Prospectus Supplement. Unless otherwise indicated, this description does not
take into account any Subsequent Home Loans that may be added to the Home 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 Home Loans intended for inclusion in the Home Loan Pool,
substitute comparable loans therefor, or add comparable loans thereto; however,
the aggregate principal balance of Initial Home Loans so replaced or added
cannot exceed __% of the Initial Pool Principal Balance and so removed may not
exceed $______________ and any such Initial Home Loans so added must be
approved by the Bond Insurer. To the extent that, prior to the Closing Date,
home loans are removed from or added to the Home Loan Pool, an amount equal to
the aggregate principal balances of such home 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 Home Loans proposed to be included in the Home Loan Pool as of the date
of this Prospectus Supplement may vary in certain respects from comparable
information based on the actual
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<PAGE> 32
composition of the Home Loan Pool at the Closing Date. In addition, after
_________, 199__ Cut-off Date, the actual Home Loan Pool may vary from the
description below due to a number of factors, including prepayments after
________, 199_ Cut-off Date or the purchase of any Subsequent Home Loans after
the Closing Date. See "-- Conveyance of Subsequent Home Loans" below. A
schedule of the Initial Home Loans included in the Home Loan Pool as of the
Closing Date will be attached to the Sale and Servicing Agreement delivered to
the Indenture Trustee upon delivery of the Offered Securities. A current
report on Form 8-K containing a description of the Home Loans included in the
final Home Loan Pool as of the end of the Funding Period will be filed with the
Commission.
The Initial Home Loans included in the initial Home Loan Pool will
consist of approximately ______ loans having an Initial Pool Principal Balance
of approximately $___________. The Initial Home Loans (by aggregate Cut-Off
Date Principal Balance) will have the characteristics set forth in the tables
below.
LOAN TYPE
<TABLE>
<CAPTION>
NUMBER PERCENT OF TOTAL
OF INITIAL AGGREGATE BY AGGREGATE
LOAN TYPE HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------- ---------- ----------------- -----------------
<S> <C> <C> <C>
---------- ----------------- -----------------
Totals . . . . . . . . . . . . . . . . ========== ================= =================
</TABLE>
HOME LOAN RATE
<TABLE>
<CAPTION>
RANGE OF NUMBER PERCENT OF TOTAL
HOME LOAN OF INITIAL AGGREGATE BY AGGREGATE
RATES (%) HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------- ---------- ----------------- -----------------
<S> <C> <C> <C>
Totals . . . . . . . . . . . . . . . . ========== ================= =================
</TABLE>
The weighted average Home Loan Rate of the Initial Home Loans as of
________, 19__ was approximately _____% per annum.
CUT-OFF DATE LOAN PRINCIPAL BALANCES
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<PAGE> 33
<TABLE>
<CAPTION>
RANGE OF PERCENT OF TOTAL
CUT-OFF DATE NUMBER OF INITIAL AGGREGATE BY AGGREGATE
PRINCIPAL BALANCE ($) HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
Totals . . . . . . . . . . . . . . . . . . . . ========== ================= ================
</TABLE>
The average principal balance of the Initial Home Loans as of ______,
19__ was approximately $______________.
ORIGINAL LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
RANGE OF PERCENT OF TOTAL
PRINCIPAL BALANCE NUMBER OF INITIAL AGGREGATE BY AGGREGATE
AT ORIGINATION($) HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
Totals . . . . . . . . . . . . . . . . . . . . ========== ================= =================
</TABLE>
The average principal balance of the Initial Home Loans at origination
was approximately $___________.
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<PAGE> 34
GEOGRAPHIC CONCENTRATION
<TABLE>
<CAPTION>
PERCENT OF TOTAL
NUMBER OF INITIAL AGGREGATE BY AGGREGATE
STATE HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----- ---------- ----------------- -----------------
<S> <C> <C> <C>
---------- ----------------- -----------------
Totals . . . . . . . . . . . . . . . . . . . . ========== ================= =================
</TABLE>
REMAINING TERM TO MATURITY
<TABLE>
<CAPTION>
RANGE OF PERCENT OF TOTAL
REMAINING TERM TO NUMBER OF INITIAL AGGREGATE BY AGGREGATE
MATURITY (MONTHS) HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- ---------- ----------------- -----------------
<S> <C> <C> <C>
Totals . . . . . . . . . . . . . . . . . . . . ========== ================= ================
</TABLE>
The weighted average remaining term to maturity of the Initial Home
Loans as of ______, 19__ was approximately ____ months.
MONTHS SINCE ORIGINATION
<TABLE>
<CAPTION>
PERCENT OF
AGE NUMBER OF INITIAL AGGREGATE TOTAL BY AGGREGATE
(IN MONTHS) HOME LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------- ---------- ----------------- ------------------
<S> <C> <C> <C>
Totals . . . . . . . . . . . . . . . . . . . . ========== ================= ==================
</TABLE>
The weighted average age of the Initial Home Loans as of ________,
19___ was approximately _____ months.
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<PAGE> 35
CONVEYANCE OF SUBSEQUENT HOME LOANS
Under the Sale and Servicing Agreement the obligation of the Trust to
purchase Subsequent Home Loans on a Subsequent Transfer Date for assignment to
the Home Loan Pool is subject to the requirements described under "Description
of the Transfer and Servicing Agreements -- Conveyance of Subsequent Home
Loans" in the Prospectus, as well as the following additional requirements: (i)
generally such Subsequent Home 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 Home Loans may not exceed ___ years; (iii)
generally each such Subsequent Home Loan will have an interest rate of not less
than ____%, and a scheduled maturity no later than ________, 20___; (iv) such
Subsequent Home 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 Home Loans; and (v) following the purchase of such
Subsequent Home Loans by the Trust, the Home Loans included in the Home Loan
Pool (including the Subsequent Home Loans purchased by the Trust after the
Closing Date) (a) will have a weighted average mortgage interest rate of at
least _____% and; (b) will have a weighted average term to maturity as of each
respective Cut-Off Date of approximately ____ to ___ months. Following the
transfer of such Subsequent Home Loans to the Home Loan Pool, the aggregate
statistical characteristics of the Home Loans then held in the Home Loan Pool
may, and likely will, vary from those of the Initial Home Loans included in the
Initial Home Loan Pool. See "Risk Factors -- Acquisition of Subsequent Home
Loans from Pre-Funding Account" herein.
THE SELLER
FIRSTPLUS INVESTMENT CORPORATION (the "Seller") is a Nevada
corporation, formerly known as Remodelers Investment Corporation, organized in
1995 and is a wholly owned subsidiary of RAC. The Seller was formed as a
limited purpose finance company to effect the securitization of conventional
property improvement loans, other consumer loans and/or debt consolidation
loans, property improvement loans and manufactured housing loans partially
insured by the FHA under the Title I Program, and other types of assets.
The Seller will acquire from the Transferor all of its right, title
and interest in and to the Home Loans to the Seller. In turn, the Seller will
sell, convey, transfer and assign the Home Loans to the Owner Trustee pursuant
to the Sale and Servicing Agreement for the benefit of the Trust.
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
Home Loans to the Seller (in such capacity, the "Transferor"). FFI also will
service the Home Loans under the Sale 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 property improvement loans, other
consumer loans and/or debt consolidation loans. The Transferor presently
maintains a staff of approximately ___ employees, including __ experienced
collectors responsible for delinquent and defaulted
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<PAGE> 36
loans. As of ___________, 199_, FFI administered and serviced approximately
______ loans representing approximately $______ million in principal balance
(including loans subserviced by others).
In February 1996, RAC completed an initial public offering of its
common stock. As of __________, 199_, 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
$___________, total liabilities of $__________ and total stockholders' equity
of $__________, and for the ___ months ended __________, 199_ set forth net
income of $__________. Additionally, as of __________, 199_, the RAC
Consolidated Financial Statements, as audited, which included RAC, FFI and
SFAC, set forth total assets of $________, total liabilities of $_______and
total stockholders' equity of $___________, and for the fiscal year ended
__________, 199_ set forth net income of $___________. Additionally, as of
____________, 199_, the financial statements of FFI, as audited, set forth
total assets of $__________, total liabilities of $_________, and total
stockholder's equity of $___________. As of ___________, 199_, the RAC
Consolidated Balance Sheet, as audited, which included RAC, FFI and SFAC, set
forth total assets of $___________, total liabilities of $___________ and total
stockholders' equity of $_________. 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 Home Loans pursuant to the Sale
and Servicing Agreement and be entitled to the Servicing Fee and additional
servicing compensation for serving as the Servicer. See "-- Servicing
Experience" below and "Description of the Transfer and Servicing Agreements --
Servicing" herein.
UNDERWRITING CRITERIA
The Transferor believes that all Conventional Loans underwritten by it
will have been underwritten pursuant to the Transferor's underwriting
requirements. Generally, the underwriting standards of the Transferor place a
greater emphasis on the creditworthiness of the borrower than on the underlying
collateral in evaluating the likelihood that a borrower will be able to repay a
Conventional Loan.
Generally, the Conventional 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 in the case of a secured loan 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.
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<PAGE> 37
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.
REPURCHASE OR SUBSTITUTION OF HOME 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 Home Loan, or
(ii) on or before the Determination Date next succeeding the end of such 60 day
period, to repurchase such Defective Home Loan at a price (the "Purchase
Price") equal to the Principal Balance of such Defective Home Loan as of the
date of repurchase, plus all accrued and unpaid interest on such Defective Home
Loan to and including the date of repurchase computed at the Home Loan Rate. In
lieu of repurchasing a Defective Home Loan, the Transferor may replace such
Defective Home Loan with one or more Qualified Substitute Home Loans. If the
aggregate outstanding principal balance of the Qualified Substitute Home
Loan(s) is less than the outstanding principal balance of the Defective Home
Loan(s) plus accrued interest thereon, the Transferor will also remit for
distribution to the holders of the Offered Certificates an amount equal to such
shortfall. As used herein, a "Qualified Substitute Home Loan" is a home loan
that (i) has an interest rate of not less than (and not more than two
percentage points more than) the Home Loan Rate for the Defective Home Loan
which it replaces (each, a "Deleted Home Loan"), (ii) matures not more than one
year later than and not more than one year earlier than the Deleted Home 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 Home Loan as of such date, (iv) has a lien priority no
lower than the Deleted Home Loan, (v) complies as of the date of substitution
with each representation and warranty set forth in the Sale and Servicing
Agreement with respect to the Home Loans, and (vi) has a borrower with an equal
or better credit grade classification than the borrower with respect to the
Deleted Home Loan. The repurchase and/or substitution obligation described
above will constitute the sole remedy available to the holders of the Offered
Certificates with respect to a Defective Home Loan.
No assurance can be given that, at any particular time, the Transferor
will be capable, financially or otherwise, of repurchasing Defective Home Loans
or substituting Qualified Substitute Home Loans for Defective Home Loans in the
manner described above. If the Transferor repurchases, or is obligated to
repurchase, Defective Home Loans from any additional series of bonds or
pass-through certificates (each, an "Additional Series"), the financial ability
of the Transferor to repurchase defective home loans from the Trust may be
adversely affected. In addition, other events relating to the Transferor and
its mortgage home lending and consumer finance operations can occur that would
adversely affect the financial ability of the Transferor to repurchase
Defective Home Loans from the Trust, 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 Home Loan, the
Servicer, on behalf of the Trust, will pursue other customary and reasonable
efforts, if any, to recover the maximum amount possible with respect to such
Defective Home Loan. If the Servicer is unable to collect all amounts due to
the Trust with respect to such Defective Home Loan, the resulting loss will be
borne by the holders of the Offered Certificates to the extent that such loss
is not otherwise covered by amounts available from the credit enhancement
provided for the Offered Securities. See "Risk Factors -- Additional Credit
Enhancement Limitations" and "-- Limitations on Repurchase or Replacement of
Defective Home Loans by Transferor" herein.
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<PAGE> 38
[The Seller and the Transferor each have the option (1) to remove Home
Loans and substitute Qualified Substitute Home Loans during the three month
period beginning on the Closing Date up to an aggregate amount of not more than
____%, without Bond Insurer approval, and ____%, with Bond Insurer approval, of
the aggregate Cut-Off Date Principal Balances of the Home Loans, and (2) to
repurchase any Home Loan incident to the foreclosure, default or imminent
default thereof at any time after the Closing Date. See "Description of the
Trust Property -- Additions, Substitution and Withdrawal of Assets" in the
Prospectus.]
SERVICING EXPERIENCE
Since January 1995, the Servicer has substantially increased the
volume of conventional home loans, including additional types of home 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
these conventional home 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 performance of the Home Loans
included in the Home 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 ___________, 199_.
A substantial portion of the Servicer's entire loan servicing
portfolio consists of loans securitized by the Servicer in its capacity as the
Transferor and sold to various trusts in connection with several prior series
of mortgage pass-through certificates issued and sold through public offerings
and private placements . 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. As of _________, 199_, 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
Except as otherwise provided herein, no principal payments will be
made on the Class A-2 Bonds until the Class A-1 Bonds have been paid in full
and no principal payments will be made on the Class A-3 Bonds until the Class
A-2 Bonds have been paid in full. In addition, except as otherwise provided,
no distributions of principal with respect to the Class B Certificates will be
made until the Distribution Date after the Distribution Date on which the Class
A-3 Bonds have been paid in full. See "Description of the Offered Securities
- -- Distributions on the Offered Securities" herein. As the rate of payment of
principal of each Class of Bonds and the Class B Certificates depends primarily
on the rate of payment (including prepayments) of the principal balance of the
Home Loans, final payment of any class of Bonds and the final distribution in
respect of the Class B Certificates could occur significantly earlier than
their respective final scheduled Distribution Dates. Holders of the Offered
Securities will bear the risk of being able to reinvest principal payments on
the Offered Securities at yields at least equal to the yield on their
respective Offered Securities. No prediction can be made as to the rate of
prepayments on the Home Loans in either stable or changing interest rate
environments. Any reinvestment risk resulting from the rate of prepayment of
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the Home Loans and the distribution of such payments to the holders of the
Offered Securities will be borne entirely by the holders of the Offered
Securities.
The subordination of the Class B Certificates to the Bonds will
provide limited protection to the Bondholders against losses on the Home Loans.
Accordingly, the yield on the Class B Certificates will be extremely sensitive
to the loss experience of the Home Loans and the timing of any such losses. If
the actual rate and amount of losses experienced by the Home Loans exceed the
rate and amount of such losses assumed by an investor, the yield to maturity on
the Class B Certificates may be lower than anticipated.
Each Home Loan bears interest computed on a simple interest basis at a
fixed rate of interest (the "Home Loan Rate"). The interest portion of each
monthly payment on a Home Loan is calculated as the product of one-twelfth of
the Home Loan Rate and the principal balance thereof immediately prior to the
monthly payment date.
The effective yield to the holders of the Offered Securities will be
slightly lower than the yield otherwise produced by the applicable Interest
Rate or Pass Through 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 Offered Securities
- -- Distributions on the Offered Securities" herein. This delay will result in
funds being passed through to the holders of the Offered Securities
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 Securities purchased at a price greater or less
than par.
The rate of principal payments on the Offered Securities, the
aggregate amount of each interest payment on the Offered Securities and the
yield to maturity on the Offered Securities will be directly related to and
affected by the rate and timing of principal reductions on the Home Loans. The
principal reductions on such Home 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, effect the early retirement of the Offered Securities, on any
Distribution Date following the Determination Date on which the sum of the
Class Principal Balance of the Bonds and the Certificate Principal Balance of
the Class B Certificates is less than 10% of the sum of the Initial Pool
Principal Balance, plus the aggregate Cut-off Date Principal Balance of the
Subsequent Home Loans conveyed to the Trust. Furthermore, to the extent so
provided in the Indenture, the Bond Insurer may be entitled to exercise a
similar right to effect an optional redemption of the Bonds. See "Description
of the Offered Securities -- Termination" herein.
The "weighted average life" of an Offered Security refers to the
average amount of time that will elapse from the Closing Date to the date each
dollar in respect of principal of such Offered Security is repaid. The weighted
average life of the Offered Security will be influenced by, among other
factors, the rate at which principal reductions occur on the Home Loans, the
rate at which Excess Spread is distributed to holders of the Offered Securities
as described herein, and the extent to which any Overcollateralization
Reduction Amount is paid to the holders of the Residual Certificate as
described herein. If substantial principal prepayments on the Home Loans are
received from unscheduled prepayments, liquidations or repurchases, then the
distributions to the holders of the Offered Securities resulting from such
prepayments may significantly shorten the actual average life of
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the Offered Securities than would otherwise be the case. If the Home Loans
experience delinquencies and defaults in the payment of principal, then the
holders of the Offered Securities 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 Securities than would otherwise be the case. However, to the
extent that the Principal Balances from Liquidated Home Loans are included in
the principal distributions on the Offered Securities as a result of
delinquencies and defaults on the Home Loans (and at such time that the
Overcollateralization Amount has been reduced to zero), then the holders of the
Offered Securities 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 Securities than would otherwise be the case. Interest
shortfalls on the Home Loans due to principal prepayments in full and
curtailments and any resulting shortfall in amounts distributable on the
Offered Securities will be covered to the extent of amounts available from the
credit enhancement provided for the Offered Securities. See "Risk Factors --
Additional Credit Enhancement Limitations -- Adequacy of Credit Enhancement"
herein.
The rate and timing of principal reductions on the Home 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 similar
types of loans and the availability of funds for such loans. The Home 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 similar types of
loans of a comparable term and risk level. If prevailing interest rates were to
fall significantly below the respective Home Loan Rates on the Home Loans, the
rate of prepayment (and refinancing) would be expected to increase. Conversely,
if prevailing interest rates were to rise significantly above the respective
Home Loan Rates on the Home Loans, the rate of prepayment on the Home 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 Seller and the Transferor make no
representations as to the particular factors that will affect the prepayment of
the Home Loans, as to the relative importance of such factors, or as to the
percentage of the principal balance of the Home Loans that will be paid as of
any date.
Distributions of principal to holders of the Offered Securities at a
faster rate than anticipated will increase the yield on Offered Securities
purchased at a discount but will decrease the yield on Offered Securities
purchased at a premium, which distributions of principal may be attributable to
scheduled payments and prepayments of principal on the Home 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 Securities (including without
limitation prepayments on the Home 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 Securities 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 Home Loans, and the
recoveries, if any, on defaulted Home Loans and foreclosed properties, will
also affect the rate and timing of principal payments on the Home Loans, and
accordingly, the weighted average life of the Offered Securities, and could
cause a delay in the payment of principal or a slower rate of principal
amortization to the holders of Offered Securities. Alternatively, the
occurrence of delinquencies and defaults on the Home Loans could result in an
increase in principal payments or more rapid rate of principal amortization of
the Offered Securities as a result of the inclusion of the Principal Balances
from Liquidated Home Loans in the amounts distributable to the holders of the
Offered Securities at such time that the Overcollateralization Amount has been
reduced to zero. Certain factors may influence such delinquencies and defaults,
including origination and underwriting
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standards, loan-to-value ratios and delinquency history. In general, defaults
on home 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
similar types of home loans. The rate of default on Home Loans with high
loan-to-value ratios, secured by junior liens or unsecured may be higher than
that of home 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 Home Loans will be affected by the general
economic condition of the region of the country in which the related Mortgaged
Properties are located or the related borrower is residing. See "The Home 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 Bonds
before other Classes, holders of the Classes of Offered Securities having a
later priority of principal distribution bear a greater risk of losses from
delinquencies and defaults on the Home Loans than holders of the Classes of
Offered Securities having earlier priorities for payment of principal. In
addition, because principal distributions are paid to the Bondholders before
the Class B Certificateholders, the Class B Certificateholders will bear a
greater risk of such losses than holders of the Bonds. See "Description of
Credit Enhancement -- Subordination and Allocation of Losses" herein.
Nevertheless, even if losses are allocated to any Class of Bonds, 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 Home Loans and such
data may not be reflective of conditions applicable to the Home Loans. No
prepayment history is generally available with respect to the types of Home
Loans included in the Home Loan Pool or similar types of loans, and there can
be no assurance that the Home Loans will achieve or fail to achieve any
particular rate of principal prepayment. A number of factors suggest that the
prepayment experience of the Home 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 Home 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 Home 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 Home 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 Home Loan Pool include general economic conditions, the amounts of and
interest rates on the 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, appliances and furnishings. Given these characteristics, the
Home 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 Securities relative to the principal
amortization of the Home Loans. If on any Distribution Date, the Required
Overcollateralization Amount exceeds the Overcollateralization Amount, any
Excess Spread
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will be distributed to the holders of the Offered Securities as an amount
attributable to principal. Once the Overcollateralization Amount equals the
Required Overcollateralization Amount for such Distribution Date (i.e., the
Excess Overcollateralization Amount equals or exceeds zero), distributions of
any Excess Spread to the holders of the Offered Securities 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 Security will be affected by the rate at which Excess Spread is
distributed to the holders of the Offered Securities. If the actual rate of
such Excess Spread distributions on the Offered Securities is slower than the
rate anticipated by an investor who purchases an Offered Security 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 Security 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 Home Loans during the related Due Period.
An additional overcollateralization feature has been designed to limit
the accelerated amortization of the Offered Securities 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 Securities
on such Distribution Date shall instead be distributed to the holder of the
Residual Certificates, thereby reducing the rate of and under certain
circumstances delaying the principal amortization with respect to the Offered
Securities, 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 Security will be affected by the extent to which any
Overcollateralization Reduction Amount is paid to the holder of the Residual
Certificates in lieu of payment of principal to the holders of the Offered
Securities. If the actual distributions of any Overcollateralization Reduction
Amount to the holder of the Residual Certificate occurs sooner than anticipated
by an investor who purchases an Offered Security 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
holder of the Residual Certificate occurs later than anticipated by an investor
who purchases an Offered Security 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, distributable on any
Distribution Date will be affected by the Required Overcollateralization
Amount, which is affected by the actual default and delinquency experience of
the Home Loan Pool.
REINVESTMENT RISK
The reinvestment risk with respect to an investment in the Offered
Securities 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 Securities are likely to receive
an increased amount of principal payments from the Home 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 Securities. Conversely, during
periods of rising interest rates, holders of the Offered Securities are likely
to receive a decreased amount of principal prepayments from the Home 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
Securities.
SCHEDULED FINAL DISTRIBUTION DATES
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The "Scheduled Final Distribution Dates" for each Class of Offered
Securities as set forth in the "Summary of Terms" herein have been calculated
generally in accordance with the Modeling Assumptions below and the additional
assumption that no prepayments, delinquencies, liquidations, substitutions or
repurchases are experienced on the Home Loans. The actual maturity of any Class
of Offered Securities may be substantially earlier, and in certain instances
could be later, than the Scheduled Final Distribution Dates set forth herein
under "Summary of Terms".
WEIGHTED AVERAGE LIFE OF THE OFFERED SECURITIES
The following information is given solely to illustrate the effect of
prepayments of the Home Loans on the estimated weighted average lives of the
Offered Securities under certain stated assumptions and is not a prediction of
the prepayment rate that might actually be experienced by the Home 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 Securities will be influenced by the rate at which principal of the
Home Loans is paid, which may be in the form of scheduled amortization or
prepayments (for this purpose, the term "prepayment" includes reductions of
principal resulting from unscheduled full or partial prepayments, refinancings,
liquidations and write-offs due to defaults, casualties or other dispositions
and repurchases by or on behalf of the Transferor or the Seller), the rate at
which Excess Spread is distributed to holders of the Offered Securities as
described herein, and the extent to which any Overcollateralization Reduction
Amount is distributed to the or the holder of the Residual Certificate as
described herein.
Prepayments on loans such as the Home 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 home loans for
that month. As used in the following tables, the column headed "0%" assumes
that none of the Home Loans is prepaid before maturity. Neither the Transferor
nor the Seller make any representations about the appropriateness of the CPR
model.
Modeling Assumptions. For purposes of preparing the tables below, the
following assumptions (the "Modeling Assumptions") have been made.
(i) all scheduled principal payments on such the Home 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 _____ 1, 199_, and no delinquencies or losses occur on
the Home Loans;
(ii) the scheduled payments on the Home Loans have been calculated
on the outstanding principal balance (prior to giving effect to prepayments),
the Home Loan Rate and the remaining term to stated maturity such that the Home
Loans will fully amortize by their remaining term to stated maturity;
(iii) all scheduled payments of interest and principal in respect of
the Home Loans have been made through the applicable Cut-off Date;
(iv) the Home Loans in the Home Loan Pool prepay monthly at the
specified percentages of CPR and no optional termination of the Offered
Securities occurs;
(v) all prepayments in respect of the Home Loans include 30 days
of interest thereon;
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(vi) the Closing Date for the Offered Securities is ______, 199_
and each year will consist of 360 days;
(vii) cash distributions are received by the holders of the Offered
Certificates on the 20th day of each month, commencing in __________ 199_;
(viii) the Required Overcollateralization Amount will equal
$___________ and will be reduced in accordance with the terms of the Indenture;
(ix) the applicable Bond Insurer Premium for each Class of Bonds
has been added to the Interest Rate for each such Class of Bonds, and the Pass
Through Rate for the Class B Certificates is _____%;
(x) the additional fees deducted from the proceeds of the Home
Loans include the Indenture Trustee's fee, the Owner Trustee's Fee, the
Custodian's fee, the Servicing Fee and the Excess Servicing Fee;
(xi) all of the Pre-Funding Account Deposit is used to acquire
Subsequent Home Loans in accordance with the schedule set forth below, and
prior to that date, the Pre-Funding Account Deposit accrues interest at
approximately ____% per annum;
(xii) no reinvestment income from any Trust account is earned and
available for distribution; and
(xiii) the Home Loan Pool consists of ___ Home Loans having the
following characteristics:
<TABLE>
<CAPTION>
INITIAL HOME NET HOME
HOME LOAN LOAN REMAINING TERM TO ORIGINAL TERM OF
LOAN INTEREST INTEREST MATURITY AMORTIZATION (IN ASSUMED DELIVERY
NUMBER PRINCIPAL BALANCE RATE RATE (IN MONTHS) MONTHS) OF HOME LOANS
------ ----------------- ---- ---- ----------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
The tables on the following ___ pages indicate at the specified percentages of
CPR the corresponding weighted average life of each Class of Bonds and the
Class B Certificates.
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[INSERT APPLICABLE DEC/PREPAYMENT TABLES
FOR EACH CLASS OF BONDS AND THE CLASS B CERTIFICATES]
The foregoing tables have been prepared based on the Modeling
Assumptions (including the assumptions regarding the characteristics and
performance of the Home Loans which may differ from the actual characteristics
and performance thereof) and should be read in conjunction therewith. It is
unlikely that the Home Loans will prepay at a constant rate or that all of the
Home Loans will prepay at the same rate. Moreover, the Home Loans actually
included in the Home Loan Pool will not conform to the assumptions made as to
the characteristics of such Home Loans in preparing the above tables. In fact,
the characteristics of the Home Loans will differ in many respects from such
assumed characteristics. See "The Home Loan Pool" herein. To the extent that
the Home Loans actually included in the Home Loan Pool have characteristics
that differ from those assumed in preparing the foregoing tables, the Offered
Certificates are likely to have weighted average lives that are shorter or
longer than those indicated.
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DESCRIPTION OF THE OFFERED SECURITIES
GENERAL
The FIRSTPLUS Home Loan Owner Trust 199_-__ (the "Trust") will issue
$___________ aggregate principal amount of Class A-1 ___% Asset Backed Bonds
(the "Class A-1 Bonds"), $_____________ aggregate principal amount of Class A-2
___% Asset Backed Bonds (the "Class A-2 Bonds") and $_____________ aggregate
principal amount of Class A-3 ___% Asset Backed Bonds (the "Class A-3 Bonds"
and, together with the Class A-1 Bonds and the Class A-2 Bonds, the "Bonds")
pursuant to an Indenture to be dated as of _________, 19__ (the "Indenture"),
between the Trust and ____________, as Indenture Trustee (the "Indenture
Trustee"). The Trust will also issue $___________ aggregate principal amount
of Class B ___% Asset Backed Certificates (the "Class B Certificates" and,
together with the Bonds, the "Offered Securities") pursuant to the terms of a
Trust Agreement to be dated as of ____, 199_ (the "Trust Agreement"), between
the Seller and the Owner Trustee. The Trust will also issue a residual
certificate (the "Residual Certificate") which represents a residual interest
in the assets of the Trust remaining after the aggregate principal balances of
the Offered Securities have been reduced to zero. The Residual Certificate is
not being offered hereby. The Bonds will be secured by the assets of the Trust
pursuant to the Indenture. The Class B Certificates will represent an
undivided ownership interest in the Trust.
On the Closing Date, the original principal balance of the Class B
Certificates (the "Original Certificate Principal Balance") will equal the
excess of the Assumed Pool Principal Balance over the sum of the Class
Principal Balance of all Classes of the Bonds as of the Closing Date (the
"Original Class Principal Balance"), or $______________.
On the 20th day of each month, or, if such day is not a business day,
the first business day immediately following, commencing __________, 199_,
(each such date, a "Distribution Date"), the Indenture Trustee or its designee
and the Owner Trustee or its designee will distribute to the persons in whose
names the Bonds and Certificates, respectively, 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
each Bondholder 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 "Certain Information Regarding
the Securities -- Book Entry Registration" in the Prospectus.
Beneficial ownership interests in each Class of Bonds will be held in
minimum denominations of $100,000 and integral multiples of $1,000 in excess
thereof. Beneficial ownership interests in the Class B Certificates will also
be held in minimum denominations of $100,000 and integral multiples of $1,000
in excess thereof.
COLLECTION ACCOUNT AND DISTRIBUTION 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
Home Loans, all Net Liquidation Proceeds, Insurance Proceeds, Released
Mortgaged Property Proceeds, any amounts payable in connection with the
repurchase or substitution of any Home Loan and any amount required to be
deposited in the Collection Account in connection with the termination of the
Offered Securities. The
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foregoing requirements for deposit in the Collection Account will be exclusive
of payments on account of principal and interest collected on the Home 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 Sale 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 Sale and Servicing Agreement. Initially,
the Collection Account will be maintained with ______________[, an affiliate of
________________, one of the Underwriters]. On the business day prior to each
Distribution Date, the Servicer is required to transfer from the Collection
Account to the Indenture Trustee the Available Remittance Amount for deposit in
an Eligible Account (the "Distribution Account") established and maintained by
the Indenture Trustee.
Any Subservicer will also maintain a collection account to deposit all
payments received with respect to the Home 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 Sale and Servicing
Agreement.
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
Distribution Account (sometimes referred to herein, together with the
Collection Account, as an "Account") will be invested by the Indenture Trustee,
as directed by the Seller, in one or more Permitted Investments (as defined in
the Sale 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 Seller,
in one or more Permitted Investments 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 Offered Securities 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 Home Loans or required to be paid by the Servicer, the
Transferor or the Seller (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 Sale and Servicing Agreement,
including without limitation the Servicing Fee) during the related Due Period
(or, in the case of amounts paid by the Transferor in connection with the
purchase or substitution of a Defective Home Loan) 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, an early retirement
of the
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Offered Securities by the Servicer or the Bond Insurer, the Termination Price,
and (v) any and all income or gain from investments in the Collection Account.
DISTRIBUTIONS ON THE OFFERED SECURITIES
On each Distribution Date, the sum of (i) the Available Remittance
Amount, (ii) any income or gain from investments in the Distribution Account[,
and (iii) the Reserve Fund Withdrawal Amount, if any] (such sum, the "Amount
Available") will be distributed by the Indenture Trustee, along with any
Guaranteed Payment deposited in the Distribution Account by or on behalf of the
Bond Insurer (which payments may only be used to pay the Bondholders the
respective Interest Remittance Amount, the Interest Carry-Forward Amount, the
Principal Remittance Amount or the Principal Carry-Forward Amount, as
applicable, with respect to each Class of Bonds) in the following order of
priority:
(i) first, to the Bond Insurer, an amount equal to the Guaranty
Insurance Premium;
(ii) then, in the following order, (a) to the Indenture Trustee, an
amount equal to the Indenture Trustee Fee, (b) to the Owner Trustee, an amount
equal to the Owner Trustee Fee, and (c), if applicable, to the Custodian, an
amount equal to the Custodian Fee;
(iii) then, pro rata, to the holders of the Bonds and Class B
Certificates in reduction of, and in accordance with, their respective Class
Principal Balances and Certificate Principal Balances, any amounts deposited
into the Distribution Account from the amounts remaining in the Pre-Funding
Account upon termination of the Funding Period;
(iv) then, pro rata, to the Bondholders (A) the Interest Remittance
Amount applicable to each Class of Bonds and (B) the Interest Carry-Forward
Amount, if any, applicable to each Class of Bonds;
(v) then, with respect to any Distribution Date occurring on an
Overcollateralization Stepdown Date and as a distribution of the Principal
Remittance Amount and any Principal Carry-Forward Amount, to the Residual
Certificateholder the Overcollateralization Reduction Amount, if any, for such
Distribution Date;
(vi) then, to the Class A-1 Bondholders, (A) to be applied to
reduce the Class Principal Balance of the Class A-1 Bonds 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 Bonds;
(vii) then, to the Class A-2 Bondholders, (A) to be applied to
reduce the Class Principal Balance of the Class A-2 Bonds 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 Bonds;
(viii) then, to the Class A-3 Bondholders, (A) to be applied to
reduce the Class Principal Balance of the Class A-3 Bonds 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 Bonds;
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(ix) then to the Bond Insurer, reimbursement for any Guaranteed
Payments in respect of the Bonds not previously reimbursed and any other
amounts that are owed to the Bond Insurer under the Insurance Agreement (the
"Bond Insurer Reimbursement Amount");
(x) then, pro rata, 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;
(xi) then, to the Class B Certificateholders, (A) to be applied to
reduce the Certificate Principal Balance of the Class B Certificates until such
Certificate 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;
(xii) 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) then to the
Servicer an amount equal to the Excess Servicing Fee (as defined under the
"Description of the Transfer and Servicing Agreements -- Servicing" below), if
any, on such Distribution Date; and
(xiii) then, the remaining balance, if any, of the Amount Available
(the "Excess Spread"), as follows:
(A) until the Due Period in which the expiration of the
Funding Period occurs and thereafter until the Excess
Overcollateralization Amount equals or exceeds zero, to the
Bondholders in reduction of the respective Class Principal Balances
thereof in accordance with the sequential, principal distribution
scheme of clauses (vi), (vii), and (viii) above, as applicable, and
then to the Class B Certificateholders in reduction of the Certificate
Principal Balance thereof in accordance with principal distribution
scheme of clause (xi); and
(B) if the Excess Overcollateralization Amount equals or
exceeds zero, then (I) to the Class B Certificateholders until the
Certificate Loss Reimbursement Amount is reduced to zero (which
distributions will not reduce the Certificate Principal Balance of the
Class B Certificates), and then (II) to the holder of the Residual
Certificate.
If the Amount Available is insufficient to distribute in full the
amounts described in items (iv) and (vi) through (vii) above to the holders of
the Bonds, the Indenture 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 Bonds under the Guaranty Policy will be
available only for distribution to holders of the Bonds, as appropriate, to
compensate for any shortfalls in respect of the Interest Remittance Amounts and
the Principal Remittance Amounts with respect to the Bonds.
All distributions made to the Class A-1 Bondholders, the Class A-2
Bondholders, the Class A-3 Bondholders or the Class B Certificateholders on
each Distribution Date will be made on a pro rata basis among the Bondholders
of the respective Class of record or the Class B Certificateholders of record
on the next preceding Record Date based on the percentage interest represented
by their respective Bonds or Class B Certificates, and except as otherwise
provided 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
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on any Class of Bonds or the Class B Certificates, as applicable, then any such
unpaid Interest Remittance Amounts will be carried forward as an Interest
Carry-Forward Amount for each such Class of Bonds or for the Class B
Certificates, as applicable, and will be distributed to holders of each such
Class of Bonds or the Class B Certificates, as applicable, 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 Home
Loans were exceptionally high or were concentrated in a particular month and,
with respect to the Bonds, 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 Bonds or Class B Certificates.
The "Interest Remittance Amount" on any Distribution Date and for each
Class of Bonds will be calculated on the basis of a 360 day year consisting of
twelve 30 day months at the respective Interest Rate for such Class on the
outstanding Class Principal Balance of such Class immediately prior to such
Distribution Date. The Interest Remittance Amount on any Distribution Date and
for the Class B Certificates will be calculated on the basis of a 360 day year
consisting of twelve 30 day months at the Pass Through Rate on the outstanding
Certificate Principal Balance of the Class B Certificates immediately prior to
such Distribution Date.
The "Principal Remittance Amount" on each Distribution Date will be
equal to the lesser of (A) the sum of the aggregate Class Principal Balance of
the Bonds and the Certificate Principal Balance of the Class B Certificates
immediately prior to such Distribution Date and (B) the greater of (1) the sum
of (i) each scheduled payment of principal collected by the Servicer in the
related Due Period, (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, Insurance Proceeds and Released Mortgaged Property
Proceeds received during the related Due Period, (iv) (a) that portion of the
purchase price of any repurchased Home 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 Reserve Fund and the Overcollateralization Amount to zero,
then with respect to the Bonds, the principal portion of any Net Loan Losses
for the preceding Due Period; and (2) the amount by which (i) the aggregate
principal balance of the Offered Securities as of the preceding Distribution
Date (after giving effect to all payments of principal on such preceding
Distribution Date) exceeds (ii) the Pool Principal Balance plus funds on
deposit in the Pre-Funding Account, each as of the immediately preceding
Determination Date. Notwithstanding clauses (B)(1)(v) or (B)(2) of the
definition of Principal Remittance Amount, if on the final Distribution Date
the funds available for distribution are not sufficient to provide for the
distribution of the Principal Remittance Amount and Principal Carry-Forward
Amount, in full, then the holders of the Offered Securities will not be
distributed such portion of the Principal Remittance Amount and Principal
Carry-Forward Amount attributable to such insufficiency, in which event the
amount of such insufficiency will be written-off and the corresponding
principal balances of all Classes of the Offered Securities will be reduced to
zero without the distribution of funds to fully pay the Offered Securities. If
prior to the final Distribution Date, the Reserve Fund and the
Overcollateralization Amount are reduced to zero, then with respect to the
Bonds, 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 Home 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
Bondholders will be dependent upon the receipt of funds from, first, the Excess
Spread, if any, and, second, with respect to the Bonds if such Excess Spread
does not provide sufficient funds, any Guaranteed Payment received by the
Indenture Trustee. If sufficient funds for the distribution of this portion of
the Principal Remittance Amount are not provided from the Excess Spread and in
the case of the Bonds the
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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 available for distribution on such final
Distribution Date, including funds distributable to pay such Principal
Carry-Forward Amount from the receipt of Excess Spread and, with respect to the
Bonds, Guaranteed Payments on or before such final Distribution Date.
The "Insurance Proceeds" on each Distribution Date will be equal to,
with respect to any Home Loan, the proceeds paid to the Indenture Trustee or
the Servicer by any insurer pursuant to any insurance policy covering a Home
Loan, Mortgaged Property or REO Property or any other insurance policy that
relates to a Home Loan, net of any expenses which are incurred by the Indenture
Trustee or the Servicer in connection with the collection of such proceeds and
not otherwise reimbursed to the Indenture Trustee or the Servicer, but
excluding any 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 Home Loan" is a defaulted Home 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) in
the case of a Secured Loan the liquidation of the related Mortgaged Property
acquired through foreclosure or similar proceedings, (b) the Servicer's
determination in accordance with customary servicing practices that no further
amounts are collectible from the Home Loan and any related security, or (c) 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 Home Loans, whether
through trustee's sale, foreclosure sale, disposition of REO or otherwise
(other than Insurance Proceeds and Released Mortgaged Property Proceeds), and
any other cash amounts received in connection with the management of the
Mortgaged Properties from defaulted Home 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 Home
Loan or Mortgaged Properties. The "Released Mortgaged Property Proceeds" on
each Distribution Date will be equal to, with respect to any Home 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 Sale and Servicing Agreement.
The "Class Principal Balance" of any Class of Bonds 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
Bondholders of such Class on all previous Distribution Dates (other than any
amounts that constitute mortgagor payments that are recovered from such
Bondholders as voidable preferences by a trustee in bankruptcy) and by all
amounts allocated to such Class in reduction of the principal balance thereof
on all previous Distribution Dates attributable to any losses as determined by
the Servicer under the Sale and Servicing Agreement The "Certificate Principal
Balance" of the Class B Certificates as of any date of determination is equal
to the Original Certificate Principal Balance of the Class B Certificates
reduced by all amounts in respect of principal previously distributed to the
Class B Certificateholders on all previous Distribution Dates (other than any
amounts that constitute mortgagor payments that are recovered from such Class B
Certificateholders as voidable preferences by a trustee in bankruptcy) and by
all amounts allocated to the Class B Certificates in reduction of the principal
balance thereof on all previous Distribution Dates attributable to any losses
as determined by the Servicer under the Sale and Servicing Agreement (See
"Description of Credit Enhancement -- Subordination and Allocation of Losses"
below).
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The "Interest Carry-Forward Amount" is the amount, if any, by which
the interest portion of the Remittance Amount applicable to any Offered
Security as of the immediately preceding Distribution Date exceeded the amount
of the actual distribution to the related holders of the Offered Securities 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
Security.
The "Principal Carry-Forward Amount" is the amount, if any, by which
the principal portion of the Remittance Amount applicable to any Offered
Security as of the immediately preceding Distribution Date exceeded the amount
of the actual distribution to the related holders of the Offered Securities in
respect of principal. Interest will accrue on the Class Principal Balance,
which includes any Principal Carry-Forward Amount, with respect to any
Security.
On each Distribution Date, after the holders of the Bonds have been
paid all amounts to which they are entitled, the Bond Insurer will be entitled
to be reimbursed for any unreimbursed Guaranteed Payments under the Guaranty
Policy and any other amounts owed to the Bond Insurer under the Insurance
Agreement together with interest thereon at the rate specified in the Insurance
Agreement (the "Bond Insurer Reimbursement Amount") and any accrued and unpaid
Guaranty Insurance Premiums. The "Insurance Agreement" means the Insurance and
Indemnification Agreement dated as of _______, 19__ between the Bond Insurer,
the Seller, FFI, as the Servicer and Transferor, RAC and the Indenture Trustee.
In connection with each Guaranteed Payment, the Indenture Trustee, as
attorney-in-fact for the holder thereof, will be required to assign to the Bond
Insurer the rights of the Bondholders with respect to the Bonds, to the extent
of such Guaranteed Payments, including, without limitation, in respect of any
amounts due to the Bondholders as a result of a securities law violation
arising from the offer and sale of the Bonds. In the event of any Bond Insurer
Reimbursement Amount attributable to the Bonds, 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 Residual Certificates will not
be entitled to receive distributions of any residual interest in the assets of
the Trust, until the Bond Insurer has been distributed such Bond Insurer
Reimbursement Amount in full.
With respect to each Distribution Date and with respect to each Class
of Offered Securities, 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 holders of such Class of the Offered Securities 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 (v) the Principal Carry-Forward Amount
applicable to such Class, constitutes the "Remittance Amount".
TERMINATION
The Servicer may, at its option, effect an early redemption or
termination of the Offered Securities on or after any Distribution Date on
which the Pool Principal Balance declines to 10% or less of the Assumed Pool
Principal Balance, in which case (i) the Bondholders will receive an amount in
respect the Bonds equal to the then outstanding Class Principal Balance of the
Bonds, plus accrued interest thereon at the applicable Interest Rates, and (ii)
the Class B Certificateholders will receive an amount in respect of the Class B
Certificates equal to the then outstanding Certificate Balance of the Class B
Certificates, plus accrued interest at the Pass Through Rate. In connection
with any such optional termination, the Servicer will pay the outstanding fees
and expenses, if any, of the Indenture Trustee, the Owner Trustee, the Bond
Insurer, the Custodian, and the Servicer. Under certain circumstances as set
forth in the Indenture (i.e.,
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based upon the default experience of the Home Loans), the Bond Insurer may, at
its option, effect an early redemption of the Bonds. In connection with any
such purchase, the Servicer will pay the outstanding fees and expenses, if any,
of the Indenture Trustee, the Bond Insurer, the Custodian, and the Servicer.
Under certain circumstances as set forth in the Indenture (i.e., based upon the
default experience of the Home Loans), the Bond Insurer may, at its option,
effect an early redemption of the Bonds at a price equal to the then
outstanding Class Principal Balance of the Bonds, plus accrued interest thereon
at the applicable Interest Rates (the "Termination Price").
DESCRIPTION OF CREDIT ENHANCEMENT
Credit enhancement with respect to the Bonds will be provided
primarily by the Guaranty Policy. Additional credit enhancement with respect
to the Bonds that will be utilized prior to the Guaranty Policy will be
provided by (i) the subordination of the Class B Certificates and Residual
Certificates to the Bonds, (ii) [the Reserve Fund and ] (iii) the
overcollateralization from principal attributable to the Residual Certificates.
The Class B Certificates will not be guaranteed by or benefit from the
Guaranty Policy, but will benefit from (i) the subordination of the Residual
Certificate, (ii) [the Reserve Fund] and (iii) the overcollateralization from
principal attributable to the Residual Certificates.
THE GUARANTY POLICY
General. The following discussion under this heading of "The Guaranty
Policy" will only be applicable to holders of the Bonds. The following
information has been supplied by _______________ (the "Bond Insurer") for
inclusion in this Prospectus Supplement.
The Bond Insurer, in consideration of the payment of the premium and
subject to the terms of the Financial 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 received
by the Indenture Trustee, or its successor, as trustee for the Owners, on
behalf of the Owners from the Bond Insurer, for distribution by the Indenture
Trustee to each Owner of each Owner's proportionate share of the Guaranteed
Payment. The Bond 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 Indenture Trustee,
whether or not such funds are properly applied by the Indenture 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 Bonds, unless such acceleration is at the sole option of
the Bond Insurer.
Notwithstanding the foregoing paragraph, the Guaranty Policy does not
cover shortfalls, if any, attributable to the liability of the Trust or the
Indenture Trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability).
The Bond 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 Bond Insurer that such order is final and not subject to
appeal, (iii) an assignment in such form as is reasonably required by the Bond
Insurer, irrevocably assigning to the Bond Insurer all rights and claims of
each Owner relating to or arising under the Bonds 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 Bond Insurer
as agent for such Owner in any legal proceeding related to
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such preference payment, such instruments being in a form satisfactory to the
Bond Insurer, provided that if such documents are received after 12:00 noon
__________ 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 Bonds to such receiver or
trustee in bankruptcy, in which case such payment will be disbursed to such
Owner.
The Bond Insurer will pay any other amount payable under the Guaranty
Policy no later than 12:00 noon ________ time on the later of the Distribution
Date on which the related Interest Remittance Amount or Principal Remittance
Amount for the Bonds is due or the second Business Day following receipt in
______________ on a Business Day by ____________________, as Fiscal Agent for
the Bond Insurer or any successor fiscal agent appointed by the Bond Insurer
(the "Fiscal Agent"), of a Notice (as defined below); provided that if such
Notice is received after 12:00 noon ____________ 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 Bond Insurer or the Fiscal Agent, as the case may be, will promptly so
advise the Indenture Trustee and the Indenture 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 Indenture 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 Indenture Trustee for the
payment of such Guaranteed Payment and legally available therefor.
The Fiscal Agent is the agent of the Bond 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 Bond Insurer to deposit or cause to be deposited sufficient
funds to make payments due under the Guaranty Policy.
As used in 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 ____________ or in the city in which the
corporate trust office of the Indenture Trustee under the Indenture is located
are authorized or obligated by law or executive order to close.
"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 Bonds exceeds the Amount Available for distribution on such Bonds for
such Distribution Date after making all prior distributions thereon. See
"Description of the Offered Securities -- Distributions on the Offered
Securities" 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 Indenture Trustee
specifying the Guaranteed Payment which will be due and owing on the applicable
Distribution Date.
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"Owner" means each Holder (as defined in the Indenture) who, on the
applicable Distribution Date is entitled under the terms of the Bonds to
payment thereunder.
"Indenture" means the Indenture dated as of _________, 199_ between
the Trust and the Indenture Trustee, without regard to any amendment or
supplement thereto.
"Preference Amount" means any amount previously distributed to an
Owner with respect to a Bond 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 Indenture as of the date of execution of the Guaranty Policy, without
giving effect to any subsequent amendment or modification to the Indenture,
unless such amendment or modification has been approved in writing by the Bond
Insurer.
Any notice under the Guaranty Policy or service of process on the
Fiscal Agent of the Bond Insurer may be made at the address listed below for
the Fiscal Agent of the Bond Insurer or such other address as the Bond Insurer
shall specify in writing to the Indenture Trustee.
The notice address of the Fiscal Agent is ______________________
Attention: ______________________, or such other address as the Fiscal Agent
shall specify to the Indenture Trustee in writing.
The Guaranty Policy is being issued under and pursuant to, and shall
be construed under, the laws of the State of ____________, 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 the latest Scheduled Final
Distribution Date of the Bonds.
The Bond Insurer, formerly known as __________________________, is the
principal operating subsidiary of _____________, a _______________ company.
_____________ is not obligated to pay the debts of or claims against the Bond
Insurer. The Bond Insurer is domiciled in the State of ___________ and is
licensed to do business in ________________________.
All information regarding the Bond Insurer, a wholly owned subsidiary
of ________________, including the financial statements of the Bond Insurer for
the year ended __________, 199_, prepared in accordance with generally accepted
accounting principles, included in the Annual Report on Form 10-K of _________
for the year ended _________, 199_, 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
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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 Bond
Insurer for the periods ended ______, 199_ and _________, 199_, respectively,
determined in accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities ("SAP") and generally accepted
accounting principles ("GAAP"):
<TABLE>
<CAPTION>
SAP GAAP
------------------------------ ------------------------------
December 31, March 31, December 31, March 31,
1995 1996 1995 1996
--------------- ------------ --------------- ------------
(Audited) (Unaudited) (Audited) (Unaudited)
(In Millions) (In Millions)
<S> <C>
Admitted Assets . . . Assets . . . . . . . . .
Liabilities . . . . . Liabilities . . . . . . .
Capital and Surplus . Shareholder's Equity . .
</TABLE>
Copies of the Bond Insurer's 199_ year-end audited financial
statements prepared in accordance with statutory accounting practices are
available from the Bond Insurer. The address of the Bond Insurer is
________________________________. A copy of the Annual Report on Form 10-K of
_____________ is available from the Bond Insurer or the Securities and Exchange
Commission.
The Bond 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 Bond 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 Bond Insurer (including the data in the foregoing tables) has been
provided by the Bond Insurer and has not been reviewed or verified by the
Transferor, the Servicer, the Seller, the Indenture Trustee, the Owner Trustee
or the Underwriters.
Moody's rates the claims paying ability of the Bond Insurer "___".
Standard & Poor's rates the claims paying ability of the Bond Insurer
"___".
Fitch Investors Service, L.P. rates the claims paying ability of the
Bond Insurer "___".
Each rating of the Bond Insurer should be evaluated independently. The
ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Bond 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 Bonds, 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
Bonds. The Bond Insurer does not guaranty the market price of any Bonds nor
does it guaranty that the ratings on any Bonds will not be reversed or
withdrawn.
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SUBORDINATION AND ALLOCATION OF LOSSES
The rights of the holders of the Class B Certificates to receive
distributions of interest and principal from amounts available in the
Distribution Account on each Distribution Date will be subordinated to such
rights of the holders of the Bonds and the rights of the holders of the
Residual Certificates to receive any distributions from amounts available in
the Distribution Account will be subordinated to such rights of the holders of
the Bonds, and the rights of the holders of the Class B Certificates. The
subordination of the Class B Certificates to the Bonds is intended to enhance
the likelihood of regular receipt by the holders of the Bonds of the full
amount of interest and principal distributions due to such holders and to
afford such holders protection against losses on the Home Loans. The
subordination of the Residual Certificates to the Class B Certificates is
intended to enhance the likelihood of regular receipt by the holders of the
Class B Certificates of the full amount of interest and principal distributions
due to such holders and to afford such holders protection against losses on the
Home Loans. In addition, Net Loan Losses in respect of the Home Loans will be
allocated first to the principal, if any, attributable to the Residual
Certificates until such principal has been reduced to zero and then to the
principal portion of the Class B Certificates until the Certificate Principal
Balance of the Class B Certificates has been reduced to zero. See "Description
of Credit Enhancement -- Subordination and Allocation of Losses" herein.
On each Distribution Date, with respect to any Home Loans that became
Liquidated Home 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 such Liquidated Home Loans as of the last day of such Due
Period, minus (ii) the aggregate amount of any recoveries with respect to such
Liquidated Home Loans from whatever source, including any Net Liquidation
Proceeds, any Insurance Proceeds, any Released Mortgaged Property Proceeds, any
payments from the related borrower and any payments made to purchase such
Liquidated Home Loans pursuant to the Sale 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 first to reduce the principal, if any, attributable to
the Residual Certificate and second, to reduce the Certificate Principal
Balance of the Class B Certificates, until such Certificate Principal Balance
has been reduced to zero. If Net Loan Losses are allocated to reduce the
Certificate Principal Balance of the Class B Certificates, then the Class B
Certificateholders may be reimbursed for the amount of such allocated Net Loan
Losses (the "Class B Loss Reimbursement Amount") from any Excess Spread with
respect to the Class B Certificates.
If prior to the final Distribution Date any Net Loan Losses occur
after the Overcollateralization Amount and the Certificate Principal Balance of
the Class B Certificates has been reduced to zero, then the full amount of the
interest and principal distributions due the holders of such Bonds 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.
[THE RESERVE FUND
On the Closing Date, the Seller will establish or will cause to be
established a Reserve Fund for the benefit of the holders of the Offered
Securities. On the Closing Date, the assets on deposit in the Reserve Fund
will equal $____________, or approximately ___% of the Assumed Pool Principal
Balance as of the Cut-off Date (the "Reserve Fund Requirement") and will
consist of cash in the amount of
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$_________. Assets on deposit in the Reserve Fund will be available to the
Indenture Trustee for distribution to the holders of the Offered Securities on
each Distribution Date as part of the Amount Available.
The Reserve Fund Requirement will be subject to reduction from time to
time in accordance with the provisions of the Indenture and any amounts in the
Reserve Fund in excess of the reduced Reserve Fund Requirement on a
Distribution Date will be released to the holder of the Residual Certificate.
WITHDRAWALS FROM THE RESERVE FUND. Subject to the total amount of
funds on deposit in the Reserve Fund on each Distribution Date, the Indenture
Trustee will withdraw and distribute funds from such Reserve Fund in the
following order of priority (collectively, the "Reserve Fund Withdrawal
Amount"):
(i) to deposit in the Distribution Account an amount
equal to the excess of (a) the amounts required to be distributed in
respect of the fees to the Indenture Trustee, the Owner Trustee and
the Custodian and the Guaranty Insurance Premium, the Interest
Remittance Amount and the Principal Remittance Amount applicable to
the Bonds and the Class B Certificates then outstanding and the Bond
Insurer Reimbursement Amount over (b) the Available Remittance Amount
with respect to such Distribution Date; and
(ii) to the extent that the amount then on deposit in the
Reserve Fund exceeds the Reserve Fund Requirement on such Distribution
Date (after giving effect to the deposit to the Distribution Account
described in clause (i) above) such amount will be transferred to the
Distribution Account and included in the Amount Available for such
Distribution Date, and, after taking into account all prior
distributions, such excess (the "Excess Reserve Amount") will be
distributed to the holders of the Residual Certificates.
The funding and maintenance of the Reserve Fund is intended to enhance
the likelihood of timely payment of distributions to the holders of the Bonds
and Class B Certificates and to decrease the likelihood that such holders of
the Bonds and the Class B Certificates will experience losses; however, in
certain circumstances, the Reserve Fund could be depleted, and shortfalls could
result. The holders of the Residual Certificates will not be required to
refund any amounts previously distributed to such holders pursuant to the Sale
and Servicing Agreement, including any distributions of Excess Spread and
Excess Reserve Amount, regardless of whether there are sufficient funds on a
subsequent Distribution Date to make a full distribution to holders of the
Bonds and the Class B Certificates.]
OVERCOLLATERALIZATION
As of each Determination Date occurring after termination of the
Funding Period, the "Overcollateralization Amount" will equal the excess of the
Pool Principal Balance over the sum of the Class Principal Balances of all
Classes of Bonds and the Certificate Principal Balances of the Class B
Certificates. On the Closing Date the Overcollateralization Amount will be
equal to zero. A limited acceleration of the principal amortization of the
Offered Securities relative to the principal amortization of the Home Loans has
been designed to increase the Overcollateralization Amount by making additional
sequential distributions of principal to the holders of the Offered Securities
in the manner described herein.
If on any Distribution Date, the Required Overcollateralization Amount
exceeds the Overcollateralization Amount, distributions of Excess Spread, if
any, will be made as an additional
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distribution of principal to the holders of the Offered Securities,
sequentially among the Classes of Bonds and the Class B Certificates in order
of their respective priorities as set forth under "Description of the Offered
Securities -- Distributions on the Offered Securities" herein. Such
distributions of such Excess Spread are intended to accelerate the amortization
of the Class Principal Balances of all Classes of Bonds and the Certificate
Principal Balances of the Class B Certificates, thereby increasing the
Overcollateralization Amount. The relative percentage of the sum of the Class
Principal Balances of Bonds and the Certificate Principal Balances of the Class
B Certificates to the Pool Principal Balance will increase as a result of the
application of such Excess Spread to reduce the Class Principal Balance of the
Bonds and the Certificate Principal Balance of 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 holder of the Residual Certificate (subject to prior
reimbursement of any Class B Loss Reimbursement Amount) and not to the holders
of the Offered Securities; therefore, ceasing the acceleration of the principal
amortization of the Offered Securities in relation to the principal
amortization of the Home Loan Pool, until such time as the Excess
Overcollateralization Amount is reduced below zero.
On any Distribution Date occurring on an Overcollateralization
Stepdown Date, the holder of the Residual Certificate 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 Offered Securities as described
below. Such amount, the "Overcollateralization Reduction Amount", with respect
to any Distribution Date occurring on 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 Offered
Securities 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 Overcollateralization Amount is
permitted to decrease or "step down" pursuant to the terms of the Indenture,
generally as a result of the delinquency and default experience of the Home
Loan Pool being lower than certain levels established by the Bond Insurer and
set forth in the Indenture. The "Excess Overcollateralization Amount" for any
Distribution Date will equal the Overcollateralization Amount for such
Distribution Date minus the Required Overcollateralization Amount for such
Distribution Date.
While the distribution of Excess Spread to holders of the Offered
Securities and the distribution of any Overcollateralization Reduction Amount
to holder of the Residual Certificate in the manner specified above has been
designed to produce and maintain a given level of overcollateralization, there
can be no assurance that Excess Spread will be generated in sufficient amounts
to ensure that such overcollateralization level will be achieved or maintained
at all times. Net Loan Losses will be allocated first to reduce the principal,
if any, attributable to the Residual Certificate and then to reduce the
Certificate Principal Balance of the Class B Certificates, thereby reducing the
level of overcollateralization. See "Risk Factors -- Additional Credit
Enhancement Limitations -- Adequacy of Credit Enhancement" herein.
If on any Determination Date the delinquency or default experience on
the Home Loan Pool exceeds certain levels as established by the Bond Insurer
and confirmed by the Rating Agencies and as set forth in the Indenture, then
the Required Overcollateralization Amount will increase. Likewise, if on any
Determination Date the delinquency and default experience on the Home Loan Pool
is lower than certain levels as established by the Bond Insurer and confirmed
by the Rating Agencies and as set forth in the Indenture, then under certain
circumstances the Required Overcollateralization Amount will decrease and an
Overcollateralization Stepdown Date will occur on the related Distribution
Date.
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Pursuant to the Indenture, as of each Determination Date, the
"Required Overcollateralization Amount" will be based on a calculation reviewed
and approved by the Bond Insurer and each Rating Agency. Following the
termination of the Funding Period, the Required Overcollateralization Amount
will be calculated based on certain percentages of the Cut-Off Date Principal
Balances of the Home 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 Home Loans and the outstanding
Principal Balances of the Home Loans. The percentages used in calculating the
Required Overcollateralization Amount will be determined based on the
delinquency and default experience of the Home Loans. 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 Home Loans. On the Closing
Date, assuming that the Assumed Pool Principal Balance has the same
characteristics as the Initial Pool Principal Balance, the Required
Overcollateralization Amount would be equal to $____________, which is ____% of
the Assumed Pool Principal Balance.
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes certain terms of the Indenture, Sale
and Servicing Agreement, the Administration Agreement and the Trust Agreement
(collectively, the "Transfer and Servicing Agreements"). Forms of the Transfer
and Servicing Agreements have been filed as exhibits to the Registration
Statement. Copies of the Transfer and Servicing Agreements will be filed with
the Commission following the issuance of the Offered Securities. The summary
does not purport to be complete and is subject to, and qualified in its
entirety by reference to, all the provisions of the Transfer and Servicing
Agreements. The following summary supplements, and to the extent inconsistent
therewith replaces, the description of the general terms and provisions of the
Transfer and Servicing Agreements set forth under the headings "Description of
the Transfer and Servicing Agreements" in the Prospectus, to which description
reference is hereby made.
SALE AND ASSIGNMENT OF THE HOME 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 Home Loans to
the Seller, and the Seller will sell, convey, transfer and assign the Initial
Home Loans to the Owner Trustee. The Owner Trustee will, concurrently with the
sale, conveyance, transfer and assignment of the Initial Home Loans and the
deposit of funds in the Pre-Funding Account, deliver the Offered Securities to
the Seller in exchange for the Initial Home Loans and the Pre-Funding Account
Deposit. The Owner Trustee will pledge and assign the Initial Home Loans and
Pre-Funding Account Deposit to the Indenture Trustee in exchange for the Bonds.
Each Initial Home Loan will be identified in a schedule appearing as an exhibit
to the Sale and Servicing Agreement (the "Home Loan Schedule").
Following the Closing Date, the funds in the Pre-Funding Account will
be used to purchase from the Seller, from time to time prior to the end of the
Funding Period, subject to the availability thereof, Subsequent Home Loans
consisting of closed-end fixed rate, loans for which the related proceeds were
used to finance (i) property improvements, (ii) the acquisition of personal
property such as home appliances or furnishings, (iii) debt consolidation, (iv)
the purchase or refinancing of single family residential property, or (v) a
combination of property improvements, debt consolidation and other consumer
purposes, which loans are marketed by the Transferor under the name
"BusterPlus(TM) Loans". See "The Home Loan Pool -- Conveyance of Subsequent
Home Loans" herein. In connection with each purchase of such Subsequent
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Home Loans, the Trust will be required to pay to the Seller from the
Pre-Funding Account a cash purchase price of not more than 100% of the
principal balance thereof; the Trust 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 Home Loans. In
connection with any purchase of Subsequent Home Loans by the Trust after the
Closing Date, the Transferor will assign to the Seller all of its right, title
and interest in and to such Subsequent Home Loans, and the Seller in turn will
sell, convey, transfer and assign to the Owner Trustee all of its right, title
and interest in and to such Subsequent Home Loans. The Owner Trustee will
pledge and assign such Subsequent Home Loans to the Indenture Trustee.
In addition, the Seller will, as to each Home Loan, deliver to the
Indenture Trustee or the Custodian the related Note endorsed to the order of
the Indenture Trustee or the Custodian without recourse, any assumption and
modification agreements and in the case of Secured Loans, 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 Owner Trustee in recordable form, and any intervening assignments of the
Mortgage (each, a "Indenture Trustee's Home Loan File"). Subject to
confirmation by the Rating Agencies and to the approval of the Bond Insurer,
with respect to the Secured Loans the Transferor and the Seller will not be
required to record assignments to the Owner Trustee of the Mortgages in the
real property records for the Home Loans. See "Risk Factors -- Additional
Factors Affecting Delinquencies, Foreclosures and Losses on Home Loans --
Non-recordation of Assignments" herein. In such circumstances, the Transferor
and the Seller will deliver to the Indenture Trustee the assignments of the
Mortgages in the name of the Owner 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
Owner Trustee and Indenture Trustee and the holders of the Offered Securities.
In all other circumstances with respect to the Secured Loans, pursuant to the
direction of the Rating Agencies or Bond Insurer, assignments to the Owner
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 Owner
Trustee and Indenture Trustee's interest in the Home Loans against the claims
of certain creditors of the Transferor or subsequent purchasers. In these
circumstances, the Transferor and the Seller will deliver to the Indenture
Trustee after recordation the assignments to the Owner Trustee of the
Mortgages. In the event that, with respect to any Home Loan as to which
recordation of the related assignment is recorded, the Seller cannot deliver
the Mortgage or any assignment with evidence of recording thereon concurrently
with the conveyance thereof under the Sale and Servicing Agreement because they
have not yet been returned by the public recording office, the Seller will
deliver or cause to be delivered to the Indenture Trustee or the Custodian a
certified true photocopy of such Mortgage or assignment. The Seller will
deliver or cause to be delivered to the Indenture Trustee or the Custodian any
such Mortgage or assignment with evidence of recording indicated thereon upon
receipt thereof from the public recording office. The Indenture Trustee or the
Custodian will agree, for the benefit of the holders of the Offered Securities,
to review (or cause to be reviewed) each Indenture Trustee's Home Loan File
within 45 days after the conveyance of the related Home Loan to the Trust to
ascertain that all required documents have been executed and received.
PRE-FUNDING ACCOUNT
On the Closing Date, cash in the aggregate amount of approximately
$___________(the "Pre-Funding Account Deposit") will be deposited in an
Eligible Account (the "Pre-Funding Account"), which account will be part of the
Trust and will be maintained as an Eligible Account with the Indenture Trustee,
in its corporate trust department for the purchase of Subsequent Home Loans.
The Pre-Funding Account Deposit will be increased or decreased by an amount
equal to the aggregate of the principal balances of any home loans removed from
or added to, respectively, the Home Loan Pool prior to the
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Closing Date, provided that any such decrease will not exceed $__________ and
any such increase will not exceed ___% of the Initial Pool Principal Balance.
During the period (the "Funding Period") from the Closing Date until the
earlier of (i) the date on which the amount on deposit in the Pre-Funding
Account is reduced to a de minimis amount, and (ii) ________, 199_, the amount
on deposit in the Pre-Funding Account will be reduced by the amount thereof
used to purchase Subsequent Home Loans in accordance with the applicable
provisions of the Sale 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 holders of the Offered
Securities on the immediately following Distribution Date. Subsequent Home
Loans purchased by and added to the Trust on any Subsequent Transfer Date must
satisfy the criteria set forth in the Sale and Servicing Agreement and must be
approved by the Bond Insurer. See "The Home Loan Pool -- Conveyance of
Subsequent Home 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 Bonds and the
Certificate Principal Balances of the Class B Certificates, on a pro rata
basis, thereby reducing the weighted average lives of such Bonds and the Class
B Certificates. See "Prepayment and Yield Considerations" herein.
Amounts on deposit in the Pre-Funding Account will be invested in
Permitted Investments. The Sale 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 Home 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 Seller, 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 Indenture
Trustee (the "Capitalized Interest Account") from a portion of the sales
proceeds from the Offered Securities. The amount on deposit in the Capitalized
Interest Account will be specifically allocated to cover shortfalls in interest
(the "Interest Shortfall") on the Offered Securities that may arise as a result
of the utilization of the Pre-Funding Account for the purchase by the Trust of
Subsequent Home Loans after the Closing Date and will be so applied by the
Indenture Trustee for the distribution of interest to holders of the Offered
Securities. 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 sum of the aggregate Class Principal Balance of
the Bonds and the Certificate Principal Balance of the Class B Certificates over
the aggregate Pool Principal Balance at the rate equal to sum of the weighted
average of the Interest Rates on all Classes of the Bonds
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and the Pass Through Rate of the Class B Certificates, plus the monthly rate
attributable to the Indenture Trustee Fee, the Owner Trustee Fee, the Custodian
Fee and the 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 the
projected Interest Shortfall with respect to the _________, 199_ Distribution
Date and the _________, 199_ Distribution Date. If the Transferor and Seller
deliver Subsequent Home Loans on or prior to _______, 199_, the Indenture
Trustee may release to the Seller the portion of the Capitalized Interest
Account Deposit which, based on a recalculation of the Interest Shortfall, will
not be needed for the _________, 199_ or _________, 199_ Distribution Dates.
Additionally, if the Transferor and Seller deliver Subsequent Home Loan on or
prior to __________, 199_, the Indenture Trustee may release to the Seller the
portion of the Capitalized Interest Account Deposit which, based on a
recalculation of the Interest Shortfall, will not be needed on the __________,
199_ Distribution Date. On or before _____________, 199_, the Seller may deposit
into the Capitalized Interest Account the Interest Shortfall with respect to the
___________, 199_ Distribution Date. The Seller's failure to make the required
Interest Shortfall deposit on or before ________, 199_ with respect to the
____________, 199_ Distribution Date will cause the Funding Period to end on
________, 199_. Any amounts remaining in the Capitalized Interest Account on any
Determination Date, that are not required to cover the anticipated interest
shortfall described above, will be distributed to the holder of the Residual
Certificate, including any net reinvestment income thereon, and such amounts
will not thereafter be available for distribution to the holders of the Offered
Securities.
Amounts on deposit in the Capitalized Interest Account will be
invested in Permitted Investments as defined in the Sale 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
Sale 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.
FEES AND EXPENSES OF THE TRUST
As compensation for their services pursuant to the applicable Transfer
and Servicing Agreements, the Indenture Trustee is entitled to the Indenture
Trustee Fee, the Owner Trustee is entitled to the Owner Trustee Fee and the
Custodian is entitled to the Custodian Fee. As compensation for its services
pursuant to the Sale and Servicing Agreement, 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 Bond Insurer is entitled to the Guaranty Insurance
Premium.
SERVICING
The Servicer is entitled to a fee (the "Servicing Fee"), payable
monthly on each Distribution Date, equal to ______% (___ basis points) per
annum of the Pool Principal Balance (as adjusted for Liquidated Home Loans) as
of the first day of the immediately preceding Due Period. 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. In addition, to the extent that
the Overcollateralization Amount equals or exceeds the Required
Overcollateralization Amount the Servicer will be entitled to an "Excess
Servicing Fee" equal to _____% per annum of the Pool Principal Balance;
provided however, that with the agreement of the Bond Insurer, any successor
Servicer may be entitled to such fee regardless of the Overcollateralization
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Amount. In each case, the distribution of such Excess Servicing Fee will be
subordinate to all prior distributions of the Amount Available, including the
distributions of principal and interest due on each Class of Bonds and the
Class B Certificates for a Distribution Date.
In the event of a delinquency or a default with respect to a Home Loan
neither the Servicer nor any Subservicer will have an obligation to advance
scheduled monthly payments of principal and interest with respect to such Home
Loan. But, the Servicer or any Subservicer will make reasonable and customary
expense advances with respect to the Home Loans in accordance with their
servicing obligations under the Sale and Servicing Agreement. For example, with
respect to a Secured Loan such expense advances may include costs and expenses
advanced for the preservation, restoration and protection of any Mortgaged
Property, including advances to pay delinquent real estate taxes and
assessments. Any expense advances by the Servicer or any Subservicer will be
reimbursable from the Amount Available after all prior distributions as
described under "-- Distributions on the Offered Securities" above or with
respect to any Liquidated Home Loan from the Liquidation Proceeds received
therefrom.
RESTRICTIONS ON SECURITYHOLDER RIGHTS
So long as (i) there does not exist a continuing failure by the Bond
Insurer to make a required payment under the Guaranty Policy and (ii) certain
bankruptcy-related events specified in the Indenture have not occurred with
respect to the Bond Insurer (any of the events described in (i) and (ii), a
"Bond Insurer Default"), the Bond Insurer will have the right to exercise all
rights, including voting rights, which the Bondholders are entitled to exercise
pursuant to the Indenture (the "Bondholder Rights"), without any consent of
such Bondholders; provided, however, that without the consent of each holder of
a Class of Bonds affected thereby, the Bond Insurer shall not exercise such
Bondholder Rights to amend the Indenture in any manner that would (i) reduce
the amount of, or delay the timing of, collections of payments on Home Loans or
distributions which are required to be made on any Bond, (ii) adversely affect
in any material respect the interests of the holders of any Class of Bonds, or
(iii) alter the rights of any such Bondholder or Class of Bonds to consent to
any such amendment.
Until the Bondholders have received all distributions of interest and
principal to which they are entitled and the Bond Insurer has been paid all
amounts owed to it under the Insurance Agreement, the rights of the Class B
Certificateholders, including voting rights, provided such holders under the
Sale and Servicing Agreement and the Trust Agreement will be subordinate to the
Bondholder Rights, and accordingly, the Class B Certificateholders will not be
entitled to exercise such rights. Notwithstanding such subordination, at all
times the Class B Certificateholders will retain their rights, and the exercise
of such rights will not be subordinate to the Bondholders or Bond Insurer, with
respect to an amendment of the Sale and Servicing Agreement or Trust Agreement
that would (i) reduce the amount of, or delay the timing of, collections of
payments on Home Loans or distributions which are required to be made on any
Class B Certificate, (ii) adversely affect in any material respect the
interests of the holders of any Class B Certificate, or (iii) alter the rights
of any such holder of a Class B Certificate to consent to any such amendment.
THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee, the Indenture Trustee and any of their respective
affiliates may hold Offered Securities in their own names or as pledgees. For
the purpose of meeting the legal requirements of certain jurisdictions, the
Servicer, the Owner Trustee and the Indenture Trustee acting jointly (or in
some instances, the Owner Trustee or the Indenture Trustee acting alone) will
have the power to appoint co-trustees or separate trustees of all or any part
of the Trust. In the event of such an appointment, all
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rights, powers, duties and obligations conferred or imposed upon the Owner
Trustee by the Sale and Servicing Agreement and the Trust Agreement and the
Indenture Trustee by the Indenture will be conferred or imposed upon the Owner
Trustee and the Indenture Trustee, respectively, and in each such case such
separate trustee or co-trustee jointly, or, in any jurisdiction in which the
Owner Trustee or Indenture Trustee will be incompetent or unqualified to
perform certain acts, singly upon such separate trustee or co-trustee who will
exercise and perform such rights, powers, duties and obligations solely at the
direction of the Owner Trustee or the Indenture Trustee, respectively.
The Owner Trustee and the Indenture Trustee may resign at any time, in
which event the Servicer will be obligated to appoint a successor thereto. The
Servicer may also remove the Owner Trustee or the Indenture Trustee if either
ceases to be eligible to continue as such under the Trust Agreement or the
Indenture, as the case may be, becomes legally unable to act or becomes
insolvent. In such circumstances, the Servicer will be obligated to appoint a
successor Owner Trustee or a successor Indenture Trustee, as applicable. Any
resignation or removal of the Owner Trustee or Indenture Trustee and
appointment of a successor thereto will not become effective until acceptance
of the appointment by such successor.
The Trust Agreement will provide that the Servicer will pay the fees
and expenses of the Owner Trustee and the Indenture will provide for the
payment of the fees and expenses of the Indenture Trustee in connection with
their duties under the Trust Agreement and Indenture, respectively. The Trust
Agreement and Indenture will further provide that the Owner Trustee and
Indenture Trustee will be entitled to indemnification by the Transferor and the
Seller for, and will be held harmless against, any loss, liability or expense
incurred by the Owner Trustee or Indenture Trustee not resulting from its own
willful misfeasance, bad faith or negligence (other than by reason of a breach
of any of its representations or warranties to be set forth in the Trust
Agreement or Indenture, as the case may be).
DUTIES OF THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee will make no representations as to the validity or
sufficiency of the Trust Agreement, the Class B Certificates (other than the
execution and authentication thereof), the Bonds or of any Home Loans or
related documents, and will not be accountable for the use or application by
the Seller or the Servicer of any funds paid to the Seller or the Servicer in
respect of the Bonds, the Class B Certificates or the Home Loans, or the
investment of any monies by the Servicer before such monies are deposited into
the Collection Account or the Distribution Account. So long as no Event of
Default has occurred and is continuing, the Owner Trustee will be required to
perform only those duties specifically required of it under the Trust
Agreement. Generally, those duties will be limited to the receipt of the
various certificates, reports or other instruments required to be furnished to
the Owner Trustee under the Trust Agreement, in which case it will only be
required to examine them to determine whether they conform to the requirements
of the Trust Agreement. The Owner Trustee will not be charged with knowledge
of a failure by the Servicer to perform its duties under the Trust Agreement or
Sale and Servicing Agreement which failure constitutes an Event of Default
unless the Owner Trustee obtains actual knowledge of such failure as will be
specified in the Trust Agreement.
The Owner Trustee will be under no obligation to exercise any of the
rights or powers vested in it by the Trust 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 Class B Certificateholders, unless such Class B
Certificateholders have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities that may be incurred therein or
thereby. Subject to the rights or consent of the Bondholders, Bond Insurer and
Indenture Trustee, no Class B Certificateholder will have any right under the
Trust Agreement to institute any proceeding with respect
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to the Trust Agreement, unless such holder previously has given to the Owner
Trustee written notice of the occurrence of an Event of Default and (i) the
Event of Default arises from the Servicer's failure to remit payments when due
or (ii) the holders of Class B Certificates evidencing not less than 25% of the
voting interests of the Class B Certificates have made written request upon the
Owner Trustee to institute such proceeding in its own name as the Owner Trustee
thereunder and have offered to the Owner Trustee reasonable indemnity and the
Owner Trustee for 30 days has neglected or refused to institute any such
proceedings.
The Indenture Trustee will make no representations as to the validity
or sufficiency of the Indenture, the Class B Certificates, the Bonds (other
than the execution and authentication thereof) or of any Home Loans or related
documents, and will not be accountable for the use or application by the Seller
or the Servicer of any funds paid to the Seller or the Servicer in respect of
the Bonds, the Class B Certificates or the Home Loans, or the investment of any
monies by the Servicer before such monies are deposited into the Collection
Account or the Distribution Account. So long as no Indenture Event of Default
has occurred and is continuing, the Indenture Trustee will be required to
perform only those duties specifically required of it under the Indenture.
Generally, those duties will be limited to the receipt of the various
certificates, reports or other instruments required to be furnished to the
Indenture Trustee under the Indenture, in which case it will only be required
to examine them to determine whether they conform to the requirements of the
Indenture. The Indenture Trustee will not be charged with knowledge of a
failure by the Servicer to perform its duties under the Trust Agreement, Sale
and Servicing Agreement or Administration Agreement which failure constitutes
an Indenture Event of Default unless the indenture Trustee obtains actual
knowledge of such failure as will be specified in the Indenture.
The Indenture Trustee will be under no obligation to exercise any of
the rights or powers vested in it by the Indenture 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 Bondholders, unless such Bondholders have offered to the Indenture Trustee
reasonable security or indemnity against the costs, expenses and liabilities
that may be incurred therein or thereby. Subject to the rights or consent of
the Bond Insurer, no Bondholder will have any right under the Indenture to
institute any proceeding with respect to the Indenture, unless such holder
previously has given to the Indenture Trustee written notice of the occurrence
of an Event of Default and (i) the Event of Default arises from the Servicer's
failure to remit payments when due or (ii) the holders of Class A-1 Bonds,
Class A-2 Bonds and Class A-3 Bonds evidencing not less than 25% of the voting
interests of each such Class of Bonds, acting together as a single class, have
made written request upon the Indenture Trustee to institute such proceeding in
its own name as the Indenture Trustee thereunder and have offered to the
Indenture Trustee reasonable indemnity and the Indenture Trustee for 30 days
has neglected or refused to institute any such proceedings.
ERISA CONSIDERATIONS
THE BONDS
The Bonds may be purchased by an employee benefit plan or an
individual retirement account (a "Plan") subject to ERISA or Section 4975 of
the Internal Revenue Code of 1986, as amended (the "Code"). A fiduciary of a
Plan must determine that the purchase of a Bond is consistent with its
fiduciary duties under ERISA and does not result in a nonexempt prohibited
transaction as defined in Section 406 of ERISA or Section 4975 of the Code.
For additional information regarding treatment of the Bonds under ERISA, see
"ERISA Considerations" in the Prospectus.
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<PAGE> 67
The Bonds may not be purchased with the assets of a Plan if the
Seller, the Servicer, the Indenture Trustee, the Owner Trustee or any of their
affiliates (a) has investment or administrative discretion with respect to such
Plan assets; (b) has authority or responsibility to give, or regularly gives,
investment advice with respect to such Plan assets, for a fee and pursuant to
an agreement or understanding that such advice (i) will serve as a primary
basis for investment decisions with respect to such Plan assets and (ii) will
be based on the particular investment needs for such Plan; or (c) is an
employer maintaining or contributing to such Plan.
THE CLASS B CERTIFICATES
The Class B Certificates may not be acquired by (a) an employee
benefit plan (as defined in Section 3(3) of ERISA) that is subject to the
provisions of Title I of ERISA, (b) a plan described in Section 4975(e)(1) of
the Code or (c) any entity whose underlying assets include plan assets by
reason of a plan's investment in the entity or which uses plan assets to
acquire Class B Certificates. By its acceptance of a Class B Certificate, each
holder of such Class B Certificate will be deemed to have represented and
warranted that it is not subject to the foregoing limitation. In this regard,
purchasers that are insurance companies should consult with their counsel with
respect to the United States Supreme Court case interpreting the fiduciary
responsibility rules of ERISA, John Hancock Mutual Life Insurance Co. v.
Harris Bank and Trust (decided December 12, 1993). In John Hancock, the
Supreme Court ruled that assets held in an insurance company's general account
may be deemed to be "plan assets" for ERISA purposes under certain
circumstances. Prospective purchasers should determine whether the decision
affects their ability to make purchases of the Class B Certificates. For
additional information regarding treatment of the Class B Certificates under
ERISA, see "ERISA Considerations" in the Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in an Underwriting
Agreement (the "Bond Underwriting Agreement"), the Seller has agreed to cause
the Trust to sell to each of the Bond Underwriters named below (collectively,
the "Bond Underwriters"), and each of the Bond Underwriters has severally
agreed to purchase, the principal amount of Bonds set forth opposite its name
below:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT OF PRINCIPAL AMOUNT OF PRINCIPAL AMOUNT OF
UNDERWRITER CLASS A-1 BONDS CLASS A-2 BONDS CLASS A-3 BONDS
----------- --------------- --------------- ---------------
<S> <C> <C> <C>
TOTAL
</TABLE>
The Seller has been advised by the Bond Underwriters that they propose
initially to offer the Bonds to the public at the prices set forth herein, and
to certain dealers at such price less the initial concession not in excess of
___% of the denominations of the Bonds per Class A-1 Bond, ___% per Class A-2
Bond and ___% per Class A-3 Bond. The Bond Underwriters may allow, and such
dealers may reallow, a concession not in excess of ___% per Class A-1 Bond,
___% per Class A-2 Bond and ___% per Class A-3
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<PAGE> 68
Bond to certain other dealers. After the initial public offering of the Bonds,
the public offering price and such concessions may be changed.
Subject to the terms and conditions set forth in an Underwriting
Agreement (the "Certificate Underwriting Agreement"), the Seller has agreed to
cause the Trust to sell to each of the Certificate Underwriters named below
(the "Certificate Underwriters" and, together with the Bond Underwriters, the
"Underwriters"), and each of the Certificate Underwriters has severally agreed
to purchase, the principal amount of Class B Certificates set forth opposite
its name below:
<TABLE>
<CAPTION>
UNDERWRITERS PRINCIPAL AMOUNT OF CLASS B CERTIFICATES
------------ ----------------------------------------
<S> <C>
TOTAL
</TABLE>
The Seller has been advised by the Certificate Underwriters that they
propose initially to offer the Class B Certificates to the public at the price
set forth herein, and to certain dealers at such price less the initial
concession not in excess of ___% per Class B Certificate. The Certificate
Underwriters may allow, and such dealers may reallow, a concession not in
excess of ___% per Class B Certificate to certain other dealers. After the
initial public offering of the Class B Certificates, the public offering price
and such concessions may be changed.
LEGAL INVESTMENT
The Offered Securities will not constitute "mortgage related
securities" under the Secondary Mortgage Market Enhancement Act of 1984
("SMMEA") because a substantial number of the Home Loans are unsecured or are
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 Offered Securities.
There may be restrictions on the ability of certain investors,
including depository institutions, either to purchase the Offered Securities or
to purchase Offered Securities 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 Securities constitute legal
investments for such investors.
RATINGS
It is a condition to the issuance of the Bonds that each Class of Bond
be rated "_____" by Standard & Poor's and "_____" by Moody's. It is a
condition to the issuance of the Class B Certificates that they be rated "___"
by Standard & Poor's and "___" by Moody's. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision
or withdrawal at any time. The ratings assigned to the Bonds will be based
primarily on the claims-paying ability of the Bond Insurer.
The ratings on the Offered Securities address the likelihood of the
receipt by the holders of the Offered Securities of all distributions on the
Home Loans to which they are entitled. The ratings on the Offered Securities
also address the structural, legal and issuer-related aspects associated with
the Offered
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<PAGE> 69
Securities, including the nature of the Home Loans. In general, the ratings on
the Offered Securities address credit risk and not prepayment risk. The ratings
on the Offered Securities do not represent any assessment of the likelihood
that principal prepayments of the Home Loans 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
Securities do not address the possibility that holders of the Offered
Securities might suffer a lower than anticipated yield in the event of
principal payments on the Offered Securities resulting from funds remaining in
the Pre-Funding Account at the end of the Funding Period or rapid prepayments
of the Home Loans, or in the event that the Trust is terminated prior to the
Scheduled Final Distribution Dates of each Class of Bonds and the Class B
Certificates.
The Seller has not discussed ratings on the Offered Securities 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
Securities, or, if it does, what rating would be assigned by any such other
rating agency. Any rating on the Offered Securities by another rating agency,
if assigned at all, may be lower than the ratings assigned to the Offered
Securities 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 ratings
initially assigned to any of the Offered Securities by the Rating Agencies are
subsequently lowered for any reason, no person or entity is obligated to
provide any additional support or credit enhancement with respect to such
Offered Securities.
EXPERTS
The Annual Report on Form 10-K of ________ for the year ended
____________, 199_ incorporated by reference into this Prospectus Supplement
has been audited by ________________, 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 OPINIONS
In addition to the legal opinions described in the Prospectus, certain
legal matters relating to the issuance of the Offered Securities will be passed
upon for the Seller, the Transferor and the Servicer by Andrews & Kurth L.L.P.,
Dallas, Texas. In addition, Andrews & Kurth L.L.P., Dallas, Texas, will pass
on certain federal income tax and other legal matters for the Trust.
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<PAGE> 70
INDEX OF TERMS
<TABLE>
<S> <C>
"Account" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-39
"Additional Series" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-29
"Amount Available" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-40
"Assumed Pool Principal Balance" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
"Available Remittance Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-39
"Bond Insurer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-iii, S-7, S-45
"Bond Insurer Reimbursement Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-41, S-44
"Bond Underwriters" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-59
"Bond Underwriting Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-59
"Bondholder Rights" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-15, S-56
"Bonds" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-i, S-37
"Business Day" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-46
"Capitalized Interest Account" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7, S-54
"Capitalized Interest Account Deposit" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7, S-54
"Cedel" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4
"Certificate Principal Balance" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-43
"Certificate Underwriters" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-60
"Certificate Underwriting Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-60
"Class A-1 Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
"Class A-2 Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
"Class A-3 Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
"Class B Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-ii, S-3, S-37
"Class Principal Balance" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-43
"Code" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-12, S-58
"Collection Account" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-38
"Commission" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-iv
"Conventional Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-ii, S-5, S-23
"Custodian Fee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-11
"Cut-off Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
"Defective Home Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-17
"Deficiency Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-46
"Deleted Home Loan" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-29
"Determination Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-39
"Distribution Account" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-39
"Distribution Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-ii, S-1, S-37
"DTC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4
"Due Period" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
"ERISA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-12
"Euroclear" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4
"Excess Overcollateralization Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-9, S-51
"Excess Servicing Fee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-55
"Excess Spread" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-41
"FFI" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-27
"Final Scheduled Distribution Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4
"Fiscal Agent" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-46
"Funding Period" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6, S-54
"Guaranteed Payment" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-46
</TABLE>
S-62
<PAGE> 71
<TABLE>
<S> <C>
"Guaranty Insurance Premium" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-11
"Guaranty Policy" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-iii, S-7, S-45
"Home Loan Pool" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-ii, S-5
"Home Loan Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-23, S-31
"Home Loan Schedule" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-52
"Home Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-ii, S-5
"Indenture" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-ii, S-2, S-37, S-47
"Indenture Trustee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-ii, S-1, S-37
"Indenture Trustee Fee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-11
"Insurance Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-44
"Insurance Proceeds" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-43
"Interest Rates" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
"Interest Remittance Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-42
"Interest Shortfall" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-54
"Issuer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
"Liquidated Home Loan" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-43
"Mortgaged Properties" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-ii, S-6
"Mortgages" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-ii, S-5
"Net Liquidation Proceeds" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-43
"Net Loan Losses" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-49
"Notice" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-46
"Offered Securities" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-ii, S-3, S-37
"Original Certificate Principal Balance" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3, S-37
"Original Class Principal Balance" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3, S-37
"Overcollateralization Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-9, S-50
"Overcollateralization Reduction Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-10, S-51
"Overcollateralization Stepdown Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-9, S-51
"Owner" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-47
"Owner Trustee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-i, S-1
"Pass Through Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
"Plan" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-58
"Preference Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-47
"Prepayment" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-35
"Pre-Funding Account" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
"Pre-Funding Account Deposit" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-6
"Principal Remittance Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-42
"Purchase Price" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-29
"Qualified Substitute Home Loan" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-29
"RAC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
"Rating Agencies" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-iii, S-12
"Record Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2, S-37
"Registration Statement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-iv
"Released Mortgaged Property Proceeds" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-43
"Remittance Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-44
"Required Overcollateralization Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-52
"Reserve Fund Requirement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8, S-49
"Residual Certificate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-ii, S-4, S-37
"Secured Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-ii, S-5
"Security Owners" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4
</TABLE>
S-63
<PAGE> 72
<TABLE>
<S> <C>
"Seller" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-i, S-1, S-21, S-27
"Servicer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-27
"Servicing Fee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-10, S-55
"Subsequent Home Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5
"Subservicer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-10
"Tax Counsel" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-11
"Transfer and Servicing Agreements" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-22, S-52
"Transferor" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1, S-27
"Trust" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-i, S-1, S-37
"Trust Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-i, S-1, S-37
"Underwriters" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-60
"Unsecured Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-ii, S-5
</TABLE>
S-64
<PAGE> 73
***************************************************************************
* *
* Information contained herein is subject to completion or amendment. *
* A registration statement relating to these securities has been filed *
* with the Securities and Exchange Commission. These securities may *
* not be sold nor may offers to buy be accepted prior to the time the *
* registration statement becomes effective. This Prospectus Supplement *
* and the accompanying 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 jurisdiction in which such offer, *
* solicitation or sale would be unlawful prior to the registration or *
* qualification under the securities laws of any such jurisdiction. *
* *
***************************************************************************
SUBJECT TO COMPLETION, DATED AUGUST 19, 1996
PROSPECTUS
FIRSTPLUS HOME IMPROVEMENT LOAN TRUSTS
ASSET BACKED BONDS
ASSET BACKED CERTIFICATES
FIRSTPLUS INVESTMENT CORPORATION,
SELLER
FIRSTPLUS FINANCIAL, INC.,
TRANSFEROR AND SERVICER
The Asset Backed Bonds (the "Bonds") and the Asset Backed Certificates
(the "Certificates" and, together with the Bonds, the "Securities") described
herein may be sold from time to time in one or more series (each, a "Series"),
in amounts, at prices and on terms to be determined at the time of sale and to
be set forth in a supplement to this Prospectus (a "Prospectus Supplement").
Each Series of Securities, which may include one or more classes (each, a
"Class") of Bonds and/or Certificates, will be issued by a trust to be formed
with respect to such Series (each, a "Trust"). Each Trust will be formed
pursuant to either a Trust Agreement (each, a "Trust Agreement") to be entered
into among FIRSTPLUS INVESTMENT CORPORATION, as Seller (the "Seller") and the
owner trustee specified in the related Prospectus Supplement (the "Owner
Trustee") or a Pooling and Servicing Agreement (each, a "Pooling and Servicing
Agreement") to be entered into among the Seller, FIRSTPLUS FINANCIAL, INC., as
Servicer (the "Servicer") and the trustee specified in the related Prospectus
Supplement (the "Trustee"). If a Series of Securities includes Bonds, such
Bonds of a Series will be issued and secured pursuant to an Indenture between
the Trust and the Indenture Trustee specified in the related Prospectus
Supplement (the "Indenture Trustee") and will represent indebtedness of the
related Trust. If a Series of Securities includes Certificates, such
Certificates of a Series will represent undivided ownership interest in the
related Trust. The related Prospectus Supplement will specify which Class or
Classes of Bonds, if any, and which Class or Classes of Certificates, if any,
of the related Series are being offered thereby.
(Continued on next page)
See "ERISA Considerations" herein and in the related Prospectus
Supplement for a discussion of restrictions on the acquisition of Securities by
"plan fiduciaries."
BEFORE PURCHASING ANY OFFERED SECURITIES, PROSPECTIVE INVESTORS SHOULD
REVIEW THE INFORMATION SET FORTH HEREIN UNDER THE CAPTION "RISK FACTORS" AND
SUCH INFORMATION AS MAY BE SET FORTH UNDER THE CAPTION "RISK FACTORS" IN THE
RELATED PROSPECTUS SUPPLEMENT.
EXCEPT AS OTHERWISE SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT, ANY NOTES
OF A SERIES REPRESENT OBLIGATIONS OF, AND THE CERTIFICATES OF A SERIES
REPRESENT BENEFICIAL INTERESTS IN, THE RELATED TRUST ONLY AND DO NOT REPRESENT
OBLIGATIONS OF OR INTERESTS IN, AND ARE NOT GUARANTEED OR INSURED BY, THE
SELLER OR THE SERVICER OR ANY OF THEIR RESPECTIVE AFFILIATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
Retain this Prospectus for future reference. This Prospectus may not
be used to consummate sales of Securities offered hereby unless accompanied by
a Prospectus Supplement.
The date of this Prospectus is _____________, 199__
<PAGE> 74
(Continued from prior page)
The property of each Trust (the "Trust Property") will consist
primarily of a segregated pool (a "Loan Asset Pool") of one or more of the
following mortgage related assets (the "Loan Assets"): (i) pools (each, a
"Mortgage Pool") of single family (one- to four-unit) residential mortgage
loans, 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"); and (ii) pools (each, 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 loans evidenced by retail installment sales or installment loan
agreements which are not secured by any interest in real or personal property
("Unsecured Contracts" and, together with the Secured Contracts, the
"Contracts"). To the extent specified in the related Prospectus Supplement,
the Loan Assets may include Title I Mortgage Loans and Title I Contracts. If
specified in the related Prospectus Supplement, the Trust Property for a Series
of Securities may include the rights or other ancillary or incidental assets
(together with the Loan Assets, collectively, the "Assets") that are intended
(i) to provide credit enhancement for the ultimate or timely distributions of
proceeds from the Loan Assets to holders of the Securities ("Securityholders")
or (ii) to assure the servicing of the Loan Assets. The Loan Assets will
consist of loans for which the related proceeds were used to finance (i)
property improvements, (ii) the acquisition of personal property such as home
appliances or furnishings, (iii) debt consolidation, (iv) the purchase or
refinancing of single family residential property, or (v) a combination of
property improvements, debt consolidation and other consumer purposes, which
loans are marketed by the Transferor under the name "BusterPlus(TM) Loans".
Each Class of Securities of a Series will represent the right to
receive specified payments in respect of collections of principal and interest
on the related Assets, at the rates, on the dates and in the manner described
herein and in the related Prospectus Supplement. If a Series includes multiple
Classes of Securities, the rights of one or more Classes of Securities to
receive payments may be senior or subordinate to the rights of one or more of
the other Classes of such Series. Distributions on Certificates of a Series
may be subordinated in priority to payments due on any related Bonds of such
Series to the extent described herein and in the related Prospectus Supplement.
A Series may include one or more Classes of Bonds and/or Certificates which
differ as to the timing and priority of payment, interest rate or amount of
distributions in respect of principal or interest or both. A Series may
include one or more Classes of Bonds or Certificates entitled to distributions
in respect of principal with disproportionate, nominal or no interest
distributions, or to interest distributions, with disproportionate, nominal or
no distributions in respect of principal. The rate of payment in respect of
principal of any Class of Bonds and distributions in respect of principal of
the Certificates of any Class will depend on the priority of payment of such
Class and Certificates and the rate and timing of payments (including
prepayments, defaults, liquidations and repurchases of Assets) on the related
Assets. A rate of payment lower or higher than that anticipated may affect the
weighted average life of each Class of Securities in the manner described
herein and in the related Prospectus Supplement. See "Risk Factors -- Effect
of Prepayments on Average Life".
Offers of the Securities may be made through one or more different
methods, including offerings through underwriters, as more fully described
herein and in the related Prospectus Supplement. See "Plan of Distribution"
herein. There will have been no public market for any Series of Securities
prior to the offering thereof. There can be no assurance that a secondary
market will develop for the Securities of any Series or, if it does develop,
that such market will continue.
-ii-
<PAGE> 75
PROSPECTUS SUPPLEMENT
As further described herein, the Prospectus Supplement relating to
each Series of Securities offered thereby (the "Offered Securities") will,
among other things, set forth, as and to the extent appropriate: (i) a
description of each Class of such Offered Securities, including with respect to
each such Class the following (A) the applicable payment or 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 Securities of the
same Series; (iii) the respective dates on which payments or distributions are
to be made; (iv) information as to the Assets, including the Loan Assets and
Credit Enhancement, constituting the related Trust Property; (v) the
circumstances, if any, under which the Securities may be subject to redemption
or early termination; (vi) additional information with respect to the method
of payment or distribution in respect of such Offered Securities; (vii) the
initial percentage ownership interest in the related Trust to be evidenced by
each Class of Certificates of such Series; (viii) information concerning the
Trustee (as defined herein) of the related Trust; (ix) if the related Trust
Property consists of Mortgage Loans or Contracts, information concerning the
Servicer and any Master Servicer (each as defined herein) of such Mortgage
Loans or Contracts; (x) information as to the nature and extent of
subordination of any Class of Securities of such Series, including a Class of
Offered Securities; and (xi) whether such Offered Securities will be initially
issued in definitive or book-entry form.
The actual characteristics of the Loan 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.
-iii-
<PAGE> 76
AVAILABLE INFORMATION
The Seller, as originator of each Trust, has filed with the Securities
and Exchange Commission (the "Commission") a Registration Statement (together
with all amendments and exhibits thereto, referred to herein as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Securities to be offered from time to
time pursuant to this Prospectus. For further information, reference is made
to the Registration Statement which may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549; and at the Commission's regional offices at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven
World Trade Center, New York, New York 10048. Copies of the Registration
Statement may also be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
In addition, the Commission maintains a Web site on the Internet that contains
reports, proxy and information statements and other information regarding the
Seller. The address of such Web site is http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Seller pursuant to Section 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the
date of this Prospectus and prior to the termination of the offering of the
Securities shall be deemed to be incorporated by reference in this Prospectus.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any 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 Seller will provide without charge to each person, including any
beneficial owner of Securities, to whom a copy of this Prospectus is delivered,
on the written or oral request of any such person, a copy of any or all of the
documents incorporated herein or in any related Prospectus Supplement by
reference, except the exhibits to such documents (unless such exhibits are
specifically incorporated by reference in such documents). Requests for such
copies should be directed to the Seller at 3773 Howard Hughes Parkway, Suite
300N, Las Vegas, Nevada 89109 (Telephone: (702) 892-3772), Attention: Michael
Orendorf.
-iv-
<PAGE> 77
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INTRODUCTORY NOTE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PROSPECTUS SUPPLEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
SUMMARY OF TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Limited Liquidity and Fluctuation in Value from Market Conditions . . . . . . . . . . . . . . . . . . . . . 10
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Lack of a Secondary Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Book Entry Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Limited Nature of Ongoing Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Sensitivity to Fluctuations in Prevailing Interest Rates . . . . . . . . . . . . . . . . . . . . . . 11
Limited Assets of the Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Additions, Substitutions and Withdrawals of Assets . . . . . . . . . . . . . . . . . . . . . . . . . 12
Effect of Prepayments on Average Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Effect of Prepayments on Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Limitations of Credit Enhancement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Limitations Regarding Types of Losses Covered . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Disproportionate Benefits to Certain Classes and Series . . . . . . . . . . . . . . . . . . . . . . 14
Limitations Regarding the Amount of Credit Enhancement . . . . . . . . . . . . . . . . . . . . . . . 14
Limitations on FHA Insurance for Title I Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Limited Nature of Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Adverse Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Original Issue Discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Certain Factors Affecting Delinquencies, Foreclosures and Losses on Loan Assets . . . . . . . . . . . . . . 17
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Geographic Concentration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Decline in Value of a Loan Asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Limitations on Realizations of Junior Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Certain Legal Considerations of the Loan Assets . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Risks Associated with Certain Loan Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
No Hazard Insurance for Title I Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Contracts Secured by Manufactured Homes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Unsecured Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Consumer Protection Laws related to Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Reliance on Management of Timeshare Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Recharacterization of Sale of Loan Assets as Borrowing . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Risks Relating to Indexed Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>
-v-
<PAGE> 78
<TABLE>
<S> <C>
DESCRIPTION OF THE BONDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Principal and Interest on the Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
The Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Modification of Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Events of Default; Rights upon Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Certain Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Annual Compliance Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Indenture Trustee's Annual Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Satisfaction and Discharge of Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
The Indenture Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Administration Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
DESCRIPTION OF THE CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Distributions of Principal and Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
POOL FACTORS AND TRADING INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
CERTAIN INFORMATION REGARDING THE SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Fixed Rate Securities and Floating Rate Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Indexed Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Book-Entry Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Definitive Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
THE TRUSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
THE TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
DESCRIPTION OF THE TRUST PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Additions, Substitution and Withdrawal of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Pre-Funding Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
CREDIT ENHANCEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Subordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Overcollateralization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Cross-Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Guaranty Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Mortgage Pool Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Special Hazard Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Reserve Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
</TABLE>
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<TABLE>
<S> <C>
SERVICING OF THE LOAN ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Enforcement of Due-on-Sale Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Realization Upon Defaulted Loan Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Waivers and Deferments of Certain Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Subservicers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Removal and Resignation of Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Servicing Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Administration and Servicing Compensation and Payment of Expenses . . . . . . . . . . . . . . . . . . . . . 50
THE SELLER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
THE SERVICER AND THE TRANSFEROR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Sale and Assignment of Loan Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Conveyance of Subsequent Loan Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Repurchase or Substitution of Loan Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Evidence as to Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
List of Securityholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Administration of the Distribution Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Reports to Securityholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Rights Upon Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
CERTAIN LEGAL ASPECTS OF THE LOAN ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
General Legal Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Cooperative Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Cooperative Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Junior Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Right of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Anti-Deficiency Legislation and Other Limitations on Lenders . . . . . . . . . . . . . . . . . . . . 66
Enforceability of Certain Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Adjustable Rate Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Environmental Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Truth in Lending Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Applicability of Usury Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
Soldiers' and Sailors' Civil Relief Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
The Title I Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Requirements for Title I Property Improvement Loans and Contracts . . . . . . . . . . . . . . . . . 75
Requirements for Title I Manufactured Home Contracts . . . . . . . . . . . . . . . . . . . . . . . . 77
</TABLE>
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<TABLE>
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Title I Underwriting Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Claims Procedures Under Title I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
No Rights of Securityholders Against FHA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
CERTAIN FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
TRUSTS FOR WHICH A PARTNERSHIP ELECTION IS MADE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Tax Characterization of the Trust as a Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
Tax Consequences to Holders of the Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Treatment of the Bonds as Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
OID, Indexed Securities, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Interest Income on the Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Sale or Other Disposition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Foreign Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Backup Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Possible Alternative Treatments of the Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Tax Consequences to Holders of the Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Treatment of the Trust as a Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Indexed Securities, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Partnership Taxation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Discount and Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Section 708 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Disposition of Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Allocations Between Transferors and Transferees . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Section 754 Election . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Administrative Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Tax Consequences to Foreign Certificateholders . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Backup Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
TRUSTS TREATED AS GRANTOR TRUSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Tax Characterization of the Trust as a Grantor Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Characterization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Stripped Bonds and Stripped Coupons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Original Issue Discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Market Discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Election to Treat All Interest as OID . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Sale or Exchange of a Grantor Trust Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Non-U.S. Persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Information Reporting and Backup Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
LEGAL INVESTMENT MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
</TABLE>
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<TABLE>
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USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
LEGAL OPINIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
INDEX OF TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
</TABLE>
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SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to the Securities of any Series contained in the
related Prospectus Supplement to be prepared and delivered in connection with
the offering of such Securities. Certain capitalized terms used herein are
defined elsewhere in this Prospectus on the pages indicated in the "Index of
Terms".
ISSUER . . . . . . . . . . . . With respect to each Series of Securities,
the Trust to be formed pursuant to either
a Trust Agreement (as amended and
supplemented from time to time, a "Trust
Agreement") among the Seller and the
applicable Owner Trustee for such Trust
(the "Trust" or the "Issuer") or a Pooling
and Servicing Agreement (as amended and
supplemented from time to time, the
"Pooling and Servicing Agreement") among
the Seller, the Servicer and the Trustee
for such Trust.
SELLER . . . . . . . . . . . . FIRSTPLUS INVESTMENT CORPORATION (the
"Seller").
TRANSFEROR AND SERVICER . . . . FIRSTPLUS FINANCIAL, INC.("FFI" or the
"Transferor" or the "Servicer").
TRUSTEE . . . . . . . . . . . . With respect to each Series of Securities
that is issued by a grantor trust, the
Trustee specified in the related
Prospectus Supplement.
OWNER TRUSTEE . . . . . . . . . With respect to each Series of Securities
that is issued by an owner trust, the
Owner Trustee specified in the related
Prospectus Supplement.
INDENTURE TRUSTEE . . . . . . With respect to any applicable Series of
Securities that includes one or more
Classes of Bonds, the Indenture Trustee
specified in the related Prospectus
Supplement.
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 Loan Assets
included as Trust Property. The
Administrator may be an affiliate of the
Seller and/or the Servicer.
MASTER SERVICER . . . . . . . . If the related Trust Property consists of
Mortgage Loans or Contracts, the entity or
entities, if any, named as the master
servicer in the related Prospectus
Supplement (the "Master Servicer"), that
will act as master servicer with respect
to such Mortgage Loans or Contracts. The
Master Servicer may be an affiliate of the
Seller and/or Servicer.
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<PAGE> 83
THE BONDS . . . . . . . . . . A Series of Securities may include one or
more Classes of Bonds, which will be
issued pursuant to an Indenture between
the Trust and the Indenture Trustee (as
amended and supplemented from time to
time, an "Indenture"). The related
Prospectus Supplement will specify which
Class or Classes, if any, of Bonds of the
related Series are being offered thereby.
To the extent specified in the related
Prospectus Supplement, Bonds will be
available for purchase in denominations of
$1,000 and integral multiples thereof and
will be available in book-entry form only.
Bondholders will be able to receive
Definitive Bonds only in the limited
circumstances described herein or in the
related Prospectus Supplement. See
"Certain Information Regarding the
Securities -- Definitive Securities".
To the extent specified in the related
Prospectus Supplement, each Class of Bonds
will have a stated principal amount and
will bear interest at a specified rate or
rates (with respect to each Class of
Bonds, the "Interest Rate"). Each Class
of Bonds may have a different Interest
Rate, which may be a fixed, variable or
adjustable Interest Rate, or any
combination of the foregoing. The related
Prospectus Supplement will specify the
Interest Rate for each Class of Bonds, or
the method for determining the Interest
Rate.
With respect to a Series that includes two
or more Classes of Bonds, each Class may
differ as to the timing and priority of
payments, seniority, allocations of
losses, Interest Rate or amount of
payments of principal or interest, or
payments of principal or interest in
respect of any such Class or Classes may
or may not be made upon the occurrence of
specified events or on the basis of
collections from designated portions of
the Trust Property.
In addition, a Series may include one or
more Classes of Bonds entitled to (i)
principal payments with disproportionate,
nominal or no interest payments or (ii)
interest payments with disproportionate,
nominal or no principal payments.
To the extent specified in the related
Prospectus Supplement, the Seller, the
Servicer or a successor thereto may have
an option to purchase the Trust Property
in the manner and on the respective terms
and conditions as set forth in the related
Prospectus Supplement.
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<PAGE> 84
THE CERTIFICATES . . . . . . . A Series may include one or more Classes
of Certificates and may or may not include
any Bonds. The related Prospectus
Supplement will specify which Class or
Classes, if any, of the Certificates are
being offered thereby.
To the extent specified in the related
Prospectus Supplement, Certificates will
be available for purchase in a minimum
denomination of $1,000 and in integral
multiples thereof and will be available in
book-entry form only. Certificateholders
will be able to receive Definitive
Certificates only in the limited
circumstances described herein or in the
related Prospectus Supplement. See
"Certain Information Regarding the
Securities--Definitive Securities".
To the extent specified in the related
Prospectus Supplement, each Class of
Certificates will have a stated
Certificate Balance specified in the
related Prospectus Supplement (the
"Certificate Balance") and will accrue
interest on such Certificate Balance at a
specified rate (with respect to each Class
of Certificates, the "Pass Through Rate").
Each Class of Certificates may have a
different Pass Through Rate, which may be
a fixed, variable or adjustable Pass
Through Rate, or any combination of the
foregoing. The related Prospectus
Supplement will specify the Pass Through
Rate for each Class of Certificates or the
method for determining the Pass Through
Rate.
With respect to a Series that includes two
or more Classes of Certificates, each
Class may differ as to timing and priority
of distributions, seniority, allocations
of losses, Pass Through Rate or amount of
distributions in respect of principal or
interest, or distributions in respect of
principal or interest in respect of any
such Class or Classes may or may not be
made upon the occurrence of specified
events or on the basis of collections from
designated portions of the Trust Property.
In addition, a Series may include one or
more Classes of Certificates entitled to
(i) distributions in respect of principal
with disproportionate, nominal or no
interest distributions or (ii) interest
distributions with disproportionate,
nominal or no distributions in respect of
principal.
If a Series of securities includes Classes
of Bonds, distributions in respect of the
Certificates may be subordinated in
priority of payment to payments on the
Bonds to the extent specified in the
related Prospectus Supplement.
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<PAGE> 85
To the extent specified in the related
Prospectus Supplement, the Seller, the
Servicer or a successor thereto may have
an option to purchase the Trust Property
in the manner and on the respective terms
and conditions as set forth in the related
Prospectus Supplement.
THE TRUST PROPERTY . . . . . . As specified in the related Prospectus
Supplement, the property of each Trust
(the "Trust Property") will include Loan
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,
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"); and
(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 loans
evidenced by retail installment
sales or installment loan
agreements which are not secured by
any interest in real or personal
property ("Unsecured Contracts"
and, together with the Secured
Contracts, the "Contracts").
The Trust Property may also include, or
the related Securities may also have the
benefits of, certain rights and other
ancillary or incidental assets (together
with the Loan Assets, collectively, the
"Assets"), that are intended (i) to
enhance the likelihood of ultimate or
timely distributions of proceeds from the
Loan Assets to Securityholders, 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 Loan
Assets, including interest rate exchange
agreements, reinvestment income and cash
accounts. The Loan Assets will consist of
loans for which the related proceeds were
used to finance (i) property improvements,
(ii) the acquisition of personal property
such as home appliances
4
<PAGE> 86
or furnishings, (iii) debt consolidation,
(iv) the purchase or refinancing of single
family residential property, or (v) a
combination of property improvements, debt
consolidation and other consumer purposes,
which loans are marketed by the Transferor
under the name "BusterPlus(TM) Loans".
The Securities of any Series will be
entitled to payment only from the Trust
Property and any other Assets pledged or
otherwise available for the benefit of the
holders of such Securities as specified in
the related Prospectus Supplement.
The property of each Trust may also
include amounts on deposit in certain
trust accounts, including the related
Collection Account, Distribution Account
and any Yield Maintenance Account, Reserve
Fund or other account identified in the
applicable Prospectus Supplement.
A. Mortgage Loans . . . . . . As specified in the related Prospectus
Supplement for a Series, "Mortgage Loans"
may include: (i) loans secured by first
liens on one-to-four family residential
properties; (ii) 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) loans
secured by junior (i.e., second, third,
etc.) liens on the related mortgaged
properties (which may be evidenced by
retail installment sales contracts and
installment loan agreements); (iv) 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 "Description of the Trust
Property -- Mortgage Loans". Certain of
the junior lien Mortgage Loans may be
conventional (i.e., not insured or
guaranteed by a governmental agency)
mortgage loans ("Conventional Mortgage
Loans"), while other junior lien Mortgage
Loans that are property improvement loans
may 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 related
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Trust and will specify certain information
regarding the payment terms of such
Mortgage Loans. See "Description of the
Trust Property -- 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)
loans evidenced by retail installment
sales or installment loan agreements which
are not secured by any interest in real or
personal property ("Unsecured Contracts").
See "Description of the Trust Property --
Contracts". Certain Contracts may be
conventional (i.e., not insured or
guaranteed by a governmental agency)
contracts (the "Conventional Contracts"),
while other Contracts may 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 the type of
Contracts, if any, included in the related
Trust. See "Description of the Trust
Property -- Contracts."
C. Pre-Funding Arrangements . To the extent provided in the related
Prospectus Supplement for a Series, the
related Sale and Servicing Agreement or
Pooling and Servicing Agreement will
provide for a commitment by the related
Trust to subsequently purchase additional
Loan Assets ("Subsequent Loan Assets")
from the Seller following the date on
which the related Securities are issued (a
"Pre-Funding Arrangement"). See
"Description of the Trust Property --
Pre-Funding Arrangements".
TRANSFER OF LOAN ASSETS . . . . On or before the date of initial issuance
of a Series of Securities (the related
"Closing Date"), the Seller will sell or
transfer Loan Assets having an aggregate
principal balance specified in the related
Prospectus Supplement as of the dates
specified therein (the "Cut-off Date") to
a Trust pursuant to, if the Trust is to be
treated as an owner trust, the related
Sale and Servicing Agreement among the
Seller, the Servicer and the Trust (as
amended and supplemented from time to
time, the "Sale and Servicing Agreement")
or, if the Trust is to be treated as a
grantor trust for federal income tax
purposes, the related Pooling and
Servicing Agreement among the Seller, the
Servicer
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and the Trustee (as amended from time to
time, the "Pooling and Servicing
Agreement")
The Loan Assets will have been (i)
originated by the Transferor in accordance
with the Transferor's underwriting
criteria or (ii) originated by the
Transferor's correspondents in accordance
with the Transferor's underwriting
criteria and subsequently purchased by the
Transferor. The Loan Assets to be sold
by the Transferor to the Seller and resold
by the Seller to a Trust will be selected
based on the underwriting criteria
specified in the Sale and Servicing
Agreement or Pooling and Servicing
Agreement, as applicable, and described
herein and in the related Prospectus
Supplement.
CREDIT ENHANCEMENT . . . . . If and to the extent specified in the
related Prospectus Supplement, credit
enhancement with respect to a Trust or any
Class or Classes of Securities may include
any one or more of the following:
subordination of one or more other Classes
of Securities, a Reserve Fund, a Yield
Maintenance Account,
overcollateralization, letters of credit,
credit or liquidity facilities, surety
bonds, guaranteed investment contracts,
swaps or other interest rate protection
agreements, repurchase obligations, cash
deposits or other agreements or
arrangements with respect to third party
payments or other support. Any form of
credit enhancement may have certain
limitations and exclusions from coverage
thereunder and, if so, such limitations
and exclusions from coverage will be
described in the related Prospectus
Supplement. See "Risk Factors --
Limitations of Credit Enhancement" and
"Credit Enhancement".
TRANSFER AND SERVICING
AGREEMENTS . . . . . . . . . . With respect to each Trust that will be
treated as an owner trust, the Seller will
sell the related Assets to such Trust
pursuant to a Sale and Servicing Agreement
or a Pooling and Servicing Agreement. The
rights and benefits of any Trust under a
Sale and Servicing Agreement will be
assigned to the Indenture Trustee as
collateral for the Bonds of the related
Series. The Servicer will agree with such
Trust to be responsible for servicing,
managing, maintaining custody of and
making collections on the Assets. If and
to the extent set forth in the related
Prospectus Supplement, FFI will undertake
certain administrative duties under an
Administration Agreement with respect to
any Trust that has issued Bonds.
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CERTAIN FEDERAL INCOME TAX
CONSEQUENCES . . . . . . . . Unless the Prospectus Supplement specifies
that the related Trust will be treated as
a grantor trust and, except as otherwise
provided in such Prospectus Supplement,
upon the issuance of the related Series of
Securities, Tax Counsel to such Trust will
deliver an opinion to the effect that for
federal income tax purposes (a) any Bonds
of such Series will be characterized as
debt and (b) such Trust will not be
characterized as an association (or a
publicly traded partnership) taxable as a
corporation. In respect of any such
Series, each Bondholder, if any, by the
acceptance of a Bond of such Series, will
agree to treat such Bond as indebtedness,
and each Certificateholder, by the
acceptance of a Certificate of such
Series, will agree to treat such Trust as
a partnership in which such
Certificateholder is a partner for federal
income tax purposes. Alternative
characterizations of such Trust and such
Certificates are possible, but would not
result in materially adverse tax
consequences to Certificateholders.
If the Prospectus Supplement specifies
that the related Trust will be treated as
a grantor trust and except as otherwise
provided in such Prospectus Supplement,
upon the issuance of the related Series of
Certificates, Tax Counsel to such Trust
will deliver an opinion to the effect that
such Trust will be treated as a grantor
trust for federal income tax purposes and
will not be subject to federal income tax.
See "Certain Federal Income Tax
Consequences"for additional information
concerning the application of federal tax
laws to the Securities.
ERISA CONSIDERATIONS . . . . . A fiduciary of any employee benefit plan
subject to the Employee Retirement Income
Security Act of 1974, as amended
("ERISA"), or the Code should carefully
review with its own legal advisors whether
the purchase or holding of Securities
could give rise to a transaction
prohibited or otherwise impermissible
under ERISA or the Code. See "ERISA
Considerations." To the extent described
in the Prospectus Supplement for a Series,
certain Classes of Securities of such
Series may not be transferred unless the
applicable Trustee and the Seller 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
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ERISA and the Code and will not subject
the applicable Trustee, the Seller, 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
"Certain Information Regarding the
Securities -- General" and "ERISA
Considerations."
LEGAL INVESTMENT MATTERS . . . The Securities of each Series will not
constitute "mortgage related securities"
under the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") because,
to the extent specified in the related
Prospectus Supplement, a substantial
number of the Mortgage Loans will be
secured by liens on real estate that are
not first liens, as required by SMMEA.
Accordingly, many institutions with legal
authority to invest in "mortgage related
securities" may not be legally authorized
to invest in the Securities of any Series.
Investors should consult their own legal
advisors in determining whether and to
what extent the Securities 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 Loan
Assets included in the related Trust or to
reimburse the amounts previously used to
effect such purchase, the costs of
carrying the Loan Assets until sale of
such Series and to pay other expenses
connected with pooling the Loan 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 Securities of such
Class be rated in one of the four highest
rating categories established for such
Securities by a nationally recognized
statistical rating agency (a "Rating
Agency").
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RISK FACTORS
In considering an investment in the Offered Securities 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.
LIMITED LIQUIDITY AND FLUCTUATION IN VALUE FROM MARKET CONDITIONS
GENERAL. The Offered Securities 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 Securities for an indefinite period of time.
Furthermore, except to the extent described herein and in the related
Prospectus Supplement, Securityholders will have no redemption rights, and the
Offered Securities of each Series are subject to early retirement only under
certain specified circumstances described in the related Prospectus Supplement.
LACK OF A SECONDARY MARKET. There can be no assurance that a
secondary market for the Offered Securities 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 Offered Securities remain
outstanding. The Prospectus Supplement for any Series of Offered Securities
may indicate that an underwriter specified therein intends to establish a
secondary market in such Offered Securities; 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 Securities may be listed on any securities exchange.
BOOK ENTRY REGISTRATION. To the extent specified in the related
Prospectus Supplement, persons acquiring beneficial ownership interests in the
Securities of any Series or Class will hold their Securities through DTC, in
the United States, or Cedel or Euroclear in Europe. Transfers within DTC,
Cedel or Euroclear, as the case may be, will be in accordance with the usual
rules and operating procedures of the relevant system. So long as the
Securities are Book- Entry Securities, such Securities will be evidenced by one
or more certificates registered in the name of Cede & Co., as the nominee of
DTC, or Citibank N.A. or Morgan Guaranty Trust Company of New York, the
relevant depositaries of Cedel and Euroclear, respectively, and each a
participating member of DTC. No Securityholder will be entitled to receive a
definitive certificate representing such person's interest, except in the event
that Definitive Securities are issued under the limited circumstances described
herein. See "Certain Information Regarding the Securities -- Book-Entry
Registration". Unless and until Definitive Securities for such Series are
issued, holders of such Securities will not be recognized by the Trustee or any
applicable Indenture Trustee as "Certificateholders", "Bondholders" or
"Securityholders", as the case may be (as such terms are used herein or in the
related Pooling and Servicing Agreement or related Indenture and Trust
Agreement, as applicable). Hence, until Definitive Securities are issued,
holders of such Securities will only be able to exercise the rights of
Securityholders indirectly through DTC (if in the United States) and its
participating organizations, or Cedel and Euroclear (in Europe) and their
respective participating organizations. See "Certain Information Regarding the
Securities -- Book-Entry Registration".
Since transactions in the Securities can be effected only through DTC,
Cedel, Euroclear, participating organizations, indirect participants and
certain banks, the ability of the beneficial owner thereof to pledge such
Securities to persons or entities that do not participate in the DTC, Cedel or
Euroclear system, or otherwise to take actions in respect of such Securities,
may be limited due to lack of a physical certificate representing such
Securities.
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Beneficial owners of Securities may experience some delay in their
receipt of distributions of interest of and principal since such distributions
will be forwarded by the Trustee or Indenture Trustee to DTC and DTC will
credit such distributions to the accounts of its Participants (as defined
herein) which will thereafter credit them to the accounts of the beneficial
owners thereof either directly or indirectly through indirect participants.
LIMITED NATURE OF ONGOING INFORMATION. The primary source of ongoing
information regarding the Offered Securities of any Series, including
information regarding the status of the related Loan Assets and any Credit
Enhancement for such Offered Securities, will be the periodic reports to
Securityholders to be delivered pursuant to the related Indenture or Pooling
and Servicing Agreement as described herein under the heading "Description of
the Transfer and Servicing Agreements -- Reports to Securityholders". There
can be no assurance that any additional ongoing information regarding the
Offered Securities of any Series will be available through any other source.
The limited nature of such information in respect of a Series of Offered
Securities may adversely affect the liquidity thereof, even if a secondary
market for such Offered Securities does develop.
SENSITIVITY TO FLUCTUATIONS IN PREVAILING INTEREST RATES. Insofar as
a secondary market does develop with respect to any Series of Offered
Securities or Class thereof, the market value of such Offered Securities 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 Loan
Assets) and prevailing interest rates. The price payable at any given time in
respect of certain Classes of Offered Securities (in particular, a Class with a
relatively long average life, or a Class of Interest Only Securities or
Principal Only Securities) may be extremely sensitive to small fluctuations in
prevailing interest rates; and the relative change in price for an Offered
Security in response to an upward or downward movement in prevailing interest
rates may not necessarily equal the relative change in price for such Offered
Security in response to an equal but opposite movement in such rates.
Accordingly, the sale of Offered Securities by a holder in any secondary market
that may develop may be at a discount from the price paid by such holder. The
Seller is not aware of any source through which price information about the
Offered Securities will be generally available on an ongoing basis.
LIMITED ASSETS OF THE TRUST
The Offered Securities and Loan 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 Securities of any Series nor the Loan
Assets in the related Trust will be guaranteed or insured by the Seller, the
Servicer or any of their respective affiliates, by any governmental agency or
instrumentality or by any other person, and no Offered Security of any Series
will represent a claim against or security interest in the Trust for any other
Series. Accordingly, if the related Trust has insufficient assets to make
payments on a Series of Offered Securities, no other assets will be available
for payment of the deficiency, and the holders of one or more Classes of such
Offered Securities 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 Securities, on any Distribution Date in respect
of which losses or shortfalls in collections on the Loan 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 Securities, and,
thereafter, by the remaining Classes of Securities in the priority and manner
and subject to the limitations specified in such Prospectus Supplement.
Because distributions of principal on the Securities 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 Securities of a Class of any such
Series having higher
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priority in payment have been fully or partially repaid will have a
disproportionately greater effect on the Securities 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
Securities of any Series because, prior to the retirement of all Classes of
such Series having higher priority in payment than such Compound Interest
Securities, 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 Securities.
ADDITIONS, SUBSTITUTIONS AND WITHDRAWALS OF ASSETS. To the extent
provided in the related Prospectus Supplement for a Series, the Seller may,
subsequent to the issuance of such a Series, deliver additional Assets or
withdraw Assets previously included in the Trust 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 payments or distributions on, or the date of the final
payment or distribution in respect of, the Securities of such Series. See
"Description of the Trust Property -- Additions, Substitution and Withdrawal of
Assets". Furthermore, certain amounts on deposit from time to time in certain
funds or accounts constituting part of the Trust Property for a Series,
including the Distribution 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 Securities.
EFFECT OF PREPAYMENTS ON AVERAGE LIFE
As a result of prepayments on the Loan Assets, the amount and timing
of payments or distributions of principal and/or interest on the Offered
Securities of the related Series may be highly unpredictable. Prepayments on
the Loan Assets in any Trust will result in a faster rate of principal payments
on one or more Classes of the related Series of Securities than if payments on
such Loan Assets were made as scheduled. Thus, the prepayment experience on
the Loan Assets in a Trust may affect the average life of one or more Classes
of Securities of the related Series, including a Class of Offered Securities.
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 Loan Assets included in a Trust, then, subject to the
particular terms of the Loan Assets (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 Loan Assets are likely to be higher than if prevailing
interest rates remain at or above the rates borne by those Loan Assets.
Conversely, if prevailing interest rates rise significantly above the interest
rates borne by the Loan Assets included in a Trust, then principal prepayments
on such Loan Assets are likely to be lower than if prevailing interest rates
remain at or below the interest rates borne by those Loan Assets. In addition
to fluctuations in prevailing interest rates, the rate of prepayments on the
Loan Assets 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 Loan Assets in any Trust 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 Loan Assets in
any
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Trust, the retirement of any Class of Securities 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 Seller
is not aware of any reliable publicly available statistical information
regarding the rates of prepayment of loans such as the Loan Assets that is
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 Loan Assets will
experience. In fact, a number of factors suggest that the prepayment
experience of the Loan Assets 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 Securities will be set forth in the related
Prospectus Supplement.
The extent to which prepayments on the Loan Assets included in any
Trust ultimately affect the average life of any Class of Securities of the
related Series will depend on the terms and provisions of such Securities. A
Class of Securities, including a Class of Offered Securities, may provide that
on any Distribution Date the holders of such Securities are entitled to a pro
rata share of the prepayments on the Loan Assets included in the related Trust
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 Securities that entitles the holders thereof to a
disproportionately large share of the prepayments on the Loan Assets included
in the related Trust increases the likelihood of early retirement of such Class
("Call Risk") if the rate of prepayment is relatively fast; while a Class of
Securities that entitles the holders thereof to a disproportionately small
share of the prepayments on the Loan Assets included in the related Trust
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 Securityholders of such Series to receive payments (and, in
particular, prepayments) of principal of the Loan Assets included in the
related Trust may vary based on the occurrence of certain events (e.g., the
retirement of one or more Classes of Securities of such Series) or whether
certain contingencies do or do not occur (e.g., prepayment and default rates
with respect to such Loan Assets).
A Series of Securities may include one or more Classes of scheduled
amortization Securities (each, a "Scheduled Amortization Security"), 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 Securities, a Class of Scheduled
Amortization Securities will generally provide a relatively stable cash flow so
long as the actual rate of prepayment on the Loan Assets included in the
related Trust remains relatively constant at the rate, or within the range of
rates, of prepayment used to establish the specific principal payment schedule
for such Securities. Prepayment risk with respect to a given pool of Loan
Assets does not disappear, however, and the stability afforded to Scheduled
Amortization Securities comes at the expense of one or more companion Classes
of the same Series (each, a "Companion Class"), any of which Companion Classes
may also be a Class of Offered Securities. 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
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Loan Assets included in the related Trust when the rate of prepayment is
relatively fast, and/or may entitle the holders thereof to a disproportionately
small share of prepayments on the Loan Assets included in the related Trust
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 Securities if all payments of principal of the
Loan Assets included in the related Trust were allocated on a pro rata basis.
EFFECT OF PREPAYMENTS ON YIELD
A Series of Securities may include one or more Classes of Offered
Securities offered at a premium or discount. Yields on such Classes of
Securities will be sensitive, and in some cases extremely sensitive, to
prepayments on the Loan Assets included in the related Trust and, where the
amount of interest payable with respect to a Class is disproportionately large,
as compared to the amount of principal, as with a Class of Interest Only
Securities, 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 Securities may vary from the anticipated yield will depend upon the
degree to which such Offered Securities 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 Security 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 Securities 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 Securities.
DISPROPORTIONATE BENEFITS TO CERTAIN CLASSES AND SERIES. A Series of
Securities may include one or more Classes of Subordinate Securities (which may
include Offered Securities), if provided in the related Prospectus Supplement.
Although subordination is intended to reduce the likelihood of temporary
shortfalls and ultimate losses to holders of the related senior Securities, 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 Securities 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 Securities of such Series has been repaid in full. As
a result, the impact of losses and shortfalls experienced with respect to the
Loan Assets may fall primarily upon those Classes of Offered Securities having
a later right of payments. Moreover, if a form of Credit Enhancement covers
the Offered Securities of more than one Series and losses on the related Loan
Assets exceed the amount of such Credit Enhancement, it is possible that the
holders of Offered Securities of one (or more) such Series will be
disproportionately benefited by such Credit Enhancement to the detriment of the
holders of Offered Securities 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
Securities, including the subordination of one or more other Classes of
Securities, will be determined on the basis of criteria established by each
Rating
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Agency rating such Classes of Securities based on an assumed level of defaults,
delinquencies and losses on the Loan Assets and certain other factors. There
can be no assurance that the default, delinquency and loss experience on such
Loan Assets will not exceed such assumed levels. See "Credit Enhancement". If
the defaults, delinquencies and losses on such Loan Assets do exceed such
assumed levels, the holders of one or more Classes of Offered Securities 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 FOR TITLE I LOANS. The related
Prospectus Supplement will specify the number and percentage of the Title I
Mortgage Loans and/or Title I Contracts, if any, included in the related Trust
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. 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 Loan Assets -- The Title I Program".
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 Seller, the FHA Claims Administrator, the Servicer and any subservicer 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 Seller'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 Loan Assets -- The Title I Program -- General".
Because the Trust is not eligible to hold an FHA contract of insurance
under the Title I Program, the FHA will not recognize the Trust or the
Securityholders as the owners of the Title I Mortgage Loans or Title I
Contracts, or any portion thereof, entitled to submit FHA Claims. Accordingly,
neither the Trust nor the Securityholders will have a direct right to receive
insurance payments from the FHA. The Seller 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
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administration agreement (the "FHA Claims Administration Agreement"), which
will provide for the FHA Claims Administrator to handle all aspects of
administering, processing and submitting FHA Claims with respect to the Title I
Mortgage Loans or Title I Contracts, in the name and on behalf of the Seller.
The Securityholders 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 Sale and Servicing Agreement or Pooling
and Servicing Agreement, as applicable. The Securityholders' rights relating
to the receipt of payment from and the administration, processing and
submission of FHA Claims by the Seller or any FHA Claims Administrator are
limited and governed by the related Sale and Servicing Agreement or Pooling and
Servicing Agreement, as applicable, and the FHA Claims Administration Agreement
and these functions are obligations of the Seller and the FHA Claims
Administrator, but not the FHA. See "Certain Legal Aspects of the Loan Assets
- -- The Title I Program -- Claims Procedures under Title I".
LIMITED NATURE OF RATINGS
Any rating assigned by a Rating Agency to a Class of Offered
Securities will reflect only its assessment of the likelihood that holders of
such Offered Securities will receive payments or distributions to which such
Securityholders are entitled under the related Indenture, Trust Agreement or
Pooling and Servicing Agreement. Such rating will not constitute an assessment
of the likelihood that principal prepayments on the Loan Assets will be made,
the degree to which the rate of such prepayments might differ from that
originally anticipated or the likelihood of early optional redemption or
termination of the Securities. Furthermore, such rating will not address the
possibility that prepayment of the Loan Assets 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 Security 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 Securities.
The amount, type and nature of Credit Enhancement, if any, provided
with respect to a Series of Securities will be determined on the basis of
criteria established by each Rating Agency rating a Class of Securities 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 Loan Assets. In other cases, such
criteria may be based upon determination of the values of the Mortgaged
Properties or other properties, if any, that provide security for the Loan
Assets. 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 Securities of any Series may be insufficient to fully protect the
holders thereof from losses on the related Loan Assets. See "-- Limitations of
Credit Enhancement" and "Credit Enhancement".
ADVERSE TAX CONSEQUENCES
ORIGINAL ISSUE DISCOUNT. Certain of the Offered Securities may be
issued with original issue discount for federal income tax purposes. A holder
of a Security issued with original issue discount will be required to include
original issue discount in ordinary gross income for federal income tax
purposes as it accrues, in advance of receipt of the cash, or a portion of the
cash, attributable to such income. Accrued but unpaid interest on the Compound
Interest Securities generally will be treated as original issue discount
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for this purpose. At certain rapid Loan Asset prepayment rates, original issue
discount may accrue on certain Classes of Securities that may never receive
payments or distributions of cash in respect thereof, resulting in a loss to
the related Securityholder. See "Certain Federal Income Tax Consequences".
CERTAIN FACTORS AFFECTING DELINQUENCIES, FORECLOSURES AND LOSSES ON LOAN ASSETS
GENERAL. The payment performance of the Offered Securities of any
Series will be directly related to the payment performance of the Loan Assets
included as part of the related Trust. Set forth below is a discussion of
certain factors that will affect the full and timely payment of the Loan Assets
included as part of any Trust.
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 Loan Assets
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 A LOAN ASSET. An investment in Securities secured
by or evidencing an interest in a pool of Mortgage Loans may be adversely
affected by, among other things, a decline in one-to-four family residential
property values. No assurance can be given that values of the Mortgaged
Properties have remained or will remain at the levels existing on the dates of
origination of the related Mortgage Loans. If the residential real estate
market should experience an overall decline in property values such that the
outstanding balances of the Mortgage Loans in a particular Mortgage Pool, and
any other financing on the Mortgaged Properties, become equal to or greater
than the value of the Mortgaged Properties, the actual rates of delinquencies,
defaults and losses could be higher than those now generally experienced with
respect to similar types of loans within the mortgage lending industry. To the
extent that such losses are not covered by applicable insurance policies, if
any, or by any Credit Enhancement as described in the related Prospectus
Supplement, holders of Securities secured by or evidencing interests in such
Mortgage Loans 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 "Description of the Trust Property -- Mortgage
Loans".
An investment in Securities 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 Securities 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, if any,
for recovery of the outstanding principal and unpaid interest of the defaulted
Contracts. See "Description of the Trust Property -- 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 related 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 related 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, as the junior
lienholder, receives any payments in respect
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of the defaulted Mortgage Loan. If the Servicer or a Subservicer, if any, were
to foreclose on any junior lien Mortgage Loan, it would do so subject to any
related senior lien(s). In order for a junior lien 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 junior lien Mortgage Loan in the aggregate, the Trust, 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 Securityholders of a Series to the extent that such delays
or losses are not otherwise covered by amounts available from any Credit
Enhancement provided for the related Securities, as specified in the related
Prospectus Supplement. See "Certain Legal Aspects of the Loan Assets --
Foreclosure -- Junior Liens".
CERTAIN LEGAL CONSIDERATIONS OF THE LOAN ASSETS. 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 Seller, the Trustee, the Indenture 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 Loan Assets. The Loan Assets may also 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 Loan Assets;
(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) the Soldiers' and Sailors' Civil Relief
Act of 1940, as amended (the "Relief Act"). In addition, 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 Loan Assets".
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 Loan Assets, 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 Loan 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 Loan Asset
because of a violation of the aforementioned laws, public policies or general
principles of equity, payments on or distributions in respect of the Securities
may be delayed or the Trust may be unable to make all payments or distributions
owed to the Securityholders to the extent any related losses are not otherwise
covered by amounts available from any Credit Enhancement provided for the
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related Series of Securities. 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.
To the extent specified in the related Prospectus Supplement, the
Seller will be required to repurchase or replace any Loan Asset which, at the
time of origination, did not comply with applicable federal and state laws or
regulations.
RISKS ASSOCIATED WITH CERTAIN LOAN 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 Securities 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 Securities, 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 Secured 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 Secured
Contract will not amend any certificate of title to change the lienholder
specified therein from such Servicer to the applicable Trustee and will not
deliver any certificate of title to such Trustee or note thereon such 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 the Servicer. If any
related Credit Enhancement is exhausted and a Secured Contract is in default,
then recovery of amounts due on such Secured Contracts is dependent on
repossession and resale of the Manufactured Home securing such Secured
Contract. Certain other factors may limit the ability of the Servicer 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 as part of the related Trust Property will not be
secured by an interest in the related real estate or otherwise, and the related
Trust, as the owner of such Unsecured Contract, will be a general unsecured
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creditor as to such obligations. As a consequence, in the event of a default
under an Unsecured Contract, the related Trust 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 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 its 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 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. The Seller 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 Secured Contract. A breach of any such warranty that materially
adversely affects the interests of the Securityholders in any Contract would
create an obligation of the Seller 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 LOAN ASSETS AS BORROWING
The Seller will agree in the Sale and Servicing Agreement or the
Pooling and Servicing Agreement that the transfer of the Loan Assets to the
Trust is intended as a valid sale and transfer of the Loan Assets to the
applicable Trustee for the benefit of the Securityholders. However, if the
Loan Assets are held to be property of the Seller or if for any reason the
applicable Sale and Servicing Agreement or Pooling and Servicing Agreement is
held to create a security interest in the related Loan Assets, the Seller will
agree in such Sale and Servicing Agreement or such Pooling and Servicing
Agreement that such transfer shall be treated as the grant of a security
interest in the Loan Assets to the applicable Trustee for the benefit of the
Securityholders. Also, the Seller will warrant that if the transfer of the
Loan Assets by it is deemed to be a grant of a security interest in the Loan
Assets, the applicable Trustee will have a perfected first-priority security
interest therein. The Seller is required to take all actions that are required
under law to protect the Trust's security interest in the Loan Assets. If the
transfer of the Loan Assets to the Trust is
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deemed to create a security interest therein, a tax or government lien on
property of the Seller arising before the Loan Assets came into existence may
have priority over the Trust's interest in such Loan Assets.
RISKS RELATING TO INDEXED SECURITIES
An investment in Securities indexed, as to principal, premium and/or
interest, to one or more values of currencies (including exchange rates and
swap indices between currencies), commodities, interest rates or other indices
entails significant risks that are not associated with similar investments in a
conventional fixed-rate debt security. If the interest rate of such a Security
is so indexed, it may result in an interest rate that is less than that payable
on a conventional fixed-rate debt security issued at the same time, including
the possibility that no interest will be paid, and, if the principal amount of
such a Security is so indexed, the principal amount payable on the related
final Distribution Date may be less than the original purchase price of such
Security if allowed pursuant to the terms of such Security, including the
possibility that no principal will be paid. The secondary market for such
Securities will be affected by a number of factors, independent of the
characteristics of the Loan Assets, structure of the cash flows and the value
of the applicable currency, commodity, interest rate or other index, including
the volatility of the applicable currency, commodity, interest rate or other
index, the time remaining to the maturity of such Securities, the amount
outstanding of such Securities and market interest rates. The value of the
applicable currency, commodity, interest rate or other index depends on a
number of interrelated factors, including economic, financial and political
events. Additionally, if the formula used to determine the principal amount,
premium, if any, or interest payable with respect to such Securities contains a
multiple or leverage factor, the effect of any change in the applicable
currency, commodity, interest rate or other index may be increased. The
historical experience of the relevant currencies, commodities, interest rates
or other indices should not be taken as an indication of future performance of
such currencies, commodities, interest rates or other indices during the term
of any Security. The credit ratings assigned to any Series or Class of
Securities, in no way, are reflective of the potential impact of the factors
discussed above, or any other factors, on the market value of the Securities.
Accordingly, prospective investors should consult their own financial and legal
advisors as to the risks entailed by an investment in such Securities and the
suitability of such Securities in light of their particular circumstances.
DESCRIPTION OF THE BONDS
GENERAL
With respect to each Trust that issues Bonds, one or more Classes of
Bonds of the related Series will be issued pursuant to the terms of an
Indenture, a form of which has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. The following summary does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, all the provisions of the Bonds and the Indenture.
Unless otherwise specified in the related Prospectus Supplement, each
Class of Bonds will initially be represented by one or more Bonds, in each case
registered in the name of the nominee of DTC (together with any successor
depository selected by the Trust, the "Depository") except as set forth below.
Unless otherwise specified in the related Prospectus Supplement, the Bonds will
be available for purchase in denominations of $1,000 and integral multiples
thereof in book-entry form only. The Seller has been informed by DTC that
DTC's nominee will be Cede, unless another nominee is specified in the related
Prospectus Supplement. Accordingly, such nominee is expected to be the holder
of record of the Bonds
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of each Class. Unless and until Definitive Bonds are issued under the limited
circumstances described herein or in the related Prospectus Supplement, no
Bondholder will be entitled to receive a physical certificate representing a
Bond. All references herein and in the related Prospectus Supplement to
actions by Bondholders refer to actions taken by DTC upon instructions from its
participating organizations (the "DTC Participants") and all references herein
and in the related Prospectus Supplement to distributions, notices, reports and
statements to Bondholders refer to distributions, notices, reports and
statements to DTC or its nominee, as the registered holder of the Bonds, for
distribution to Bondholders in accordance with DTC's procedures with respect
thereto. See "Certain Information Regarding the Securities--Book-Entry
Registration" and "--Definitive Securities".
PRINCIPAL AND INTEREST ON THE BONDS
The timing and priority of payment, seniority, allocations of losses,
Interest Rate and amount of or method of determining payments of principal and
interest on each Class of Bonds of a given Series will be described in the
related Prospectus Supplement. The right of holders of any Class of Bonds to
receive payments of principal and interest may be senior or subordinate to the
rights of holders of any other Class or Classes of Bonds of such Series, as
described in the related Prospectus Supplement. See "Certain Information
Regarding the Securities -- General". Unless otherwise provided in the related
Prospectus Supplement, payments of interest on the Bonds of such Series will be
made prior to payments of principal thereon. Each Class of Bonds may have a
different Interest Rate, which may be a fixed, variable or adjustable Interest
Rate (and which may be zero for Principal Only Securities), or any combination
of the foregoing. The related Prospectus Supplement will specify the Interest
Rate for each Class of Bonds of a given Series or the method for determining
such Interest Rate. See "Certain Information Regarding the Securities--Fixed
Rate Securities and Floating Rate Securities". One or more Classes of Bonds of
a Series may be redeemable in whole or in part under the circumstances
specified in the related Prospectus Supplement, including as a result of the
Servicer's exercising its option to purchase the related Loan Assets Pool.
One or more Classes of Bonds of a given Series may have fixed
principal payment schedules, as set forth in such Prospectus Supplement.
Holders of such Bonds would be entitled to receive as payments of principal on
any given Distribution Date the applicable amounts set forth on such schedule
with respect to such Bonds, in the manner and to the extent set forth in the
related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
payments to Bondholders of all Classes within a Series in respect of interest
will have the same priority. Under certain circumstances, the amount available
for such payments could be less than the amount of interest payable on the
Bonds on any of the dates specified for payments in the related Prospectus
Supplement (each, a "Distribution Date"), in which case each Class of
Bondholders will receive its ratable share (based upon the aggregate amount of
interest due to such Class of Bondholders) of the aggregate amount available to
be distributed in respect of interest on the Bonds of such Series.
In the case of a Series of Bonds which includes two or more Classes of
Bonds, the sequential order and priority of payment in respect of principal and
interest, and any schedule or formula or other provisions applicable to the
determination thereof, of each such Class will be set forth in the related
Prospectus Supplement. Payments in respect of principal and interest of any
Class of Bonds will be made on a pro rata basis among all the Bondholders of
such Class.
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THE INDENTURE
MODIFICATION OF INDENTURE. With respect to each Trust that has issued
Bonds pursuant to an Indenture, the Trust and the Indenture Trustee may, with
the consent of the holders of a majority of the outstanding Bonds of the
related Series, execute a supplemental indenture to add provisions to, change
in any manner or eliminate any provisions of, the related Indenture, or modify
(except as provided below) in any manner the rights of the related Bondholders.
Unless otherwise specified in the related Prospectus Supplement with
respect to a Series of Bonds, without the consent of the holder of each such
outstanding Bond affected thereby no supplemental indenture will: (i) change
the due date of any installment of principal of or interest on any such Bond or
reduce the principal amount thereof, the interest rate specified thereon or the
redemption price with respect thereto or change any place of payment where or
the coin or currency in which any such Bond or any interest thereon is payable;
(ii) impair the right to institute suit for the enforcement of certain
provisions of the related Indenture regarding payment; (iii) reduce the
percentage of the aggregate amount of the outstanding Bonds of such Series, the
consent of the holders of which is required for any such supplemental indenture
or the consent of the holders of which is required for any waiver of compliance
with certain provisions of the related Indenture or of certain defaults
thereunder and their consequences as provided for in such Indenture; (iv)
modify or alter the provisions of the related Indenture regarding the voting of
Bonds held by the applicable Trust, any other obligor on such Bonds, the Seller
or an affiliate of any of them; (v) reduce the percentage of the aggregate
outstanding amount of such Bonds, the consent of the holders of which is
required to direct the related Indenture Trustee to sell or liquidate the Loan
Assets if the proceeds of such sale would be insufficient to pay the principal
amount and accrued but unpaid interest on the outstanding Bonds of such Series;
(vi) decrease the percentage of the aggregate principal amount of such Bonds
required to amend the sections of the related Indenture which specify the
applicable percentage of aggregate principal amount of the Bonds of such Series
necessary to amend such Indenture or certain other related agreements; or (vii)
permit the creation of any lien ranking prior to or on a parity with the lien
of the related Indenture with respect to any of the collateral for such Bonds
or, except as otherwise permitted or contemplated in such Indenture, terminate
the lien of such Indenture on any such collateral or deprive the holder of any
such Bond of the security afforded by the lien of such Indenture.
To the extent provided in the applicable Prospectus Supplement, the
Trust and the applicable Indenture Trustee may also enter into supplemental
indentures, without obtaining the consent of the Bondholders of the related
Series, for the purpose of, among other things, adding any provisions to or
changing in any manner or eliminating any of the provisions of the related
Indenture or of modifying in any manner the rights of such Bondholders;
provided that such action will not materially and adversely affect the interest
of any such Bondholder.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT. With respect to the
Bonds of a given Series, unless otherwise specified in the related Prospectus
Supplement, "Events of Default" under the related Indenture will consist of:
(i) a default for five days or more in the payment of any interest on any such
Bond; (ii) a default in the payment of the principal of or any installment of
the principal of any such Bond when the same becomes due and payable; (iii) a
default in the observance or performance of any covenant or agreement of the
applicable Trust made in the related Indenture and the continuation of any such
default for a period of 90 days after notice thereof is given to such Trust by
the applicable Indenture Trustee or to such Trust and such Indenture Trustee by
the holders of at least 25% in principal amount of such Bonds then outstanding
acting together as a single class; (iv) any representation or warranty made by
such Trust in the related Indenture or in any certificate delivered pursuant
thereto or in connection therewith having
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been incorrect in a material respect as of the time made, and such breach not
having been cured within 30 days after notice thereof is given to such Trust by
the applicable Indenture Trustee or to such Trust and such Indenture Trustee by
the holders of at least 25% in principal amount of such Bonds then outstanding
acting together as a single class; or (v) certain events of bankruptcy,
insolvency, receivership or liquidation of the applicable Trust. However, the
amount of principal required to be paid to Bondholders of such Series under the
related Indenture will generally be limited to amounts available to be
deposited in the Collection Account. Therefore, unless otherwise specified in
the related Prospectus Supplement, the failure to pay principal on a Class of
Bonds generally will not result in the occurrence of an Event of Default until
the final scheduled Distribution Date for such Class of Bonds.
If an Event of Default should occur and be continuing with respect to
the Bonds of any Series, the related Indenture Trustee or holders of a majority
in principal amount of such Bonds then outstanding may declare the principal of
such Bonds to be immediately due and payable. Unless otherwise specified in
the related Prospectus Supplement, such declaration may, under certain
circumstances, be rescinded by the holders of a majority in principal amount of
such Bonds then outstanding.
If the Bonds of any Series are due and payable following an Event of
Default with respect thereto, the related Indenture Trustee may institute
proceedings to collect amounts due or foreclose on Trust property, exercise
remedies as a secured party, sell the related Loan Assets or elect to have the
applicable Trust maintain possession of such Loan Assets and continue to apply
collections on such Loan Assets as if there had been no declaration of
acceleration. Unless otherwise specified in the related Prospectus Supplement,
however, such Indenture Trustee is prohibited from selling the related Loan
Assets following an Event of Default, other than a default in the payment of
any principal of or a default for five days or more in the payment of any
interest on any Bond of such Series, unless (i) the holders of all such
outstanding Bonds consent to such sale, (ii) the proceeds of such sale are
sufficient to pay in full the principal of and the accrued interest on such
outstanding Bonds at the date of such sale or (iii) such Indenture Trustee
determines that the proceeds of Loan Assets would not be sufficient on an
ongoing basis to make all payments on such Bonds as such payments would have
become due if such obligations had not been declared due and payable, and such
Indenture Trustee obtains the consent of the holders of 66 2/3% of the
aggregate outstanding amount of such Bonds.
Subject to the provisions of the applicable Indenture relating to the
duties of the related Indenture Trustee, if an Event of Default occurs and is
continuing with respect to a Series of Bonds, such Indenture Trustee will be
under no obligation to exercise any of the rights or powers under such
Indenture at the request or direction of any of the holders of such Bonds, if
such Indenture Trustee reasonably believes it will not be adequately
indemnified against the costs, expenses and liabilities which might be incurred
by it in complying with such request. Subject to the provisions for
indemnification and certain limitations contained in the related Indenture, the
holders of a majority in principal amount of the outstanding Bonds of a given
Series will have the right to direct the time, method and place of conducting
any proceeding or any remedy available to the applicable Indenture Trustee, and
the holders of a majority in principal amount of such Bonds then outstanding
may, in certain cases, waive any default with respect thereto, except a default
in the payment of principal or interest or a default in respect of a covenant
or provision of such Indenture that cannot be modified without the waiver or
consent of all the holders of such outstanding Bonds.
Unless otherwise specified in the related Prospectus Supplement, no
holder of a Bond of any Series will have the right to institute any proceeding
with respect to the related Indenture, unless (i) such holder previously has
given to the applicable Indenture Trustee written notice of a continuing Event
of Default,
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(ii) the holders of not less than 25% in principal amount of the outstanding
Bonds of such Series have made written request to such Indenture Trustee to
institute such proceeding in its own name as Indenture Trustee, (iii) such
holder or holders have offered such Indenture Trustee reasonable indemnity,
(iv) such Indenture Trustee has for 60 days failed to institute such proceeding
and (v) no direction inconsistent with such written request has been given to
such Indenture Trustee during such 60-day period by the holders of a majority
in principal amount of such outstanding Bonds.
In addition, each Indenture Trustee and the related Bondholders, by
accepting the related Bonds, will covenant that they will not at any time
institute against the applicable Trust any bankruptcy, reorganization or other
proceeding under any federal or state bankruptcy or similar law.
With respect to any Trust, neither the related Indenture Trustee nor
the related Trustee in its individual capacity, nor any holder of a Certificate
representing an ownership interest in such Trust nor any of their respective
owners, beneficiaries, agents, officers, directors, employees, affiliates,
successors or assigns will, in the absence of an express agreement to the
contrary, be personally liable for the payment of the principal of or interest
on the related Bonds or for the agreements of such Trust contained in the
applicable Indenture.
CERTAIN COVENANTS. Each Indenture will provide that the related Trust
may not consolidate with or merge into any other entity, unless (i) the entity
formed by or surviving such consolidation or merger is organized under the laws
of the United States, any state or the District of Columbia, (ii) such entity
expressly assumes such Trust's obligation to make due and punctual payments
upon the Bonds of the related Series and the performance or observance of every
agreement and covenant of such Trust under the Indenture, (iii) no Event of
Default shall have occurred and be continuing immediately after such merger or
consolidation, (iv) such Trust has been advised that the rating of the Bonds or
the Certificates of such Series then in effect would not be reduced or
withdrawn by the Rating Agencies as a result of such merger or consolidation
and (v) such Trust has received an opinion of counsel to the effect that such
consolidation or merger would have no material adverse tax consequence to the
Trust or to any related Bondholder or Certificateholder.
Each Trust will not, among other things, (i) except as expressly
permitted by the applicable Indenture, the applicable Transfer and Servicing
Agreements or certain related documents with respect to such Trust
(collectively, the "Related Documents"), sell, transfer, exchange or otherwise
dispose of any of the assets of such Trust, (ii) claim any credit on or make
any deduction from the principal and interest payable in respect of the Bonds
of the related Series (other than amounts withheld under the Code or applicable
state law) or assert any claim against any present or former holder of such
Bonds because of the payment of taxes levied or assessed upon such Trust, (iii)
dissolve or liquidate in whole or in part, (iv) permit the validity or
effectiveness of the related Indenture to be impaired or permit any person to
be released from any covenants or obligations with respect to such Bonds under
such Indenture except as may be expressly permitted thereby or (v) permit any
lien, charge, excise, claim, security interest, mortgage or other encumbrance
to be created on or extend to or otherwise arise upon or burden the assets of
such Trust or any part thereof, or any interest therein or the proceeds
thereof.
No Trust may engage in any activity other than as specified under the
section of the related Prospectus Supplement entitled "The Trust". No Trust
will incur, assume or guarantee any indebtedness other than indebtedness
incurred pursuant to the related Bonds and the related Indenture, pursuant to
any Advances made to it by the Servicer or otherwise in accordance with the
Related Documents.
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ANNUAL COMPLIANCE STATEMENT. Each Trust will be required to file
annually with the related Indenture Trustee a written statement as to the
fulfillment of its obligations under the Indenture.
INDENTURE TRUSTEE'S ANNUAL REPORT. The Indenture Trustee for each
Trust will be required to mail each year to all related Bondholders a brief
report relating to its eligibility and qualification to continue as Indenture
Trustee under the related Indenture, any amounts advanced by it under the
Indenture, the amount, interest rate and maturity date of certain indebtedness
owing by such Trust to the applicable Indenture Trustee in its individual
capacity, the property and funds physically held by such Indenture Trustee as
such and any action taken by it that materially affects the related Bonds and
that has not been previously reported.
SATISFACTION AND DISCHARGE OF INDENTURE. An Indenture will be
discharged with respect to the collateral securing the related Bonds upon the
delivery to the related Indenture Trustee for cancellation of all such Bonds
or, with certain limitations, upon deposit with such Indenture Trustee of
funds sufficient for the payment in full of all such Bonds.
THE INDENTURE TRUSTEE
The Indenture Trustee for a Series of Bonds will be specified in the
related Prospectus Supplement. The Indenture Trustee for any Series may resign
at any time, in which event the Issuer will be obligated to appoint a successor
thereto for such Series. The Issuer or Administrator may also remove any such
Indenture Trustee if such Indenture Trustee ceases to be eligible to continue
as such under the related Indenture or if such Indenture Trustee becomes
insolvent. In such circumstances, the Issuer will be obligated to appoint a
successor thereto for the applicable Series of Bonds. Any resignation or
removal of the Indenture Trustee and appointment of a successor thereto for any
Series of Bonds will not become effective until acceptance of the appointment
by such successor.
ADMINISTRATION AGREEMENT
If and to the extent specified in the related Prospectus Supplement,
FFI, in its capacity as administrator (the "Administrator"), will enter into an
agreement (as amended and supplemented from time to time, an "Administration
Agreement") with each Trust that issues Bonds and the related Indenture Trustee
pursuant to which the Administrator will agree, to the extent provided in such
Administration Agreement, to provide the notices and to perform other
administrative obligations required by the related Indenture. To the extent
specified in the related Prospectus Supplement with respect to any such Trust,
as compensation for the performance of the Administrator's obligations under
the applicable Administration Agreement and as reimbursement for its expenses
related thereto, the Administrator will be entitled to a monthly administration
fee of such amount as may be set forth in the related Prospectus Supplement
(the "Administration Fee"), which fee will be paid by the Servicer.
DESCRIPTION OF THE CERTIFICATES
GENERAL
With respect to each Trust, one or more Classes of Certificates of the
related Series will be issued pursuant to the terms of a Trust Agreement or a
Pooling and Servicing Agreement, a form of each of which has been filed as an
exhibit to the Registration Statement of which this Prospectus forms a part.
The
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following summary does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the
Certificates and the Trust Agreement or Pooling and Servicing Agreement, as
applicable.
Unless otherwise specified in the related Prospectus Supplement and
except for the Certificates, if any, of a given Series purchased by the Seller,
each Class of Certificates will initially be represented by one or more
Certificates registered in the name of the nominee for DTC, except as set forth
below. Unless otherwise specified in the related Prospectus Supplement and
except for the Certificates, if any, of a given Series purchased by the Seller,
the Certificates will be available for purchase in minimum denominations of
$1,000 and integral multiples thereof in book-entry form only. The Seller has
been informed by DTC that DTC's nominee will be Cede, unless another nominee is
specified in the related Prospectus Supplement. Accordingly, such nominee is
expected to be the holder of record of the Certificates of any Series that are
not purchased by the Seller. Unless and until Definitive Certificates are
issued under the limited circumstances described herein or in the related
Prospectus Supplement, no Certificateholder (other than the Issuer) will be
entitled to receive a physical certificate representing a Certificate. All
references herein and in the related Prospectus Supplement to actions by
Certificateholders refer to actions taken by DTC upon instructions from the
Participants and all references herein and in the related Prospectus Supplement
to distributions, notices, reports and statements to Certificateholders refer
to distributions, notices, reports and statements given, made or sent to DTC or
its nominee, as the case may be, as the registered holder of the Certificates,
for distribution to Certificateholders in accordance with DTC's procedures with
respect thereto. See "Certain Information Regarding the Securities--Book-Entry
Registration" and "--Definitive Securities". Any Certificates of a given
Series owned by the Seller or its affiliates will be entitled to equal and
proportionate benefits under the applicable Trust Agreement or Pooling and
Servicing Agreement, except that such Certificates will be deemed not to be
outstanding for the purpose of determining whether the requisite percentage of
Certificateholders have given any request, demand, authorization, direction,
notice, consent or other action under the Related Documents (other than the
commencement by the related Trust of a voluntary proceeding in bankruptcy as
described under "Description of the Transfer and Servicing
Agreements--Insolvency Event").
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
The timing and priority of distributions, seniority, allocations of
losses, Pass Through Rate and amount of or method of determining distributions
with respect to principal and interest of each Class of Certificates will be
described in the related Prospectus Supplement. Distributions of interest on
such Certificates will be made on the dates specified in the related Prospectus
Supplement (each, a "Distribution Date") and will be made prior to
distributions with respect to principal of such Certificates.
Each Class of Certificates may have a different Pass Through Rate,
which may be a fixed, variable or adjustable Pass Through Rate (and which may
be zero for certain Classes of Certificates) or any combination of the
foregoing. The related Prospectus Supplement will specify the Pass Through
Rate for each Cass of Certificates of a given Series or the method for
determining such Pass Through Rate. See also "Certain Information Regarding
the Securities--Fixed Rate Securities Floating Rate Securities". Unless
otherwise provided in the related Prospectus Supplement, distributions in
respect of the Certificates of a given Series that includes Bonds may be
subordinate to payments in respect of the Bonds of such Series as more fully
described in the related Prospectus Supplement. Distributions in respect of
interest on and principal of any Class of Certificates will be made on a pro
rata basis among all the Certificateholders of such Class.
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In the case of a Series of Certificates which includes two or more
Classes of Certificates, the timing, sequential order, priority of payment or
amount of distributions in respect of interest and principal, and any schedule
or formula or other provisions applicable to the determination thereof, of each
such Class shall be as set forth in the related Prospectus Supplement.
If and as provided in the related Prospectus Supplement, certain
amounts remaining on deposit in the Collection Account after all required
distributions to the related Securityholders have been made may be released to
the Seller, FFI or one or more third party credit or liquidity enhancement
providers.
POOL FACTORS AND TRADING INFORMATION
The "Bond Pool Factor" for each Class of Bonds will be a seven-digit
decimal which the Servicer will compute prior to each distribution with respect
to such Class of Bonds indicating the remaining outstanding principal balance
of such Class of Bonds, as of the applicable Distribution Date (after giving
effect to payments to be made on such Distribution Date), as a fraction of the
initial outstanding principal balance of such Class of Bonds. The "Certificate
Pool Factor" for each Class of Certificates will be a seven-digit decimal which
the Servicer will compute prior to each distribution with respect to such Class
of Certificates indicating the remaining Certificate Balance of such Class of
Certificates, as of the applicable Distribution Date (after giving effect to
distributions to be made on such Distribution Date), as a fraction of the
initial Certificate Balance of such Class of Certificates. Each Bond Pool
Factor and each Certificate Pool Factor will initially be 1.0000000 and
thereafter will decline to reflect reductions in the outstanding principal
balance of the applicable Class of Bonds, or the reduction of the Certificate
Balance of the applicable Class of Certificates, as the case may be. A
Bondholder's portion of the aggregate outstanding principal balance of the
related Class of Bonds is the product of (i) the original denomination of such
Bondholder's Bond and (ii) the applicable Bond Pool Factor. A
Certificateholder's portion of the aggregate outstanding Certificate Balance
for the related Class of Certificates is the product of (a) the original
denomination of such Certificateholder's Certificate and (b) the applicable
Certificate Pool Factor.
Unless otherwise provided in the related Prospectus Supplement with
respect to each Trust, the Bondholders, if any, and the Certificateholders will
receive reports on or about each Distribution Date concerning (i) with respect
to the Collection Period immediately preceding such Distribution Date, payments
received on the Loan Assets, the Pool Balance (as such term is defined in the
related Prospectus Supplement, the "Pool Balance"), each Certificate Pool
Factor or Bond Pool Factor, as applicable, and various other items of
information, and (ii) with respect to the Collection Period second preceding
such Distribution Date, as applicable, amounts allocated or distributed on the
preceding Distribution Date and any reconciliation of such amounts with
information provided by the Servicer prior to such current Distribution Date.
In addition, Securityholders of record during any calendar year will be
furnished information for tax reporting purposes not later than the latest date
permitted by law. See "Description of the Transfer and Servicing Agreements --
Reports to Securityholders".
CERTAIN INFORMATION REGARDING THE SECURITIES
GENERAL
To the extent provided in the related Prospectus Supplement, a Series
may include one or more Classes of Securities entitled only to (i) payments
allocable to interest ("Interest Only Securities"); (ii)
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payments allocable to principal ("Principal Only Securities") and allocable as
between scheduled payments of principal and Principal Prepayments (as defined
below); or (iii) payments allocable to both principal (and allocable as between
scheduled payments of principal and Principal Prepayments) and interest. A
Series of Securities may include one or more Classes as to which distributions
will be allocated (i) on the basis of collections from designated portions of
the Trust Property, (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.
To the extent provided in the related Prospectus Supplement, one or
more Classes of Securities may provide for interest that accrues, but is not
currently payable ("Compound Interest Securities"). With respect to any Class
of Compound Interest Securities, 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.
To the extent provided in the related Prospectus Supplement, a Series
of Securities may include one or more Classes of Scheduled Amortization
Securities and Companion Securities. "Scheduled Amortization Securities" are
Securities with respect to which 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 Securities" are Securities
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 Securities on such Distribution
Date. Because of the manner of application of distributions of principal to
Companion Securities, the weighted average lives of Companion Securities of a
Series may be expected to be more sensitive to the actual rate of prepayments
on the Loan Assets in the related Trust than will the Scheduled Amortization
Securities of such Series.
To the extent provided in the related Prospectus Supplement, one or
more Series of Securities may constitute a Series of "Special Allocation
Securities" which may include Senior Securities, Subordinated Securities,
Priority Securities and Non-Priority Securities. As more fully described in
the related Prospectus Supplement for a Series of Special Allocation
Securities, Special Allocation Securities are Securities for which the timing
and/or priority of distributions of principal and/or interest may favor one or
more Classes of such Securities over one or more other Classes of such
Securities. 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 Securities,
losses on the Assets included in the related Trust 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
Securities in a Series may be comprised of one or more Classes of Senior
Securities ("Senior Securities") having a priority in right to distributions of
principal and interest over one or more Classes of Subordinated Securities
("Subordinated Securities"), to the extent described in the related Prospectus
Supplement, as a form of Credit Enhancement. See "Credit Enhancement --
Subordination". Typically, Subordinated Securities of a Series will carry a
rating by the rating agencies rating the Securities of such Series lower than
that of the Senior Securities of such Series. In addition, one or more Classes
of Securities of a Series ("Priority Securities") may be entitled to a priority
of distributions of principal or interest from Assets included in the related
Trust over another Class of Securities of such Series ("Non-Priority
Securities"), but only after the exhaustion of other Credit Enhancement
applicable to such Series. Priority Securities and Non-Priority Securities
nonetheless may be within the same rating category.
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FIXED RATE SECURITIES AND FLOATING RATE SECURITIES
Any Class of Securities (other than Principal Only Securities) may
bear interest at a fixed rate per annum ("Fixed Rate Securities") or at a
variable or adjustable rate per annum ("Floating Rate Securities"), as more
fully described in the applicable Prospectus Supplement. Each Class of Fixed
Rate Securities will bear interest at the applicable per annum Interest Rate or
Pass Through Rate, as the case may be, specified in the applicable Prospectus
Supplement. Unless otherwise set forth in the applicable Prospectus
Supplement, interest on each Class of Fixed Rate Securities will be computed on
the basis of a 360-day year of twelve 30-day months. See "Description of the
Bonds--Principal and Interest on the Bonds" and "Description of the
Certificates--Distributions of Principal and Interest".
INDEXED SECURITIES
To the extent so specified in any Prospectus Supplement, any Class of
Securities of a given Series may consist of Securities ("Indexed Securities")
in which the principal amount payable on the final Distribution Date for such
Class (the "Indexed Principal Amount") and/or the interest payable on any
Distribution Date is determined by reference to a measure (the "Index") which
will be related to the exchange rates of one or more currencies or composite
currencies (the "Index Currencies"); the price or prices of specified
commodities; or specified stocks, which may be based on U.S. or foreign
stocks, on specified dates specified in the applicable Prospectus Supplement,
or such other price, interest rate, exchange rate or other financial index or
indices as are described in the applicable Prospectus Supplement. Holders of
Indexed Securities may receive a principal amount on the related final
Distribution Date that is greater than or less than the face amount of the
Indexed Securities depending upon the relative value on the related final
Distribution Date of the specified indexed item. Information as to the method
for determining the principal amount payable on the related final Distribution
Date, if any, and, where applicable, certain historical information with
respect to the specific indexed item or items and special tax considerations
associated with investment in Indexed Securities, will be set forth in the
applicable Prospectus Supplement. Notwithstanding anything to the contrary
herein, for purposes of determining the rights of a holder of a Security
indexed as to principal in respect of voting for or against amendments to the
related Trust Agreement, Indenture or Pooling and Servicing Agreement, as the
case may be, and modifications and the waiver of rights thereunder, the
principal amount of such Indexed Security shall be deemed to be the face amount
thereof upon issuance.
If the determination of the Indexed Principal Amount of an Indexed
Security is based on an Index calculated or announced by a third party and such
third party either suspends the calculation or announcement of such Index or
changes the basis upon which such Index is calculated (other than changes
consistent with policies in effect at the time such Indexed Security was issued
and permitted changes described in the applicable Prospectus Supplement), then
such Index shall be calculated for purposes of such Indexed Security by an
independent calculation agent named in the applicable Prospectus Supplement on
the same basis, and subject to the same conditions and controls, as applied to
the original third party. If for any reason such Index cannot be calculated on
the same basis and subject to the same conditions and controls as applied to
the original third party, then the Indexed Principal Amount of such Indexed
Security shall be calculated in the manner set forth in the applicable
Prospectus Supplement. Any determination of such independent calculation agent
shall, in the absence of manifest error, be binding on all parties.
The applicable Prospectus Supplement will describe whether the
principal amount of the related Indexed Security, if any, that would be payable
upon redemption or repayment prior to the applicable final scheduled
Distribution Date will be the Face Amount of such Indexed Security, the Indexed
Principal
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Amount of such Indexed Security at the time of redemption or repayment or
another amount described in such Prospectus Supplement. See "Risk Factors --
Risks Relating to Indexed Securities".
BOOK-ENTRY REGISTRATION
Unless otherwise specified in the related Prospectus Supplement, each
Class of Securities offered hereby will be represented by one or more
certificates registered in the name of Cede, as nominee of DTC. Unless
otherwise specified in the related Prospectus Supplement, Securityholders may
hold beneficial interests in Securities through DTC (in the United States) or
Cedel or Euroclear (in Europe) directly if they are participants of such
systems, or indirectly through organizations which are participants in such
systems.
No Securityholder will be entitled to receive a certificate
representing such person's interest in the Securities, except as set forth
below. Unless and until Securities of a Class are issued in fully registered
certificated form ("Definitive Securities") under the limited circumstances
described below, all references herein to actions by Bondholders,
Certificateholders or Securityholders shall refer to actions taken by DTC upon
instructions from DTC Participants, and all references herein to distributions,
notices, reports and statements to Bondholders, Certificateholders or
Securityholders shall refer to distributions, notices, reports and statements
to Cede, as the registered holder of the Securities, for distribution to
Securityholders in accordance with DTC procedures. As such, it is anticipated
that the only Bondholder, Certificateholder or Securityholder will be Cede, as
nominee of DTC. Securityholders will not be recognized by the related Trustee
as Bondholders, Certificateholders or Securityholders as such terms will be
used in the relevant agreements, and Securityholders will only be permitted to
exercise the rights of holders of Securities of the related Class indirectly
through DTC and DTC Participants, as further described below.
Cedel and Euroclear will hold omnibus positions on behalf of their
participants through customers' securities accounts in their respective names
on the books of their respective Depositaries which in turn will hold such
positions in customers' securities accounts in the Depositaries' names on the
books of DTC.
Transfers between DTC Participants will occur in accordance with DTC
rules. Transfers between Cedel Participants and Euroclear Participants will
occur in accordance with their applicable rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel or
Euroclear participants, on the other, will be effected in DTC in accordance
with DTC rules on behalf of the relevant European international clearing system
by its Depositary. However, each such cross- market transaction will require
delivery of instructions to the relevant European international clearing system
by the counterparty in such system in accordance with its rules and procedures
and within its established deadlines. The relevant European international
clearing system will, if the transaction meets its settlement requirements,
deliver instructions to its Depositary to take action to effect final
settlement on its behalf by delivering or receiving securities in DTC, and
making or receiving payment in accordance with normal procedures for same-day
funds settlement applicable to DTC. Cedel Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities received in
Cedel or Euroclear as a result of a transaction with a DTC Participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in
such securities settled during such processing will be reported to the relevant
Euroclear or Cedel participant on
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such business day. Cash received in Cedel or Euroclear as a result of sales of
Securities by or through a Cedel Participant or a Euroclear Participant to a
DTC Participant will be received with value on the DTC settlement date but will
be available in the relevant Cedel or Euroclear cash account only as of the
business day following settlement in DTC.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York UCC and a "clearing agency" registered
pursuant to Section 17A of the Exchange Act. DTC was created to hold
securities for its participating members ("DTC Participants") and to facilitate
the clearance and settlement of securities transactions between DTC
Participants through electronic book-entries, thereby eliminating the need for
physical movement of certificates. DTC Participants include securities brokers
and dealers, banks, trust companies and clearing corporations which may include
underwriters, agents or dealers with respect to the Securities of any Class or
Series. Indirect access to the DTC system also is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a DTC Participant, either directly or indirectly
(the "Indirect DTC Participants"). The rules applicable to DTC and DTC
Participants are on file with the Commission.
Unless otherwise specified in the related Prospectus Supplement,
Securityholders that are not DTC Participants or Indirect DTC Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Securities may do so only through DTC Participants and Indirect DTC
Participants. DTC Participants will receive a credit for the Securities on
DTC's records. The ownership interest of each Securityholder will in turn be
recorded on respective records of the DTC Participants and Indirect DTC
Participants. Securityholders will not receive written confirmation from DTC
of their purchase, but Securityholders are expected to receive written
confirmations providing details of the transaction, as well as periodic
statements of their holdings, from the DTC Participant or Indirect DTC
Participant through which the Securityholder entered into the transaction.
Transfers of ownership interests in the Securities of any Class will be
accomplished by entries made on the books of DTC Participants acting on behalf
of Securityholders.
To facilitate subsequent transfers, all Securities deposited by DTC
Participants with DTC will be registered in the name of Cede, a nominee of DTC.
The deposit of Securities with DTC and their registration in the name of Cede
will effect no change in beneficial ownership. DTC will have no knowledge of
the actual Securityholders and its records will reflect only the identity of
the DTC Participants to whose accounts such Securities are credited, which may
or may not be the Securityholders. DTC Participants and Indirect DTC
Participants will remain responsible for keeping account of their holdings on
behalf of their customers. While the Securities of a Series are held in
book-entry form, Securityholders will not have access to the list of
Securityholders of such Series, which may impede the ability of Securityholders
to communicate with each other.
Conveyance of notices and other communications by DTC to DTC
Participants, by DTC Participants to Indirect DTC Participants and by DTC
Participants and Indirect DTC Participants to Securityholders will be governed
by arrangements among them, subject to any statutory or regulatory requirements
as may be in effect from time to time.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among DTC
Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit distributions of principal of and interest on
the
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Securities. DTC Participants and Indirect DTC Participants with which
Securityholders have accounts with respect to the Securities similarly are
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective Securityholders.
DTC's practice is to credit DTC Participants' accounts on each
Distribution Date in accordance with their respective holdings shown on its
records, unless DTC has reason to believe that it will not receive payment on
such Distribution Date. Payments by DTC Participants and Indirect DTC
Participants to Securityholders will be governed by standing instructions and
customary practices, as is the case with securities held for the accounts of
customers in bearer form or registered in "street name", and will be the
responsibility of such DTC Participant and not of DTC, the related Indenture
Trustee or Trustee (or any paying agent appointed thereby), the Seller or the
Servicer, subject to any statutory or regulatory requirements as may be in
effect from time to time. Payment of principal of and interest on each Class
of Securities to DTC will be the responsibility of the related Indenture
Trustee or Trustee (or any paying agent), disbursement of such payments to DTC
Participants will be the responsibility of DTC and disbursement of such
payments to the related Securityholders will be the responsibility of DTC
Participants and Indirect DTC Participants. As a result, under the book-entry
format, Securityholders may experience some delay in their receipt of payments.
DTC will forward such payments to its DTC Participants which thereafter will
forward them to Indirect DTC Participants or Securityholders.
Because DTC can only act on behalf of DTC Participants, who in turn
act on behalf of Indirect DTC Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or otherwise take actions with respect to such
Securities, may be limited due to the lack of a physical certificate for such
Securities.
DTC has advised the Seller that it will take any action permitted to
be taken by a Securityholder only at the direction of one or more DTC
Participants to whose account with DTC the Securities are credited.
Additionally, DTC has advised the Seller that it will take such actions with
respect to specified percentages of the Securityholders' interest only at the
direction of and on behalf of DTC Participants whose holdings include undivided
interests that satisfy such specified percentages. DTC may take conflicting
actions with respect to other undivided interests to the extent that such
actions are taken on behalf of DTC Participants whose holdings include such
undivided interests.
Neither DTC nor Cede will consent or vote with respect to the
Securities. Under its usual procedures, DTC will mail an "Omnibus Proxy" to
the related Indenture Trustee or Trustee as soon as possible after any
applicable Record Date for such a consent or vote. The Omnibus Proxy will
assign Cede's consenting or voting rights to those DTC Participants to whose
accounts the related Securities are credited on that record date (which record
date will be identified in a listing attached to the Omnibus Proxy).
Cedel Bank, societe anonyme ("Cedel") is incorporated under the laws
of Luxembourg as a professional depository. Cedel holds securities for its
participating organizations ("Cedel Participants") and facilitates the
clearance and settlement of securities transactions between Cedel Participants
through electronic book entry changes in accounts of Cedel Participants,
thereby eliminating the need for physical movement of certificates.
Transactions may be settled in Cedel in any of 28 currencies, including United
States dollars. Cedel provides to Cedel Participants, among other things,
services for safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing. Cedel
interfaces with domestic markets in several countries. As a professional
depository, Cedel is subject to regulation by the Luxembourg Monetary
Institute. Cedel Participants are recognized
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financial institutions around the world including underwriters, securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations and may include any underwriters, agents or dealers with
respect to any Class or Series of Securities offered hereby. Indirect access
to Cedel is also available to others, such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a Cedel
Participant, either directly or indirectly.
The Euroclear System was created in 1968 to hold securities for
participants of the Euroclear System ("Euroclear Participants") and to clear
and settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need
for physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may now be settled in any of 27
currencies, including United States dollars. The Euroclear System includes
various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. The
Euroclear System is operated by Morgan Guaranty Trust Company of New York,
Brussels, Belgium office (the "Euroclear Operator" or "Euroclear"), under
contract with Euroclear Clearance System S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for the Euroclear System on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries
and may include any underwriters, agents or dealers with respect to any Class
or Series of Securities offered hereby. Indirect access to the Euroclear
System is also available to other firms that clear through or maintain a
custodial relationship with a Euroclear Participant, either directly or
indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it
is regulated and examined by the Board of Governors of the Federal Reserve
System and the New York State Banking Department, as well as the Belgian
Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear
and the related Operating Procedures of the Euroclear System and applicable
Belgian law (collectively, the "Terms and Conditions"). The Terms and
Conditions govern transfers of securities and cash within the Euroclear System,
withdrawals of securities and cash from the Euroclear System and receipts of
payments with respect to securities in the Euroclear System. All securities in
the Euroclear System are held on a fungible basis without attribution of
specific certificates to specific securities clearance accounts. The Euroclear
Operator acts under the Terms and Conditions only on behalf of Euroclear
Participants, and has no record of or relationship with persons holding through
Euroclear Participants.
Distributions with respect to Securities held through Cedel or
Euroclear will be credited to the cash accounts of Cedel Participants or
Euroclear Participants in accordance with the relevant system's rules and
procedures, to the extent received by its Depositary. Such distributions will
be subject to tax withholding in accordance with relevant United States tax
laws and regulations. See "Certain Federal Income Tax Considerations". Cedel
or the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a Securityholder on behalf of a Cedel Participant or
Euroclear Participant only in accordance with its relevant rules and procedures
and subject to its Depositary's ability to effect such actions on its behalf
through DTC.
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Although DTC, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities among participants of
DTC, Cedel and Euroclear, they are under no obligation to perform or continue
to perform such procedures and such procedures may be discontinued at any time.
DEFINITIVE SECURITIES
Unless otherwise specified in the related Prospectus Supplement, the
Bonds, if any, and the Certificates of a given Series will be issued in fully
registered, certificated form ("Definitive Bonds" and "Definitive
Certificates", respectively, and collectively referred to herein as "Definitive
Securities") to Bondholders or Certificateholders or their respective nominees,
rather than to DTC or its nominee, only if (i) DTC is no longer willing or able
to discharge properly its responsibilities as depository with respect to such
Securities and such Administrator or Trustee is unable to locate a qualified
successor (and if it is an Administrator that has made such determination, such
Administrator so notifies the Applicable Trustee in writing), (ii) the Seller
or the Administrator or Trustee, as applicable, at its option, elects to
terminate the book-entry system through DTC or (iii) after the occurrence of an
Event of Default or a Servicer Default with respect to such Securities, holders
representing at least a majority of the outstanding principal amount of the
Bonds or the Certificates, as the case may be, of such Series, acting together
as a single Class, advise the Applicable Trustee through DTC in writing that
the continuation of a book-entry system through DTC (or a successor thereto)
with respect to such Bonds or Certificates is no longer in the best interest of
the holders of such Securities.
Upon the occurrence of any event described in the immediately
preceding paragraph, the Applicable Trustee or Indenture Trustee will be
required to notify all applicable Securityholders of a given Series through
Participants of the availability of Definitive Securities. Upon surrender by
DTC of the definitive certificates representing the corresponding Securities
and receipt of instructions for re-registration, the applicable Trustee or
Indenture Trustee will reissue such Securities as Definitive Securities to such
Securityholders.
Distributions of principal of, and interest on, such Definitive
Securities will thereafter be made by the applicable Trustee or Indenture
Trustee in accordance with the procedures set forth in the related Indenture or
the related Trust Agreement or Pooling and Servicing Agreement, as applicable,
directly to holders of Definitive Securities in whose names the Definitive
Securities were registered at the close of business on the applicable Record
Date specified for such Securities in the related Prospectus Supplement. Such
distributions will be made by check mailed to the address of such holder as it
appears on the register maintained by the applicable Trustee or Indenture
Trustee. The final payment on any such Definitive Security, however, will be
made only upon presentation and surrender of such Definitive Security at the
office or agency specified in the notice of final distribution to the
applicable Securityholders. The applicable Trustee or the Indenture Trustee
will provide such notice to the applicable Securityholders not less than 15 nor
more than 30 days prior to the date on which such final distribution is
expected to occur.
Definitive Securities will be transferable and exchangeable at the
offices of the applicable Trustee or of a registrar named in a notice delivered
to holders of Definitive Securities. No service charge will be imposed for any
registration of transfer or exchange, but the Applicable Trustee may require
payment of a sum sufficient to cover any tax or other governmental charge
imposed in connection therewith.
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THE TRUSTS
With respect to each Series of Securities, the Seller will establish a
separate Trust pursuant to the respective Trust Agreement or Pooling and
Servicing Agreement, as applicable, for the transactions described herein and
in the related Prospectus Supplement.
On the applicable Closing Date, the Seller will sell the Loan Assets
to the Trust as specified in the related Prospectus Supplement.
The Servicer will service the Loan Assets held by each Trust and will
receive fees for such services as specified in the related Prospectus
Supplement. To the extent specified in the related Prospectus Supplement, in
order to facilitate the servicing of the Loan Assets, the Seller and each
Trustee will authorize the Servicer to retain physical possession of the Loan
Assets held by each Trust and other documents relating thereto as custodian for
each such Trust.
The principal offices of each Trust that is not a grantor trust and
the related Owner Trustee will be specified in the applicable Prospectus
Supplement.
THE TRUSTEE
As used herein, the term "Trustee" shall refer to the Indenture
Trustee with respect to a Series of Bonds, the Owner Trustee under the
applicable Trust Agreement with respect to a Series of Certificates or the
Trustee under the applicable Pooling and Servicing Agreement with respect to a
Series of Certificates. The Trustee for each Trust will be specified in the
related Prospectus Supplement. The Trustee's liability in connection with the
issuance and sale of the related Securities is limited solely to the express
obligations of such Trustee set forth in the related Trust Agreement, Indenture
or Pooling and Servicing Agreement, as applicable. A Trustee may resign at any
time, in which event the Servicer, or its successor, will be obligated to
appoint a successor thereto. The Administrator of a Trust that is not a
grantor trust and the Servicer in respect of a Trust that is a grantor trust
may also remove a Trustee that ceases to be eligible to continue in such
capacity under the related Trust Agreement or Pooling and Servicing Agreement,
as applicable, or becomes insolvent. In such circumstances, the Servicer or,
in the case of a Series that includes Bonds, the Administrator, as the case may
be, will be obligated to appoint a successor thereto. Any resignation or
removal of a Trustee and appointment of a successor trustee will not become
effective until acceptance of the appointment by such successor.
Any commercial bank or trust company serving as Trustee may have
normal banking relationships with the Seller 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 relating to a particular
Series of Securities. In the event of such appointment, all rights, powers,
duties and obligations conferred or imposed upon the Trustee by the applicable
Indenture, Trust Agreement or Pooling and Servicing Agreement shall be
conferred or imposed upon the Trustee and such separate trustee or co-trustee
jointly, or in any jurisdiction in which the Trustee shall be incompetent or
unqualified to perform certain acts, singly upon such separate trustee or
co-trustee who shall exercise and perform such rights, powers, duties and
obligations solely at the direction of the Trustee.
The Trustee will make no representations as to the validity or
sufficiency of the applicable Indenture, Trust Agreement or Pooling and
Servicing Agreement, the related Securities, or of any Loan
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Asset or related document, and will not be accountable for the use or
application by the Seller or a Transferor of any funds paid to the Seller or
such Transferor in respect of the Securities or the related Assets, or amounts
deposited in the related Distribution Account or deposited into any other
account for purposes of making payments or distributions to Securityholders.
If no Event of Default has occurred, the Trustee will be required to perform
only those duties specifically required of it under the applicable Indenture,
Trust Agreement or 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 Indenture, Trust Agreement or
Pooling and Servicing Agreement.
The Trustee may resign at any time and the Seller, the Servicer or the
Administrator, as applicable, may remove the Trustee if the Trustee ceases to
be eligible to continue as such under the applicable Indenture, Trust Agreement
or Pooling and Servicing Agreement, if the Trustee becomes insolvent or in such
other instances, if any, as are set forth in the applicable Indenture, Trust
Agreement or Pooling and Servicing Agreement. Following any resignation or
removal of the Trustee, the Seller 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 Property may at the time be
located, the Seller and the Trustee acting jointly shall have the power and
shall execute and deliver all instruments to appoint one or more Persons
approved by the Trustee to act as co-trustee or co- trustees, jointly with the
Trustee, or separate trustee or separate trustees, of all or any part of the
Trust Property, and to vest in such Person or Persons, in such capacity, such
title to the Trust Property, or any part thereof, and, subject to the
provisions of the applicable Indenture, Trust Agreement or Pooling and
Servicing Agreement, such powers, duties, obligations, rights and trusts as the
Seller and the Trustee may consider necessary or desirable.
DESCRIPTION OF THE TRUST PROPERTY
GENERAL
The Trust Property for a Series of Securities may include (i) Loan
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 that includes Mortgage Loans or Secured
Contracts, all property acquired by foreclosure or deed in lieu of foreclosure
with respect to any such Mortgage Loan or Secured Contract and certain rights
of the Administrator, if any, and the Servicer under any policies required to
be maintained in respect of the related Loan Assets; and (iv) if specified in
the Prospectus Supplement, one or more forms of Credit Enhancement. The Trust
Property of each Trust will consist primarily of Loan Assets.
With respect to a Series, the Seller will acquire the Loan Assets in
the open market or in privately negotiated transactions from one or more
entities, and each such entity from whom the Seller so acquires a significant
portion of the Loan 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 Seller. To the extent
specified in the related prospectus supplement, the Loan Assets will have been
originated or acquired by the Transferor in one of four ways: (i) the indirect
origination and purchase of
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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 Loan Assets
from a Transferor, the Seller will rely on the representations and warranties
made by the Transferor with respect to such Loan Assets. For a summary
description of the expected representations and warranties with respect to such
Loan Assets, See "Description of the Transfer and Servicing Agreements -- Sale
and Assignment of Loan Assets". As further described in the related Prospectus
Supplement for a Series, the Transferor will be obligated to repurchase or
replace any Loan 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 Loan
Assets or the interest of Securityholders therein. To the extent that the
Seller has any obligation to repurchase or replace any Loan Assets for a
material breach of any representations or warranties made by the Seller, the
Seller is not expected to have the financial capability to repurchase or
replace such defective Loan Assets, but rather the Seller will be relying on
the related Transferor of such defective Loan Assets to repurchase or replace
them. See "The Seller".
The following is a brief description of the Loan Assets expected to be
included in the Trusts for each Series. If specific information respecting the
Loan 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 Sale and Servicing Agreement or 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 Loan Assets relating
to each Series, will be attached to the related Sale and Servicing Agreement or
Pooling and Servicing Agreement delivered to the applicable 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, town homes 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 related Loan Asset 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.
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The payment terms of the Mortgage Loans to be included in a Trust for
a Series or will be described in the related Prospectus Supplement and may
include any of the following features or combinations thereof or other features
described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable
from time to time in relation to an index, a rate that is fixed for a period of
time or under certain circumstances and is followed by an adjustable rate, a
rate that otherwise varies from time to time, or a rate that is convertible
from an adjustable rate to a fixed rate. Changes to an adjustable rate may be
subject to periodic limitations, maximum rates, minimum rates or a combination
of such limitations. Accrued interest may be deferred and added to the
principal of a loan for such periods and under such circumstances as may be
specified in the related Prospectus Supplement. Mortgage Loans may provide for
the payment of interest at a rate lower than the specified mortgage rate for a
period of time or for the life of the Mortgage Loan with the amount of any
difference contributed from funds supplied by the seller of the Mortgaged
Property or another source.
(b) Principal may be payable on a level debt service basis to
fully amortize the loan over its term, may be calculated on the basis of an
amortization schedule that is significantly longer than the original term to
maturity or on an interest rate that is different from the interest rate on the
Mortgage Loan or may not be amortized during all or a portion of the original
term. Payment of all or a substantial portion of the principal may be due on
maturity. Principal may include interest that has been deferred and added to
the principal balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed for
the life of the loan, may increase over a specified period of time or may
change from period to period. Mortgage Loans may include limits on periodic
increases or decreases in the amount of monthly payments and may include
maximum or minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment fee,
which may be fixed for the life of the loan or may decline over time, and may
be prohibited for the life of the loan or for certain periods ("lockout
periods"). Certain loans may permit prepayments after expiration of the
applicable lockout period and may require the payment of a prepayment fee in
connection with any such subsequent prepayment. Other loans may permit
prepayments without payment of a fee 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 Seller.
With respect to a Series for which the related Trust includes Mortgage
Loans the related Prospectus Supplement may specify, among other things,
information regarding the interest rates (the "Mortgage Rates"), the average
principal balance and the aggregate principal balance of such Mortgage Loans,
the years of origination, geographic dispersion and original principal balances
and the loan-to-value ratios of such Mortgage Loans.
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
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such Manufactured Homes are not permanently affixed to real estate ("Secured
Contracts") and (ii) loans evidenced by retail installments sales or loan
agreements which are not secured by any interest in real or personal property
("Unsecured Contracts"). To the extent described in the related Prospectus
Supplement, certain Contracts will be conventional (i.e., not insured or
guaranteed by a governmental agency) contracts (the "Conventional Contracts"),
while other Contracts 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 as part of the Trust Property for
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 borrower's credit history and ability to repay 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."
To the extent specified in the Prospectus Supplement with respect to a
Series for which the related Trust 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.
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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 Seller may, subsequent to the
issuance of a Series, (i) deliver additional Assets to the related Trust, (ii)
withdraw Assets previously included in a Trust 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 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 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 Loan Asset Pool characteristics with
respect to the Loan 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 the related
Transferor or the Seller will be subject to the applicable limitations,
requirements and conditions provided in the related Sale and Servicing
Agreement or 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 Sale and Servicing Agreement or Pooling and Servicing
Agreement will provide for a commitment by the related Trust to subsequently
purchase additional Loan Assets ("Subsequent Loan Assets") from the Seller
following the date on which the Trust is established and the related Securities
are issued (a "Pre-Funding Arrangement"). With respect to a Series, the
Pre-Funding Arrangement will require that any Subsequent Loan Assets
transferred to the Trust conform to the requirements and conditions provided in
the related Sale and Servicing Agreement or Pooling and Servicing Agreement.
If a Pre-Funding Arrangement is utilized in connection with the issuance of the
Series of Securities, 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 such
Trustee in connection with the sale of one or more Classes of Securities of
such Series; and, subsequently, the Trust will acquire Subsequent Loan Assets
from the Seller 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 Loan 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 Securities 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 Securities as specified in the related Prospectus Supplement.
Although it is intended that the principal amount of Subsequent Loan Assets
transferred to the Trust after the closing date for the issuance of any
particular Series will require application of substantially all of the
Pre-Funding
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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 Securities, no assurance
can be given that such a distribution with respect to the Securities 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 Loan 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
Securities 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 applicable
Sale and Servicing Agreement or 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 related Trustee, commercial paper, debt obligations, and
money market funds; provided such investments are acceptable to each Rating
Agency rating the Series of Offered Securities 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 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 Offered Securities.
The utilization of a Pre-Funding Arrangement is intended to improve
the efficiency of the issuance of a Series of Securities and the sale and
assignment of the Loan Assets to the related Trust through the incremental
delivery of the Loan Assets on the closing date and during the three month
period following the closing date for such Series, which allows for a more even
accumulation of the Loan Assets by the Seller and the related Transferor and
the issuance of a larger principal amount of Securities for such Series than
would be the case without a Pre-Funding Arrangement.
CREDIT ENHANCEMENT
GENERAL
The amount and types of credit and cash flow enhancement arrangements
("Credit Enhancement") and the provider thereof, if applicable, with respect to
each Class of Securities of a given Series, if any, will be set forth in the
related Prospectus Supplement. If and to the extent provided in the related
Prospectus Supplement, Credit Enhancement may be in the form of the
subordination of one or more Classes of Securities of such Series, the
overcollateralization of the Trust 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, Guaranty Policy, Special Hazard Insurance
Policy, bankruptcy bond, surety bond, letter of credit, credit or liquidity
facility, guaranteed investment contract, swap or other interest rate
protection agreement, repurchase obligation, yield maintenance agreement, other
agreements with respect to third party payments or other support, cash deposits
or such other form of Credit Enhancement as may be described in the related
Prospectus Supplement, or any combination of two or more of the foregoing. If
specified in the related Prospectus Supplement, Credit Enhancement for a Class
of Securities may cover
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one or more other Classes of Securities of the same Series, and Credit
Enhancement for a Series of Securities may cover one or more other Series of
Securities.
The presence of Credit Enhancement for the benefit of any Class or
Series of Securities is intended to enhance the likelihood of receipt by the
Securityholders of such Class or Series of the full amount of principal and
interest due thereon and to decrease the likelihood that such Securityholders
will experience losses. 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 Securities 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, as described in the related Prospectus
Supplement. In addition, if a form of Credit Enhancement covers more than one
Class or Series of Securities, Securityholders of any such Class or Series will
be subject to the risk that such credit enhancement will be exhausted by the
claims of Securityholders of other Classes or Series.
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 Securities") will instead be payable to one or more
other Classes of such Series (the "Senior Securities") 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 Loan
Assets and losses on defaulted Loan Assets will be borne first by the various
Classes of Subordinated Securities and thereafter by the various Classes of
Senior Securities, in each case under the circumstances and subject to the
limitations specified in the Prospectus Supplement. The aggregate distributions
in respect of delinquent payments or distributions on the Loan Assets over the
lives of the Securities of a Series or at any time, the aggregate losses in
respect of defaulted Loan Assets which must be borne by the Subordinated
Securities by virtue of subordination and the amount of the distributions
otherwise distributable to the Subordinated Securities that will be
distributable to holders of Senior Securities 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 Loan
Assets or aggregate losses in respect of such Loan Assets were to exceed the
total amounts distributable and available for distribution to holders of
Subordinated Securities were to exceed the specified maximum amount, holders of
Senior Securities could experience losses on their Securities.
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 Securities on any Distribution Date
may instead be deposited into one or more Reserve Funds (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 Securities or
otherwise, thereafter to the extent necessary to restore the balance in the
Reserve Fund to required levels, in each case as specified in 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 Securities at the times and under the circumstances specified in
such Prospectus Supplement.
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If specified in the related Prospectus Supplement, various Classes of
Senior Securities and Subordinated Securities may themselves be subordinate in
their right to receive certain distributions to other Classes of Senior and
Subordinated Securities, respectively, through a cross-support mechanism or
otherwise.
As between Classes of Senior Securities and as between Classes of
Subordinated Securities, distributions may be allocated among such Classes (i)
in the order of their Stated Maturity or Assumed Final Distribution Dates, (ii)
in accordance with a schedule or formula, (iii) in relation to the occurrence
of events, or (iv) otherwise, in each case as specified in the related
Prospectus Supplement. As between Classes of Subordinated Securities,
distributions to holders of Senior Securities 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 Loan Assets included in the Trust may exceed the
aggregate original principal balance of the Securities of 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 Securities to produce and maintain a specified level of
overcollateralization. With respect to a Series of Securities, 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 Indenture, Sale and Servicing Agreement
or Pooling and Servicing Agreement.
CROSS-SUPPORT
If specified in the related Prospectus Supplement, separate Classes of
related Series of Securities may represent the beneficial ownership of or be
separately secured by, separate groups of Assets included in the Trust for a
Series or otherwise available for the benefit of such Securities. In such
case, Credit Enhancement may be provided by a cross-support feature which may
require that distributions be made with respect to Securities evidencing
beneficial ownership of or secured by one or more groups of Assets prior to
distributions to Subordinated Securities evidencing a beneficial ownership
interest in or secured by other groups of Assets within the same Trust. The
Prospectus Supplement for a Series which includes a cross-support feature will
describe the manner and conditions for applying such cross-support feature.
GUARANTY INSURANCE
If specified in the Prospectus Supplement, one or more financial
guaranty insurance policies (each, a "Guaranty Policy") will be obtained. Each
such Guaranty Policy with respect to a Series will, subject to limitations
described in the related Prospectus Supplement, provide to the holders of the
insured Securities of a 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 Guaranty Policy and will
set forth certain information with respect to the applicable insurer.
MORTGAGE POOL INSURANCE
With respect to a Series for which the related Trust includes Mortgage
Loans (and, if specified in the related Prospectus Supplement, a Series for
which the related Trust includes Contracts), in order to
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decrease the likelihood that holders of the Securities 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. Each 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 Sale and Servicing Agreement or Pooling and
Servicing Agreement will agree to use its best reasonable efforts to cause to
be maintained in effect any such Mortgage Pool Insurance Policy and to file
claims thereunder to the issuer of such Mortgage Pool Insurance Policy (the
"Pool Insurer"). A Mortgage Pool Insurance Policy, however, is not a blanket
policy against loss, since claims thereunder may only be made respecting
particular defaulted Mortgage Loans and only upon satisfaction of certain
conditions precedent set forth in such policy as described in the related
Prospectus Supplement. To the extent specified in the related Prospectus
Supplement, no Mortgage Pool Insurance Policy, if any, will 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 includes Mortgage
Loans (and, if specified in the related Prospectus Supplement, each Series for
which the related Trust includes Contracts), in order to decrease the
likelihood that holders of the Securities 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. Each 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 Securities 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. 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
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such Prospectus Supplement will be deposited by the Seller 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, to pay
the expenses of the related Trust or for such other purposes specified in such
Prospectus Supplement. Whether or not the Seller has any obligation to make
such a deposit, certain amounts to which the holders of the Subordinated
Securities of such Series, if any, the Seller 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 applicable
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 Securities of such Series, as beneficiary and will be issued by
an entity acceptable to each rating agency that rates such Securities.
Additional information with respect to such instruments deposited in the
Reserve Funds may be set forth in the Prospectus Supplement.
SERVICING OF THE LOAN ASSETS
Except as otherwise noted in the applicable Prospectus Supplement, the
description set forth below of the servicing of Loan Assets is applicable to
Loan Assets included in the Trust with respect to a Series of Securities.
To the extent provided in the related Prospectus Supplement, the Loan
Assets included in the Trust for a Series of Securities 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 Seller. If the Servicer is not an affiliate of the
Seller, the discussion relating to the servicing of the Loan Assets as set
forth below may be modified or superseded by any discussion relating to the
servicing of the Loan Assets set forth in the Prospectus Supplement.
To the extent specified in the related Prospectus Supplement, the Loan
Assets 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 applicable
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; 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
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Mortgage does 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 such Mortgage 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 Mortgage.
REALIZATION UPON DEFAULTED LOAN ASSETS
With respect to any defaulted Loan Asset 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 Securityholders. Without limiting the
generality of the preceding sentence, the Servicer will, in accordance with the
servicing standard described above, (i) in the case of Title I Mortgage Loans
and Title I Contracts only, direct the Trustee (or any Administrator) to submit
an FHA Claim to the FHA, in accordance with FHA Regulations, or (ii) in the
case of Mortgage Loans and Contracts, take such other action as the Servicer
deems to be in the best interests of the Securityholders, 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
Securityholders, provided such action was economically justified. Typically,
however, the Servicer has chosen not to pursue foreclosures of defaulted loans
comparable to the Loan Assets 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 related Mortgaged Property, or to
advance funds to keep the senior mortgage(s) current. In addition, if a
defaulted Loan Asset (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 defaulted Loan Asset. In the event an FHA Claim is rejected by the FHA
due to circumstances that constitute a breach of the Seller's representations
and warranties in the applicable Sale and Servicing Agreement or Pooling and
Servicing Agreement, the Seller 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 such Sale and Servicing Agreement or 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
Each Sale and Servicing Agreement and each Pooling and Servicing
Agreement will require the Servicer to make reasonable efforts to collect all
payments called for under the terms and provisions of the Loan Assets.
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 Loan Asset 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 Loan Asset 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 applicable Sale and Servicing Agreement or
Pooling and Servicing Agreement and the FHA Regulations, if applicable.
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SUBSERVICERS
The Servicer is permitted under the applicable Sale and Servicing
Agreement or Pooling and Servicing Agreement to enter into servicing
arrangements from time to time with subservicers (each, a "Subservicer")
meeting the requirements of such Sale and Servicing Agreement or Pooling and
Servicing Agreement, provided that the applicable Trustee gives written consent
thereto. Notwithstanding any subservicing arrangements, the Servicer shall not
be relieved of its obligations under the applicable Sale and Servicing
Agreement or Pooling and Servicing Agreement to the applicable Trustee and the
Securityholders, 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 related Loan Assets.
REMOVAL AND RESIGNATION OF SERVICER
To the extent specified in the Prospectus Supplement, the applicable
Trustee may remove the Servicer upon the occurrence and continuation beyond the
applicable cure period of certain events described in the applicable Sale and
Servicing Agreement or 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 Seller, the applicable Trustee and any other persons so specified
in the applicable Sale and Servicing Agreement or 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 Sale and
Servicing Agreement or Pooling and Servicing Agreement.
ADVANCES
To the extent specified in the Prospectus Supplement, neither the
Servicer, nor any Subservicer on behalf of the Servicer, shall have any
obligation to advance its own funds for any delinquent scheduled payments of
principal and interest on any Loan 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 Securityholders, be added to the amount owing
under the related Loan Asset.
SERVICING PROCEDURES
To the extent specified in the related Prospectus Supplement, the
Servicer and each Subservicer will service the Loan Assets pursuant to written
guidelines promulgated by the Seller or the Servicer. The Servicer will
exercise its best reasonable efforts to insure that any Subservicers service
the Loan Assets 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 applicable Sale and Servicing Agreement or
Pooling and Servicing Agreement. The Servicer, in servicing and administering
the Mortgage Loans, will be required to employ or cause to be employed
procedures
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(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 Securityholders'
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 applicable Sale and Servicing Agreement
or Pooling and Servicing Agreement.
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
Loan Assets -- General Legal Considerations -- Cooperative Loans". This
approval is usually based on the purchaser's income and net worth and numerous
other factors. Although the Cooperative's approval is unlikely to be
unreasonably withheld or delayed, the necessity of acquiring such approval
could limit the number of potential purchasers for those shares and otherwise
limit the ability to sell and realize the value of those shares.
In general, a "tenant-stockholder" (as defined in Code Section
216(b)(2)) of a corporation that qualifies as a "cooperative housing
corporation" within the meaning of Code Section 216(b)(1) is allowed a
deduction for amounts paid or accrued within his taxable year to the
corporation representing his proportionate share of certain interest expenses
and certain real estate taxes allowable as a deduction under Code Section
216(a) to the corporation under Code Sections 163 and 164. In order for a
corporation to qualify under Code Section 216(b)(1) for its taxable year in
which such items are allowable as a deduction to the corporation, such Code
Section requires, among other things, that at least 80% of the gross income of
the corporation be derived from its tenant-stockholders (as defined in Code
Section 216(b)(2). By virtue of this requirement, the status of a corporation
for purposes of Code Section 216(b)(1) must be determined on a year-to-year
basis. Consequently, there can be no assurance that Cooperatives relating to
the Cooperative Loans will qualify under such Code Section for any particular
year. In the event that such a Cooperative fails to qualify for one or more
years, the value of the collateral securing any related Cooperative Loans could
be significantly impaired because no deduction would be allowable to
tenant-stockholders under Code Section 216(a) with respect to those years. In
view of the significance of the tax benefits accorded tenant-stockholders of a
corporation that qualifies under Code Section 216(b)(1), the likelihood that
such a failure would be permitted to continue over a period of years appears
remote.
So long as it acts as servicer of the Mortgage Loans, the Servicer
will be required to maintain certain insurance covering errors and omissions in
the performance of its obligations as servicer and certain fidelity bond
coverage ensuring against losses through wrongdoing of its officers, employees
and agents.
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CONTRACTS. With respect to a Trust that includes Contracts, pursuant
to the applicable Sale and Servicing Agreement or Pooling and Servicing
Agreement, the Servicer will service and administer the Contracts assigned to
the Trustee as more fully set forth below. The Servicer, either directly or
through Subservicers subject to general supervision by the Servicer, will
perform diligently all services and duties specified in each Sale and Servicing
Agreement or 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 applicable Sale and Servicing
Agreement or 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 Loan Asset, 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
Loan Assets. No loss will be suffered on the Securities by reason of such
expenses to the extent claims for such expenses are paid directly under any
applicable Mortgage Pool Insurance Policy, any primary mortgage insurance
policy, or from any other forms of Credit Enhancement. In the event, however,
that the defaulted Mortgage Loans are not covered by a Mortgage Pool Insurance
Policy, any primary mortgage insurance policy, 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 Securities of the affected Series to the extent that the proceeds from the
liquidation of a defaulted Loan Asset, after reimbursement of the Servicer's
and the Subservicer's expenses, are less than the then outstanding principal
balance of such defaulted Loan Asset.
THE SELLER
FIRSTPLUS INVESTMENT CORPORATION (the "Seller"), 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 Seller maintains its principal office at 3773
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 Seller will be limited to functions
relating to the issuance of one or more Series of Securities or similar series
of asset-backed or mortgage-backed securities, the acquisition and resale of
Loan Assets and other incidental activities related thereto. The Seller does
not have, and is not expected in the future to have, any significant assets.
If the Seller were required to repurchase a Loan Asset included in the Trust
for a Series, its only sources of funds to make such repurchase would be funds
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obtained from the enforcement of a corresponding obligation, if any, on the
part of the Transferor of such Loan 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 Seller nor any of its affiliates will insure or guarantee
the Securities of any Series or the Loan Assets backing any such Series. See
"Risk Factors -- Limited Assets of Trust."
THE SERVICER AND THE TRANSFEROR
To the extent specified in the related Prospectus Supplement, the
Servicer with respect to any Series of Securities may be FIRSTPLUS FINANCIAL,
INC. ("FFI"), an affiliate of the Seller. In addition, to the extent specified
in the related Prospectus Supplement for a Series, the related Transferor of
the Loan Assets to the Seller for such Series may also be FFI. See
"Description of the Trust Property -- 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.
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<TABLE>
<CAPTION>
Delinquency Experience
----------------------
Three Months Ended
-----------------------------------------------------------------------
1994 1995 1996
------- --------------------------------------------- -------
Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31
<S> <C> <C> <C> <C> <C> <C>
DELINQUENCY DATA:
Delinquencies in Serviced Loan
Portfolio (at period end) (1):
31-60 days . . . . . . . . . . 3.7% 2.3% 1.7% 1.8% 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) $60,850 $70,410 $177,358 $238,584 $387,343 $506,287
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
LOSS AND DEFAULT DATA:
Net Losses as a percentage of the average
Serviced Loan Portfolio (2) . . . . . . . . 0.39% 0.44% 0.04%
Defaults as a percentage of the average
Serviced Loan Portfolio (2) . . . . . . . . 2.04% 2.64% 0.69%
</TABLE>
(1) Delinquencies (as a percentage of the total serviced loan portfolio
balance) typically increase in November and December of each calendar
year.
(2) The average serviced loan portfolio is calculated by adding the
beginning and ending balances for the fiscal year and dividing the sum
by two.
While the preceding tables generally indicate that FFI is experiencing
declining delinquency, loss and default rates on its serviced loan portfolio as
a whole, such rates have been increasing on a pool-by-pool basis. Although
such increases to date have been within the parameters anticipated by FFI at
the time of the issuance of each Series of Securities, there can be no
assurance that such rates will not continue to increase. Loan Assets that will
be conveyed to the Seller in connection with the issuance of a Series of
Securities 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
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<PAGE> 134
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 Loan Assets or with
respect to any pool of Loan Assets will be comparable to the experience
reflected above for assets originated and serviced by FFI or its affiliates.
Because certain Loan Assets may have been underwritten pursuant to standards
that rely primarily on the value of the related Mortgaged Properties rather
than the creditworthiness of the related mortgagor, the actual rates of
delinquencies, foreclosures and losses on such Loan 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 Loan 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 Loan Assets".
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes certain terms of each Sale and
Servicing Agreement or Pooling and Servicing Agreement pursuant to which a
Trust will purchase Loan Assets from the Seller and the Servicer will agree to
service such Loan Assets, each Trust Agreement (in the case of a grantor trust,
the Pooling and Servicing Agreement) pursuant to which a Trust will be created
and Securities will be issued and each Administration Agreement pursuant to
which FFI will undertake certain administrative duties with respect to a Trust
that issues Bonds (collectively, the "Transfer and Servicing Agreements").
Forms of the Transfer and Servicing Agreements have been filed as exhibits to
the Registration Statement of which this Prospectus forms a part. This summary
does not purport to be complete and is subject to, and qualified in its
entirety by reference to, all the provisions of the Transfer and Servicing
Agreements.
SALE AND ASSIGNMENT OF LOAN ASSETS
On or prior to the Closing Date specified with respect to any given
Trust in the related Prospectus Supplement (the "Closing Date"), the Transferor
will sell and assign to the Seller, without recourse, its entire interest in
the Loan Assets comprising the related Loan Asset Pool, together with all
principal and interest on such Loan Assets (subject to exclusions or
adjustments specified in the related Prospectus Supplement received by the
Seller on or with respect to such Loan Assets on or after the Cut-off Date),
other than principal and interest due and payable in respect of such Loan
Assets on or before the date specified in the related Prospectus Supplement.
On the Closing Date, the Seller will transfer and assign to the applicable
Trustee, without recourse, pursuant to a Sale and Servicing Agreement or a
Pooling and Servicing Agreement, as applicable, its entire interest in the Loan
Assets comprising the related Loan Asset Pool, together with all principal and
interest on such Loan Assets (subject to exclusions or adjustments specified in
the related Prospectus Supplement received by the Seller on or with respect to
such Loan Assets on or after the Cut- off Date), other than principal and
interest due and payable in respect of such Loan Assets on or before the date
specified in the related Prospectus Supplement. Each such Loan Asset will be
identified in a schedule appearing as an exhibit to such Sale and Servicing
Agreement or such Pooling and Servicing Agreement (a "Schedule of Loan
Assets"). The applicable Trustee will, concurrently with such transfer and
assignment, execute and deliver the related Securities. Unless
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<PAGE> 135
otherwise provided in the related Prospectus Supplement, the net proceeds
received from the sale of the Securities of a given Series will be applied to
the purchase of the related Loan Assets from the Seller and, to the extent
specified in the related Prospectus Supplement, to provide for the funding of
the applicable Credit Enhancement.
In addition, as to each Loan Asset that is a Mortgage Loan, the Seller
will deliver to the applicable Trustee or its custodian, as specified in the
related Prospectus Supplement, the related mortgage note ("Mortgage Note") and
mortgage ("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 Seller may deliver copies thereof and deliver the original
recorded documents promptly upon receipt.
With respect to each Loan Asset that is a Cooperative Loan, the Seller
will cause to be delivered to the applicable Trustee or its custodian, as
specified in the related Prospectus Supplement, the related original
Cooperative note endorsed to the order of such 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 Seller will file in the appropriate office
an assignment and a financing statement evidencing such Trustee's security
interest in each Cooperative Loan.
With respect to each Loan Asset that is a Contract for a Manufactured
Home, the Seller will deliver or cause to be delivered to the applicable
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
Securityholders to the Contracts, the Seller will cause a UCC-1 financing
statement to be filed identifying such 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 Seller to such 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
Securities of the applicable Series in the Contracts could be defeated. See
"Certain Legal Aspects of the Loan Assets."
To the extent specified in the related Prospectus Supplement, in the
applicable Sale and Servicing Agreement or Pooling and Servicing Agreement, the
Seller generally will represent and warrant to the applicable Trustee, among
other things, that (i) the information with respect to each Loan Asset set
forth in the Schedule of Loan Assets attached thereto is true and correct in
all material respects; (ii) at the date of initial issuance of the Securities,
the Seller has good and marketable title to the Loan Assets included in the
Trust and such other items comprising the corpus of the Trust are free and
clear of any lien, mortgage, pledge, charge, security interest or other
encumbrance; (iii) at the date of initial issuance of the Securities, no
payment in respect of a Loan Asset is 30 or more days delinquent and there are
no delinquent tax or assessment liens against the related Mortgaged Property,
if any; and (iv) at origination, each Mortgage Loan complied in all material
respects with applicable state and federal laws, including, without limitation,
consumer, usury, truth-in-lending, consumer credit protection, equal credit
opportunity and disclosure laws and with respect to any Title I Mortgage Loans,
the FHA Regulations.
In the event that the Seller has acquired the Loan Assets for a
Series, if specified in the related Prospectus Supplement, the Seller may, in
lieu of making the representations set forth in the preceding paragraph, cause
the entity from which such Loan Assets were acquired to make such
representations
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(other than those regarding the Seller's title to the Loan Assets, which will
in all events be made by the Seller), in the agreement pursuant to which such
Loan Assets are acquired, or if such entity is acting as Servicer, in the
applicable Sale and Servicing Agreement or Pooling and Servicing Agreement, or
if such entity is acting as a Subservicer, in its Subservicing Agreement. In
such event such representations, and the Seller's rights against such entity in
the event of a breach thereof, will be assigned to the Trustee for the benefit
of the Securityholders of such Series.
CONVEYANCE OF SUBSEQUENT LOAN ASSETS
With respect to a Series of Securities for which a Pre-Funding
Arrangement is provided, in connection with any conveyance of Subsequent Loan
Assets to the Trust after the issuance of such Series, the related Sale and
Servicing Agreement or Pooling and Servicing Agreement will require the
Transferor and Seller to satisfy the following conditions, among others: (i)
each Subsequent Loan Asset purchased after the Closing Date must satisfy the
representations and warranties contained in the subsequent transfer agreement
to be entered into by the Transferor, the applicable Trustee and the Seller
(the "Subsequent Transfer Agreement") and in the related Sale and Servicing
Agreement or Pooling and Servicing Agreement; (ii) the Transferor will not
select such Subsequent Loan Assets in a manner that it believes is adverse to
the interests of the Securityholders; (iii) as of the related cut-off date, all
of the Loan Assets in the Loan Asset Pool at that time, including the
Subsequent Loan Assets purchased after the closing date will satisfy the
criteria set forth in the related Sale and Servicing Agreement or Pooling and
Servicing Agreement; (iv) the Subsequent Loan Assets will have been approved by
any third party provider of Credit Enhancement, if applicable; and (v) prior to
the purchase of each Subsequent Loan Asset the applicable Trustee will perform
an initial review of certain related loan file documentation for such Loan
Asset and issue an initial certification for which the required documentation
in such loan file has been received with respect to each such Subsequent Loan
Asset. The Subsequent Loan Assets on an aggregate basis, will have
characteristics similar to the characteristics of the pool of Initial Loan
Assets as described in the related Prospectus Supplement. Each acquisition of
any Subsequent Loan 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 Loan Asset Pool for compliance with the applicable statistical criteria
set forth in the related Sale and Servicing Agreement or Pooling and Servicing
Agreement.
REPURCHASE OR SUBSTITUTION OF LOAN ASSETS
The Trustee (or its custodian as specified in the related Prospectus
Supplement) will review the documents delivered to it with respect to the Loan
Assets included in the related Trust. 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 Seller cannot deliver such document
or cure such defect within 60 days after notice thereof (which the applicable
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
Loan Asset, then the Seller 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 Loan Asset from the Trust and substitute one or
more other Loan Assets therefor or (b) repurchase the Loan Asset from the
applicable 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 Loan Asset. 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,
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substitution obligation will constitute the sole remedy available to holders of
the Securities of the applicable Series or the related Trustee against the
Seller for a material defect in a document relating to a Loan Asset.
If the Prospectus Supplement for a Series of Securities so provides,
then in lieu of agreeing to repurchase or substitute Loan Assets as described
above, the Seller may obtain such an agreement from the entity which sold such
Loan Assets to the Seller, which agreement will be assigned to the applicable
Trustee for the benefit of the holders of the Securities of such Series.
EVIDENCE AS TO COMPLIANCE
The related Sale and Servicing Agreement or 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 applicable Trustee and certain
other Persons (i) an opinion by a firm of independent certified public
accountants on the financial position of the Servicer at the end of the
relevant fiscal year and the results of operations and changes in financial
position of the Servicer for such year then ended on the basis of an
examination conducted in accordance with generally accepted auditing standards,
and (ii) if the Servicer is then servicing any Mortgage Loans, a statement from
such independent certified public accountants to the effect that based on an
examination of certain specified documents and records relating to the
servicing of the Servicer's mortgage loan portfolio conducted substantially in
compliance with the audit program for mortgages serviced for the United States
Department of Housing and Urban Development Mortgage Audit Standards, or the
Uniform Single Audit Program for Mortgage Bankers (the "Applicable Accounting
Standards"), such firm is of the opinion that such servicing has been conducted
in compliance with the Applicable Accounting Standards except for (a) such
exceptions as such firm shall believe to be immaterial and (b) such other
exceptions as shall be set forth in such statement.
LIST OF SECURITYHOLDERS
Upon written request of the applicable Trustee, the Registrar for a
Series of Securities 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 the Securities of such Series as of the most recent Record Date for
payment of distributions to holders of Securities of that Series. Upon written
request of three or more holders of record of a Series of Securities for
purposes of communicating with other holders with respect to their rights under
the applicable Indenture, Trust Agreement or Pooling and Servicing Agreement
for such Series, the applicable Trustee will afford such holders access during
business hours to the most recent list of holders of such Series held by such
Trustee. With respect to Book Entry Securities, the only named holder on the
Certificate Register will be the Clearing Agency.
No Indenture, Trust Agreement or Pooling and Servicing Agreement will
provide for the holding of any annual or other meetings of holders of
Securities.
ADMINISTRATION OF THE DISTRIBUTION ACCOUNT
The applicable Sale and Servicing Agreement or Pooling and Servicing
Agreement with respect to a Series will require the Servicer to maintain a
Distribution Account that is either: (i) an account maintained with a
depository institution the debt obligations of which (or, in the case of a
depository institution which is a part of a holding company structure, the debt
obligations of the holding company of which) have a long-term or short-term
rating acceptable to each rating agency that rated the Securities; (ii)
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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 applicable 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 Indenture, Trust Agreement, Sale and
Servicing Agreement or Pooling and Servicing Agreement; or (iv) an account that
will not cause any rating agency rating the Securities of such Series to
downgrade or withdraw its then-current rating assigned to the Securities, as
evidenced in writing by such rating agency. The instruments in which amounts in
the Distribution Account may be invested are limited to Permitted Investments.
To the extent specified in the related Prospectus Supplement, a Distribution
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
Seller or the Trustee will be entitled to receive any such interest or other
income earned on funds in the Distribution 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 Distribution 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 Sale and
Servicing Agreement or Pooling and Servicing Agreement;
(iv) all Insurance Proceeds;
(v) all proceeds of any Loan Asset or property acquired in respect
thereof repurchased by the Servicer, the Seller or the Transferor or otherwise
as described herein;
(vi) all amounts, if any, required to be transferred to the
Distribution Account from any Credit Enhancement for the related Series; and
(vii) all other amounts required to be deposited in the Distribution
Account pursuant to the related Indenture, Trust Agreement, Sale and Servicing
Agreement or Pooling and Servicing Agreement.
REPORTS TO SECURITYHOLDERS
Concurrently with each payment or distribution on the Securities of a
Series, to the extent specified in the related Prospectus Supplement, the
applicable Trustee will furnish to the related Securityholders 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;
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(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
Securities after giving effect to distributions on such Distribution Date;
(iv) if applicable, the aggregate principal balance of any Class of
Securities which are Compound Interest Securities after giving effect to any
increase in such principal balance that results from the accrual of interest
that is not yet distributable thereon;
(v) if applicable, the amount otherwise distributable to holders
of any Class of Securities that were distributed to holders of other Classes of
Securities;
(vi) if any Class of Securities has priority in the right to
receive Principal Prepayments, the amount of Principal Prepayments received by
the related Trust in respect of the related Loan Assets;
(vii) certain performance information regarding the Loan Assets,
including delinquency and foreclosure information, specified in the related
Sale and Servicing Agreement or 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 Indenture, Trust Agreement, Sale and Servicing Agreement or Pooling and
Servicing Agreement.
The Servicer or the applicable Trustee will also furnish annually
customary information deemed necessary for holders of such Securities to
prepare their tax returns.
EVENTS OF DEFAULT
"Events of Default" under the applicable Sale and Servicing Agreement
or 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 Sale and Servicing Agreement or such
Pooling and Servicing Agreement materially affecting the rights of holders of
the Securities of such Series which continues unremedied for 60 days after the
giving of written notice of such failure to the Servicer by the applicable
Trustee or to the Servicer or the applicable Trustee by the holders of such
Securities evidencing interests aggregating not less than 25% of the then
outstanding principal balance of the affected Class of Securities; and (ii)
certain events of insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceedings and certain actions by the Servicer
indicating its insolvency, reorganization or inability to pay its obligations.
RIGHTS UPON EVENT OF DEFAULT
As long as an Event of Default under a Sale and Servicing Agreement or
Pooling and Servicing Agreement remains unremedied by the Servicer, the
applicable Trustee, or holders of Securities of each Class affected thereby
evidencing, as to each such Class, interests aggregating not less than 51% of
the then outstanding principal balance of such Class, may terminate all of the
rights and obligations of the Servicer under the applicable Sale and Servicing
Agreement or Pooling and Servicing Agreement, whereupon the
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applicable Trustee, or a new Servicer appointed pursuant to such Sale and
Servicing Agreement or such Pooling and Servicing Agreement, will succeed to
all the responsibilities, duties and liabilities of the Servicer under such
Sale and Servicing Agreement or such Pooling and Servicing Agreement and will
be entitled to similar compensation arrangements. Notwithstanding its
termination as Servicer, the Servicer will be entitled to receive amounts
earned by it under the applicable Sale and Servicing Agreement or 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 applicable Trustee, or to the applicable 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 applicable Trustee will be required to
fulfill the duties of the Servicer.
No Securityholder will have any right under the applicable Sale and
Servicing Agreement or Pooling and Servicing Agreement to institute any
proceeding with respect to such Sale and Servicing Agreement or such Pooling
and Servicing Agreement, unless such holder previously has given to the
applicable Trustee written notice of default and unless the holders of
Securities as specified in the applicable Sale and Servicing Agreement or
Pooling and Servicing Agreement have made written request to the applicable
Trustee to institute such proceeding in its own name as trustee thereunder and
have offered to the applicable Trustee reasonable indemnity and the Trustee for
60 days has neglected or refused to institute any such proceedings. However, no
Trustee will be under any obligation to exercise any of the trusts or powers
vested in it by the applicable Indenture, Trust Agreement or 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 Securityholders,
unless such Securityholders have offered to such Trustee reasonable security or
indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby.
AMENDMENT
Each of the Sale and Servicing Agreement with respect to a Series and
the Pooling and Servicing Agreement with respect to a Series may be amended by
the Seller, the Servicer and the applicable Trust or Trustee without the
consent of the Securityholders 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 such Sale and Servicing
Agreement or such Pooling and Servicing Agreement provided that such action
will not adversely affect in any material respect the interests of any
Securityholders of such Series. An amendment described above shall not be
deemed to adversely affect in any material respect the interests of the
Securityholders of a Series if either (a) an opinion of counsel satisfactory to
the applicable 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
Securities 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
Securities.
To the extent specified in the Prospectus Supplement, each of the Sale
and Servicing Agreement with respect to a Series and the Pooling and Servicing
Agreement with respect to a Series may also be amended by the Seller, the
Servicer, and the applicable Trust or Trustee with the consent of the
Securityholders evidencing interests aggregating in excess of 50% of the then
outstanding principal balance of the Securities 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 Sale and Servicing Agreement or such
Pooling and
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Servicing Agreement or of modifying in any manner the rights of Securityholders
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 Loan Assets or distributions which are required to be made on
any Security without the consent of the holder of such Security, (ii) adversely
affect in any material respect the interests of the holders of any Class of
Securities in any manner other than as described in clause (i), without the
consent of the holders of Securities evidencing 100% of the then outstanding
principal balance of such Class or (iii) reduce the aforesaid percentage of
Securities of any Class required to consent to any such amendment, without the
consent of the holders of Securities evidencing 100% of the then outstanding
principal balance of such Class.
CERTAIN LEGAL ASPECTS OF THE LOAN ASSETS
The following discussion contains summaries of certain legal aspects
of the Loan Assets 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 Loan Assets is situated. The summaries are qualified in
their entirety by reference to the applicable federal and state laws governing
the Loan Assets.
In addition, the following discussion also contains a summary of the
Title I Program, which may be applicable to certain of the Loan Assets. With
respect to each Series for which the related Trust 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 Seller, the
Trustee, the Indenture 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 Loan Assets.
The Loan Assets may also be 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 Loan
Assets; (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").
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MORTGAGES. The Mortgage Loans will be secured by either deeds of
trust, mortgages, deeds to secure debt or chattel mortgages, depending upon the
prevailing practice in the state in which the Mortgaged Property subject to a
Mortgage Loan is located. In some states, a mortgage creates a lien upon the
real property encumbered by the mortgage. In other states, the mortgage
conveys legal title to the property to the mortgagee subject to a condition
subsequent, i.e., the payment of the indebtedness secured thereby. There are
two parties to a mortgage, the borrower, who is the owner of the property and
usually the borrower, and the mortgagee, who is the lender. Under the mortgage
instrument, the borrower delivers to the mortgagee a note or bond and the
mortgage. Although a deed of trust is similar to a mortgage, a deed of trust
has three parties, the owner of the property and usually the borrower, called
the trustor (similar to a borrower), a lender called the beneficiary (similar
to a mortgagee), and a third-party grantee called the trustee. Under a deed of
trust, the borrower grants the property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
obligation. The trustee's authority under a deed of trust and the mortgagee's
authority under a mortgage are governed by applicable state law, the express
provisions of the deed of trust or mortgage, and, in some cases, with respect
to deeds of trust, the directions of the beneficiary. Some states use a
security deed or deed to secure debt which is similar to a deed of trust except
that it has only two parties: a grantor (similar to a borrower) and a grantee
(similar to a mortgagee). Mortgages, deeds of trust and deeds to secure debt
generally are not prior to liens for real estate taxes and assessments and
other charges imposed under governmental police powers. Priority with respect
to mortgages, deeds of trust and deeds to secure debt and other encumbrances
depends on their terms, the knowledge of the parties to such instrument and
generally on the order of recordation of the mortgage, deed of trust or the
deed to secure debt in the appropriate recording office.
COOPERATIVE LOANS. Certain of the Mortgage Loans may be Cooperative
Loans. The private, non-profit, cooperative apartment corporation owns all the
real property that comprises the project, including the land, separate dwelling
units and all common areas. The cooperative is directly responsible for project
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. If there is a blanket mortgage on the cooperative
apartment building and/or underlying land, as is generally the case, the
cooperative, as project borrower, is also responsible for meeting these
mortgage obligations. A blanket mortgage is ordinarily incurred by the
cooperative in connection with the construction or purchase of the
cooperative's apartment building. The interest of the occupant under
proprietary leases or occupancy agreements to which that cooperative is a party
are generally subordinate to the interest of the holder of the blanket mortgage
in that building. If the cooperative is unable to meet the payment obligations
arising under its blanket mortgage, the mortgagee holding the blanket mortgage
could foreclose on that mortgage and terminate all subordinate proprietary
leases and occupancy agreements. In addition, the blanket mortgage on a
cooperative may provide financing in the form of a mortgage that does not fully
amortize with a significant portion of principal being due in one lump sum at
final maturity. The inability of the cooperative to refinance this mortgage and
its consequent inability to make such final payment could lead to foreclosure
by the mortgagee providing the financing. A foreclosure in either event by the
holder of the blanket mortgage could eliminate or significantly diminish the
value of any collateral held by the lender who financed the purchase by an
individual tenant-stockholder of cooperative shares or, in the case of a pool
of Mortgage Loans including Cooperative Loans, the collateral securing the
Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership
of stock shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units. Generally, a tenant-stockholder of a cooperative must
make a monthly payment to the cooperative representing such
tenant-stockholder's pro rata share of the cooperative's payments for its
blanket mortgage, real property taxes, maintenance expenses and other
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capital or ordinary expenses. An ownership interest in a cooperative and
accompanying occupancy rights is financed through a cooperative share loan
evidenced by a promissory note and secured by a security interest in the
occupancy agreement or proprietary lease and in the related cooperative shares.
The lender takes possession of the share certificate and a counterpart of the
proprietary lease or occupancy agreement and a financing statement covering the
proprietary lease or occupancy agreement and the cooperative shares is filed in
the appropriate state and local offices to perfect the lender's interest in its
collateral. Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in
the security agreement covering the assignment of the proprietary lease or
occupancy agreement and the pledge of cooperative shares.
FORECLOSURE
MORTGAGES. Foreclosure of a mortgage is generally accomplished by
judicial action. Generally, the action is initiated by the service of legal
pleadings upon all parties having an interest of record in the real property.
Delays in completion of the foreclosure may occasionally result from
difficulties in locating necessary parties defendant. Judicial foreclosure
proceedings are often not contested by any of the parties defendant. However,
when the mortgagee's right to foreclose is contested, the legal proceedings
necessary to resolve the issue can be time consuming. After the completion of
a judicial foreclosure, the court generally issues a judgment of foreclosure
and appoints a referee or other court officer to conduct the sale of the
property.
An action to foreclose a mortgage is an action to recover the mortgage
debt by enforcing the mortgagee's rights under the mortgage. Foreclosure is
regulated by statutes and rules and is subject to the court's equitable powers.
Generally, a borrower is bound by the terms of the mortgage note and the
mortgage as made and cannot be relieved from his default if the mortgagee has
exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature the court may exercise
equitable powers to relieve a borrower of a default and deny the mortgagee
foreclosure on proof that either the borrower's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith
or oppressive or unconscionable conduct such as to warrant a court of equity to
refuse affirmative relief to the mortgagee. Under certain circumstances a
court of equity may relieve the borrower from an entirely technical default
where such default was not willful.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, sometimes requiring
up to several years to complete. Moreover, a non-collusive, regularly
conducted foreclosure sale may be challenged as a fraudulent conveyance,
regardless of the parties' intent, if a court determines that the sale was for
less than reasonably equivalent value and such sale occurred while the borrower
was insolvent and within one year (or within the state statute of limitations
if the trustee in bankruptcy elects to proceed under state fraudulent
conveyance law) of the filing of bankruptcy. Similarly, a suit against the
debtor on the mortgage note may take several years and, generally, is a remedy
alternative to foreclosure, the mortgagee being precluded from pursuing both at
the same time.
In some states, mortgages may also be foreclosed by advertisement
pursuant to a power of sale provided in the mortgage. Foreclosure of a
mortgage by advertisement is essentially similar to foreclosure of a deed of
trust by nonjudicial power of sale.
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Foreclosure of a deed of trust or a deed to secure debt is generally
accomplished by a non-judicial trustee's sale under a specific provision in the
deed of trust or deed to secure debt which authorizes the trustee to sell the
property upon default by the borrower under the terms of the note, deed of
trust or deed to secure debt. In some states, prior to such sale, the trustee
must record a notice of default and send a copy to the borrower-trustor and to
any person who has recorded a request for a copy of a notice of default and
notice of sale. In addition, in some states, prior to such sale, the trustee
must provide notice to any other individual having an interest of record in the
real property, including any junior lienholders. In some states, the borrower,
or any other person having a junior encumbrance on the real estate, may, during
a reinstatement period, cure the default by paying the entire amount in arrears
plus the costs and expenses incurred in enforcing the obligations, including
attorney's and trustee's fees to the extent allowed by applicable law. Certain
states may require notices of sale to be published periodically for a
prescribed period in a specified manner prior to the date of the trustee's
sale. In addition, some state laws require that a copy of the notice of sale
be posted on the property and sent to all parties having an interest in the
real property. In certain states, foreclosure under a deed of trust may also
be accomplished by judicial action in the manner provided for foreclosure of
mortgages.
In case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is generally
a public sale. Because of the difficulty a potential buyer at the sale might
have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, a third party may be unwilling to purchase the property at a
foreclosure sale. For these and other reasons, it is common for the lender to
purchase the property from the trustee, referee or other court officer for an
amount equal to the principal amount of the indebtedness secured by the
mortgage or deed of trust, plus accrued and unpaid interest and the expenses of
foreclosure. Generally, state law controls the amount of foreclosure costs and
expenses, including attorneys' and trustee's fees, which may be recovered by a
lender. In some states there is a statutory minimum purchase price which the
lender may offer for the property. Thereafter, subject to the right of the
borrower in some states to remain in possession during the redemption period,
the lender will assume ownership of the mortgaged property and, therefore, the
burdens of ownership, including the obligation to pay taxes, obtain casualty
insurance and to make such repairs at its own expense as are necessary to
render the property suitable for sale. The lender will commonly obtain the
services of a real estate broker and pay the broker's commission in connection
with the sale of the property. Depending upon market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property. Any loss may be mitigated by the receipt of any mortgage
insurance proceeds.
A second mortgagee may not foreclose on the property securing a second
mortgage unless it forecloses subject to the first mortgage and any other prior
liens, in which case it must either pay the entire amount due on the first
mortgage and such other liens, prior to or at the time of the foreclosure sale
or undertake the obligation to make payments on the first mortgage and such
liens, in either event adding the amounts expended to the balance due on the
second loan, and may be subrogated to the rights of the first mortgagee. In
addition, in the event that the foreclosure of a second mortgage triggers the
enforcement of a "due-on-sale" clause, the second mortgagee may be required to
pay the full amount of the first mortgage to the first mortgagee. Accordingly,
with respect to those Mortgage Loans which are second mortgage loans, if the
lender purchases the property, the lender's title will be subject to all senior
liens and claims and certain governmental liens.
The proceeds received by the referee or trustee from the sale are
applied first to the costs, fees and expenses of sale and then in satisfaction
of the indebtedness secured by the mortgage or deed of trust under which the
sale was conducted. Any remaining proceeds are generally payable to the
holders of junior
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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.
Some states impose prohibitions or limitations on remedies available
to the mortgagee, including the right to recover the debt from the borrower.
See "--Anti-Deficiency Legislation and Other Limitations on Lenders" below.
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
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pay the costs and expenses of the sale and then to satisfy the indebtedness
secured by the lender's security interest. The recognition agreement, however,
generally provides that the lender's right to reimbursement is subject to the
right of the cooperative corporation to receive sums due under the proprietary
lease or occupancy agreement. If there are proceeds remaining, the lender must
account to the tenant-stockholder for the surplus. Conversely, if a portion of
the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency. See "--Anti-Deficiency Legislation and Other
Limitations on Lenders" below.
JUNIOR LIENS. Certain of the Mortgage Loans, including the Title I
Mortgage Loans, may be secured by junior lien mortgages or deeds of trust.
Second mortgages or deeds of trust are generally junior to first mortgages or
deeds of trust held by other lenders, and third mortgages or deeds of trust are
generally junior to first and second mortgages or deeds of trust held by other
lenders, and so forth. The rights of the Securityholders 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.
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
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period in which to redeem the property from the foreclosure sale. In some
states, statutory redemption may occur only upon payment of the foreclosure
sale price. In other states, redemption may be authorized if the former
borrower pays only a portion of the sums due. The effect of a statutory right
of redemption is to diminish the ability of the lender to sell the foreclosed
property. The exercise of a right of redemption would defeat the title of any
purchaser subsequent to foreclosure or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has expired.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS. Certain
states have imposed statutory prohibitions that limit the remedies of a
beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender.
Other statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower.
In certain other states, the lender has the option of bringing a personal
action against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, in those states permitting such
election, is that lenders will usually proceed against the security first
rather than bringing a personal action against the borrower. Finally, other
statutory provisions limit any deficiency judgment against the former borrower
following a judicial sale to the excess of the outstanding debt over the fair
market value of the property at the time of the public sale. The purpose of
these statutes is generally to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result
of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including the federal bankruptcy laws, the
Relief Act and state laws affording relief to debtors, may interfere with or
affect the ability of the secured mortgage lender to realize upon collateral
and/or enforce a deficiency judgment. For example, with respect to federal
bankruptcy law, a court with federal bankruptcy jurisdiction may permit a
debtor through his or her Chapter 11 or Chapter 13 rehabilitative plan to cure
a monetary default in respect of a mortgage loan on a debtor's residence by
paying arrearages within a reasonable time period and reinstating the original
mortgage loan payment schedule even though the lender accelerated the mortgage
loan and final judgment of foreclosure had been entered in state court
(provided no sale of the residence had yet occurred) prior to the filing of the
debtor's petition. Some courts with federal bankruptcy jurisdiction have
approved plans, based on the particular facts of the reorganization case, that
effected the curing of a mortgage loan default by paying arrearages over a
number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that such modifications may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule or forgiving all or a portion of the debt. Additionally, a
federal bankruptcy court in a Chapter 11 bankruptcy case may be able to reduce
the lender's security interest to the value of the residence, thus leaving the
lender a general unsecured creditor for the difference between the value of the
residence and the outstanding balance of the loan; however, the United States
Supreme Court has recently eliminated such a risk in Chapter 7 and Chapter 13
bankruptcy cases.
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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 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.
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Forms of notes, mortgages and deeds of trust used by lenders may
contain provisions obligating the borrower to pay a late charge if payments are
not timely made. In certain states, there are or may be specific limitations
upon the late charges which a lender may collect from a borrower for delinquent
payments. Late charges are typically retained by servicers as additional
servicing compensation.
A portion of the Mortgage Loans contain "due-on-sale" clauses. These
clauses permit the lender to accelerate the maturity of the loan if the
borrower sells, transfers or coveys the property. The enforceability of these
clauses has been the subject of legislation or litigation in many states, and
in some cases the enforceability of these clauses was limited or denied.
However, the Garn-St. Germain Depository Institutions Act of 1982 (the
"Garn-St. Germain Act") preempts state constitutional, statutory and case law
that prohibits the enforcement of due-on-sale clauses and permits lenders to
enforce these clauses in accordance with their terms, subject to certain
limited exceptions. The Garn-St. Germain Act does "encourage" lenders to
permit assumption of loans at the original rate of interest or at some other
rate less than the average of the original rate and the market rate.
Exempted from the general rule of enforceability of due-on-sale
clauses were mortgage loans (originated other than by federal savings and loan
associations and federal savings banks) that were made or assumed during the
period beginning on the date a state, by statute or final appellate court
decision having statewide effect, prohibited the exercise of due-on-sale
clauses and ending on October 15, 1982 ("Window Period Loans"). However, this
exception applied only to transfers of property underlying Window Period Loans
occurring between October 15, 1982 and October 15, 1985 and does not restrict
enforcement of a due-on-sale clause in connection with current transfers of
property underlying Window Period Loans. Due-on-sale clauses contained in
mortgage loans originated by federal savings and loan associations or federal
savings banks are fully enforceable pursuant to regulations of the Office of
Thrift Supervision (the "OTS"), as successor to the Federal Home Loan Bank
Board which preempt state law restrictions on the enforcement of due-on-sale
clauses.
The Garn-St. Germain Act also sets forth nine instances in which a
mortgage lender covered by the Garn-St. Germain Act may not exercise a
due-on-sale clause, notwithstanding the fact that transfer of the property may
have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. The Garn-St. Germain Act also grants the Director of the Office
of Thrift Supervision (successor to the Federal Home Loan Bank Board) authority
to prescribe by regulation further instances in which a due-on-sale clause may
not be exercised upon the transfer of the property. To date no such
regulations have been issued. Regulations 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 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
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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 Trustee or a
Trust) to homeowners. In the event that title to a property securing a Mortgage
Loan in a pool of Mortgage Loans was acquired by a Trustee or a Trust and
cleanup costs were incurred in respect of the property, the holders of the
related Securities 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 Securities realizing a loss if
associated costs were required to be paid. The Seller, the Administrator, the
Underwriters, the Transferors, the Servicers, and any of their respective
affiliates (i) have not caused any environmental site assessments or
evaluations to be conducted with respect to any properties securing the
Mortgage Loans, (ii) are not required to make any such assessments or
evaluations and (iii) make no representations or warranties and assume no
liability with respect to the absence or effect of hazardous wastes or
hazardous substances on any property or any casualty resulting from the
presence or effect of hazardous wastes or hazardous substances.
In the event that title to a Mortgaged Property is acquired by a Trust
and cleanup costs are incurred in respect of such property, the related
Securityholders 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 Securityholders realizing a loss if any associated
remedial costs are required to be paid. The Transferor, the Seller, 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
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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 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
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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 Securities, but the Offered Securities 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
Securities. See "Risk Factors -- Limitations of Credit Enhancement". 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 United 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 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.
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Unlike certain other government loan insurance programs, loans under
the Title I Program (other than loans in excess of $25,000) are not subject to
prior review by the FHA. Under the Title I Program, the FHA disburses
insurance proceeds with respect to defaulted loans for which insurance claims
have been filed by a Title I Lender prior to any review of such loans. A Title
I Lender is required to repurchase a Title I loan from the FHA that is
determined to be ineligible for insurance after insurance claim payments for
such loan have been paid to such lender. Under the FHA Regulations, if the
Title I Lender's obligation to repurchase the Title I loan is unsatisfied, the
FHA is permitted to offset the unsatisfied obligation against future insurance
claim payments owed by the FHA to such lender. FHA Regulations permit the FHA
to disallow an insurance claim with respect to any loan that does not qualify
for insurance for a period of up to two years after the claim is made and to
require the Title I Lender that has submitted the insurance claim to repurchase
the loan. Pursuant to a letter ruling issued by the FHA in October 1994, the
FHA has stated that, as a policy, the FHA will strive to review all insurance
claim submissions in a timely manner and limit the period of time within which
it will request the repurchase of a loan to a period of one year after claim
submission. The letter further states, however, that the FHA may find it
necessary with respect to some claim submissions to apply the foregoing
two-year incontestability provision strictly.
The proceeds of loans under the Title I Program may be used only for
permitted purposes, including, but not limited to, the alteration, repair or
improvement of residential property, the purchase of a manufactured home or lot
(or cooperative interest therein) on which to place such home or the purchase
of both a manufactured home loan and the lot (or cooperative interest therein)
on which such home is placed. Title I Program loans may be made directly to
the owners of the property to be improved or purchased ("direct loans") or with
the assistance of a dealer or home improvement contractor that will have an
interest in the proceeds of the loan ("dealer loans").
Subject to certain limitations described below, eligible Title I loans
are insured by the FHA for 90% of an amount equal to the sum of (i) the net
unpaid principal amount and the uncollected interest earned to the date of
default, (ii) interest on the unpaid loan obligation from the date of default
to the date of the initial submission of the insurance claim, plus 15 calendar
days (the total period not to exceed nine months) at a rate of 7% per annum,
(iii) uncollected court costs, (iv) title examination costs, (v) fees for
required inspections by the lenders or its agents, up to $75, and (vi)
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.
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Under the Title I Program the FHA will reduce the insurance coverage
available in a Title I Lender's FHA Reserve with the respect to loans insured
under such Title I Lender's contract of insurance by (i) the amount of FHA
Insurance claims approved for payment related to such loans, (ii) prior to
October 1, 1995, after a Title I Lender has held its Title I contract of
insurance for five years, the amount of the annual reduction (the "Annual
Reduction") equal to 10% of the amount of insurance coverage contained in the
related FHA Reserve as of that date, and (iii) the amount of reduction of the
Title I Lender's FHA Reserve by reason of the sale, assignment or transfer of
loans registered under the Title I Lender's contract of insurance. Such
insurance coverage also may be reduced for any FHA insurance claims previously
disbursed to the Title I Lender that are subsequently rejected by the FHA. On
June 5, 1995, the FHA announced the elimination of Annual Reductions, effective
as of October 1, 1995.
Upon the receipt and acknowledgment by the FHA of a Transfer Report,
originations of new loans will increase a Title I Lender's insurance coverage
reserve account balance by 10% of the amount disbursed, advanced or expended in
originating such loans registered with the FHA for insurance under the Title I
Program. A Title I Lender is permitted to sell or otherwise transfer loans
reported for insurance under the Title I Program only to another Title I
Lender. Upon any such transfer, except a transfer with recourse or under a
guaranty or repurchase Agreement, the seller is required to file a Transfer
Report with the FHA reporting the transfer of such loans. Upon notification
and approval of such transfer, the FHA Reserve of the selling Title I Lender is
reduced, and the FHA Reserve of the purchasing Title I Lender is increased, by
an amount equal to the lesser of 10% of the actual purchase price of the loans
or the net unpaid principal balance of the loans, up to the total amount of the
selling Title I Lender's FHA Reserve. Thus, in the event the selling Title I
Lender's FHA Reserve was less than 10% of the unpaid principal balance of its
portfolio of loans reported for insurance under the Title I Program prior to
the sale, the seller's FHA Reserve may be exhausted as the result of a sale of
only a portion of its total portfolio, with the result that its remaining Title
I Program portfolio may be ineligible for Title I Program benefits until the
lender originates or otherwise acquires additional loans reported for insurance
under the Title I Program. Accordingly, the insurance coverage reserves
transferred to the purchasing Title I Lender in such case will be less than 10%
of the lesser of the purchase price or the principal balance of the portfolio
of loans purchased, which may be the case with respect to the Transferor's
purchase of certain Title I Mortgage Loans and Title I Contracts from certain
Title I lenders and the transfer of the related insurance coverage from such
lenders' FHA Reserves. Additionally, pursuant to FHA Regulations, not more
than $5,000 in insurance coverage shall be transferred to or from a Title I
Lender's insurance coverage reserve account during any October 1 to September
30 fiscal year without the approval of the Secretary of HUD. Such HUD approval
is generally viewed as automatic, provided the formal requirements for transfer
are satisfied, but HUD does have the right under FHA Regulations to withhold
approval.
Unlike most other FHA insurance programs, the obligation of the FHA to
reimburse a Title I Lender for losses in the portfolio of insured loans held by
such Title I Lender is limited to the amount in an FHA Reserve maintained on a
lender-by-lender basis and not on a loan-by-loan basis. Except when to do so
would be in HUD's best interest, the FHA does not track or "earmark" the loans
within a Title I Lender's portfolio to determine whether a reduction in such
lender's FHA Reserve as the result of an insurance claim by such lender are, in
fact, attributable to the insured loan with respect to which the claim was
made. For this reason, if a Title I Lender is holding insured loans as a
fiduciary on behalf of multiple non-affiliated beneficiaries, in order for such
a lender to cause its FHA Reserve to be reduced only by an amount to which a
particular beneficiary is entitled by reason of the insured loans beneficially
held by it, the Title I Lender must segregate or "earmark" its FHA Reserve on
its own books and records according to which beneficiary is entitled to what
portion of the insurance coverage in the Title I Lender's FHA Reserve as if the
insurance coverage were not commingled by the FHA in such FHA Reserve. If such
Title
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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, 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. If the Trustee were unable to recover the
amount of such offset from the other trust fund, the Trust could experience a
loss as a result.
Accordingly, claims paid to the Trustee (or the Administrator, if any)
by the FHA with respect to Title I loans insured under the Seller's FHA Reserve
other than the Title I Mortgage Loans and Title I Contracts may reduce the FHA
Insurance Amount. In the applicable Sale and Servicing Agreement or Pooling
and Servicing Agreement, the Seller 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 Seller 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 applicable Sale and Servicing Agreement or Pooling and Servicing
Agreement and similar such agreements that may be entered into by the Seller in
the future.
On the final Transfer Date, such FHA Insurance Amount will be the
maximum amount of insurance coverage in the Seller'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 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 Seller and
reported for insurance in the Seller'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 Seller'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 applicable Trustee, on behalf of
the Trust, 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 Seller's FHA Reserve has been reduced to a balance which is less
than such maximum amount. Accordingly, the transfer of insurance coverage from
the Seller's FHA Reserve as the result of the repurchase of Title I Mortgage
Loans and Title I Contracts will cause a
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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.
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 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
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refinancing or modification of an existing loan, up to $100, (x) fees for
approving assumption or preparing assumption agreements, not to exceed 5%, (xi)
certain fees of closing agents and (xii) such other items as may be specified
by the FHA. FHA Regulations prohibit the advancement of such fees and charges
to the borrower by any party to the transaction.
FHA Regulations distinguish between "direct loans" and "dealer loans."
A loan is a "dealer loan" if an approved dealer having a direct or indirect
financial interest in the transaction assists the borrower in obtaining the
loan. A loan made by the lender to the borrower without the assistance of any
party with a financial interest in the loan transaction (other than the lender)
is a "direct loan."
With respect to dealer loans, the dealer-contractor typically enters
into a consumer credit contract or note with the borrower and, after completion
of the financed improvements, assigns the contract or note to the Title I
Lender. The dealer-contractor presents the loan application to the Title I
Lender, receives the check or money order representing the loan proceeds and
may accompany the borrower to the institution for the purpose of receiving
payment. As a condition to the disbursement of the proceeds of a dealer loan,
the Title I Lender is required to obtain a completion certificate signed by the
borrower and the dealer certifying that the improvements have been completed in
accordance with the contract and that the borrower has received no inducement
from the dealer to enter into the transaction other than discount points. The
Title I Lender may enter into an agreement under which the lender has full or
partial recourse against the dealer for a period of three years in the event
the Title I Lender sustains losses with respect to loans originated by such
dealer and such loans do not satisfy FHA Regulations. FHA Regulations require
that each dealer meet certain net worth and experience requirements and be
approved by the FHA on an annual basis. Any Title I Lender that makes dealer
loans is required to supervise and monitor the dealer's activities with respect
to loans insured under the Title I Program and to terminate a dealer's approval
if the dealer does not satisfactorily perform its contractual obligations or
comply with Title I Program requirements.
The note evidencing a property improvement loan insured under the
Title I Program is required to bear a genuine signature of the borrower and any
co-maker and co-signer, must be valid and enforceable, must be complete and
regular on its face and must have interest and principal stated separately.
The interest rate must be negotiated and agreed to by the borrower and the
lender and must be fixed for the term of the loan and recited in the note.
Interest on the Title I loan must accrue from the date of the loan and be
calculated according to the actuarial method, which allocates payments on the
loan between principal and interest such that a payment is applied first to
accrued interest and any remainder is subtracted from, or any deficiency is
added to, the unpaid principal balance.
Principal and interest on the note is required to be payable in equal
installments at least monthly except where the borrower has irregular cash
flow. The first and last payments may vary in amount from the regular
installment amount but may not exceed 150% of the regular installment amount.
The first payment may be due no later than two months from the date of the loan
(i.e., the date upon which proceeds are disbursed by the lender). Late charges
may be assessed only after fifteen days and cannot exceed the lesser of 5% of
the installment, up to a maximum of $10 and must be billed as an additional
charge to the borrower. In lieu of late charges, the note may provide for
interest to accrue on late installments on a daily basis at the note rate. The
note must include a provision for acceleration of maturity, at the option of
the holder, upon a default by the borrower and a provision permitting
prepayment in part or in full without penalty. The Title I Lender must assure
that the note and all other documents evidencing the loan are in compliance
with applicable Federal, state and local laws.
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A written but unrecorded modification agreement executed by the
borrower may be used in lieu of refinancing a delinquent or defaulted loan to
reduce or increase the installment payment, but not to increase the term or
interest rate. A written modification agreement may also be used to refinance
a loan in order to reduce the interest rate, provided the loan is current.
Alternatively, the lender may negotiate an informal repayment plan for the
borrower to cure a temporary delinquency within a short period of time by
sending a letter to the borrower reciting the terms of the agreement. The
lender may not release any party from liability under the note or any lien
securing an insured loan without prior FHA approval.
FHA Regulations do not require that the borrower obtain title or fire
and casualty insurance as a condition to obtaining loan, except with respect to
manufactured home loans. If the property is located in a flood hazard area,
however, flood insurance in an amount at least equal to the loan amount is
required at the date of loan disbursement. The Borrower is required to
maintain flood insurance of at least the unpaid balance of the loan (or the
value of the property if state law so limits the amount of flood insurance).
REQUIREMENTS FOR TITLE I MANUFACTURED HOME CONTRACTS. The maximum
principal amount for any Title I Contract for a Manufactured Home must not
exceed the sum of certain itemized amounts, which include a specified
percentage of the purchase price of the manufactured home depending on whether
it is a new or existing home; provided that such maximum amount does not exceed
the following loan amounts: (i) $48,600 for a new or existing manufactured home
purchase loan; (ii) $16,200 for a manufactured home lot purchase; and (iii)
$64,800 for a combination loan (i.e. a loan to purchase a new or existing
manufactured home and the lot for such home). Generally, the term of a Title I
Contract for a Manufacture Home may not be less than six months nor greater
than 20 years and 32 days, except that the maximum term of a manufactured home
lot loan is limited to 15 years and 32 days and the maximum term of a
multimodule manufactured home and lot in combination is limited to 25 years and
32 days.
Borrower eligibility for a Title I Contract for a Manufactured Home
requires that the borrower become the owner of the property to be financed with
such loan and occupy the manufactured home as the borrower's principal
residence, except for a manufactured home lot loan which allows six months from
the date of the loan to occupy the home as the borrower's principal residence.
If a manufactured home is classified as realty, then ownership of the home must
be in fee simple, and also, the ownership of the manufactured home lot must be
in fee simple, except for a lot which consists of a share in a cooperative
association that owns and operates a manufactured home park. The borrower's
minimum cash down payment requirement to obtain financing through a Title I
Contract for a Manufactured Home is as follows: (i) at least 5% of the first
$5,000 and 10% of the balance of the purchase price of a new manufactured home
and at least 10% of the purchase price of an existing manufactured home for a
manufactured home purchase loan, or in lieu of a full or partial cash down
payment, the trade-in of the borrower's equity in an existing manufactured
home; (ii) at least 10% of the purchase price and development costs of a lot
for a manufactured home lot loan; and (iii) at least 5% of the first $5,000 and
10% of the balance of the purchase price of the manufactured home and lot for a
combination loan.
Any manufactured home financed by a Title I Contract must be certified
by the manufacturer to have been constructed in compliance with the National
Manufactured Housing Construction and Safety Standards Act of 1974 (42 U.S.C.
Sections 5401-5426), so as to conform to all applicable Federal construction
and safety standards, and with respect to the purchase of a new manufactured
home, the manufacturer must furnish the borrower with a one year written
warranty on a HUD approved form which obligates the manufacturer to correct any
nonconformity with all applicable Federal construction and safety standards or
any defects in materials or workmanship which become evident within one year
after the date of
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delivery. The regulations under the Title I Program set forth certain
additional requirements relating to the construction, transportation and
installation of any manufactured home and standards for the manufactured
homesite financed by any Title I Contract. The proceeds from a Title I Contract
for a Manufactured Home may be used as follows: the purchase or refinancing of
a manufactured home, a suitably developed lot for a manufactured home already
owned by the borrower or a manufactured home and suitably developed lot for the
home in combination; or the refinancing of an existing manufactured home
already owned by the borrower in connection with the purchase of a manufactured
home lot or an existing lot already owned by the borrower in connection with
the purchase of a manufactured home. In addition, the proceeds for a Title I
Contract for a Manufactured Home which is a manufactured home purchase loan may
be used for the purchase, construction or installation of a garage, carport,
patio or other comparable appurtenance to the manufactured home, and the
proceeds for a Title I Contract for a Manufactured Home which is a combination
loan may be used for the purchase, construction or installation of a
foundation, garage, carport, patio or other comparable appurtenance to the
manufactured home. The proceeds from a Title I Contract for a Manufactured
Home cannot be used for the purchase of furniture or the financing of any items
and activities which are set forth on the list published by the Secretary of
HUD as amended from time to time.
Any Title I Contract for a Manufactured Home must be secured by a
recorded lien on the manufactured home (or lot or home and lot, as
appropriate), its furnishings, equipment, accessories and appurtenance, which
lien must be a first lien, superior to any other lien on the property which is
evidenced by a properly recorded financing statement, a properly recorded
security instrument executed by the borrower and any other owner of the
property or other acceptable instrument. With respect to any Title I Contract
involving a manufactured home purchase loan or combination loan and the sale of
the manufactured home by a dealer, the lender or its agent (other than a
manufactured home dealer) must conduct a site-of-placement inspection within 60
days after the date of the loan to verify that the terms and conditions of the
purchase contract have been met, the manufactured home and any options and
appurtenances included in the purchase price or financed with the loan have
been delivered and installed and the placement certificate executed by the
borrower and the dealer is in order.
TITLE I UNDERWRITING REQUIREMENTS. FHA Regulations require that,
before making a loan insured under the Title I Program, a Title I Lender
exercise prudence and diligence in determining whether the borrower and any
co-maker or co- signer is solvent and an acceptable credit risk with a
reasonable ability to make payments on the loan obligation. Prior to loan
approval, the Title I Lender is required to satisfy specified credit
underwriting requirements and to keep documentation supporting its credit
determination. As part of its credit underwriting, the Title I Lender must
obtain the following: (i) a dated credit application executed by the borrower,
any co-maker and any co-signer, (ii) written verification of current employment
and current income of the borrower and any co-maker or co-signer, (iii) a
consumer credit report stating the credit accounts and payment history of the
borrower and any co-maker or co-signer, (iv) on loans in excess of $5,000,
written evidence that the borrower is not over 30 days delinquent on any senior
lien instruments encumbering the improved property, (v) verification whether
the borrower is in default on any obligation owed to or insured or guaranteed
by the Federal Government and (vi) written verification of the source of funds
for any initial payment required of the borrower if such payment is in excess
of 5% of the loan. Before making a final credit determination, the lender is
required to conduct a face-to-face or telephone interview with the borrower and
any co- maker or co-signer to resolve any discrepancies in the information on
the credit application and to assure that the information is accurate and
complete. The Title I Lender's files must contain, among other things, the
note or other debt instrument, the lien instrument and a copy of the property
improvement contract (in the case of a dealer loan) or a detailed written
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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
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in carrying out any foreclosure or repossession, and where the borrower is in
bankruptcy or deceased, evidence that the lender has properly filed proofs of
claims. Generally, a Title I Lender must file its claim of insurance with the
FHA not later than nine months after the date of default. Concurrently with
filing the insurance claim, such Title I Lender is required to assign to the
United States of America it's entire interest in the note (or a judgment in
lieu of the note), in any securities held and in any claims filed in any legal
proceedings. If, at the time the note is assigned to the United States, the
Secretary of HUD has reason to believe that the note is not valid or
enforceable against the borrower, the FHA may deny the claim and reassign the
note to the Title I Lender. If either such defect is discovered after the FHA
has paid a claim, the FHA may require the Title I Lender to repurchase the paid
claim and to accept an assignment of the loan note. If the Title I Lender
subsequently obtains a valid and enforceable judgment against the borrower, it
may resubmit a new insurance claim with an assignment of the judgment. The FHA
may contest any insurance claim previously paid by it and make a demand for
repurchase of the loan with respect to which the claim was paid at any time up
to two years from the date the claim was certified for payment and may do so
thereafter in the event of fraud or misrepresentation on the part of the Title
I Lender.
A claim for reimbursement of loss with respect to a loan eligible for
insurance under the Title I Program is required to be made on an FHA-approved
form executed by a duly qualified officer of the Title I Lender and must be
accompanied by copies of certain relevant documents and documentation specified
in the FHA Regulations to support the claim. The Title I Lender is required,
among other things, to document its efforts to effect recourse against any
dealer in accordance with any recourse agreement with such dealer. If the loan
is subject to an unsatisfied dealer recourse agreement claim, the Title I
Lender is also required to assign its rights under such recourse agreement.
The FHA has the right to deny any claim for insurance in whole or in part based
upon a violation of the FHA Regulations unless a waiver of compliance is
granted. The Title I Lender is permitted to appeal any such claim denial and
resubmit the claim within six months of the date of the claim denial, subject
to a reprocessing fee. The applicable Sale and Servicing Agreement or 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 Securityholders 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 Distribution Account.
NO RIGHTS OF SECURITYHOLDERS AGAINST FHA. Because the Trust and the
Securityholders will not hold an FHA contract of insurance, the FHA will not
recognize the Trust or the Securityholders 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 and the Securityholders 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 Securityholders' 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 Sale and Servicing Agreement or 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.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of the Bonds
and the Certificates of any Series, to the extent it relates to matters of law
or legal conclusions with respect thereto, represents the opinion of tax
counsel to each Trust with respect to the related Series on the material
matters associated with such consequences, subject to the qualifications set
forth herein. "Tax Counsel" with respect to each Trust will be Andrews & Kurth
L.L.P. The summary does not purport to deal with federal income tax
consequences applicable to all categories of investors, some of which may be
subject to special rules. For example, it does not discuss the tax treatment
of Bondholders or Certificateholders that are insurance companies, regulated
investment companies or dealers in securities. Moreover, there are no cases or
Internal Revenue Service ("IRS") rulings on similar transactions involving both
debt and equity interests issued by a trust with terms similar to those of the
Bonds and the Certificates. As a result, the IRS may disagree with all or a
part of the discussion below. Prospective investors are urged to consult their
own tax advisors in determining the federal, state, local, foreign and any
other tax consequences to them of the purchase, ownership and disposition of
the Bonds and the Certificates.
The following summary is based upon current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the Treasury regulations
promulgated thereunder and judicial or ruling authority, all of which are
subject to change, which change may be retroactive. Each Trust will be
provided with an opinion of Tax Counsel regarding certain federal income tax
matters discussed below. An opinion of Tax Counsel, however, is not binding on
the IRS or the courts. No ruling on any of the issues discussed below will be
sought from the IRS. For purposes of the following summary, references to the
Trust, the Bonds, the Certificates and related terms, parties and documents
shall be deemed to refer, unless otherwise specified herein, to each Trust and
the Bonds, Certificates and related terms, parties and documents applicable to
such Trust. The federal income tax consequences to Certificateholders will
vary depending on whether an election is made to treat the Trust as a
partnership under the Code or whether the Trust will be treated as a grantor
trust. The Prospectus Supplement for each Series of Securities will specify
whether a partnership election will be made or the Trust will be treated as a
grantor trust.
TRUSTS FOR WHICH A PARTNERSHIP ELECTION IS MADE
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
The following general discussion of the anticipated federal income tax
consequences of the purchase, ownership and disposition of the Bonds and the
Certificates of a Trust for which a partnership election will be made, to the
extent it relates to matters of law or legal conclusions with respect thereto,
represents the opinion of Tax Counsel to each Trust with respect to the related
Series on the material matters associated with such consequences, subject to
the qualifications set forth herein. In addition, Tax Counsel has prepared or
reviewed the statements in the Prospectus under the heading "Trusts for Which a
Partnership Election is Made", and is of the opinion that such statements are
correct in all material respects. Such statements are intended as an
explanatory discussion of the 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 Bonds or Certificates.
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Tax Counsel will deliver its opinion that a Trust for which a
partnership election is made will not be an association (or publicly traded
partnership) taxable as a corporation for federal income tax purposes. This
opinion will be based on the assumption that the terms of the Trust Agreement
and related documents will be complied with, and on counsel's conclusions that
(1) the Trust will not have certain characteristics necessary for a business
trust to be classified as an association taxable as a corporation and (2) the
nature of the income of the Trust will exempt it from the rule that certain
publicly traded partnerships are taxable as corporations.
If the Trust were taxable as a corporation for federal income tax
purposes, the Trust would be subject to corporate income tax on its taxable
income. The Trust's taxable income would include all its income on the Loan
Assets, possibly reduced by its interest expense on the Bonds. Any such
corporate income tax could materially reduce cash available to make payments on
the Bonds and distributions on the Certificates, and Securityholders could be
liable for any such tax that is unpaid by the Trust.
TAX CONSEQUENCES TO HOLDERS OF THE BONDS
TREATMENT OF THE BONDS AS INDEBTEDNESS. The Seller will agree, and
the Bondholders will agree by their purchase of Bonds, to treat the Bonds as
debt for federal income tax purposes. Tax Counsel will, except as otherwise
provided in the related Prospectus Supplement, advise the Trust that the Bonds
will be classified as debt for federal income tax purposes. The discussion
below assumes this characterization of the Bonds is correct.
OID, INDEXED SECURITIES, ETC. The discussion below assumes that all
payments on the Bonds are denominated in U.S. dollars, and that the Bonds are
not Indexed Securities, Interest Only Securities or Principal Only Securities.
Moreover, the discussion assumes that the interest formula for the Bonds meets
the requirements for "qualified stated interest" under Treasury regulations
(the "OID regulations") relating to original issue discount ("OID"), and that
any OID on the Bonds (i.e., any excess of the principal amount of the Bonds
over their issue price) does not exceed a de minimis amount (i.e., 1/4% of
their principal amount multiplied by the number of full years included in their
term), all within the meaning of the OID regulations. If these conditions are
not satisfied with respect to any given Series of Bonds, additional tax
considerations with respect to such Bonds will be disclosed in the applicable
Prospectus Supplement.
INTEREST INCOME ON THE BONDS. Based on the above assumptions, except
as discussed in the following paragraph, the Bonds will not be considered
issued with OID. The stated interest thereon will be taxable to a Bondholder
as ordinary interest income when received or accrued in accordance with such
Bondholder's method of tax accounting. Under the OID regulations, a holder of
a Bond issued with a de minimis amount of OID must include such OID in income,
on a pro rata basis, as principal payments are made on the Bond. A purchaser
who buys a Bond for more or less than its principal amount will generally be
subject, respectively, to the premium amortization or market discount rules of
the Code.
A holder of a Bond that has a fixed maturity date of not more than one
year from the issue date of such Bond (a "Short-Term Bond") may be subject to
special rules. An accrual basis holder of a Short-Term Bond (and certain cash
method holders, including regulated investment companies, as set forth in
Section 1281 of the Code) generally would be required to report interest income
as interest accrues on a straight-line basis over the term of each interest
period. Other cash basis holders of a Short-Term Bond would, in general, be
required to report interest income as interest is paid (or, if earlier, upon
the taxable disposition of the Short-Term Bond). However, a cash basis holder
of a Short-Term Bond reporting interest income as it is paid may be required to
defer a portion of any interest expense otherwise deductible
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on indebtedness incurred to purchase or carry the Short-Term Bond until the
taxable disposition of the Short-Term Bond. A cash basis taxpayer may elect
under Section 1281 of the Code to accrue interest income on all nongovernment
debt obligations with a term of one year or less, in which case the taxpayer
would include interest on the Short-Term Bond in income as it accrues, but
would not be subject to the interest expense deferral rule referred to in the
preceding sentence. Certain special rules apply if a Short-Term Bond is
purchased for more or less than its principal amount.
SALE OR OTHER DISPOSITION. If a Bondholder sells a Bond, the holder
will recognize gain or loss in an amount equal to the difference between the
amount realized on the sale and the holder's adjusted tax basis in the Bond.
The adjusted tax basis of a Bond to a particular Bondholder will equal the
holder's cost for the Bond, increased by any market discount, acquisition
discount, OID and gain previously included by such Bondholder in income with
respect to the Bond and decreased by the amount of bond premium, if any,
previously amortized and by the amount of principal payments previously
received by such Bondholder with respect to such Bond. Any such gain or loss
will be capital gain or loss if the Bond was held as a capital asset, except
for gain representing accrued interest and accrued market discount not
previously included in income. Capital losses generally may be used only to
offset capital gains.
FOREIGN HOLDERS. Interest payments made (or accrued) to a Bondholder
who is a nonresident alien, foreign corporation or other non-United States
person (a "foreign person") generally will be considered "portfolio interest",
and generally will not be subject to United States federal income tax and
withholding tax, if the interest is not effectively connected with the conduct
of a trade or business within the United States by the foreign person and the
foreign person (i) is not actually or constructively a "10 percent shareholder"
of the Trust or the Seller (including a holder of 10% of the outstanding
Securities) or a "controlled foreign corporation" with respect to which the
Trust or the Seller is a "related person" within the meaning of the Code and
(ii) provides the Owner Trustee or other person who is otherwise required to
withhold U.S. tax with respect to the Bonds with an appropriate statement (on
Form W-8 or a similar form), signed under penalties of perjury, certifying that
the beneficial owner of the Bond is a foreign person and providing the foreign
person's name and address. If a Bond is held through a securities clearing
organization or certain other financial institutions, the organization or
institution may provide the relevant signed statement to the withholding agent;
in that case, however, the signed statement must be accompanied by a Form W-8
or substitute form provided by the foreign person that owns the Bond. If such
interest is not portfolio interest, then it will be subject to United States
federal income and withholding tax at a rate of 30 percent, unless reduced or
eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Bond by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
BACKUP WITHHOLDING. Each holder of a Bond (other than an exempt
holder such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's
name, address, correct federal taxpayer identification number and a statement
that the holder is not subject to backup withholding. Should a nonexempt
Bondholder fail to provide the required certification, the Trust will be
required to withhold 31 percent of the amount otherwise payable to the holder,
and remit the withheld amount to the IRS as a credit against the holder's
federal income tax liability.
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POSSIBLE ALTERNATIVE TREATMENTS OF THE BONDS. If, contrary to the
opinion of Tax Counsel, the IRS successfully asserted that one or more of the
Bonds did not represent debt for federal income tax purposes, the Bonds might
be treated as equity interests in the Trust. If so treated, the Trust might be
taxable as a corporation with the adverse consequences described above (and the
taxable corporation would not be able to reduce its taxable income by
deductions for interest expense on Bonds recharacterized as equity).
Alternatively, and most likely in the view of Tax Counsel, the Trust might be
treated as a publicly traded partnership that would not be taxable as a
corporation because it would meet certain qualifying income tests. Nonetheless,
treatment of the Bonds as equity interests in such a publicly traded
partnership could have adverse tax consequences to certain holders. For
example, income to certain tax-exempt entities (including pension funds) would
be "unrelated business taxable income", income to foreign holders generally
would be subject to U.S. tax and U.S. tax return filing and withholding
requirements, and individual holders might be subject to certain limitations on
their ability to deduct their share of Trust expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
TREATMENT OF THE TRUST AS A PARTNERSHIP. The Seller and the Servicer
will agree, and the Certificateholders will agree by their purchase of
Certificates, to treat the Trust as a partnership for purposes of federal and
state income tax, franchise tax and any other tax measured in whole or in part
by income, with the assets of the partnership being the assets held by the
Trust, the partners of the partnership being the Certificateholders (including
the Seller in its capacity as recipient of distributions from the Reserve
Fund), and the Bonds being debt of the partnership. However, the proper
characterization of the arrangement involving the Trust, the Certificates, the
Bonds, the Seller and the Servicer is not clear because there is no authority
on transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Seller or the Trust. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
INDEXED SECURITIES, ETC. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities, Principal Only Securities or Interest Only
Securities, and that a Series of Securities includes a single Class of
Certificates. If these conditions are not satisfied with respect to any given
Series of Certificates, additional tax considerations with respect to such
Certificates will be disclosed in the applicable Prospectus Supplement.
PARTNERSHIP TAXATION. As a partnership, the Trust will not be subject
to federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust. The Trust's income will consist
primarily of interest earned on the Loan Assets (including appropriate
adjustments for market discount, OID and bond premium) and any gain upon
foreclosure of Loan Assets. The Trust's deductions will consist primarily of
interest accruing with respect to the Bonds, servicing and other fees, and
losses or deductions upon foreclosure of the Loan Assets.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(here, the Trust Agreement and related documents). The Trust Agreement will
provide, in general, that the Certificateholders will be allocated taxable
income of the Trust
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for each month equal to the sum of (i) the interest that accrues on the
Certificates in accordance with their terms for such month, including interest
accruing at the Pass Through Rate for such month and interest on amounts
previously due on the Certificates but not yet distributed; (ii) any Trust
income attributable to discount on the Loan Assets that corresponds to any
excess of the principal amount of the Certificates over their initial issue
price; (iii) prepayment premium payable to the Certificateholders for such
month; and (iv) any other amounts of income payable to the Certificateholders
for such month. Such allocation will be reduced by any amortization by the
Trust of premium on Loan Assets that corresponds to any excess of the issue
price of Certificates over their principal amount. All remaining taxable
income of the Trust will be allocated to the Seller. Based on the economic
arrangement of the parties, this approach for allocating Trust income should be
permissible under applicable Treasury regulations, although no assurance can be
given that the IRS would not require a greater amount of income to be allocated
to Certificateholders. Moreover, even under the foregoing method of
allocation, Certificateholders may be allocated income equal to the entire Pass
Through Rate plus the other items described above even though the Trust might
not have sufficient cash to make current cash distributions of such amount.
Thus, cash basis holders will in effect be required to report income from the
Certificates on the accrual basis and Certificateholders may become liable for
taxes on Trust income even if they have not received cash from the Trust to pay
such taxes. In addition, because tax allocations and tax reporting will be
done on a uniform basis for all Certificateholders but Certificateholders may
be purchasing Certificates at different times and at different prices,
Certificateholders may be required to report on their tax returns taxable
income that is greater or less than the amount reported to them by the Trust.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute "unrelated
business taxable income" generally taxable to such a holder under the Code.
An individual taxpayer's share of expenses of the Trust (including
fees to the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or
in part and might result in such holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to such holder over the life of
the Trust.
The Trust intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Receivable, the
Trust might be required to incur additional expense but it is believed that
there would not be a material adverse effect on Certificateholders.
DISCOUNT AND PREMIUM. It is believed that the Loan Assets were not
issued with OID, and, therefore, the Trust should not have OID income.
However, the purchase price paid by the Trust for the Loan Assets may be
greater or less than the remaining principal balance of the Loan Assets at the
time of purchase. If so, the Loan Assets will have been acquired at a premium
or discount, as the case may be. (As indicated above, the Trust will make this
calculation on an aggregate basis, but might be required to recompute it on an
asset-by-asset basis.)
If the Trust acquires the Loan Assets at a market discount or premium,
the Trust will elect to include any such discount in income currently as it
accrues over the life of the Loan Assets or to offset any such premium against
interest income on the Loan Assets. As indicated above, a portion of such
market discount income or premium deduction may be allocated to
Certificateholders.
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SECTION 708 TERMINATION. Under Section 708 of the Code, the Trust
will be deemed to terminate for federal income tax purposes if 50% or more of
the capital and profits interests in the Trust are sold or exchanged within a
12-month period. If such a termination occurs, the Trust will be considered to
distribute its assets to the partners, who would then be treated as
recontributing those assets to the Trust, as a new partnership. The Trust will
not comply with certain technical requirements that might apply when such a
constructive termination occurs. As a result, the Trust may be subject to
certain tax penalties and may incur additional expenses if it is required to
comply with those requirements. Furthermore, the Trust might not be able to
comply due to lack of data.
DISPOSITION OF CERTIFICATES. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates
sold. A Certificateholder's tax basis in a Certificate will generally equal
the holder's cost increased by the holder's share of Trust income (includible
in income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the
amount realized on a sale of a Certificate would include the holder's share of
the Bonds and other liabilities of the Trust. A holder acquiring Certificates
at different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the
Certificates sold (rather than maintaining a separate tax basis in each
Certificate for purposes of computing gain or loss on a sale of that
Certificate).
Any gain on the sale of a Certificate attributable to the holder's
share of unrecognized accrued market discount on the Loan Assets would
generally be treated as ordinary income to the holder and would give rise to
special tax reporting requirements. The Trust does not expect to have any
other assets that would give rise to such special reporting requirements.
Thus, to avoid those special reporting requirements, the Trust will elect to
include market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise
to a capital loss upon the retirement of the Certificates.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES. In general, the
Trust's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the
Certificateholders in proportion to the principal amount of Certificates owned
by them as of the close of the last day of such month. As a result, a holder
purchasing Certificates may be allocated tax items (which will affect its tax
liability and tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust might be reallocated among the Certificateholders. The Seller is
authorized to revise the Trust's method of allocation between transferors and
transferees to conform to a method permitted by future regulations.
SECTION 754 ELECTION. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder
had. The tax basis of the Trust's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust were to file an election under Section
754 of the Code. In order to avoid the administrative complexities that would
be involved in keeping accurate accounting records, as well as
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potentially onerous information reporting requirements, the Trust will not make
such election. As a result, Certificateholders might be allocated a greater or
lesser amount of Trust income than would be appropriate based on their own
purchase price for Certificates.
ADMINISTRATIVE MATTERS. The Owner Trustee is required to keep or have
kept complete and accurate books of the Trust. Such books will be maintained
for financial reporting and tax purposes on an accrual basis and the fiscal
year of the Trust will be set forth in the related Prospectus Supplement. The
Trustee will file a partnership information return (IRS Form 1065) with the IRS
for each taxable year of the Trust and will report each Certificateholder's
allocable share of items of Trust income and expense to holders and the IRS on
Schedule K-1. The Trust will provide the Schedule K-1 information to nominees
that fail to provide the Trust with the information statement described below
and such nominees will be required to forward such information to the
beneficial owners of the Certificates. Generally, holders must file tax
returns that are consistent with the information return filed by the Trust or
be subject to penalties unless the holder notifies the IRS of all such
inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as
a nominee at any time during a calendar year is required to furnish the Trust
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of such
person, (y) whether such person is a United States person, a tax-exempt entity
or a foreign government, an international organization, or any wholly owned
agency or instrumentality of either of the foregoing, and (z) certain
information on Certificates that were held, bought or sold on behalf of such
person throughout the year. In addition, brokers and financial institutions
that hold Certificates through a nominee are required to furnish directly to
the Trust information as to themselves and their ownership of Certificates. A
clearing agency registered under Section 17A of the Exchange Act is not
required to furnish any such information statement to the Trust. The
information referred to above for any calendar year must be furnished to the
Trust on or before the following January 31. Nominees, brokers and financial
institutions that fail to provide the Trust with the information described
above may be subject to penalties.
The Seller will be designated as the tax matters partner in the
related Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which
the partnership information return is filed. Any adverse determination
following an audit of the return of the Trust by the appropriate taxing
authorities could result in an adjustment of the returns of the
Certificateholders, and, under certain circumstances, a Certificateholder may
be precluded from separately litigating a proposed adjustment to the items of
the Trust. An adjustment could also result in an audit of a
Certificateholder's returns and adjustments of items not related to the income
and losses of the Trust.
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS. It is not clear
whether the Trust would be considered to be engaged in a trade or business in
the United States for purposes of federal withholding taxes with respect to
non-U.S. persons because there is no clear authority dealing with that issue
under facts substantially similar to those described herein. Although it is
not expected that the Trust would be engaged in a trade or business in the
United States for such purposes, the Trust will withhold as if it were so
engaged in order to protect the Trust from possible adverse consequences of a
failure to withhold. The Trust expects to withhold on the portion of its
taxable income that is allocable to foreign Certificateholders
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pursuant to Section 1446 of the Code, as if such income were effectively
connected to a U.S. trade or business, at a rate of 35% for foreign holders
that are taxable as corporations and 39.6% for all other foreign holders.
Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Trust to change its withholding
procedures. In determining a holder's withholding status, the Trust may rely
on IRS Form W-8, IRS Form W-9 or the holder's certification of nonforeign
status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the
branch profits tax) on its share of the Trust's income. Each foreign holder
must obtain a taxpayer identification number from the IRS and submit that
number to the Trust on Form W-8 in order to assure appropriate crediting of the
taxes withheld. A foreign holder generally would be entitled to file with the
IRS a claim for refund with respect to taxes withheld by the Trust, taking the
position that no taxes were due because the Trust was not engaged in a U.S.
trade or business. However, interest payments made (or accrued) to a
Certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard
to the income of the Trust. If these interest payments are properly
characterized as guaranteed payments, then the interest will not be considered
"portfolio interest." As a result, Certificateholders will be subject to United
States federal income tax and withholding tax at a rate of 30 percent, unless
reduced or eliminated pursuant to an applicable treaty. In such case, a
foreign holder would only be entitled to claim a refund for that portion of the
taxes in excess of the taxes that should be withheld with respect to the
guaranteed payments.
BACKUP WITHHOLDING. Distributions made on the Certificates and
proceeds from the sale of the Certificates will be subject to a "backup"
withholding tax of 31% if, in general, the Certificateholder fails to comply
with certain identification procedures, unless the holder is an exempt
recipient under applicable provisions of the Code.
TRUSTS TREATED AS GRANTOR TRUSTS
TAX CHARACTERIZATION OF THE TRUST AS A GRANTOR TRUST
The following general discussion of the anticipated federal income tax
consequences of the purchase, ownership and disposition of the Bonds and the
Certificates of a Trust for which a partnership election will not be made, to
the extent it relates to matters of law or legal conclusions with respect
thereto, represents the opinion of Tax Counsel to each Trust with respect to
the related Series on the material matters associated with such consequences,
subject to the qualifications set forth herein. In addition, Tax Counsel has
prepared or reviewed the statements in the Prospectus under the heading "Trusts
Treated as Grantor Trusts", 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 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 Bonds or
Certificates.
If a partnership election is not made, Tax Counsel will deliver its
opinion that the Trust will not be classified as an association taxable as a
corporation and that such Trust will be classified as a grantor trust under
subpart E, Part I of subchapter J of Chapter 1 of Subtitle A of the Code. In
this case, owners
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of Certificates (referred to herein as "Grantor Trust Certificateholders") will
be treated for federal income tax purposes as owners of a portion of the
Trust's assets as described below. The Certificates issued by a Trust that is
treated as a grantor trust are referred to herein as "Grantor Trust
Certificates".
CHARACTERIZATION. Each Grantor Trust Certificateholder will be
treated as the owner of a pro rata undivided interest in the interest and
principal portions of the Trust represented by the Grantor Trust Certificates
and will be considered the equitable owner of a pro rata undivided interest in
each of the Loan Assets in the Trust. Any amounts received by a Grantor Trust
Certificateholder in lieu of amounts due with respect to any Loan Asset because
of a default or delinquency in payment will be treated for federal income tax
purposes as having the same character as the payments they replace.
Each Grantor Trust Certificateholder will be required to report on its
federal income tax return in accordance with such Grantor Trust
Certificateholder's method of accounting its pro rata share of the entire
income from the Loan Assets in the Trust represented by Grantor Trust
Certificates, including interest, OID, if any, prepayment fees, assumption
fees, any gain recognized upon an assumption and late payment charges received
by the Servicer. Under Sections 162 or 212 each Grantor Trust
Certificateholder will be entitled to deduct its pro rata share of servicing
fees, prepayment fees, assumption fees, any loss recognized upon an assumption
and late payment charges retained by the Servicer, provided that such amounts
are reasonable compensation for services rendered to the Trust. Grantor Trust
Certificateholders that are individuals, estates or trusts will be entitled to
deduct their share of expenses only to the extent such expenses plus all other
Section 212 expenses exceed two percent of its adjusted gross income. A
Grantor Trust Certificateholder using the cash method of accounting must take
into account its pro rata share of income and deductions as and when collected
by or paid to the Servicer. A Grantor Trust Certificateholder using an accrual
method of accounting must take into account its pro rata share of income and
deductions as they become due or are paid to the Servicer, whichever is
earlier. If the servicing fees paid to the Servicer are deemed to exceed
reasonable servicing compensation, the amount of such excess could be
considered as an ownership interest retained by the Servicer (or any person to
whom the Servicer assigned for value all or a portion of the servicing fees) in
a portion of the interest payments on the Loan Assets. The Loan Assets would
then be subject to the "coupon stripping" rules of the Code discussed below.
PREMIUM. The price paid for a Grantor Trust Certificate by a holder
will be allocated to such holder's undivided interest in each Loan Asset based
on each Loan Asset's relative fair market value, so that such holder's
undivided interest in each Loan Asset will have its own tax basis. A Grantor
Trust Certificateholder that acquires an interest in Loan Assets at a premium
may elect to amortize such premium under a constant interest method.
Amortizable bond premium will be treated as an offset to interest income on
such Grantor Trust Certificate. The basis for such Grantor Trust Certificate
will be reduced to the extent that amortizable premium is applied to offset
interest payments. It is not clear whether a reasonable prepayment assumption
should be used in computing amortization of premium allowable under Section
171. A Grantor Trust Certificateholder that makes this election for a Grantor
Trust 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 Grantor Trust Certificateholder acquires
during the year of the election or thereafter.
If a premium is not subject to amortization using a reasonable
prepayment assumption, the holder of a Grantor Trust Certificate acquired at a
premium should recognize a loss if a Loan Asset prepays in full, equal to the
difference between the portion of the prepaid principal amount of such Loan
Asset that is allocable to the Grantor Trust Certificate and the portion of the
adjusted basis of the Grantor Trust
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Certificate that is allocable to such Loan Asset. If a reasonable prepayment
assumption is used to amortize such premium, it appears that such a loss would
be available, if at all, only if prepayments have occurred at a rate faster
than the reasonable assumed prepayment rate. It is not clear whether any other
adjustments would be required to reflect differences between an assumed
prepayment rate and the actual rate of prepayments.
STRIPPED BONDS AND STRIPPED COUPONS
Although the tax treatment of stripped bonds is not entirely clear,
based on recent guidance by the IRS, each purchaser of a Grantor Trust
Certificate will be treated as the purchaser of a stripped bond which generally
should be treated as a single debt instrument issued on the day it is purchased
for purposes of calculating any original issue discount. Generally, under
applicable Treasury regulations (the "Section 1286 Treasury Regulations"), if
the discount on a stripped bond is larger than a de minimis amount (as
calculated for purposes of the OID rules of the Code) such stripped bond will
be considered to have been issued with OID. See "--Original Issue Discount"
below. Based on the preamble to the Section 1286 Treasury Regulations, Tax
Counsel is of the opinion that, although the matter is not entirely clear, the
interest income on the Certificates at the sum of the Pass Through Rate and the
portion of the Servicing Fee Rate that does not constitute excess servicing
will be treated as "qualified stated interest" within the meaning of the
Section 1286 Treasury Regulations and such income will be so treated in the
Trustee's tax information reporting.
Original Issue Discount. The IRS has stated in published rulings
that, in circumstances similar to those described herein, the special rules of
the Code relating to "original issue discount" (currently Sections 1271 through
1273 and 1275) will be applicable to a Grantor Trust Certificateholder's
interest in those Loan Assets meeting the conditions necessary for these
sections to apply. Generally, a Grantor Trust Certificateholder that acquires
an undivided interest in a Loan Asset issued or acquired with OID must include
in gross income the sum of the "daily portions," as defined below, of the OID
on such Loan Asset for each day on which it owns a Certificate, including the
date of purchase but excluding the date of disposition. In the case of an
original Grantor Trust Certificateholder, the daily portions of OID with
respect to a Loan Asset generally would be determined as follows. A
calculation will be made of the portion of OID that accrues on the Loan Asset
during each successive monthly accrual period (or shorter period in respect of
the date of original issue or the final Distribution Date). This will be done,
in the case of each full monthly accrual period, by adding (i) the present
value of all remaining payments to be received on the Loan Asset under the
prepayment assumption used in respect of the Loan Assets and (ii) any payments
received during such accrual period, and subtracting from that total the
"adjusted issue price" of the Loan Asset at the beginning of such accrual
period. No representation is made that the Loan Assets will prepay at any
prepayment assumption. The "adjusted issue price" of a Loan Asset at the
beginning of the first accrual period is its issue price (as determined for
purposes of the OID rules of the Code) and the "adjusted issue price" of a Loan
Asset at the beginning of a subsequent accrual period is the "adjusted issue
price" at the beginning of the immediately preceding accrual period plus the
amount of OID allocable to that accrual period and reduced by the amount of any
payment (other than "qualified stated interest") made at the end of or during
that accrual period. The OID accruing during such accrual period will then be
divided by the number of days in the period to determine the daily portion of
OID for each day in the period. With respect to an initial accrual period
shorter than a full monthly accrual period, the daily portions of OID must be
determined according to a reasonable method, provided that such method is
consistent with the method used to determine the yield to maturity of the Loan
Assets.
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With respect to the Loan Assets, the method of calculating OID as
described above will cause the accrual of OID to either increase or decrease
(but never below zero) in any given accrual period to reflect the fact that
prepayments are occurring at a faster or slower rate than the prepayment
assumption used in respect of the Loan Assets. Subsequent purchasers that
purchase Loan Assets at more than a de minimis discount should consult their
tax advisors with respect to the proper method to accrue such OID.
MARKET DISCOUNT. A Grantor Trust Certificateholder that acquires an
undivided interest in Loan Assets may be subject to the market discount rules
of Sections 1276 through 1278 to the extent an undivided interest in a Loan
Asset is considered to have been purchased at a "market discount." Generally,
the amount of market discount is equal to the excess of the portion of the
principal amount of such Loan Asset allocable to such holder's undivided
interest over such holder's tax basis in such interest. Market discount with
respect to a Grantor Trust Certificate will be considered to be zero if the
amount allocable to the Grantor Trust Certificate is less than 0.25% of the
Grantor Trust Certificate's stated redemption price at maturity multiplied by
the weighted average maturity remaining after the date of purchase. Treasury
regulations implementing the market discount rules have not yet been issued;
therefore, investors should consult their own tax advisors regarding the
application of these rules and the advisability of making any of the elections
allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled
payment or a prepayment) or any gain on disposition of a market discount bond
shall be treated as ordinary income to the extent that it does not exceed the
accrued market discount at the time of such payment. The amount of accrued
market discount for purposes of determining the tax treatment of subsequent
principal payments or dispositions of the market discount bond is to be reduced
by the amount so treated as ordinary income.
The Code also grants the Treasury Department authority to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
While the Treasury Department has not yet issued regulations, rules described
in the relevant legislative history will apply. Under those rules, the holder
of a market discount bond may elect to accrue market discount either on the
basis of a constant interest rate or according to one of the following methods.
If a Grantor Trust Certificate is issued with OID, the amount of market
discount that accrues during any accrual period would be equal to the product
of (i) the total remaining market discount and (ii) a fraction, the numerator
of which is the OID accruing during the period and the denominator of which is
the total remaining OID at the beginning of the accrual period. For Grantor
Trust Certificates issued without OID, the amount of market discount that
accrues during a period is equal to the product of (i) the total remaining
market discount and (ii) a fraction, the numerator of which is the amount of
stated interest paid during the accrual period and the denominator of which is
the total amount of stated interest remaining to be paid at the beginning of
the accrual period. For purposes of calculating market discount under any of
the above methods in the case of instruments (such as the Grantor Trust
Certificates) that provide for payments that may be accelerated by reason of
prepayments of other obligations securing such instruments, the same prepayment
assumption applicable to calculating the accrual of OID will apply. Because the
regulations described above have not been issued, it is impossible to predict
what effect those regulations might have on the tax treatment of a Grantor
Trust Certificate purchased at a discount or premium in the secondary market.
A holder who acquired a Grantor Trust Certificate at a market discount
also may be required to defer a portion of its interest deductions for the
taxable year attributable to any indebtedness incurred or continued to purchase
or carry such Grantor Trust Certificate purchased with market discount. For
these purposes, the de minimis rule referred above applies. Any such deferred
interest expense would not
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exceed the market discount that accrues during such taxable year and is, in
general, allowed as a deduction not later than the year in which such market
discount is includible in income. If such holder elects to include market
discount in income currently as it accrues on all market discount instruments
acquired by such holder in that taxable year or thereafter, the interest
deferral rule described above will not apply.
PREMIUM. To the extent a Grantor Trust Certificateholder is
considered to have purchased an undivided interest in a Loan Asset for an
amount that is greater than its stated redemption price at maturity of such
Loan Asset, such Grantor Trust Certificateholder will be considered to have
purchased the Loan Asset with "amortizable bond premium" equal in amount to
such excess. A Grantor Trust Certificateholder (who does not hold the
Certificate for sale to customers or in inventory) may elect under Section 171
of the Code to amortize such premium. Under the Code, premium is allocated
among the interest payments on the Loan Assets to which it relates and is
considered as an offset against (and thus a reduction of) such interest
payments. With certain exceptions, such an election would apply to all debt
instruments held or subsequently acquired by the electing holder. Absent such
an election, the premium will be deductible as an ordinary loss only upon
disposition of the Certificate or pro rata as principal is paid on the Loan
Assets.
ELECTION TO TREAT ALL INTEREST AS OID. The OID regulations permit a
Grantor Trust Certificateholder to elect to accrue all interest, discount
(including de minimis market or original issue discount) and premium in income
as interest, based on a constant yield method. If such an election were to be
made with respect to a Grantor Trust Certificate with market discount, the
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 Grantor Trust Certificateholder acquires during the
year of the election or thereafter. Similarly, a Grantor Trust
Certificateholder that makes this election for a Grantor Trust 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 Grantor Trust Certificateholder owns or acquires. See
"--Premium". The election to accrue interest, discount and premium on a
constant yield method with respect to a Grantor Trust Certificate is
irrevocable.
SALE OR EXCHANGE OF A GRANTOR TRUST CERTIFICATE. Sale or exchange of
a Grantor Trust Certificate prior to its maturity will result in gain or loss
equal to the difference, if any, between the amount received and the owner's
adjusted basis in the Grantor Trust Certificate. Such adjusted basis generally
will equal the seller's purchase price for the Grantor Trust Certificate,
increased by the OID included in the seller's gross income with respect to the
Grantor Trust Certificate, and reduced by principal payments on the Grantor
Trust Certificate previously received by the seller. Such gain or loss will be
capital gain or loss to an owner for which a Grantor Trust Certificate is a
"capital asset" within the meaning of Section 1221, and will be long-term or
short-term depending on whether the Grantor Trust Certificate has been owned
for the long-term capital gain holding period (currently more than one year).
Grantor Trust Certificates will be "evidences of indebtedness" within
the meaning of Section 582(c)(1), so that gain or loss recognized from the sale
of a Grantor Trust Certificate by a bank or a thrift institution to which such
section applies will be treated as ordinary income or loss.
NON-U.S. PERSONS. Generally, interest or OID paid by the person
required to withhold tax under Section 1441 or 1442 to (i) an owner that is not
a U.S. Person (as defined below) or (ii) a Grantor Trust Certificateholder
holding on behalf of an owner that is not a U.S. Person and accrued OID
recognized by the owner on the sale or exchange of such a Grantor Trust
Certificate will not be subject to withholding to the extent that a Grantor
Trust Certificate evidences ownership in Loan Assets issued after July 18, 1984
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by natural persons if such Grantor Trust Certificateholder complies with
certain identification requirements (including delivery of a statement, signed
by the Grantor Trust Certificateholder under penalties of perjury, certifying
that such Grantor Trust Certificateholder is not a U.S. Person and providing
the name and address of such Grantor Trust Certificateholder). Additional
restrictions apply to Loan Assets where the obligor is not a natural person in
order to qualify for the exemption from withholding.
As used herein, a "U.S. Person" means a citizen or resident of the
United States, a corporation or a partnership organized in or under the laws of
the United States or any political subdivision thereof or an estate or trust,
the income of which from sources outside the United States is includible in
gross income for federal income tax purposes regardless of its connection with
the conduct of a trade or business within the United States.
INFORMATION REPORTING AND BACKUP WITHHOLDING. The Servicer will
furnish or make available, within a reasonable time after the end of each
calendar year, to each person who was a Grantor Trust Certificateholder at any
time during such year, such information as may be deemed necessary or desirable
to assist Grantor Trust Certificateholders in preparing their federal income
tax returns, or to enable holders to make such information available to
beneficial owners or financial intermediaries that hold Grantor Trust
Certificates as nominees on behalf of beneficial owners. If a holder,
beneficial owner, financial intermediary or other recipient of a payment on
behalf of a beneficial owner fails to supply a certified taxpayer
identification number or if the Secretary of the Treasury determines that such
person has not reported all interest and dividend income required to be shown
on its federal income tax return, 31% backup withholding may be required with
respect to any payments. Any amounts deducted and withheld from a distribution
to a recipient would be allowed as a credit against such recipient's federal
income tax liability.
THE TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A SECURITYHOLDER'S
PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS OF THE SECURITIES SHOULD
CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE
PURCHASE, OWNERSHIP AND DISPOSITION OF THE SECURITIES, INCLUDING THE TAX
CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
Section 406 of ERISA and Section 4975 of the Code prohibit a pension,
profit-sharing or other employee benefit plan, as well as individual retirement
accounts and certain types of Keogh Plans (each a "Benefit Plan"), from
engaging in certain transactions involving "plan assets" with persons that are
"parties in interest" under ERISA or "disqualified persons" under the Code with
respect to such Benefit Plan. ERISA also imposes certain duties on persons who
are fiduciaries of Benefit Plans subject to ERISA and prohibits certain
transactions between a Benefit Plan and parties in interest with respect to
such Benefit Plans. Under ERISA, any person who exercises any authority or
control with respect to the management or disposition of the assets of a
Benefit Plan is considered to be a fiduciary of such Benefit Plan (subject to
certain exceptions not here relevant). A violation of these "prohibited
transaction" rules may result in an excise tax or other penalties and
liabilities under ERISA and the Code for such persons.
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Certain transactions involving a Trust might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Benefit Plan
that purchased Bonds or Certificates if assets of the Trust were deemed to be
assets of the Benefit Plan. Under a regulation issued by the United States
Department of Labor (the "Plan Assets Regulation"), the assets of a Trust would
be treated as plan assets of a Benefit Plan for the purposes of ERISA and the
Code only if the Benefit Plan acquired an "equity interest" in the Trust and
none of the exceptions contained in the Plan Assets Regulation was applicable.
An equity interest is defined under the Plan Assets Regulation as an interest
other than an instrument which is treated as indebtedness under applicable
local law and which has no substantial equity features. The likely treatment
in this context of Bonds and Certificates of a given Series will be discussed
in the related Prospectus Supplement.
Employee benefit plans that are governmental plans (as defined in
Section 3(32) of ERISA) and certain church plans (as defined in Section 3(33)
of ERISA) are not subject to ERISA requirements. Due to the complexities of
the "prohibited transaction" rules and the penalties imposed upon persons
involved in prohibited transactions, it is important that the fiduciary of any
Benefit Plan considering the purchase of Securities consult with its tax and/or
legal advisors regarding whether the assets of the related Trust would be
considered plan assets, the possibility of exemptive relief from the prohibited
transaction rules and other issues and their potential consequences.
LEGAL INVESTMENT MATTERS
To the extent specified in the related Prospectus Supplement, the
Securities 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 Securities.
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 Securities.
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
Securities. 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 Securities),
except under limited circumstances, and sets forth certain investment practices
deemed to be unsuitable for regulated institutions. The NCUA issued final
regulations effective December 2, 1991 that restrict and in some instances
prohibit the investment by federal credit unions in certain types of mortgage
related securities.
The foregoing does not take into consideration the applicability of
statutes, rules, 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
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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 Securities constitute legal investments for such
investors.
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement
with respect to the Securities of a given Series (collectively, the
"Underwriting Agreements"), the Seller will agree to cause the related Trust to
sell to the underwriters named therein and in the related Prospectus
Supplement, and each of such underwriters will severally agree to purchase, the
principal amount of each Class of Securities of the related Series set forth
therein and in the related Prospectus Supplement.
In each of the Underwriting Agreements with respect to any given
Series of Securities, the several underwriters will agree, subject to the terms
and conditions set forth therein, to purchase all the Securities described
therein which are offered hereby and by the related Prospectus Supplement if
any of such Securities are purchased.
Each Prospectus Supplement will either (i) set forth the price at
which each Class of Securities being offered thereby will be offered to the
public and any concessions that may be offered to certain dealers participating
in the offering of such Securities or (ii) specify that the related Securities
are to be resold by the underwriters in negotiated transactions at varying
prices to be determined at the time of such sale. After the initial public
offering of any such Securities, such public offering prices and such
concessions may be changed.
Each Underwriting Agreement will provide that FFI and the Seller will
indemnify the underwriters against certain civil liabilities, including
liabilities under the Securities Act, or contribute to payments the several
underwriters may be required to make in respect thereof.
Each Trust may, from time to time, invest the funds in its Trust
Accounts in Eligible Investments acquired from such underwriters or from the
Seller.
Pursuant to each Underwriting Agreement with respect to a given Series
of Securities, the closing of the sale of any Class of Securities subject to
such Underwriting Agreement will be conditioned on the closing of the sale of
all other such Classes of Securities of that Series.
The place and time of delivery for the Securities in respect of which
this Prospectus is delivered will be set forth in the related Prospectus
Supplement.
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 Securities will be applied to the simultaneous purchase of the Loan
Assets related to such Series or to reimburse the amounts previously used to
effect such a purchase,
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the costs of carrying such Loan Assets until sale of the Securities and other
expenses connected with pooling the Loan Assets and issuing the Securities.
LEGAL OPINIONS
Certain legal matters relating to the Securities of any Series will be
passed upon for the related Trust, the Seller and the Servicer by Andrews &
Kurth L.L.P., Dallas, Texas. In addition, certain United States federal and
Texas state tax and other matters will be passed upon for the related Trust by
Andrews & Kurth L.L.P., Dallas, Texas.
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<PAGE> 178
INDEX OF TERMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
"Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
"Administration Fee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
"Administrator" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 26
"Annual Reduction" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
"Applicable Accounting Standards" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
"Assets" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii, 4
"Benefit Plan" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
"Bonds" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
"Call Risk" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
"Cedel" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
"Certificate Balance" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
"Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
"Class" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
"Closing Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 53
"Code" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
"Collateral Value" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
"Commission" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
"Companion Class" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
"Companion Securities" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
"Compound Interest Securities" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
"Contract Pool" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii, 4
"Contracts" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii, 4, 6, 39
"Conventional Contracts" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 40
"Conventional Mortgage Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
"Cooperative" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
"Cooperative Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
"Cooperatives" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 38
"Credit Enhancement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 7, 15, 16, 42
"Cut-off Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
"Definitive Bonds" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
"Definitive Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
"Definitive Securities" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31, 35
"Depository" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
"Distribution Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22, 27
"DTC Participants" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22, 32
"Euroclear" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
"Events of Default" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23, 58
"Excess Spread" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
"Extension Risk" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
"FFI" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 51
"FHA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
"FHA Claims Administration Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
"FHA Claims Administrator" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
"FHA Reserve" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
"Fixed Rate Securities" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
"Floating Rate Securities" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
"Grantor Trust Certificateholders" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
"Grantor Trust Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
"Guaranty Policy" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
"Indenture" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"Indenture Trustee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
"Index" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
"Index Currencies" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
"Indexed Principal Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
"Indexed Securities" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
"Indirect DTC Participants" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
"indirect originations" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
"Interest Only Securities" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
"Interest Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"Issuer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
"Loan Asset Pool" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii
"Loan Assets" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii
"Manufactured Home" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
"Manufacturer's Invoice Price" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
"Master Servicer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
"Mortgage" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
"Mortgage Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii, 4, 5
"Mortgage Notes" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
"Mortgage Note" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
"Mortgage Pool Insurance Policy" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
"Mortgage Rates" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
"Mortgaged Properties" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
"Mortgages" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
"Non-Priority Securities" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
"Offered Securities" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
"OID" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
"OID regulations" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
"Pass Through Rate" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
"Permitted Investments" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
"Pool Insurer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
"Pooling and Servicing Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 1, 7
"Pre-Funding Account" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
"Principal Only Securities" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
"Priority Securities" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
"Prospectus Supplement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
"Rating Agency" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
"Registration Statement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
"Related Documents" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
"Relief Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18, 60, 71
</TABLE>
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
"Reserve Fund" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
"Sale and Servicing Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
"Schedule of Loan Assets" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
"Scheduled Amortization Securities" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
"Scheduled Amortization Security" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
"Secured Contracts" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii, 4, 6, 40
"Secured Property" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
"Securities" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
"Securities Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
"Seller" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 1, 50
"Senior Securities" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29, 43
"Series" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
"Servicer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 1
"SMMEA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 94
"Special Allocation Securities" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
"Special Hazard Insurance Policy" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
"Subordinated Securities" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29, 43
"Subsequent Loan Assets" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 41
"Subsequent Transfer Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
"Subservicer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
"Subservicing Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
"Terms and Conditions" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
"Title I Contracts" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 40
"Title I Mortgage Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 38
"Transfer and Servicing Agreements" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
"Transfer Report" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
"Transferor" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 37
"Trust" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 1
"Trust Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 1
"Trust Property" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii, 4
"Trustee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 36
"UCC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
"Underwriting Agreements" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
"Unsecured Contracts" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii, 4, 6, 40
"Window Period Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
</TABLE>
99
<PAGE> 181
ANNEX B
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered
Securities (the "Global Securities") will be available only in book-entry form.
Investors in the Global Securities may hold such Global Securities through DTC,
Cedel or Euroclear. The Global Securities will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedure applicable
to U.S. corporate debt obligations and prior asset-backed securities issues.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding securities will be effected on a delivery-against-payment
basis through the Relevant Depositaries of Cedel and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Cedel and
Euroclear will hold positions on behalf of their participants through their
Relevant Depositaries, which in turn will hold such positions in accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow DTC settlement practice. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the
settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to
securities custody accounts on the settlement date against payment in same-day
funds.
B-1
<PAGE> 182
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between
DTC Participants will be settled using the procedures applicable to prior
asset-backed securities issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the Procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC Seller and Cedel or Euroclear Participants. When
Global Securities are to be transferred from the account of a DTC Participant
to the account of a Cedel Participant or a Euroclear Participant, the purchaser
will send instructions to Cedel or Euroclear through a Cedel Participant or
Euroclear Participant at least one business day prior to settlement. Cedel or
Euroclear will instruct the respective Depositary, as the case may be, to
receive the Global Securities against payment. Payment will include interest
accrued on the Global Securities from and including the last coupon payment
date to and excluding the settlement date, on the basis of the actual number of
days in such accrual period and a year assumed to consist of 360 days. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. Payment will
then be made by the respective Depositary to the DTC Participant's account
against delivery of the Global Securities. After settlement has been
completed, the Global Securities will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the Cedel Participant's or Euroclear Participant's account. The securities
credit will appear the next day (European time) and the cash debt will be
back-valued to, and the interest on the Global Securities will accrue from, the
value date (which would be the preceding day when settlement occurred in New
York). If settlement is not completed on the intended value date (i.e., the
trade fails), the Cedel or Euroclear cash debt will be valued instead as of the
actual settlement date.
Cedel Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedel or Euroclear. Under this
approach, they may take on credit exposure to Cedel or Euroclear until the
Global Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit
to them, Cedel Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, Cedel Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day,
assuming they clear the overdraft when the Global Securities are credited to
their accounts. However, interest on the Global Securities would accrue from
the value date. Therefore, in many cases the investment income on the Global
Securities earned during that one-day period may substantially reduce or offset
the amount of such overdraft charges, although this result will depend on each
Cedel Participants or Euroclear Participant's particular cost of funds.
B-2
<PAGE> 183
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global
Securities to the respective European Depositary for the benefit of Cedel
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two
DTC Participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Cedel Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. In these cases,
Cedel or Euroclear will instruct the Relevant Depositary, as appropriate, to
deliver the Global Securities to the DTC Participant's account against payment.
Payment will include interest accrued on the Global Securities from and
including the last coupon payment to and excluding the settlement date on the
basis of the actual number of days in such accrual period and a year assumed to
consist of 360 days. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. The payment will then be reflected in the account of the Cedel
Participant or Euroclear Participant the following day, and receipt of the cash
proceeds in the Cedel Participant's or Euroclear Participant's account would be
back-valued to the value date (which would be the preceding day, when
settlement occurred in New York). Should the Cedel Participant or Euroclear
Participant have a line of credit with its respective clearing system and elect
to be in debt in anticipation of receipt of the sale proceeds in its account,
the back valuation will extinguish any overdraft incurred over that one-day
period. If settlement is not completed on the intended value date (i.e., the
trade fails), receipt of the cash proceeds in the Cedel Participant's or
Euroclear Participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedel Participants or
Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action were taken. At least three
techniques should be readily available to eliminate this potential problem:
(a) borrowing though Cedel or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedel or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which would give the
Global Securities sufficient time to be reflected in their Cedel or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the Cedel Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Cedel or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that
B-3
<PAGE> 184
generally applies to payments of interest (including original issue discount)
on registered debt issued by U.S. Persons, unless (i) each clearing system,
bank or other financial institution that holds customers' securities in the
ordinary course of its trade or business in the chain of intermediaries between
such beneficial owner and the U.S. entity required to withhold tax complies
with applicable certification requirements and (ii) such beneficial owner takes
one of the following steps to obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of
Global Securities that are Non-U.S. Persons can obtain a complete exemption
from the withholding tax by filing a signed Form W-8 (Certificate of Foreign
Status). If the information shown on Form W-8 changes, a new Form W-8 must be
filed within 30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on
Income Effectively Connected with the Conduct of a Trade or Business in the
United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons residing in a country that has a tax
treaty with the United States can obtain an exemption or reduced tax rate
depending on the treaty terms) by filing Form 1001 (Ownership, Exemption or
Reduced Rate Certificate). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer alternatively
files Form W-8. Form 1001 may be filed by the Certificate Owners or their
agents.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of
a Global Security or, in the case of a Form 1001 or a Form 4224 filer, his
agent, files by submitting the appropriate form to the person though whom it
holds (the clearing agency, in the case of persons holding directly on the
books of the clearing agency). Form W-8 and Form 1001 are effective for three
calendar years, and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof or (iii) an estate or trust
that is subject to United States federal income tax, regardless of the source
of its income. The term "Non-U.S. Person" means any person who is not a U.S.
Person. This summary does not deal with all aspects of U.S. federal income tax
withholding that may be relevant to foreign holders of Global Securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of Global Securities.
B-4
<PAGE> 185
No dealer, salesman or other person has been authorized to give any information
or to make any representations other than those contained or incorporated by
reference in this Prospectus Supplement or the Prospectus and, if given or
made, such information or representations must not be relied upon. This
Prospectus Supplement and the Prospectus do not constitute an offer to sell or
a solicitation of an offer to buy any securities other than the securities
offered hereby, nor an offer of the securities in any state or jurisdiction in
which, or to any person to whom, such offer would be unlawful. The delivery of
this Prospectus Supplement or the Prospectus at any time does not imply that
information herein or therein is correct as of any time subsequent to its
date.
_________________
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT Page
----
<S> <C>
Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
Reports to Securityholders . . . . . . . . . . . . . . . . . . . . . . . . iv
Summary of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-13
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-21
Description of the Trust . . . . . . . . . . . . . . . . . . . . . . . . . S-21
The Home Loan Pool . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-22
The Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-27
The Transferor and the Servicer . . . . . . . . . . . . . . . . . . . . . . S-27
Prepayment and Yield Considerations . . . . . . . . . . . . . . . . . . . . S-30
Description of the Offered Securities . . . . . . . . . . . . . . . . . . . S-38
Description of Credit Enhancement . . . . . . . . . . . . . . . . . . . . . S-45
Description of the Transfer and Servicing Agreements . . . . . . . . . . . S-52
ERISA Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . S-58
Underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-59
Legal Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-60
Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-60
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-61
Legal Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-61
Index of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-62
PROSPECTUS
Prospectus Supplement . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
Incorporation of Certain Documents by Reference . . . . . . . . . . . . . . iv
Summary of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Description of the Bonds . . . . . . . . . . . . . . . . . . . . . . . . . 21
Description of the Certificates . . . . . . . . . . . . . . . . . . . . . . 26
Pool Factors and Trading Information . . . . . . . . . . . . . . . . . . . 28
Certain Information Regarding the Securities . . . . . . . . . . . . . . . 28
The Trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
The Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Description of the Trust Property . . . . . . . . . . . . . . . . . . . . . 37
Credit Enhancement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
The Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
The Servicer and the Transferor . . . . . . . . . . . . . . . . . . . . . . 51
Description of the Transfer and Servicing Agreements . . . . . . . . . . . 53
Certain Legal Aspects of the Loan Assets . . . . . . . . . . . . . . . . . 60
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . 81
Trusts For Which a Partnership Election is Made . . . . . . . . . . . . . . 81
Trusts Treated as Grantor Trusts . . . . . . . . . . . . . . . . . . . . . 88
ERISA Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Legal Investment Matters . . . . . . . . . . . . . . . . . . . . . . . . . 94
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Legal Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Index of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
ANNEX B: Global Clearance, Settlement and Tax Documentation Procedures . . B-1
</TABLE>
FIRSTPLUS HOME IMPROVEMENT LOAN
OWNER TRUST 199_-__
$_______________________
ASSET BACKED BONDS
AND
ASSET BACKED CERTIFICATES
$________ CLASS A-1 ____% ASSET BACKED BONDS
$________ CLASS A-2 ____% ASSET BACKED BONDS
$________ CLASS A-3 ____% ASSET BACKED BONDS
$________ CLASS B ____% ASSET BACKED CERTIFICATES
FIRSTPLUS
INVESTMENT CORPORATION
SELLER
FIRSTPLUS FINANCIAL, INC.
TRANSFEROR AND SERVICER
___________________________
PROSPECTUS SUPPLEMENT
[DATE]
___________________________
[UNDERWRITERS]
<PAGE> 186
***************************************************************************
* *
* Information contained herein is subject to completion or amendment. A *
* registration statement relating to these securities has been filed *
* with the Securities and Exchange Commission. These securities may not *
* be sold nor may offers to buy be accepted prior to the time the *
* registration statement becomes effective. This prospectus shall not *
* constitute an offer to sell or the solicitation of an offer to buy *
* nor shall there be any sale of these securities in any State in which *
* such offer, solicitation or sale would be unlawful prior to *
* registration or qualification under the securities laws of any such *
* State. *
* *
***************************************************************************
SUBJECT TO COMPLETION; DATED AUGUST 19, 1996
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED ___________, 199_)
$_____________
FIRSTPLUS INVESTMENT CORPORATION
(DEPOSITOR)
FIRSTPLUS FINANCIAL, INC.
(TRANSFEROR AND SERVICER)
FIRSTPLUS HOME LOAN TRUST 199 _-_
The FIRSTPLUS Asset-Backed Certificates, Series 199_-_ will consist of
the following classes: (i) the Class A-1 Certificates, the Class A-2
Certificates, the Class A-3 Certificates, and the Class A-4 Certificates
(collectively, the "Class A Certificates" or the "Senior Certificates"), (ii)
the Class B Certificates (the "Class B Certificates") and (iii) the Class R
Certificates (the "Class R Certificates"). The Class R Certificates and the
Class B Certificates are collectively referred to as the "Subordinated
Certificates"; and the Senior Certificates and the Subordinated Certificates
are collectively referred to as the "Certificates". Only the Senior
Certificates are offered hereby (the "Offered Certificates"). It is a condition
to the issuance of the Offered Certificates that they each be rated "___" by
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("Standard &
Poor's") and "___" by Moody's Investors Service ("Moody's").
For capitalized terms used but not defined herein, see the "Index to
Location of Principal Terms" included as an Appendix A to both this Prospectus
Supplement and the Prospectus.
BEFORE PURCHASING ANY OFFERED CERTIFICATES PROSPECTIVE INVESTORS
SHOULD REVIEW THE INFORMATION SET FORTH HEREIN AND IN THE PROSPECTUS, SEE "RISK
FACTORS" AND "PREPAYMENT AND YIELD CONSIDERATIONS" HEREIN, AND SEE "RISK
FACTORS" IN THE PROSPECTUS.
(Cover continued on next page)
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 CERTIFICATE UNDERWRITING PROCEEDS TO
PRINCIPAL BALANCE INTEREST RATE PRICE TO 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 . . $____________ ____% _____% ______% _____%
Total . . . . . . . $____________ $______________ $______________ $______________
</TABLE>
(1) Plus accrued interest, if any, at the applicable rate from _________,
199_.
(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 __________, 199_.
[UNDERWRITER]
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS ____________, 199_
<PAGE> 187
(Cover continued from previous page)
The Class A-1, Class A-2, Class A-3 and Class A-4 Certificates will
have initial aggregate principal balances of the approximate dollar amounts set
forth above for each such Class, respectively (the "Original Class Principal
Balances"), which in the aggregate, will equal ____% of the sum of (i) the
outstanding principal balances of the Initial Mortgage Loans as of ________,
199_ of approximately $____________ and (ii) the amount deposited into the
Pre-Funding Account as described herein of approximately $__________. 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 _______________________ (the "Certificate Insurer") as
described herein, see "The Guaranty Policy" herein, but the Subordinated
Certificates will not be so guaranteed.
The Certificates will evidence in the aggregate the entire beneficial
ownership interest in a trust fund (the "Trust Fund"), to be formed pursuant to
a Pooling and Servicing Agreement dated as of________, 199_ (the "Pooling and
Servicing Agreement"), between FIRSTPLUS INVESTMENT CORPORATION, as depositor
(the "Depositor"), FIRSTPLUS FINANCIAL, INC., as transferor and servicer (in
its capacity as such, the "Transferor" or the "Servicer", respectively), and
__________________________, as trustee (the "Trustee"). The Trust Fund will
consist primarily of 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 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 __________, 199_ (each, a "Distribution Date"). On each
Distribution Date, holders of the Certificates will be entitled to receive,
from and to the extent that funds are available therefor in the Certificate
Account, distributions with respect to interest and principal calculated as
described herein. See "Description of the Certificates" herein.
As described herein, a "real estate mortgage investment conduit"
("REMIC") election will be made with respect to the Trust Fund (other than the
Pre-Funding Account and the Capitalized Interest Account) for federal income
tax purposes. The Offered Certificates constitute "regular interests" in the
REMIC. See "Certain Federal Income Tax Consequences" herein and in the
Prospectus.
The yield to maturity on the Offered Certificates will depend on (i)
the rate and timing of principal reductions of the Class Principal Balances for
the Offered Certificates from the receipt of payments of principal and interest
on and other principal reductions of the Mortgage Loans (including scheduled
payments, prepayments, delinquencies, recognition of defaults and allocation of
losses by the Servicer, and substitutions and repurchases by the Transferor and
the Depositor), substantially all of which may be prepaid at any time without
penalty, (ii) any principal reductions of the Class Principal
ii
<PAGE> 188
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.
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.
-----------
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 __________, 199_ 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. The Commission maintains a Web site
that contains reports, proxy and information statements and other information
regarding the Depositor. The address of such Web site is http://www.sec.gov.
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.
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<PAGE> 189
SUMMARY OF PROSPECTUS SUPPLEMENT
The following Summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Certain capitalized terms that are used in this
Summary may be defined elsewhere in this Prospectus Supplement or in the
Prospectus. See "Index to Location of Principal Terms" included as an Appendix
A to both this Prospectus Supplement and the Prospectus. Capitalized terms that
are used but not defined in this Prospectus Supplement will have the meanings
specified in the Prospectus.
Issuer . . . . . . . . . . . . . . FIRSTPLUS Home Loan Trust 199_-_ (the
"Trust Fund").
Offered Certificates . . . . . . . The FIRSTPLUS Asset-Backed Certificates,
Series 199_-_ (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
__________;
$__________ Original Class Principal
Balance of Class A-2 Certificates with a
____% Certificate Interest Rate and a
Scheduled Final Distribution Date in
__________;
$__________ Original Class Principal
Balance of Class A-3 Certificates with a
____% Certificate Interest Rate and a
Scheduled Final Distribution Date in
__________; and
$__________ Original Class Principal
Balance of Class A-4 Certificates with a
____% Certificate Interest Rate and a
Scheduled Final Distribution Date in
__________.
The Class A-1, Class A-2, Class A-3 and
Class A-4 Certificates are collectively
referred to herein as the "Class A
Certificates" or the "Senior
Certificates". Only the Senior
Certificates are offered hereby (the
"Offered Certificates").
The "Scheduled Final Distribution Dates"
for each Class of Offered Certificates
set forth above are based upon the
assumptions set forth herein under
"Prepayment and Yield Considerations --
Weighted Average Life of the Offered
Certificates -- Modeling Assumptions" and
the additional assumption that the
Mortgage Loans amortize with no
prepayments, delinquencies, liquidations,
substitutions or repurchases thereof.
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<PAGE> 190
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 . . . . . . . . . . . . . . __________________________, as the
trustee (the "Trustee").
Custodian . . . . . . . . . . . . . __________________________, 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 __________, 199_ (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 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"); (iii) payments in
respect of the Mortgage Loans of interest
and principal received after __________,
199_, in the case of the Initial Mortgage
Loans, and the related cut-off date for
any Subsequent Mortgage Loans (in each
case, a "Cut-Off Date"); (iv) amounts on
deposit in the Pre-Funding Account and
the
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<PAGE> 191
Capitalized Interest Account (as each term
is defined herein) until the end of the
Funding Period; (v) the Guaranty Policy
issued by the Certificate Insurer; (vi)
the Certificate Account; and (vii) 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 __________,
199_, which is expected to equal
approximately $__________. On the Closing
Date, the "Assumed Pool Principal
Balance" will be equal to the sum of the
Initial Pool Principal Balance, plus the
Pre-Funding Account Deposit, which sum is
expected to equal approximately
$__________.
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 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
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<PAGE> 192
interests in each Class of Offered
Certificates will be held only in minimum
denominations of $__________ and integral
multiples of $______ in excess thereof.
Closing Date . . . . . . . . . . . On or about __________, 199_ ("Closing
Date").
Cut-Off Date . . . . . . . . . . . __________, 199_ 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
__________, 199_ (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 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.
S-4
<PAGE> 193
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. 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
Considerations . . . . . . . . . The yield on the Offered Certificates of
any Class will depend on, among other
things, the Certificate Interest Rate for
such Class of Certificates. The yield on
any Offered Certificate that is purchased
at a discount or premium will also be
affected by the rate and timing of
distributions in respect of principal on
such Certificate, which in turn will be
affected by (i) the rate and timing of
principal payments (including principal
prepayments) and interest payments on the
Mortgage Loans and (ii) the extent to
which such principal distributions are
applied on any Distribution Date in
reduction of the Class Principal Balance
of the Class to which such Certificate
belongs. See "Description of the
Certificates -- Distributions on the
Offered Certificates" 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
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<PAGE> 194
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 ______ loans, having an
Initial Pool Principal Balance of
approximately $__________. 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 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 ____% of the Initial Pool
Principal Balance and so removed may not
exceed $__________. 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
S-6
<PAGE> 195
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 ___%, without Certificate
Insurer approval, and ___%, 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 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
$__________ (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
$__________ and any such increase will
not exceed ___% of the Initial Pool
Principal Balance. See "The Mortgage Loan
Pool" herein. During the period (the
"Funding Period") from the Closing Date
until the earlier of (i) the date on
which
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<PAGE> 196
the amount on deposit in the Pre-Funding
Account is reduced below $________ and
(ii) __________, 199_, the amount on
deposit in the Pre-Funding Account will
be reduced by the amount used to purchase
Subsequent Mortgage Loans after the
Closing Date in accordance with the
applicable provisions of the Pooling and
Servicing Agreement; provided that the
Funding Period will be subject to an
earlier termination if insufficient funds
are on deposit in the Capitalized
Interest Account on any Determination
Date to cover any interest shortfall for
distributions to the Class A 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 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.
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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
account will be established as part of
the Trust Fund for the Offered
Certificates. See "Risk Factors --
Additional Credit Enhancement
Limitations" herein.
The Guaranty Policy . . . . . . . . The Depositor will obtain in the name of
the Trustee a Certificate Guaranty
Insurance Policy (the "Guaranty Policy")
from __________________________ (the
"Certificate Insurer"), the principal
operating subsidiary of
__________________________, 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
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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
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 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
excess of such required amount. Excess
overcollateralization may also result
from distributions in reduction of the
Class Principal Balances of the Class A
Certificates. If on any Distribution
Date identified in the Pooling and
Servicing Agreement as an
"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
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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, and (y) the amount
available 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
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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 Insurance on the
Title I Mortgage Loans . . . . The Transferor will transfer the FHA
insurance coverage for the Title I
Mortgage Loans to the Depositor for the
benefit of the Certificateholders and the
Certificate Insurer. Due to the FHA
procedures for transferring FHA insurance
coverage from one Title I Lender's FHA
insurance coverage reserve account (such
account, an "FHA Reserve") to another
Title I Lender's FHA Reserve, 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 ___% 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 ___% of the Cut-Off Date
Principal Balances of the Title I
Mortgage Loans that are actually conveyed
to the Trust Fund, then the amount of the
Required Class A Overcollateralization
Level will be increased by 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
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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.
Servicing of the Mortgage Loans
and FHA Claims Administration . . 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
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Servicer will be responsible for paying
the fees of each Subservicer. Under
certain circumstances the Servicer may be
entitled to an Excess Servicing Fee as
described herein.
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
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).
FHA Insurance Premium and
Fees of Certificate Insurer,
Trustee, and Custodian . . . . On each Distribution Date, prior to
distributions on the Certificates,
amounts available in the Certificate
Account will be distributed (i) to
deposit a portion of the FHA Insurance
premium into the FHA Insurance Premium
Account (the "FHA Insurance Premium
Deposit Amount") for the Title I Mortgage
Loans, and (ii) to pay the following
periodic Trust Fund fees: (1) the
Certificate Insurer premium (the
"Certificate Guaranty Insurance
Premium"); (2) the Trustee fee; and (3)
the Custodian fee for custody of the
Trustee's Mortgage Loan Files (the
"Custodian Fee"); provided, however, that
with respect to the first Distribution
Date the payment of all such monthly fees
will be prorated 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 on or after the
date on which the Class Principal Balance
of the Offered Certificates then
outstanding is ___% or less 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, effect an early
retirement and termination of the
Certificates by purchasing from the Trust
Fund all of the Mortgage Loans and REO
Properties (as defined in the Pooling and
Servicing Agreement) at a price (the
"Termination Price") equal to the sum of
(i) Pool Principal Balance, plus (ii) the
sum of thirty days' accrued interest on
the Pool Principal Balance computed at
the weighted average Mortgage Loan Rate
for the Mortgage Loans (including REO
Properties) then outstanding, plus (iii)
any accrued and unpaid interest on the
Class A Certificates and Class B
Certificates as of the immediately
preceding Distribution Date. The Servicer
will pay the unpaid fees and expenses, if
any,
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of the Trustee, the Certificate Insurer,
the Custodian and the Servicer in
connection with such optional
termination. Under certain circumstances
as set forth in the Pooling and Servicing
Agreement (i.e., based upon the default
experience of the Mortgage Loans) the
Certificate Insurer may, at its option,
effect an early retirement and
termination of the Certificates at the
Termination Price.
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 "___" by Standard & Poor's and
"___" by Moody's. Standard & Poor's and
Moody's are sometimes referred to herein,
collectively, as the "Rating Agencies".
A security rating does not address the
frequency of principal prepayments or the
corresponding effect on yield to
investors. Neither the Depositor, the
Transferor, the Servicer, the Trustee,
the Certificate Insurer nor any other
person is obligated to maintain the
rating on any Offered Certificate. See
"Ratings" herein.
ERISA Considerations . . . . . . . For a discussion of certain ERISA
considerations, see "ERISA
Considerations" herein and in the
Prospectus.
Legal Investment . . . . . . . . . For a discussion of certain legal
investment considerations, see "Legal
Investment Matters" herein and in the
Prospectus.
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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
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which the timing of distributions to holders thereof is sensitive to scheduled
payments, prepayments, liquidations, defaults and purchases of Mortgage Loans
and to the distribution of Excess Spread and amounts remaining in the
Pre-Funding Account after the Funding Period ends. In the case of any Offered
Certificate purchased at a discount, an investor should consider the risk that
a slower than anticipated rate of principal distributions to the 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.
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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.
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
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could include, without limitation, delays in transferring the FHA Insurance to
the Depositor's FHA Reserve, delays in the processing and payment of FHA Claims
or the termination or reduction of the FHA Insurance for the Title I Mortgage
Loans. HUD has indicated that the recent government shut-down has caused a
number of delays in the Title I Program, including delays in the processing and
payment of claims and the recording of Title I loans for FHA insurance.
LIMITATIONS ON RIGHTS OF 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 __________, 199_,
however, approximately ____% of the Initial Pool Principal Balance consists of
Initial Mortgage Loans that have a first scheduled monthly payment due date
occurring after __________, 199_, and therefore, it was not possible for such
Initial Mortgage Loans to have had a scheduled monthly payment that was 30 days
or more late as of __________, 199_. 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 __________, 199_, 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,
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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 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
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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 ____% and ____% 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, 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. But, the Servicer or any
Subservicer will make reasonable and customary expense advances with respect to
the Mortgage Loans in accordance with their servicing obligations. See
"Description of the Certificates -- Servicing" herein.
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
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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 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
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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 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
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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.
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,
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in combination, which loans are marketed by the Transferor under the name
"BusterTM 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) __________, 199_ Cut-Off Date 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 ___% of the Initial Pool
Principal Balance and so removed may not exceed $__________ 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 __________, 199_, the actual Mortgage Loan Pool may vary
from the description below due to a number of factors, including prepayments
after __________, 199_ 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.
After each transfer of Subsequent Mortgage Loans to the Trust Fund it
is expected that the Pool Principal Balance will consist of approximately ____%
Conventional Mortgage Loans (by aggregate Cut-Off Date Principal Balance) and
approximately ___% Title I Mortgage Loans (by aggregate Cut-Off Date Principal
Balance).
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The Initial Mortgage Loans included in the initial Mortgage Loan Pool
will consist of approximately ______ loans having an Initial Pool Principal
Balance of approximately $__________. The Initial Mortgage Loans (by aggregate
Cut-Off Date Principal Balance) will have the characteristics set forth in the
tables below.
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 . . . $_____________ ______%
Title I Mortgage Loans . . . . .
------------------ --------------------- ---------------------
Totals . . . . . . . . . . . . $ %
================== ===================== =====================
</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 . . . .
10.000 - 10.999 . . . .
11.000 - 11.999 . . . .
12.000 - 12.999 . . . .
13.000 - 13.999 . . . .
14.000 - 14.999 . . . .
15.000 - 15.999 . . . .
16.000 - 16.999 . . . .
17.000 - 17.999 . . . .
------------------
Totals . . . . . . . ______
================== ===================== =====================
</TABLE>
The weighted average Mortgage Loan Rate of the Initial Mortgage Loans
as of __________, 199_ was approximately ______% per annum.
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<PAGE> 215
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 . . . .
10,000.00 - 19,999.99 . . . .
20,000.00 - 29,999.99 . . . .
30,000.00 - 39,999.99 . . . .
40,000.00 - 49,999.99 . . . .
50,000.00 - 59,999.99 . . . .
70,000.00 - 79,999.99 . . . .
------------------
Totals . . . . . . . . . . ______
================== ===================== =====================
</TABLE>
The average principal balance of the Initial Mortgage Loans as of
__________, 199_ was approximately $________.
ORIGINAL LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
RANGE OF PERCENT OF TOTAL
PRINCIPAL BALANCE NUMBER OF INITIAL AGGREGATE BY AGGREGATE
AT ORIGINATION($) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0.00 - 9,999.99 . . . .
10,000.00 - 19,999.99 . . . .
20,000.00 - 29,999.99 . . . .
30,000.00 - 39,999.99 . . . .
40,000.00 - 49,999.99 . . . .
50,000.00 - 59,999.99 . . . .
60,000.00 - 69,999.99 . . . .
70,000.00 - 79,999.99 . . . .
------------------
Totals . . . . . . . . . . ______
================== ===================== =====================
</TABLE>
The average principal balance of the Initial Mortgage Loans at
origination was approximately $__________.
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<PAGE> 216
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 . . . . . . . . . . .
Arizona . . . . . . . . . . .
Arkansas . . . . . . . . . .
California . . . . . . . . .
Colorado . . . . . . . . . .
Connecticut . . . . . . . . .
Delaware . . . . . . . . . .
Florida . . . . . . . . . . .
Georgia . . . . . . . . . . .
Idaho . . . . . . . . . . . .
Illinois . . . . . . . . . .
Indiana . . . . . . . . . . .
Iowa . . . . . . . . . . . .
Kansas . . . . . . . . . . .
Kentucky . . . . . . . . . .
Louisiana . . . . . . . . . .
Maine . . . . . . . . . . . .
Maryland . . . . . . . . . .
Michigan . . . . . . . . . .
Minnesota . . . . . . . . . .
Mississippi . . . . . . . . .
Missouri . . . . . . . . . .
Montana . . . . . . . . . . .
Nevada . . . . . . . . . . .
New Hampshire . . . . . . . .
New Jersey . . . . . . . . .
New Mexico . . . . . . . . .
New York . . . . . . . . . .
North Carolina . . . . . . .
Ohio . . . . . . . . . . . .
Oklahoma . . . . . . . . . .
Oregon . . . . . . . . . . .
Pennsylvania . . . . . . . .
Rhode Island . . . . . . . .
South Carolina . . . . . . .
Tennessee . . . . . . . . . .
Texas . . . . . . . . . . . .
Utah . . . . . . . . . . . .
Virginia . . . . . . . . . .
Washington . . . . . . . . .
West Virginia . . . . . . . .
Wisconsin . . . . . . . . . .
------------------ ---------------------
Totals . . . . . . . . . . ______
================== =====================
</TABLE>
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<PAGE> 217
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 . . . . . . . . . .
60 - 89 . . . . . . . . . .
90 - 119 . . . . . . . . . .
120 - 149 . . . . . . . . . .
150 - 179 . . . . . . . . . .
180 - 209 . . . . . . . . . .
210 - 239 . . . . . . . . . .
240 - 269 . . . . . . . . . .
------------------
Totals . . . . . . . . . . ______
================== ===================== =====================
</TABLE>
The weighted average remaining term to maturity of the Initial
Mortgage Loans as of __________, 199_ was approximately ______ months.
MONTHS SINCE ORIGINATION
<TABLE>
<CAPTION>
PERCENT OF
AGE NUMBER OF INITIAL AGGREGATE TOTAL BY AGGREGATE
(IN MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0 - 5 . . . . . . . . . . .
6 - 11 . . . . . . . . . . .
12 - 17 . . . . . . . . . . .
18 - 23 . . . . . . . . . . .
24 - 29 . . . . . . . . . . .
30 - 35 . . . . . . . . . . .
48 - 53 . . . . . . . . . . .
------------------
Totals . . . . . . . . . . ______
================== ===================== =====================
</TABLE>
The weighted average age of the Initial Mortgage Loans as of
__________, 199_ 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 ________,
_____; (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
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<PAGE> 218
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 ____% 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 and; (b) will
have a weighted average term to maturity as of each respective Cut-Off Date of
approximately ______ to ______ months. 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.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The FIRSTPLUS Asset-Backed Certificates, Series 199_-_ (the
"Certificates") will consist of the Class A-1, Class A-2, Class A-3, Class A-4,
Class B and Class R Certificates (each, a "Class"). Only the Class A-1, Class
A-2, Class A-3 and Class A-4 Certificates (collectively, the "Class A
Certificates" or the "Offered Certificates") are offered hereby.
On the 20th day of each month, or, if such day is not a business day,
the first business day immediately following, commencing __________, 199_,
(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 $__________ and integral multiples of
$______ 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
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<PAGE> 219
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
__________________________, an affiliate of __________________________, one of
the Underwriters. On the business day prior to each Distribution Date, the
Servicer is required to transfer from the Collection Account to the Trustee the
Available Remittance Amount for deposit in an Eligible Account (the
"Certificate Account") established and maintained by the Trustee.
Any Subservicer will also maintain a collection account to deposit all
payments received with respect to the Mortgage Loans being serviced by such
Subservicer. Such Subservicer's collection account will be an Eligible Account
and will satisfy requirements that are substantially similar to the
requirements for the Collection Account set forth in the Pooling and Servicing
Agreement.
FHA INSURANCE PREMIUM ACCOUNT
To provide for the payment of the FHA Premium Amount on each Title I
Mortgage Loan, the Trustee will establish and maintain an Eligible Account (the
"FHA Insurance Premium Account") into which an initial deposit will be made on
the Closing Date in the amount required under the Pooling and Servicing
Agreement and into which will be deposited on a monthly basis an amount equal
to one-twelfth of the product of the original principal balance of each
outstanding Title I Mortgage Loan multiplied by the appropriate annual premium
rate applicable to each such Title I Mortgage Loan (the "FHA Insurance Premium
Deposit Amount"). Amounts may be withdrawn from the FHA Insurance Premium
Account on each Distribution Date to reimburse the Transferor or FHA Claims
Administrator, or any Person acting on either of their behalf, for any amounts
advanced to the FHA by such entity in respect of the FHA Premium Amount
relating to any Title I Mortgage Loan in lieu of withdrawals from the FHA
Insurance Premium Account. In addition, monies in excess of that required to be
maintained in the FHA Insurance Premium Account as of the Distribution Date
occurring in ________ of each year commencing in 199_ 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
S-31
<PAGE> 220
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, including without limitation the Servicing Fee) during the related
Due Period (or, in the case of amounts paid by the Transferor in connection
with the purchase or substitution of a Mortgage Loan for defective loan
documentation or a breach of representation or warranty, as of the related
Determination Date) as reduced by any portion thereof that may not be withdrawn
therefrom pursuant to an order of a United States bankruptcy court of 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;
S-32
<PAGE> 221
(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 in reduction
of, and in accordance with, their Class Principal Balances, any amounts
deposited into the Certificate Account from the amounts remaining in the
Pre-Funding Account upon termination of the Funding Period;
(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 of the Principal
Remittance Amount and any Principal Carry-Forward Amount, (A) to the Class R
Certificateholders, until the Pool Principal Balance has been reduced to the
sum of the Class Principal Balances of the Class A and Class B Certificates,
the Overcollateralization Reduction Amount, if any, for such Distribution Date,
and (B) to the Class B Certificateholders in reduction of the Class Principal
Balance thereof, any remaining Overcollateralization Reduction Amount for 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;
(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 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");
(xii) 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;
(xiii) 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
S-33
<PAGE> 222
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;
(xiv) 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) then to the
Servicer an amount equal to the Excess Servicing Fee (as defined under the
subheading "-- Servicing" below), if any, on such Distribution Date; and
(xv) then the remaining balance, if any, of the Amount Available
(the "Excess Spread"), as follows:
(A) 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
equals or exceeds zero, to the Class A Certificateholders in reduction
of the Class Principal Balances thereof in accordance with the
sequential priority scheme of clauses (vii), (viii), (ix) and (x)
above, as applicable; and
(B) if the Excess Overcollateralization Amount equals or
exceeds zero, then (I) to the Class B Certificateholders 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.
If the Amount Available is insufficient to distribute in full the
amounts described in items (v) and (vii) through (x) above to the holders of
the Offered Certificates, the Trustee will make a claim under the Guaranty
Policy for the amount of such insufficiency in accordance with the terms
thereof. Guaranteed Payments, if any, for any Offered Certificates under the
Guaranty Policy will be available only for distribution to holders of the
Offered Certificates, as appropriate, to compensate for any shortfalls in
respect of the Interest Remittance Amounts and the Principal Remittance Amounts
with respect to the Offered Certificates.
All distributions made to the Class A-1 Certificateholders, the Class
A-2 Certificateholders, the Class A-3 Certificateholders, the Class A-4
Certificateholders, the Class B Certificateholders or the holders of the Class
R Certificates as a Class on each Distribution Date will be made on a pro rata
basis among the Certificateholders of the respective Class of record on the
next preceding Record Date based on the Percentage Interest represented by
their respective Certificates, and except as otherwise provided 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
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<PAGE> 223
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 greater of (1) 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, then with respect
to the Class A Certificates, the principal portion of any Net Loan Losses (as
defined below) for the preceding Due Period; and (2) the amount by which (i)
the Class Principal Balance of the Class A Certificates as of the preceding
Distribution Date (after giving effect to all payments of principal on such
preceding Distribution Date) exceeds (ii) the Pool Principal Balance plus funds
on deposit in the Pre-Funding Account, each as of the immediately preceding
Determination Date. Notwithstanding clauses (B)(1)(v) or (B)(2) of the
definition of Principal Remittance Amount, if on the final Distribution Date
the funds available for distribution are not sufficient to provide for the
distribution of the Principal Remittance Amount and Principal Carry-Forward
Amount, in full, then the holders of the Class A Certificates will not be
distributed such portion of the Principal Remittance Amount and Principal
Carry-Forward Amount attributable to such insufficiency, in which event the
amount of such insufficiency 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 prior
to the final Distribution Date the Class A Overcollateralization Level is
reduced to zero, 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 available for distribution on such final Distribution Date, including
funds distributable to pay such Principal Carry-Forward Amount 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,
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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 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 __________, 199_ 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
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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 (v) 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 ____% 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 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.
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,
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 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 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,
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generally as a result of the delinquency and default experience of the Mortgage
Loan Pool being lower than certain levels established by the Certificate
Insurer and set forth in the Pooling and Servicing Agreement. 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 on any Determination Date the delinquency or default experience on
the Mortgage Loan Pool exceeds certain levels as established 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 on any Determination Date the delinquency and
default experience on the Mortgage Loan Pool is lower than certain levels as
established 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
and an Overcollateralization Stepdown Date will occur on the related
Distribution Date.
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 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 ___________ (____)
Distribution Date, or (ii) the Distribution Date on which the Pool Principal
Balance is equal to or less than ___________ percent (___%) 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
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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.
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 such Liquidated Mortgage Loans as of the last
day of such Due Period, 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 on the final Distribution Date the funds available
for distribution are not sufficient to provide for the distribution of the
Principal Remittance Amount and Principal Carry-Forward Amount, in full, then
to reduce the Class Principal Balance of the Class A Certificates, pro rata,
until such Class Principal Balances have been reduced to zero. If prior to the
final Distribution Date any Net Loan Losses occur after the Class A
Overcollateralization Level has been reduced to zero, then 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 B Certificates and the corresponding amount of the accrued and
unpaid interest on such Certificates, then the Class B Certificateholders may
be reimbursed for such allocated Net Loan Losses from any Excess Spread, as
defined under "-- Distributions on the Offered Certificates" 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
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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;
(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").
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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
Delinquencies, 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 office. The Trustee agrees, for the
benefit of the Certificateholders, to review (or cause to be reviewed) each
Trustee's Mortgage Loan File within 45 days after the conveyance of the related
Mortgage Loan to the Trust Fund to ascertain that all required documents have
been executed and received.
PRE-FUNDING ACCOUNT
On the Closing Date, cash in the aggregate amount of approximately
$__________ (the "Pre-Funding Account Deposit") will be deposited in an
Eligible Account (the "Pre-Funding Account"), which account will be part of the
Trust Fund and will be maintained as an Eligible Account with the Trustee, in
its corporate trust department for the purchase of Mortgage Loans. The
Pre-Funding Account Deposit will be increased or decreased by an amount equal
to the aggregate of the principal balances of any mortgage loans removed from
or added to, respectively, the Mortgage Loan Pool prior to the Closing Date,
provided that any such decrease will not exceed $__________ and any such
increase will not exceed ____% of the Initial Pool Principal Balance. During
the period (the "Funding Period") from the Closing Date until the earlier of
(i) the date on which the amount on deposit in the Pre-Funding Account is
reduced
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below $_________, and (ii) __________, 199_, the amount on deposit in the
Pre-Funding Account will be reduced by the amount thereof used to purchase
Subsequent Mortgage Loans in accordance with the applicable provisions of the
Pooling and Servicing Agreement; provided that the Funding Period will be
subject to an earlier termination if insufficient funds are on deposit in the
Capitalized Interest Account on any Determination Date to cover any interest
shortfall for distributions to the Class A Certificates and the Class B
Certificates on the immediately following Distribution Date. Subsequent
Mortgage Loans purchased by and added to the Trust Fund on any Subsequent
Transfer Date must satisfy the criteria set forth in the Pooling and Servicing
Agreement and must be approved by the Certificate Insurer. Assuming that the
aggregate Cut-Off Date Principal Balances of all Subsequent Mortgage Loans
conveyed to the Trust Fund equals the Pre-Funding Account Deposit, then it is
expected that the Assumed Pool Principal Balance will consist of approximately
____% Title I Mortgage Loans (by aggregate Cut-Off Date Principal Balance) and
approximately ____% Conventional Mortgage Loans (by aggregate Cut-Off Date
Principal Balance). 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 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
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Permitted Investments in which funds are invested. The initial deposit in the
Capitalized Interest Account on the Closing Date will be sufficient to cover
the projected Interest Shortfall with respect to the __________, 199_
Distribution Date and the __________, 199_ Distribution Date. If the Transferor
and Depositor deliver Subsequent Mortgage Loans on or prior to __________,
199_, the Trustee may release to the Depositor the portion of the Capitalized
Interest Account Deposit which, based on a recalculation of the Interest
Shortfall, will not be needed for the
__________, 199_ or __________, 199_ Distribution Dates. Additionally, if the
Transferor and Depositor deliver Subsequent Mortgage Loan on or prior to
__________, 199_, 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__________, 199_ Distribution
Date. On or before __________, 199_, the Depositor may deposit into the
Capitalized Interest Account the Interest Shortfall with respect to the
__________, 199_ Distribution Date. The Depositor's failure to make the
required Interest Shortfall deposit on or before __________, 199_ with respect
to the__________, 199_ Distribution Date will cause the Funding Period to end
on __________, 199_. Any amounts remaining in the Capitalized Interest Account
on any Determination Date, that are not required to cover the anticipated
interest shortfall described above, will be distributed to the Depositor,
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 ____% (____ basis points) per annum of the Pool
Principal Balance (as adjusted for Liquidated Mortgage Loans) as of the first
day of the immediately preceding Due Period. 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. In addition, to the extent that the Class A
Overcollateralization Level equals or exceeds the Required Class A
Overcollateralization Level the Servicer will be entitled to an "Excess
Servicing Fee" equal to ____% (____ basis points) per annum of the Pool
Principal Balance; provided however, that with the agreement of the Certificate
Insurer, any successor Servicer may be entitled to such fee regardless of the
Class A Overcollateralization Level. In each case, the distribution of such
Excess Servicing Fee 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.
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. But, the Servicer or any Subservicer will make reasonable
and customary expense advances with respect to the Mortgage Loans in accordance
with their servicing obligations under the Pooling and Servicing Agreement. For
example, such expense advances may include
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costs and expenses advanced for the preservation, restoration and protection of
any Mortgaged Property, including advances to pay delinquent real estate taxes
and assessments. Any expense advances by the Servicer or any Subservicer will
be reimbursable from the Amount Available after all prior distributions as
described under " -- Distributions on the Offered Certificates" above or with
respect to any Liquidated Mortgage Loan from the Liquidation Proceeds received
therefrom.
THE TRUSTEE
__________________________, has been named Trustee pursuant to the
Pooling and Servicing Agreement. The Trustee has accepted appointment as the
Certificate Registrar and Paying Agent pursuant to the Pooling and Servicing
Agreement. The address of the Trustee is: __________________
___________________________________. The Trustee is a wholly-owned subsidiary
of______________, which is a bank holding company headquartered
in______________, _____________.
TERMINATION
The Servicer may, at its option, terminate the Pooling and Servicing
Agreement on or after any Distribution Date on which the Class Principal
Balance of the Certificates is ____% or less 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. Under
certain circumstances as set forth in the Pooling and Servicing Agreement
(i.e., based upon the default experience of the Mortgage Loans) the Certificate
Insurer may, at its option, effect an early retirement and termination of the
Certificates at the Termination Price.
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 Certificates to consent to any such amendment.
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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 __________________________ (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 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
______________________________, 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.
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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 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.
"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 __________, 199_ between FIRSTPLUS FINANCIAL, INC., a
Texas corporation, as Transferor and Servicer, FIRSTPLUS INVESTMENT
CORPORATION, as Depositor, and ______________________________, as Trustee,
without regard to any amendment or supplement thereto.
"Preference Amount" means any amount previously distributed to 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.
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The notice address of the Fiscal Agent is
______________________________, Attention:____________________, 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 __________, 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 __________________________,
is the principal operating subsidiary of __________________________,.
__________________________ is not obligated to pay the debts of or claims
against the Certificate Insurer. The Certificate Insurer is domiciled in the
State of __________ and licensed to do business in all [50 states, the District
of Columbia, the Commonwealth of Puerto Rico, 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 __________________________, including the financial statements of
the Certificate Insurer for the year ended __________, 199_, prepared in
accordance with generally accepted accounting principles, included in the
Annual Report on Form 10-K of __________________________, for the year ended
__________, 199_, 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 GAAP
--------------------------- --------------------------
December 31, March 31, December 31, March 31,
1995 1996 1995 1996
------------- ------------ ------------ ------------
(Audited) (Unaudited) (Audited) (Unaudited)
(In Millions) (In Millions)
<S> <C> <C> <C> <C> <C>
Admitted Assets . . . . . . Assets . . . . . . . . .
Liabilities . . . . . . . . Liabilities . . . . . . .
Capital and Surplus . . . . Shareholder's Equity . .
</TABLE>
Copies of the Certificate Insurer's 199_ 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 ________________________________________.
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A copy of the Annual Report on Form 10-K of __________________________
is available from the Certificate Insurer or the Securities and Exchange
Commission. The address of the Certificate Insurer is
________________________________________.
The Certificate Insurer does not accept any responsibility for the
accuracy or completeness of this Prospectus Supplement or any information or
disclosure contained herein, or omitted herefrom, other than with respect to
the accuracy of the information regarding the 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
"___".
Standard & Poor's rates the claims paying ability of the Certificate
Insurer "___".
Fitch Investors Service, L.P. rates the claims paying ability of the
Certificate Insurer "___".
Each 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.
FHA INSURANCE FOR TITLE I MORTGAGE LOANS
GENERAL
Under the Title I coinsurance program (the "Title I Program") and
subject to the regulations, rules and procedures promulgated by the FHA (the
"FHA Regulations"), approved lenders ("Title I Lenders") may obtain insurance
payments against approximately 90% of certain losses incurred with respect to
eligible Title I loans up to the amount of insurance in such Title I Lender's
FHA insurance coverage reserve account (such account, an "FHA Reserve"). Under
the Title I Program, the FHA maintains an FHA Reserve for each Title I Lender
and the amount of insurance therein is limited to a maximum of 10% of the
amount disbursed, advanced or expended by the Title I Lender in originating or
purchasing each eligible loan registered with the FHA for Title I insurance,
with certain adjustments permitted or required by the FHA Regulations. The FHA
will recognize the Depositor as the owner of the Title I Mortgage Loans for
purposes of the related FHA insurance coverage. The FHA will not recognize the
Trust Fund or the Certificateholders as the owners of the Title I Mortgage
Loans, or any portion thereof, and the Certificateholders will not be entitled
to submit FHA Claims to the FHA, but will be dependent upon the Depositor and
any FHA Claims Administrator to submit, process and administer FHA Claims with
respect to the Title I Mortgage Loans. 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.
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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. The Depositor will transfer its beneficial ownership interest
in such FHA insurance coverage for the Title I Mortgage Loans to the Trust
Fund, however, for purposes of the records of the FHA, such FHA insurance
coverage will be recorded in the FHA Reserve for the Depositor. See "Summary of
Prospectus Supplement -- FHA Claims Administrator" herein. 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
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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 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
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<PAGE> 239
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.
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 approximately 30 experienced collectors
responsible for delinquent and defaulted loans. As of __________, 199_, FFI
administered and serviced approximately __________ loans representing
approximately $__________ 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
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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 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
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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 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 ____%, without Certificate Insurer approval, and ____%, with
Certificate Insurer approval, of the aggregate Cut-Off Date Principal Balances
of the Mortgage Loans,
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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 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 __________, 199_.
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 __________,
199_, 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
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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. Furthermore, to the extent so provided in the
Pooling and Servicing Agreement, the Certificate Insurer may be entitled to
exercise a similar right to effect an optional termination of the Certificates.
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 __________, 199_ 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 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
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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 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,
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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 in reduction of the Class
Principal Balances of the Offered Certificates, sequentially in order of their
respective numerical Class designations. 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 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
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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.
SCHEDULED FINAL DISTRIBUTION DATES
The "Scheduled Final Distribution Dates" for each Class of Offered
Certificates set forth in the "Summary of Prospectus Supplement -- Offered
Certificates" herein have been calculated generally in accordance with the
Modeling Assumptions below and the additional assumption that no prepayments,
delinquencies, liquidations, substitutions or repurchases are experienced on
the Mortgage Loans. 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 herein.
WEIGHTED AVERAGE LIFE OF THE OFFERED CERTIFICATES
The following information is given solely to illustrate the effect of
prepayments of the Mortgage Loans on the estimated weighted average lives of
the Offered Certificates under certain stated assumptions and is not a
prediction of the prepayment rate that might actually be experienced by the
Mortgage Loans. Weighted average life refers to the average amount of time that
will elapse from the date of delivery of a security until each dollar of
principal of such security will be repaid to the investor. The weighted average
life of the Offered Certificates will be influenced by the rate at which
principal of the Mortgage Loans is paid, which may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
reductions of principal resulting from unscheduled full or partial prepayments,
refinancings, liquidations and write-offs due to defaults, casualties or other
dispositions and repurchases by or on behalf of the Transferor or the
Depositor), 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 following tables, 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 below, 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 __________, 199_, 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
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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 __________, 199_ and
each year will consist of 360 days;
(vii) cash distributions are received by the Certificateholders on
the 20th day of each month, commencing in __________, 199_;
(viii) the Required Class A Overcollateralization Level will equal $
__________ and will be reduced in accordance with the Pooling and Servicing
Agreement;
(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;
(xi) all of the Pre-Funding Account Deposit is used to acquire
Subsequent Mortgage Loans in accordance with the schedule set forth below, and
prior to that date, the Pre-Funding Account Deposit accrues interest at
approximately _____% 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 nine Mortgage Loans having
the following characteristics:
<TABLE>
<CAPTION>
MORTGAGE INITIAL REMAINING TERM TO ORIGINAL TERM OF
LOAN MORTGAGE NET MORTGAGE MATURITY AMORTIZATION (IN ASSUMED DELIVERY OF
NUMBER PRINCIPAL BALANCE INTEREST RATE INTEREST RATE (IN MONTHS) MONTHS) MORTGAGE LOANS
------ ----------------- ------------- ------------- ----------------- ---------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
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-59
<PAGE> 248
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF CPR (1)
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% 5% 10% 14% 20% 25% 30% 0% 5% 10% 14% 20% 25% 30%
----------------- -- -- --- --- --- --- --- -- -- --- --- --- --- ---
CLASS A-1 CLASS A-2
--------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Balance . .
__________ 1997 . .
__________ 1998 . .
__________ 1999 . .
__________ 2000 . .
__________ 2001 . .
__________ 2002 . .
__________ 2003 . .
__________ 2004 . .
__________ 2005 . .
__________ 2006 . .
__________ 2007 . .
__________ 2008 . .
__________ 2009 . .
__________ 2010 . .
__________ 2011 . .
__________ 2012 . .
__________ 2013 . .
__________ 2014 . .
__________ 2015 . .
__________ 2016 . .
__________ 2017 . .
__________ 2018 . .
Weighted Average
Life (2) with
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 one decimal place.
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> 249
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF CPR (1)
<TABLE>
<CAPTION>
DISTRIBUTION DATE 0% 5% 10% 14% 20% 25% 30% 0% 5% 10% 14% 20% 25% 30%
----------------- -- -- --- --- --- --- --- -- -- --- --- --- --- ---
CLASS A-3 CLASS A-4
--------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Balance . .
__________ 1997 . .
__________ 1998 . .
__________ 1999 . .
__________ 2000 . .
__________ 2001 . .
__________ 2002 . .
__________ 2003 . .
__________ 2004 . .
__________ 2005 . .
__________ 2006 . .
__________ 2007 . .
__________ 2008 . .
__________ 2009 . .
__________ 2010 . .
__________ 2011 . .
__________ 2012 . .
__________ 2013 . .
__________ 2014 . .
__________ 2015 . .
__________ 2016 . .
__________ 2017 . .
__________ 2018 . .
Weighted Average
Life (2) with
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 one decimal place.
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> 250
It is unlikely that the Mortgage Loans will prepay at a constant rate
or that all of the Mortgage Loans will prepay at the same rate. Moreover, the
Mortgage Loans actually included in the Mortgage Loan Pool will not conform to
the assumptions made as to the characteristics of such Mortgage Loans in
preparing the above tables. In fact, the characteristics of the Mortgage Loans
will differ in many respects from such assumed characteristics. See "The
Mortgage Loan Pool" herein. To the extent that the Mortgage Loans actually
included in the Mortgage Loan Pool have characteristics that differ from those
assumed in preparing the foregoing tables, the Offered Certificates are likely
to have weighted average lives that are shorter or longer than those indicated.
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.
S-62
<PAGE> 251
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.
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;
S-63
<PAGE> 252
(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.
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
S-64
<PAGE> 253
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 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, provided the Subsequent Mortgage Loans are identified as of the Closing
Date.
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.
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 "___"
by Standard & Poor's and "___" by Moody's. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision
or withdrawal at any time. The ratings assigned to the Class A Certificates
will be based primarily on the claims-paying ability of the Certificate
Insurer.
S-65
<PAGE> 254
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.
EXPERTS
The Annual Report on Form 10-K of __________________________for the
year ended December 31, 199_ incorporated by reference into this Prospectus
Supplement has been audited by __________ __________, 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
__________________________. In addition, Andrews & Kurth L.L.P. will pass on
certain other legal matters for the Depositor. Certain legal matters will be
passed upon for the Certificate Insurer by __________________________.
UNDERWRITING
The Depositor and its parent have entered into an Underwriting
Agreement with __________________________ and __________________________ (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
UNDERWRITER A-1 A-2 A-3 A-4
- ----------- --- --- --- ---
<S> <C> <C> <C> <C>
__________________ . .
__________________ . .
------------------ ------------------ ------------------ ------------------
Total
================== ================== ================== ==================
</TABLE>
S-66
<PAGE> 255
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>
</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.
[In addition to the purchase of the Class A Certificates pursuant to
the Underwriting Agreement, the Underwriters and their affiliates have several
business relationships with the Transferor and Servicer and its affiliates,
including its parent RAC. Affiliates of the Underwriters provide warehouse
financing to the Transferor for its property improvement and/or debt
consolidation mortgage loans. See "Use of Proceeds" herein.
__________________________ also 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
__________________________ have provided certain debt and equity financing to
RAC and its subsidiaries, and these affiliates hold a majority of RAC's
outstanding shares of non-voting common stock and a significant portion 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 in
February, 1996. __________________________ , a ____________ of
__________________________, and __________________________ , a ________________
of __________________________ , are each a director of RAC.]
S-67
<PAGE> 256
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL TERMS
<TABLE>
<S> <C>
"Additional Series" . . . . . . . . . . . . . . . . . . . . . . . . . . . S-13
"Amount Available" . . . . . . . . . . . . . . . . . . . . . . . . . . . S-32
"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 Deposit" . . . . . . . . . . . . . . S-9, S-42
"Capitalized Interest Account" . . . . . . . . . . . . . . . . . . S-9, S-42
"Certificate Account" . . . . . . . . . . . . . . . . . . . . . . . . . . S-31
"Certificate Guaranty Insurance Premium" . . . . . . . . . . . . . . . . S-14
"Certificate Insurer Default" . . . . . . . . . . . . . . . . . . . . . . S-44
"Certificate Insurer Reimbursement Amount" . . . . . . . . . . . . S-33, S-36
"Certificate Insurer" . . . . . . . . . . . . . . . . . . . . . ii, S-9, S-45
"Certificateholder Rights" . . . . . . . . . . . . . . . . . . . . S-19, S-44
"Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . i, S-1, S-30
"Class A Certificates" . . . . . . . . . . . . . . . . . . . . . i, S-1, S-30
"Class A Overcollateralization Level" . . . . . . . . . . . . . . . S-10, S-37
"Class B Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . i
"Class B Loss Reimbursement Amount" . . . . . . . . . . . . . . . . . . . S-39
"Class Principal Balance" . . . . . . . . . . . . . . . . . . . . . . . . S-36
"Class R Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . i
"Class" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-30
"Closing Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4
"Collection Account" . . . . . . . . . . . . . . . . . . . . . . . . . . S-31
"Conventional Combination Loans" . . . . . . . . . . . . . . . . . S-6, S-25
"Conventional Debt Consolidation Loans" . . . . . . . . . . . . . . S-6, S-24
"Conventional Home Improvement Loans" . . . . . . . . . . . . . . . S-6, S-24
"Conventional Mortgage Loans" . . . . . . . . . . . . . . . . . ii, S-6, S-24
"Credit Support Reduction Date" . . . . . . . . . . . . . . . . . . . . . S-38
"Custodian Fee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-14
"Custodian" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
"Cut-Off Date Principal Balance" . . . . . . . . . . . . . . . . . . . . S-3
"Cut-Off Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2, S-4
"Deficiency Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . S-46
"Definitive Certificates" . . . . . . . . . . . . . . . . . . . . . . . . S-62
"Deleted Mortgage Loan" . . . . . . . . . . . . . . . . . . . . . . . . . S-53
"Depositor" . . . . . . . . . . . . . . . . . . . . . . . . . . ii, S-2, S-50
"Determination Date" . . . . . . . . . . . . . . . . . . . . . . . S-4, S-32
"Distribution Date" . . . . . . . . . . . . . . . . . . . . . . ii, S-4, S-30
"DTC Participants" . . . . . . . . . . . . . . . . . . . . . . . . . . . S-62
"DTC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3, S-62
"Due Period" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4
"ERISA Plan" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-63
"ERISA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-63
"Excess Overcollateralization Amount" . . . . . . . . . . . . . . . S-11, S-38
"Excess Spread" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-34
"FFI" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2, S-51
"FHA Claims Administrator" . . . . . . . . . . . . . . . . . . . . . . . S-14
</TABLE>
S-68
<PAGE> 257
<TABLE>
<S> <C>
"FHA Insurance Amount" . . . . . . . . . . . . . . . . . . . . . . . . . S-12
"FHA Insurance Premium Account" . . . . . . . . . . . . . . . . . . . . . S-31
"FHA Insurance Premium Deposit Amount" . . . . . . . . . . . . . . S-14, S-31
"FHA Insurance Proceeds" . . . . . . . . . . . . . . . . . . . . . . . . S-35
"FHA Regulations" . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-48
"FHA Reserve" . . . . . . . . . . . . . . . . . . . . . . . . . . . S-12, S-48
"FHA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii
"Fiscal Agent" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-45
"Funding Period" . . . . . . . . . . . . . . . . . . . . . . . . . S-7, S-41
"Guaranty Policy" . . . . . . . . . . . . . . . . . . . . . . . . . S-9, S-45
"HUD" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii, S-18
"Initial Class A Overcollateralization Level" . . . . . . . . . . . S-10, S-37
"Initial Mortgage Loans" . . . . . . . . . . . . . . . . . . . . . . ii, S-2
"Initial Pool Principal Balance" . . . . . . . . . . . . . . . . . . . . S-3
"Insurance Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . S-36
"Insurance Proceeds" . . . . . . . . . . . . . . . . . . . . . . . . . . S-35
"Interest Carry-Forward Amount" . . . . . . . . . . . . . . . . . . . . . S-36
"Interest Remittance Amount" . . . . . . . . . . . . . . . . . . . . . . S-34
"Interest Shortfall" . . . . . . . . . . . . . . . . . . . . . . . . . . S-42
"Liquidated Mortgage Loan" . . . . . . . . . . . . . . . . . . . . . . . S-35
"Modeling Assumptions" . . . . . . . . . . . . . . . . . . . . . . . . . S-58
"Moody's" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
"Mortgage Loan Pool" . . . . . . . . . . . . . . . . . . . . . . . S-5, S-24
"Mortgage Loan Rate" . . . . . . . . . . . . . . . . . . . . . . . S-24, S-54
"Mortgage Loan Schedule" . . . . . . . . . . . . . . . . . . . . . . . . S-40
"Mortgage Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . ii, S-2
"Mortgaged Properties" . . . . . . . . . . . . . . . . . . . . . . . . . S-24
"Mortgage" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-22
"Net Liquidation Proceeds" . . . . . . . . . . . . . . . . . . . . . . . S-36
"Net Loan Losses" . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-39
"Notes" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5, S-24
"Notice" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-46
"Offered Certificates" . . . . . . . . . . . . . . . . . . . . . i, S-1, S-30
"Original Class Principal Balances" . . . . . . . . . . . . . . . . . . . . ii
"Overcollateralization Reduction Amount" . . . . . . . . . . . . . S-11, S-37
"Overcollateralization Stepdown Date" . . . . . . . . . . . . . . . S-10, S-37
"Pool Principal Balance" . . . . . . . . . . . . . . . . . . . . . . . . S-3
"Pooling and Servicing Agreement" . . . . . . . . . . . . . . . ii, S-2, S-46
"Pre-Funding Account Deposit" . . . . . . . . . . . . . . . . . . . S-7, S-41
"Pre-Funding Account" . . . . . . . . . . . . . . . . . . . . . . . S-7, S-41
"Preference Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . S-46
"Principal Balance" . . . . . . . . . . . . . . . . . . . . . . . . . . . S-3
"Principal Carry-Forward Amount" . . . . . . . . . . . . . . . . . . . . S-36
"Principal Remittance Amount" . . . . . . . . . . . . . . . . . . . . . . S-35
"Purchase Price" . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-53
"Qualified Substitute Mortgage Loan" . . . . . . . . . . . . . . . S-7, S-53
"RAC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
"Rating Agencies" . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-15
"Record Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4, S-30
"Released Mortgaged Property Proceeds" . . . . . . . . . . . . . . . . . S-36
"REMIC Administrator" . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
"REMIC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii
"Remittance Amount" . . . . . . . . . . . . . . . . . . . . . . . . . . . S-37
</TABLE>
S-69
<PAGE> 258
<TABLE>
<S> <C>
"Required Class A Overcollateralization Level" . . . . . . . . . . . . . S-38
"Scheduled Final Distribution Dates" . . . . . . . . . . . . . . . S-1, S-58
"Senior Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . i, S-1
"Servicer" . . . . . . . . . . . . . . . . . . . . . . . . . . ii, S-2, S-51
"Servicing Fee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-13
"SMMEA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-65
"Standard & Poor's" . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
"Subordinated Certificates" . . . . . . . . . . . . . . . . . . . . . . i, S-2
"Subsequent Mortgage Loans" . . . . . . . . . . . . . . . . . . . . . ii, S-2
"Subsequent Transfer Date" . . . . . . . . . . . . . . . . . . . . . . . S-8
"Subservicer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-13
"Termination Price" . . . . . . . . . . . . . . . . . . . . . . . . . . . S-14
"Title I Lenders" . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-48
"Title I Mortgage Loans" . . . . . . . . . . . . . . . . . . . ii, S-6, S-24
"Title I Program" . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-48
"Transfer Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-12
"Transferor" . . . . . . . . . . . . . . . . . . . . . . . . . ii, S-2, S-51
"Trust Fund" . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii, S-1
"Trustee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii, S-2
"Trustee's Mortgage Loan File" . . . . . . . . . . . . . . . . . . . . . S-41
"Underwriters" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-66
</TABLE>
S-70
<PAGE> 259
***************************************************************************
* *
* Information contained herein is subject to completion or amendment. *
* A registration statement relating to these securities has been filed *
* with the Securities and Exchange Commission. These securities may *
* not be sold nor may offers to buy be accepted prior to the time the *
* registration statement becomes effective. This Prospectus Supplement *
* and the accompanying 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 jurisdiction in which such offer, *
* solicitation or sale would be unlawful prior to the registration or *
* qualification under the securities laws of any such jurisdiction. *
* *
***************************************************************************
PROSPECTUS SUBJECT TO COMPLETION; DATED AUGUST 19, 1996
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.
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 __________, 199_.
<PAGE> 260
(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.
See "ERISA Considerations" herein and in the related Prospectus
Supplement for a discussion of restrictions on the acquisition of Certificates
by "plan fiduciaries."
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
ii
<PAGE> 261
Mortgage Loans or Contracts; (xi) information as to the nature and extent of
subordination of any Class of Certificates of such Series, including a Class of
Offered Certificates; and (xii) whether such Offered Certificates will be
initially issued in definitive or book-entry form.
The actual characteristics of the Mortgage Assets relating to a Series
will not deviate in any material respect from the parameters specified in the
related Prospectus Supplement; provided, however, that if the characteristics
described therein materially differ from the actual characteristics, a
supplement to such Prospectus Supplement will be distributed.
AVAILABLE INFORMATION
The Depositor is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith is required to file reports and other information (the
"Reports") with the Securities and Exchange Commission (the "Commission"). The
Depositor has filed with the Commission a Registration Statement under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Certificates. This Prospectus, which forms a part of the Registration
Statement, and the Prospectus Supplement relating to each Series of
Certificates contain summaries of the material documents referred to herein and
therein, but do not contain all of the information contained in such
Registration Statement pursuant to the rules and regulations of the Commission.
For further information, reference is made to such Registration Statement and
the exhibits thereto. The Registration Statement can be inspected and copied at
prescribed rates at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street N.W., 1st Floor,
Room 1024, Washington, D.C. 20549, and at the following regional offices of the
Commission: Chicago Regional Office, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511 and New York Regional Office, 7 World
Trade Center, 13th Floor, New York, New York 10048.
The Depositor does not plan to send any financial information to
Certificateholders. The Trustee will include with each distribution to
Certificateholders a statement containing certain payment information with
respect to such Certificates.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Depositor pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the Certificates
shall be deemed to be incorporated by reference in this Prospectus and to be a
part hereof from the date of filing of such documents. Any statement contained
in a document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that a statement contained herein or in another subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Depositor will provide without charge to each person to whom a
copy of this Prospectus has been delivered, upon the request of such person, a
copy of any or all of the documents referred to above which have been or may be
incorporated in this Prospectus by reference (other than exhibits to such
documents, unless such exhibits are specifically incorporated by 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> 262
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUPPLEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . ii
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . iii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE . . . . . . . . . . . . . iii
SUMMARY OF PROSPECTUS . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Limited Liquidity and Fluctuation in Value from Market Conditions . . 12
Limited Assets of Trust Fund . . . . . . . . . . . . . . . . . . . . 13
Effect of Prepayments on Average Life . . . . . . . . . . . . . . . . 13
Effect of Prepayments on Yield . . . . . . . . . . . . . . . . . . . 15
Limitations of Credit Enhancement . . . . . . . . . . . . . . . . . . 15
Limited Nature of Ratings . . . . . . . . . . . . . . . . . . . . . . 17
Adverse Tax Consequences . . . . . . . . . . . . . . . . . . . . . . 17
Certain Factors Affecting Delinquencies, Foreclosures and Losses on
Underlying Loans . . . . . . . . . . . . . . . . . . . . . . . . . 18
Risks Associated with Certain Mortgage Assets . . . . . . . . . . . . 20
Recharacterization of Sale of Mortgage Assets as Borrowing . . . . . 21
DESCRIPTION OF THE CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . 21
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
The Certificates -- General . . . . . . . . . . . . . . . . . . . . . 22
Form of Certificates; Transfer and Exchange . . . . . . . . . . . . . 22
REMIC Election . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Classes of Certificates . . . . . . . . . . . . . . . . . . . . . . . 23
Distributions of Principal and Interest . . . . . . . . . . . . . . . 25
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Book Entry Registration . . . . . . . . . . . . . . . . . . . . . . . 27
Mutilated, Destroyed, Lost or Stolen Certificates . . . . . . . . . . 28
ASSETS SECURING OR UNDERLYING THE CERTIFICATES . . . . . . . . . . . . . . 28
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Agency Securities . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Additions, Substitution and Withdrawal of Assets . . . . . . . . . . 37
Pre-Funding Arrangements . . . . . . . . . . . . . . . . . . . . . . 37
CREDIT ENHANCEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Subordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Overcollateralization . . . . . . . . . . . . . . . . . . . . . . . . 39
Cross-Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Certificate Insurance . . . . . . . . . . . . . . . . . . . . . . . . 40
Pool Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Special Hazard Insurance . . . . . . . . . . . . . . . . . . . . . . 40
Reserve Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
</TABLE>
iv
<PAGE> 263
<TABLE>
<S> <C>
Other Insurance, Guarantees and Similar Instruments or Agreements . . 41
SERVICING OF THE MORTGAGE LOANS AND CONTRACTS . . . . . . . . . . . . . . . 41
Enforcement of Due-on-Sale Clauses . . . . . . . . . . . . . . . . . 42
Realization Upon Defaulted Mortgage Loans . . . . . . . . . . . . . . 42
Waivers and Deferments of Certain Payments . . . . . . . . . . . . . 43
Subservicers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Removal and Resignation of Servicer . . . . . . . . . . . . . . . . . 43
Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Servicing Procedures . . . . . . . . . . . . . . . . . . . . . . . . 43
Administration and Servicing Compensation and Payment of Expenses . . 45
THE POOLING AND SERVICING AGREEMENT . . . . . . . . . . . . . . . . . . . . 45
Assignment of Mortgage Assets . . . . . . . . . . . . . . . . . . . . 45
Conveyance of Subsequent Mortgage Assets . . . . . . . . . . . . . . 47
Repurchase or Substitution of Mortgage Loans and Contracts . . . . . 47
Evidence as to Compliance . . . . . . . . . . . . . . . . . . . . . . 48
List of Certificateholders . . . . . . . . . . . . . . . . . . . . . 48
Administration of the Certificate Account . . . . . . . . . . . . . . 48
Reports to Certificateholders . . . . . . . . . . . . . . . . . . . . 49
Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Rights Upon Event of Default . . . . . . . . . . . . . . . . . . . . 50
Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
THE SERVICER AND THE TRANSFEROR . . . . . . . . . . . . . . . . . . . . . . 52
THE TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS . . . . . . . . . . . . . . . 54
General Legal Considerations . . . . . . . . . . . . . . . . . . . . 54
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 . . . . . . . . . . . . . . . . . . . . . . . . . 72
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
CERTAIN FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . 74
Federal Income Tax Consequences for REMIC Certificates . . . . . . . . . . 75
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Status of REMIC Certificates . . . . . . . . . . . . . . . . . . . . 75
Taxation of Regular Certificates . . . . . . . . . . . . . . . . . . 76
Taxation of Residual Certificates . . . . . . . . . . . . . . . . . . 84
Treatment of Certain Items of REMIC Income and Expense . . . . . . . 85
Tax-Related Restrictions on Transfer of Residual Certificates . . . . 87
Taxes That May Be Imposed on the REMIC Pool . . . . . . . . . . . . . 90
Limitations on Deduction of Certain Expenses . . . . . . . . . . . . 91
</TABLE>
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<PAGE> 264
<TABLE>
<S> <C>
Taxation of Certain Foreign Investors . . . . . . . . . . . . . . . . 92
Backup Withholding . . . . . . . . . . . . . . . . . . . . . . . . . 93
Reporting Requirements . . . . . . . . . . . . . . . . . . . . . . . 93
Federal Income Tax Consequences for Certificates as to
Which No REMIC Election Is Made . . . . . . . . . . . . . . . . . . . 94
Standard Certificates . . . . . . . . . . . . . . . . . . . . . . . . 94
Premium and Discount . . . . . . . . . . . . . . . . . . . . . . . . 95
Sale or Exchange of Certificates . . . . . . . . . . . . . . . . . . 97
Stripped Certificates . . . . . . . . . . . . . . . . . . . . . . . . 97
Taxation of Stripped Certificates . . . . . . . . . . . . . . . . . . 99
Reporting Requirements and Backup Withholding . . . . . . . . . . . 100
Taxation of Certain Foreign Investors . . . . . . . . . . . . . . . 100
STATE TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . . . . . . . 100
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . 101
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
FINANCIAL INFORMATION AND ADDITIONAL INFORMATION . . . . . . . . . . . . 101
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL TERMS . . . . . . . . . . . . . . . 103
</TABLE>
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<PAGE> 265
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and in the
Prospectus Supplement with respect to the Series offered thereby and to the
related Pooling and Servicing Agreement. Unless otherwise specified, initially
capitalized terms used and not defined in this Summary of Prospectus have the
meanings given to them in this Prospectus and in the related Prospectus
Supplement. Reference is made to the " Index to Location of Principal Terms"
set forth in Appendix A for the location of certain capitalized terms.
Securities Offered . . . . . Asset Backed Certificates issuable in Series
as described in the Prospectus Supplement.
Certificates of a Series will be issued
pursuant to a pooling and servicing agreement
(each, a "Pooling and Servicing Agreement")
between the Depositor, as depositor, the
Servicer, any Administrators, the Master
Servicer, if any, and the Trustee for such
Series and will evidence beneficial interests
in the assets included in a trust fund (the
"Trust Fund") and assigned to the Trustee for
the applicable Series. Holders of Certificates
are referred to herein as "Holders" or
"Certificateholders."
The Certificates of any Series may be issued
in one or more classes (each a "Class"), as
specified in the related Prospectus
Supplement. One or more Classes of
Certificates of each Series:
(i) may be entitled to receive distributions
allocable only to principal ("Principal Only
Certificates"), only to interest ("Interest
Only Certificates") or to any combination
thereof;
(ii) may be entitled to receive distributions
only of prepayments of principal throughout
the lives of the Certificates of such Series
or during specified periods;
(iii) may be subordinated in the right to
receive distributions of scheduled payments of
principal, prepayments of principal, interest
or any combination thereof to one or more
other Classes of such Series throughout the
lives of the Certificates of such Series or
during specified periods;
(iv) may be entitled to receive such
distributions only after the occurrence of
events specified in the Prospectus Supplement;
(v) may be entitled to receive distributions
in accordance with a schedule or formula or on
the basis of collections from designated
portions of the Assets securing such Series or
in the related Trust Fund;
(vi) may be entitled to receive interest at a
rate that is subject to change from time to
time ("Variable Interest Rate Certificates")
or at a fixed rate;
(vii) may accrue interest, with such accrued
interest added to the principal amount of the
Certificates of such Class and no
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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 (the "Master
Servicer"), that will act as master servicer
with respect to such
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<PAGE> 267
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 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
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<PAGE> 268
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 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
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<PAGE> 269
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 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.
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<PAGE> 270
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 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.
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<PAGE> 271
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 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
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<PAGE> 272
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
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
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<PAGE> 273
or more types of credit enhancement ("Credit
Enhancement") including but not limited to
overcollateralization, subordination, cross
support, mortgage pool insurance, certificate
insurance, special hazard insurance, a
bankruptcy bond, reserve funds, cash accounts,
other insurance, guarantees, letters of credit
and similar instruments and arrangements. The
protection against losses afforded by any such
Credit Enhancement will be limited. See "Risk
Factors -- Limitations of Credit Enhancement"
and "Credit Enhancement" herein.
Book Entry Registration . . . If the Prospectus Supplement for a Series so
provides, Certificates of one or more Classes
of such Series may be issued in book entry
form ("Book Entry Certificates") in which case
a single Certificate will be issued in the
name of a clearing agency (a "Clearing
Agency") registered with the Securities and
Exchange Commission, or its nominee. Transfers
and pledges of Book Entry Certificates may be
made only through entries on the books of the
Clearing Agency in the name of brokers,
dealers, banks and other organizations
eligible to maintain accounts with the
Clearing Agency ("Clearing Agency
Participants") or their nominees. Transfers
and pledges by purchasers 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").
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If the applicable Prospectus Supplement so
specifies with respect to a Series of
Certificates, the Certificates of such Series
will not be treated as regular or residual
interests in a REMIC for federal income tax
purposes but instead will be treated as (i)
indebtedness of the Issuer, (ii) an undivided
beneficial ownership interest in the Mortgage
Assets (and the arrangement pursuant to which
the Mortgage Assets will be held and the
Certificates will be issued will be treated as
a grantor trust under Subpart E, part I of
subchapter J of Chapter 1 of Subtitle A of the
Code and not as an association taxable as a
corporation for federal income tax purposes);
(iii) equity interests in an association that
will satisfy the requirements for
qualification as a real estate investment
trust; or (iv) interests in an entity that
will satisfy the requirements for
qualification as a partnership for federal
income tax purposes. The federal income tax
consequences to Holders of any such Series
will be described in the related Prospectus
Supplement to the extent not described herein.
Compound Interest Certificates and Principal
Only Certificates will, and certain other
Classes of Certificates may, be issued with
original issue discount that is not de
minimis. In such cases, the Holder will be
required to include the original issue
discount in gross income as it accrues, which
may be prior to the receipt of cash, or a
portion of the cash, attributable to such
income. If a Certificate is issued at a
premium, the Holder will be entitled to make
an election to amortize such premium on a
constant yield method. Certificates
constituting regular or residual interests in
a REMIC will generally represent "qualifying
real property loans" for mutual savings banks
and domestic building and loan associations,
"loans secured by an interest in real
property" for domestic building and loan
associations and "real estate assets" for real
estate investment trusts to the extent that
the underlying mortgage loans and interest
thereon qualify for such treatment. Non-REMIC
Certificates will not qualify for such
treatment.
A Holder of a Residual Certificate will be
required to include in its income its pro rata
share of the taxable income of the REMIC. In
certain circumstances, the Holder of a
Residual Certificate may have REMIC taxable
income or tax liability attributable to REMIC
taxable income for a particular period in
excess of cash distributions for such period
or have an after-tax return that is less than
the after-tax return on comparable debt
instruments. In addition, a portion (or, in
some cases, all) of the income from a Residual
Certificate (i) except in certain
circumstances with respect to a Holder
classified as a thrift institution under the
Code, may not be subject to offset by losses
from other activities, (ii) for a Holder that
is subject to tax under the Code on unrelated
business taxable income, may be treated as
unrelated business taxable income and (iii)
for a foreign Holder, may not qualify for
exemption from or reduction of withholding.
Further,
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individual Holders are subject to limitations
on the deductibility of expenses of the REMIC.
See "Certain Federal Income Tax Consequences."
ERISA Considerations . . . . A fiduciary of any employee benefit plan
subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or
the Code should carefully review with its own
legal advisors whether the purchase or holding
of Certificates could give rise to a
transaction prohibited or otherwise
impermissible under ERISA or the Code. See
"ERISA Considerations." To the extent
described in the Prospectus Supplement for a
Series, certain Classes of Certificates of
such Series may not be transferred unless the
Trustee and the Depositor are furnished with a
letter of representation or an opinion of
counsel to the effect that such transfer will
not result in a violation of the prohibited
transaction provisions of ERISA and the Code
and will not subject the Trustee, the
Depositor or the Servicer, the Master
Servicer, if any, or the Administrator, if
any, to additional obligations. If specified
in the related Prospectus Supplement, the
United States Department of Labor may have
issued to the Underwriter an administrative
exemption for certain classes of securities.
See "Description of the Certificates --
General" and "ERISA Considerations."
Legal Investment Matters . . Certificates of each Series will not
constitute "mortgage related securities" under
the Secondary Mortgage Market Enhancement Act
of 1984 ("SMMEA") because, to the extent
specified in the related Prospectus
Supplement, a substantial number of the
Mortgage Loans will be secured by liens on
real estate that are not first liens.
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").
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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
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affected by several factors, including the perceived liquidity thereof, the
anticipated cash flow thereon (which may vary widely depending upon the
prepayment and default assumptions applied in respect of the underlying
Mortgage Loans) and prevailing interest rates. The price payable at any given
time in respect of certain Classes of Offered Certificates (in particular, a
Class with a relatively long average life, or a Class of Companion
Certificates, Interest Only Certificates or Principal Only Certificates) may be
extremely sensitive to small fluctuations in prevailing interest rates; and the
relative change in price for an Offered Certificate in response to an upward or
downward movement in prevailing interest rates may not necessarily equal the
relative change in price for such Offered Certificate in response to an equal
but opposite movement in such rates. Accordingly, the sale of Offered
Certificates by a holder in any secondary market that may develop may be at a
discount from the price paid 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
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any Trust Fund (in either case, the "Underlying Loans"), the amount and timing
of distributions of principal and/or interest on the Offered Certificates of
the related Series may be highly unpredictable. Prepayments on the Underlying
Loans in any Trust Fund will result in a faster rate of principal payments on
one or more Classes of the related Series of Certificates than if payments on
such Underlying Loans were made as scheduled. Thus, the prepayment experience
on the Underlying Loans in a Trust Fund may affect the average life of one or
more Classes of Certificates of the related Series, including a Class of
Offered Certificates. The rate of principal payments on pools of mortgage loans
and installment loan contracts varies among pools and from time to time is
influenced by a variety of economic, demographic, geographic, social, tax and
legal factors. For example, if prevailing interest rates fall significantly
below the interest rates borne by the Underlying Loans included in a Trust
Fund, then, subject to the particular terms of the Underlying Loans (e.g.,
provisions that prohibit voluntary prepayments during specified periods or
impose penalties in connection therewith) and the ability of borrowers to
obtain new financing, principal prepayments on such Underlying Loans are likely
to be higher than if prevailing interest rates remain at or above the rates
borne by those Underlying Loans. Conversely, if prevailing interest rates rise
significantly above the interest rates borne by the Underlying Loans included
in a Trust Fund, then principal prepayments on such Underlying Loans are likely
to be lower than if prevailing interest rates remain at or below the interest
rates borne by those Underlying Loans. In addition to fluctuations in
prevailing interest rates, the rate of prepayments on the Underlying Loans may
be influenced by changes and developments 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
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Class ("Extension Risk") if the rate of prepayment is relatively slow. To the
extent described in the related Prospectus Supplement, the respective
entitlement of the various Classes of Certificateholders of such Series to
receive payments (and, in particular, prepayments) of principal of the
Underlying Loans in the related Trust Fund may vary based on the occurrence of
certain events (e.g., the retirement of one or more Classes of Certificates of
such Series) or whether certain contingencies do or do not occur (e.g.,
prepayment and default rates with respect to such Underlying Loans).
A Series of Certificates may include one or more Classes of Scheduled
Amortization Certificates, which will entitle the holders thereof to receive
principal distributions according to a specified principal payment schedule.
Although prepayment risk cannot be eliminated entirely from any Class of
Certificates, a Classes of Scheduled Amortization Certificates will generally
provide a relatively stable cash flow so long as the actual rate of prepayment
on the Underlying Loans included in the related Trust Fund remains relatively
constant at the rate, or within the range of rates, of prepayment used to
establish the specific principal payment schedule for such Certificates.
Prepayment risk with respect to a given Mortgage Asset Pool does not disappear,
however, and the stability afforded to Scheduled Amortization Certificates
comes at the expense of one or more Companion Classes of the same Series, any
of which Companion Classes may also be a Class of Offered Certificates. In
general, and as more specifically described in the related Prospectus
Supplement, a Companion Class may entitle the holders thereof to a
disproportionately large share of prepayments on the Underlying Loans in the
related Trust Fund when the rate of prepayment is relatively fast, and/or may
entitle the holders thereof to a disproportionately small share of prepayments
on the Underlying Loans in the related Trust Fund when the rate of prepayment
is relatively slow. As and to the extent described in the related Prospectus
Supplement, a Companion Class absorbs some (but not all) of the Call Risk
and/or Extension Risk that would otherwise belong to the related Scheduled
Amortization Certificates if all payments of principal of the Underlying Loans
in the related Trust Fund were allocated on a pro rata basis.
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
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of a Series are made in a specified order of priority, any related Credit
Enhancement may be exhausted before the principal of the later paid classes of
Offered Certificates of such Series has been repaid in full. As a result, the
impact of losses and shortfalls experienced with respect to the Mortgage Assets
may fall primarily upon those classes of Offered Certificates having a later
right of payments. Moreover, if a form of Credit Enhancement covers the Offered
Certificates of more than one Series and losses on the related Mortgage Assets
exceed the amount of such Credit Enhancement, it is possible that the holders
of Offered Certificates of one (or more) such Series will be disproportionately
benefited by such Credit Enhancement to the detriment of the holders of Offered
Certificates of one (or more) other such Series.
Limitations Regarding the Amount of Credit Enhancement. The amount of
any applicable Credit Enhancement supporting one or more classes of Offered
Certificates, including the subordination of one or more other Classes of
Certificates, will be determined on the basis of criteria established by each
Rating Agency rating such Classes of Certificates based on an assumed level of
defaults, delinquencies and losses on the Underlying Loans that comprise or
back the Mortgage Assets and certain other factors. There can be no assurance
that the default, delinquency and loss experience on such Underlying Loans will
not exceed such assumed levels. See "Credit Enhancement" herein. If the
defaults, delinquencies and losses on such Underlying Loans do exceed such
assumed levels, the holders of one or more Classes of Offered Certificates will
be required to bear such additional defaults, delinquencies and losses.
Regardless of the form of Credit Enhancement provided with respect to a Series,
the amount of coverage will be limited in amount and in most cases will be
subject to periodic reduction in accordance with a schedule or formula.
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.
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Because the Trust Fund is not eligible to hold an FHA contract of
insurance under the Title I Program, the FHA will not recognize the Trust Fund
or the Certificateholders as the owners of the Title I Mortgage Loans or Title
I Contracts, or any portion thereof, entitled to submit FHA Claims.
Accordingly, the Trust Fund and the Certificateholders will have no direct
right to receive insurance payments from the FHA. The Depositor will contract
with the Servicer (or another person specified in the Prospectus Supplement) to
serve as the Administrator for FHA Claims (the "FHA Claims Administrator")
pursuant to an FHA claims administration agreement (the "FHA Claims
Administration Agreement"), which will provide for the FHA Claims Administrator
to handle all aspects of administering, processing and submitting FHA Claims
with respect to the Title I Mortgage Loans or Title I Contracts, in the name
and on behalf of the Depositor. The Certificateholders will be dependent on the
FHA Claims Administrator to (i) make claims on the Title I Mortgage Loans or
Title I Contracts in accordance with FHA Regulations and (ii) remit all FHA
Insurance proceeds received from the FHA in accordance with the related Pooling
and Servicing Agreement. The Certificateholders' rights relating to the receipt
of payment from and the administration, processing and submission of FHA Claims
by the Depositor or any FHA Claims Administrator are limited and governed by
the related Pooling and Servicing Agreement and the FHA Claims Administration
Agreement and these functions are obligations of the Depositor and the FHA
Claims Administrator, not the FHA. See "Certain Legal Aspects of the Mortgage
Assets -- The Title I Program -- Claims Procedures under Title I" herein.
LIMITED NATURE OF RATINGS
Any rating assigned by a Rating Agency to a Class of Offered
Certificates will reflect only its assessment of the likelihood that holders of
such Offered Certificates will receive distributions to which such
Certificateholders are entitled under the related Pooling and Servicing
Agreement. Such rating will not constitute an assessment of the likelihood that
principal prepayments on the Underlying Loans will be made, the degree to which
the rate of such prepayments might differ from that originally anticipated or
the likelihood of early optional termination of the related Trust Fund.
Furthermore, such rating will not address the possibility that prepayment of
the Underlying Loans at a higher or lower rate than anticipated by an investor
may cause such investor to experience a lower than anticipated yield or that an
investor that purchases an Offered Certificate at a significant premium might
fail to recover its initial investment under certain prepayment scenarios.
Hence, a rating assigned by a Rating Agency does not guarantee or ensure the
realization of any anticipated yield on a Class of Offered Certificates.
The amount, type and nature of Credit Enhancement, if any, provided
with respect to a Series of Certificates will be determined on the basis of
criteria established by each Rating Agency rating a Class of Certificates of
such Series. Those criteria are sometimes based upon an actuarial analysis of
the behavior of similar types of loans in a larger group. However, there can be
no assurance that the historical data supporting any such actuarial analysis
will accurately reflect future experience, or that the data derived from a
large pool of similar types of loans will accurately predict the delinquency,
default or loss experience of any particular pool of Underlying Loans. In other
cases, such criteria may be based upon determination of the values of the
Mortgaged Properties that provide security for the Underlying Loans. However,
no assurance can be given that those values will not decline in the future. As
a result, the Credit Enhancement required in respect of the Offered
Certificates of any Series may be insufficient to fully protect the holders
thereof from losses on the related Mortgage Asset Pool. See "Credit
Enhancement" herein.
ADVERSE TAX CONSEQUENCES
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
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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
returns their pro rata share of REMIC taxable income or loss. All or a portion
of the REMIC taxable income reportable by Residual Holders may be treated as
such holders' "excess inclusion" subject to special rules for federal income
tax purposes. The REMIC taxable income, and possibly the tax liabilities of the
Residual Holders, may exceed the cash distributions on the Residual
Certificates during certain periods. Residual Holders who are individuals may
be subject to limitations on the deductibility of servicing fees on the related
Mortgage Assets and other REMIC administrative expenses. Hence, Residual
Holders may experience an after-tax return that is significantly lower than
would be anticipated based upon the stated interest rate, if any, of their
Residual Certificates. See "Certain Federal Income Tax Consequences -- Federal
Income Tax Consequences for REMIC Certificates -- Taxation of Residual
Certificates."
CERTAIN FACTORS AFFECTING DELINQUENCIES, FORECLOSURES AND LOSSES ON UNDERLYING
LOANS
General. The payment performance of the Offered Certificates of any
Series will be directly related to the payment performance of the Underlying
Loans included in the related Trust Fund. Set forth below is a discussion of
certain factors that will affect the full and timely payment of the Underlying
Loans included in any Trust Fund.
Geographic Concentration. Certain geographic regions of the United
States from time to time will experience weaker regional economic conditions
and housing markets, and, consequently, will experience higher rates of loss
and delinquency on mortgage loans generally. Any concentration of the
Underlying Loans in such a region may present risk considerations in addition
to those generally present for similar mortgage-backed or asset-backed
securities without such concentration.
Decline in Value of the Underlying Asset. An investment in
Certificates secured by or evidencing an interest in a Mortgage Pool may be
affected by, among other things, a decline in one-to-four family residential
property values. No assurance can be given that values of the Mortgaged
Properties have remained or will remain at the levels existing on the dates of
origination of the related Mortgage Loans. If the residential real estate
market should experience an overall decline in property values such that the
outstanding balances of the Mortgage Loans in a particular Mortgage Pool, and
any other financing on the Mortgaged Properties, become equal to or greater
than the value of the Mortgaged Properties, the actual rates of delinquencies,
defaults and losses could be higher than those now generally experienced with
respect to similar types of loans within the mortgage lending industry. To the
extent that such losses are not covered by applicable insurance policies, if
any, or by any Credit Enhancement as described in the related Prospectus
Supplement, Holders of Certificates secured by or evidencing interests in such
Mortgage Pool will bear all risk of loss resulting from defaults by Borrowers
and will have to look primarily to the value of the related Mortgaged
Properties for recovery of the outstanding principal and unpaid interest of the
defaulted Mortgage Loans. See "Assets Securing or Underlying the Certificates
- -- Mortgage Loans."
An investment in Certificates secured by or evidencing interests in
Contracts may be affected by, among other things, a downturn in regional or
local economic conditions. These regional or local economic conditions are
often volatile, and historically have affected the delinquency, loan loss and
repossession experience of Contracts. To the extent that losses on Contracts
are not covered by applicable insurance policies, if any, or by
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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 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
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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.
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
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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 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
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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 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
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allocable to principal, but will be used solely for convenience in expressing
the calculation of interest and for certain other purposes.
Except as described below under "Book Entry Registration" with respect
to Book Entry Certificates, the Certificates of each Series will be
transferable and exchangeable on a register to be maintained at the corporate
trust office of the related Trustee or such other office or agency maintained
for such purposes by the Trustee. To the extent specified in the Prospectus
Supplement with respect to a Series, under the related Pooling and Servicing
Agreement, the Trustee will be appointed initially as the "Registrar" for such
Series for purposes of maintaining books and records of the ownership and
transfer of the Certificates of such Series. To the extent specified in the
Prospectus Supplement with respect to a Series, no service change will be made
for any registration of transfer or exchange of Certificates of such Series,
but payment of a sum sufficient to cover any tax or other governmental charge
may be required.
Under current law the purchase and holding of a Class of Certificates
entitled only to a specified percentage of distributions of either interest or
principal or a notional amount of either interest or principal on the related
Mortgage Assets or a Class of Certificates entitled to receive distributions of
interest and principal on the Mortgage Assets only after distributions to other
Classes or after the occurrence of certain specified events by or on behalf of
any employee benefit plan or other retirement arrangement (including individual
retirement accounts and annuities, Keogh plans and collective investment funds
in which such plans, accounts or arrangements are invested) subject to
provisions of ERISA or the Code, may result in "prohibited transactions" within
the meaning of ERISA and the Code. See "ERISA Considerations." To 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
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aggregate original principal balance as specified in the related Prospectus
Supplement. The original principal balance of the Certificates of a Series and
the Certificate Interest Rate on the Classes of such Certificates will be
determined in the manner specified in the Prospectus Supplement.
Each Class of Certificates that is entitled to distributions allocable
to interest will bear interest at the applicable Certificate Interest Rate,
which may be a fixed rate (which may be zero) or, in the case of Variable
Interest Certificates, may be a rate that is subject to change from time to
time (a) in accordance with a schedule, (b) in reference to an index, or (c)
otherwise in each case as specified in the related Prospectus Supplement.
Notwithstanding the foregoing, if specified in the related Prospectus
Supplement, one or more Classes of a Series may be entitled to receive
distributions of interest only to the extent of amounts available to make such
distributions. One or more Classes of Certificates may provide for interest
that accrues, but is not currently payable ("Compound Interest Certificates").
With respect to any Class of Compound Interest Certificates, if specified in
the related Prospectus Supplement, any interest that has accrued but is not
paid on a given Distribution Date will be added to the aggregate principal
balance of such Class on that Distribution Date.
A Series may include one or more Classes entitled only to
distributions (i) allocable to interest ("Interest Only Certificates"), (ii)
allocable to principal ("Principal Only Certificates"), and allocable as
between scheduled payments of principal and Principal Prepayments, as defined
below under "Distributions of Principal and Interest" or (iii) allocable to
both principal (and allocable as between scheduled payments of principal and
Principal Prepayments) and interest. A Series may include one or more classes
as to which distributions will be allocated (i) on the basis of collections
from designated portions of the Assets included in the related Trust Fund, (ii)
in accordance with a schedule or formula, (iii) in relation to the occurrence
of events, or (iv) otherwise, in each case as specified in the related
Prospectus Supplement. The timing and amounts of such distributions may vary
among Classes, over time or otherwise, in each case as specified in the related
Prospectus Supplement.
A Series of Certificates may include one or more Classes of Scheduled
Amortization Certificates and Companion Certificates. "Scheduled Amortization
Certificates" are Certificates with respect to which distributions of principal
are to be made in specified amounts on specified Distribution Dates, to the
extent of funds available on such Distribution Date. "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
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Enhancement applicable to such Series. Priority Certificates and Non-Priority
Certificates nonetheless may be within the same rating category.
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
General. Distributions of principal and interest on the Certificates
of a Series will be made by the related Trustee, to the extent of funds
available therefor, on the related Distribution Date. Distributions will be
made to the persons in whose names the Certificates of such Series are
registered at the close of business on the dates specified in the related
Prospectus Supplement (each, a "Record Date"). With respect to Certificates
other than Book Entry Certificates, distributions will be made by check or
money order mailed to Certificateholders of such Series at their addresses
appearing in the books and records maintained by or on behalf of the Issuer of
such Series or, if specified in the related Prospectus Supplement, in the case
of Certificates that are of a certain minimum denomination as specified in the
related Prospectus Supplement, upon written request by a Holder of such Series,
by wire transfer or by such other means as are agreed upon with such
Certificateholder; provided, however, that the final distribution in retirement
of a Series (other than Book Entry Certificates) will be made only upon
presentation and surrender of such Certificates at the office or agency of the
related Trustee specified in the notice to Certificateholders of such final
distribution. With respect to Book Entry Certificates, such distributions will
be made as described below under "Book Entry Registration" and in the related
Prospectus Supplement.
To the extent specified in the related Prospectus Supplement,
distributions allocable to principal and interest on the Certificates of a
Series will be made by the related Trustee out of, and only to the extent of,
funds in a separate account established and maintained under the related
Pooling and Servicing Agreement for the benefit of Certificateholders of such
Series (the "Certificate Account"), including any funds transferred from any
related Reserve Fund or otherwise applicable accounts maintained by the
Trustee. As between Certificates of different Classes of a Series and as
between distributions of principal (and, if applicable, between distributions
of Principal Prepayments) and interest, distributions made on any Distribution
Date will be applied as specified in the related Prospectus Supplement. To the
extent specified in the related Prospectus Supplement, distributions to any
Class of Certificates will be made pro rata to all Certificateholders of that
Class. If specified in the related Prospectus Supplement, the amounts received
by the Trustee as described below under "Assets Securing or Underlying the
Certificates" will be invested in the Permitted Investments specified herein
and in the related Prospectus Supplement, and all income or other gain from
such investments will be deposited in the related Certificate Account and will
be available to make distributions on the Certificates of the applicable Series
on the next succeeding Distribution Date in the manner specified in the related
Prospectus Supplement.
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
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to principal of the Certificates), and allocations of losses on the Mortgage
Assets (if specified in the related Prospectus Supplement), are made on the
first day of the preceding Due Period and not on the Distribution Date for such
preceding Due Period when actually made or added. Such method would produce a
lower effective yield than if interest were calculated on the basis of the
actual principal amount outstanding.
A Series may include one or more Classes of Variable Interest Rate
Certificates. With respect to each Class of Variable Interest Certificates of a
Series, the related Prospectus Supplement will set forth: (i) the initial
Certificate Interest Rate (or the manner of determining the initial Certificate
Interest Rate); (ii) the formula, index or other method by which the
Certificate Interest Rate will be determined from time to time; (iii) the
periodic intervals at which such determination will be made; (iv) the Maximum
Variable Interest Rate, if any, and the Minimum Variable Interest Rate; and (v)
any other terms relevant to such Class of Certificates.
Distributions of Principal. Principal distributions on the
Certificates of a Series will be made from amounts available therefor on each
Distribution Date in an aggregate amount determined as set forth in the related
Prospectus Supplement and will be allocated among the respective Classes of a
Series of Certificates at the times, in the manner and in the priority set
forth in the related Prospectus Supplement.
Except with respect to Compound Interest Certificates and Interest
Only Certificates or similar securities, unless specified otherwise in the
related Prospectus Supplement, on each Distribution Date principal
distributions will be made on the Certificates of a Series in an aggregate
amount determined in the related Prospectus Supplement. If a Series of
Certificates has a Class of Compound Interest Certificates, additional
principal payments on the Certificates of such Series will be made on each
Distribution Date in an amount equal to the interest accrued, but not then
distributable, on such Class of Compound Interest Certificates for the related
Due Period.
If specified in the related Prospectus Supplement, on any Distribution
Date on which the principal balance of the Mortgage Assets relating to a Series
is reduced due to losses on such Mortgage Assets, (i) the amount of such losses
will be allocated first, to reduce the aggregate outstanding principal balance
of the Subordinate Certificates of such Series (or other subordination, if
any,) and, thereafter, to reduce the aggregate outstanding principal balance of
the remaining Certificates of such Series in the priority and manner specified
in such Prospectus Supplement until the aggregate outstanding principal balance
of each Class of such Certificates of such Series so specified has been reduced
to zero or paid in full, thus reducing the amount of principal distributable on
each such Class of Certificates or (ii) such losses may be allocated in any
other manner set forth in the related Prospectus Supplement. To the extent
specified in the related Prospectus Supplement, such reductions of principal of
a Class or Classes of Certificates will be allocated to the Holders of the
Certificates of such Class or Classes pro rata in the proportion which the
outstanding principal of each Certificate of such Class or Classes bears to the
aggregate outstanding principal balance of all Certificates of such Class.
If provided in the related Prospectus Supplement, one or more Classes
of Senior Certificates of a Series will be entitled to receive all or a
disproportionate percentage of the payments of principal which are received on
the related Mortgage Assets in advance of their scheduled due dates and are not
accompanied by amounts representing scheduled interest due after the month of
such payments ("Principal Prepayments") in the percentages and under the
circumstances or for the 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
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related Trustee will be required to make such unscheduled distributions on the
Certificates of a Series on the date and in the amount specified in the related
Prospectus Supplement if, due to substantial payments of principal (including
Principal Prepayments) on the related Mortgage Assets, low rates then available
for reinvestment of such payments or both, the Trustee determines, based on the
assumptions specified in the related Pooling and Servicing Agreement, that the
amount anticipated to be on deposit in the Certificate Account for such Series
on the next related Distribution Date, together with, if applicable, any
amounts available to be withdrawn from any related Reserve Fund or from any
other Credit Enhancement provided for such Series, may be insufficient to make
required distributions on the Certificates of such Series on such Distribution
Date. To the extent specified in the related Prospectus Supplement, the amount
of any such unscheduled distribution that is allocable to principal will not
exceed the amount that would otherwise have been required to be distributed as
principal on the Certificates of such Series on the next Distribution Date. To
the extent specified in the related Prospectus Supplement, all unscheduled
distributions will include interest at the applicable Certificate Interest Rate
(if any) on the amount of the unscheduled distribution allocable to principal
for the period and to the date specified in such Prospectus Supplement.
To the extent specified in the related Prospectus Supplement, all
distributions allocable to principal in any unscheduled distribution made on
the Certificates of a Series will be made in the same priority and manner as
distributions of principal on such Certificates would have been made on the
next Distribution Date, and with respect to Certificates of the same Class,
unscheduled distributions of principal will be made on a pro rata basis. Notice
of any unscheduled distribution will be given by the Trustee prior to the date
of such distribution.
TERMINATION
The obligations created by the Pooling 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.
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Purchasers and other Beneficial Owners of Book Entry Certificates
("Beneficial Owners") may not hold Book Entry Certificates directly, but may
hold, transfer or pledge their ownership interest in the Book Entry
Certificates only through Clearing Agency Participants. Additionally,
Beneficial Owners will receive all distributions of principal and interest with
respect to Book Entry Certificates, and, if applicable, may request repurchase
of Book Entry Certificates only through the Clearing Agency and the Clearing
Agency Participants. Beneficial Owners will not be registered holders of
Certificates or be entitled to receive definitive certificates representing
their ownership interest in the Certificates except under the limited
circumstances, if any, described in the related Prospectus Supplement. See
"Risk Factors -- Limited Liquidity and Fluctuation in Value from Market
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 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
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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 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:
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(a) Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index, a rate that is fixed for a period of time
or under certain circumstances and is followed by an adjustable rate, a rate
that otherwise varies from time to time, or a rate that is convertible from an
adjustable rate to a fixed rate. Changes to an adjustable rate may be subject
to periodic limitations, maximum rates, minimum rates or a combination of such
limitations. Accrued interest may be deferred and added to the principal of a
loan for such periods and under such circumstances as may be specified in the
related Prospectus Supplement. Mortgage Loans may provide for the payment of
interest at a rate lower than the specified mortgage rate for a period of time
or for the life of the Mortgage Loan with the amount of any difference
contributed from funds supplied by the seller of the Mortgaged Property or
another source.
(b) Principal may be payable on a level debt service basis to fully
amortize the loan over its term, may be calculated on the basis of an
amortization schedule that is significantly longer than the original term to
maturity or on an interest rate that is different from the interest rate on the
Mortgage Loan or may not be amortized during all or a portion of the original
term. Payment of all or a substantial portion of the principal may be due on
maturity. Principal may include interest that has been deferred and added to
the principal balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the loan, may increase over a specified period of time or may change
from period to period. Mortgage Loans may include limits on periodic increases
or decreases in the amount of monthly payments and may include maximum or
minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment fee, which
may be fixed for the life of the loan or may decline over time, and may be
prohibited for the life of the loan or for certain periods ("lockout periods").
Certain loans may permit prepayments after expiration of the applicable lockout
period and may require the payment of a prepayment fee in connection with any
such subsequent prepayment. Other loans may permit prepayments without payment
of a fee 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.
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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.
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
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monthly installment on such GNMA Certificate is due. Such regular monthly
installments on each such GNMA Certificate are required to be paid to the
Trustee as registered holder by the 15th day of each month in the case of a
GNMA I Certificate and are required to be mailed to the Trustee by the 20th day
of each month in the case of a GNMA II Certificate. Any principal prepayments
on any FHA Loans, FmHA Loans or VA Loans underlying a GNMA Certificate relating
to a series or any other early recovery of principal on such loan will be
passed through to the Trustee as the registered holder of such GNMA
Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or
by "buydown" mortgage loans for which funds will have been provided (and
deposited into escrow accounts) for application to the payment of a portion of
the borrowers' monthly payments during the early years of such mortgage loan.
Payments due the registered holders of GNMA Certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from non-"buydown" GNMA Certificates and will include amounts
to be collected from both the borrower and the related escrow account. The
graduated payment mortgage loans will provide for graduated interest payments
that, during the early years of such mortgage loans, will be less than the
amount of stated interest on such mortgage loans. The interest not so paid will
be added to the principal of such graduated payment mortgage loans and,
together with interest thereon, will be paid in subsequent years. The
obligations of GNMA and of a GNMA Issuer will be the same irrespective of
whether the GNMA Certificates relating to a series of Certificates are backed
by graduated payment mortgage loans or "buydown" mortgage loans. No statistics
comparable to the FHA's prepayment experience on level payment, non-"buydown"
mortgage loans are available in respect of graduated payment or " buydown"
mortgages. GNMA Certificates included in the Trust Fund for a Series may be
held in book-entry form.
If specified in the related Prospectus Supplement, GNMA Certificates
included in the Trust Fund for a Series may be held on deposit at PTC, a
limited purpose trust company organized under the banking law of the State of
New York. PTC operates a private sector, industry-owned depository and
settlement facility for the book-entry transfer of interests in GNMA
Certificates. Distributions of principal of and interest on each GNMA
Certificate held through PTC will be credited by PTC to the PTC participant on
whose account the GNMA Certificate is credited.
Federal National Mortgage Association (FNMA). FNMA is a federally
chartered and privately owned corporation organized and existing under the
Federal National Mortgage Association Charter Act (the "Charter Act"). FNMA was
originally established in 1938 as a United States government agency to provide
supplemental liquidity to the mortgage market and was transformed into a
stockholder-owned and privately-managed corporation by legislation enacted in
1968.
FNMA provides funds to the mortgage market primarily by purchasing
mortgage loans from lenders, thereby replenishing their funds for additional
lending. FNMA acquires funds to purchase mortgage loans from many capital
market investors that may not ordinarily invest in mortgages, thereby expanding
the total amount of funds available for housing. Operating nationwide, FNMA
helps to redistribute mortgage funds from capital surplus to capital-short
areas.
FNMA Certificates. FNMA Certificates are Guaranteed Mortgage
Pass-Through Certificates representing fractional undivided interests in a pool
of mortgage loans formed by FNMA. Each mortgage loan must meet the applicable
standards of the FNMA purchase program. Mortgage loans comprising a pool are
either provided by FNMA from its own portfolio or purchased pursuant to the
criteria of the FNMA purchase program.
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.
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Mortgage loans underlying a FNMA Certificate may have annual interest
rates that vary by as much as two percentage points from each other. The rate
of interest payable on a FNMA Certificate is equal to the lowest interest rate
of any mortgage loan in the related pool, less a specified minimum annual
percentage representing servicing compensation and FNMA's guaranty fee. Thus,
the annual interest rates on the mortgage loans underlying a FNMA Certificate
will generally be between 50 basis points and 250 points greater than the
annual FNMA Certificate pass-through rate. If specified in the related
Prospectus Supplement, FNMA Certificates included in the Trust Fund with
respect to a Series may be backed by adjustable rate mortgages.
Regular monthly installment payments on each FNMA Certificate will be
comprised of interest due as specified by such FNMA Certificate plus the
scheduled principal payments on the Mortgage Loans underlying such FNMA
Certificate due during the period beginning on the second day of the month
prior to the month in which the scheduled monthly installment on such FNMA
Certificate is due and ending on the first day of such month in which the
scheduled monthly installment on such FNMA Certificate is due. Such regular
monthly installments on each such FNMA Certificate will be distributed to the
holder of record on the 25th day of each month. Any principal prepayments on
the mortgage loans underlying any FNMA Certificate included in the Trust Fund
with respect to a Series or any other early recovery of principal on such
mortgage loans will be passed through to the holder of record of such FNMA
Certificate on the 25th day of the month next following such prepayment or
recovery and, in turn, a portion of such amounts will be paid or distributed to
Holders of such Series, secured thereby, as additional principal payments.
FNMA guarantees to each registered holder of a FNMA Certificate that
it will distribute amounts representing such holder's proportionate share of
scheduled principal and interest payments at the applicable pass-through rate
provided for by such FNMA Certificate on the underlying mortgage loans, whether
or not received, and such holder's proportionate share of the full principal
amount of any foreclosed or other finally liquidated mortgage loan, whether or
not such principal amount is actually recovered. The obligations of FNMA under
its guarantees are obligations solely of FNMA and are not backed by, nor
entitled to, the full faith and credit of the United States. Although the
Secretary of the Treasury of the United States has discretionary authority to
lend FNMA up to $2.25 billion outstanding at any time, neither the United
States nor any agency thereof is obligated to finance FNMA's operations or to
assist FNMA in any other manner. If FNMA were unable to satisfy its
obligations, distributions to holders of FNMA Certificates would consist solely
of payments and other recoveries on the underlying mortgage loans and,
accordingly, monthly distributions to holders of FNMA Certificates would be
affected by delinquent payments and defaults on such mortgage loans.
Federal Home Loan Mortgage Corporation (FHLMC). FHLMC is a corporate
instrumentality of the United States created pursuant to Title III of the
Emergency Home Finance Act of 1970, as amended (the "FHLMC Act"). The common
stock of FHLMC is owned by the Federal Home Loan Banks. FHLMC was established
primarily for the purpose of increasing the availability of mortgage credit for
the financing of urgently needed housing. It seeks to provide an enhanced
degree of liquidity for residential mortgage investments primarily by assisting
in the development of secondary markets for conventional mortgages. The
principal activity of FHLMC currently consists of the purchase of first lien
conventional mortgage loans or participation interests in such mortgage loans
and the sale of the mortgage loans or participations so purchased in the form
of mortgage securities, primarily FHLMC Certificates. FHLMC is confined to
purchasing, so far as practicable, mortgage loans that it deems to be of such
quality, type and class as to meet generally the purchase standards imposed by
private institutional mortgage investors.
FHLMC Certificates. Each FHLMC Certificate represents an undivided
interest in a pool of mortgage loans that may consist of first lien
conventional loans, FHA Loans or VA Loans (a "FHLMC Certificate Group"). FHLMC
Certificates are sold under the terms of a Mortgage Participation Certificate
Agreement. A FHLMC Certificate may be issued under either FHLMC's Cash Program
or Guarantor Program.
To the extent described in the related Prospectus Supplement, mortgage
loans underlying the FHLMC Certificates relating to a series will consist of
mortgage loans with original terms to maturity of between 10 and 30 years. Each
such mortgage loan must meet the applicable standards set forth in FHLMC Act. A
FHLMC
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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 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.
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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 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
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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 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.
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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 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
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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 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
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related Prospectus Supplement. If aggregate distributions in respect of
delinquent payments or distributions on the Mortgage Assets or aggregate losses
in respect of such Mortgage Assets were to exceed the total amounts
distributable and available for distribution to Holders of Subordinated
Certificates were to exceed the specified maximum amount, Holders of Senior
Certificates could experience losses on their Certificates.
In addition to or in lieu of the foregoing, if specified in the
related Prospectus Supplement, all or any portion of distributions otherwise
distributable to Holders of Subordinated Certificates on any Distribution Date
may instead be deposited into one or more Reserve Fund (as defined below)
established by the related Trustee. If specified in the related Prospectus
Supplement, such deposits may be made (i) on each Distribution Date, (ii) on
each Distribution Date for specified periods, or (iii) on each Distribution
Date until the balance in the Reserve Fund has reached a specified amount and,
following payments from the Reserve Fund to Holders of Senior Certificates or
otherwise, thereafter to the extent necessary to restore the balance in the
Reserve Fund to required levels, in each case as specified in such Prospectus
Supplement. If specified in the related Prospectus Supplement, amounts on
deposit in the Reserve Fund may be released to the Depositor or the Holders of
any Class of Certificates at the times and under the circumstances specified in
such Prospectus Supplement.
If specified in the related Prospectus Supplement, various Classes of
Senior Certificates and Subordinated Certificates may themselves be subordinate
in their right to receive certain distributions to other Classes of Senior and
Subordinated Certificates, respectively, through a cross-support mechanism or
otherwise.
As between Classes of Senior Certificates and as between Classes of
Subordinated Certificates, distributions may be allocated among such Classes
(i) in the order of their 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.
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CERTIFICATE INSURANCE
If specified in the Prospectus Supplement, one or more Certificate
Guaranty Insurance Policies (each, a "Certificate Guaranty Policy") will be
obtained. Such Certificate Guaranty Policy with respect to a Series will,
subject to limitations described in the related Prospectus Supplement, provide
to the Holders of the insured Certificates of such Series a guarantee of
payment of any interest and/or principal payments due to such Holders on each
Distribution Date. The related Prospectus Supplement will describe the terms of
any Certificate Guaranty Policy and will set forth certain information with
respect to the Certificate Insurer.
POOL INSURANCE
With respect to a Series for which the related Trust Fund includes
Mortgage Loans (and, if specified in the related Prospectus Supplement, a
Series for which the related Trust Fund includes Contracts), in order to
decrease the likelihood that Holders of the Certificates of such Series will
experience losses in respect of such Mortgage Loans, if specified in the
related Prospectus Supplement, one or more mortgage pool insurance policies
(each, a "Mortgage Pool Insurance Policy") will be obtained. Such Mortgage Pool
Insurance Policy will, subject to the limitations described below and in the
Prospectus Supplement, cover loss by reason of default in payments on such
Mortgage Loans up to the amounts specified in the Prospectus Supplement or
reported on Form 8-K and for the periods specified in the Prospectus
Supplement. To the extent specified in the related Prospectus Supplement, the
Servicer under the related Pooling and Servicing Agreement will agree to use
its best reasonable efforts to cause to be maintained in effect any such
Mortgage Pool Insurance Policy and to file claims thereunder to the issuer of
such Mortgage Pool Insurance Policy (the "Pool Insurer"). A Mortgage Pool
Insurance Policy, however, is not a blanket policy against loss, since claims
thereunder may only be made respecting particular defaulted Mortgage Loans and
only upon satisfaction of certain conditions precedent set forth in such policy
as described in the related Prospectus Supplement. To the extent specified in
the related Prospectus Supplement, the Mortgage Pool Insurance Policies, if
any, will not cover losses due to a failure to pay or denial of a claim under a
primary mortgage insurance policy, irrespective of the reason therefor. The
related Prospectus Supplement will describe the terms of any applicable
Mortgage Pool Insurance Policy and will set forth certain information with
respect to the related Pool Insurer.
SPECIAL HAZARD INSURANCE
With respect to a Series for which the related Trust Fund includes
Mortgage Loans (and, if specified in the related Prospectus Supplement, each
Series for which the related Trust Fund includes Contracts), in order to
decrease the likelihood 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.
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The related Prospectus Supplement will describe the terms of any
applicable Special Hazard Insurance Policy and will set forth certain
information with respect to the related Special Hazard Insurer.
RESERVE FUNDS
If specified in the Prospectus Supplement with respect to a Series,
assets such as cash, U.S. Treasury securities, instruments evidencing ownership
of principal or interest payments thereon, letters of credit, demand notes,
certificates of deposit or a combination thereof in the aggregate amount
specified in such Prospectus Supplement will be deposited by the related
Transferor or the Depositor in one or more accounts (each, a "Reserve Fund")
established and maintained with the related Trustee. Such cash and the payments
on such other assets will be used to enhance the likelihood of timely
distribution of principal of, and interest on, or, if specified in the related
Prospectus Supplement, to provide additional protection against losses in
respect of, the Assets in the related Trust Fund, to pay the expenses of the
related Trust Fund or for such other purposes specified in such Prospectus
Supplement. Whether or not the related Transferor or the Depositor has any
obligation to make such a deposit, certain amounts to which the Holders of the
Subordinated Certificates of such Series, if any, the related Transferor or the
Depositor would otherwise be entitled may instead be deposited into the Reserve
Fund from time to time and in the amounts as specified in the related
Prospectus Supplement. Any cash in any Reserve Fund and the proceeds of any
other instrument upon maturity will be invested in Permitted Investments. If a
letter of credit is deposited with the Trustee, such letter of credit will be
irrevocable. To the extent specified in the Prospectus Supplement with respect
to a Series, any instrument deposited therein will name the related Trustee, in
its capacity as trustee for the Holders of the Certificates of such Series, as
beneficiary and will be issued by an entity acceptable to each rating agency
that rates such Certificates. Additional information with respect to such
instruments deposited in the Reserve Funds may be set forth in the Prospectus
Supplement.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If specified in the Prospectus Supplement with respect to a Series,
the related Trust Fund may also include, or the Certificates of such Series may
also have the benefits of, assets such as insurance, guarantees, surety bonds,
letters of credit, guaranteed investment contracts, swap agreements, option
agreements or similar arrangements for the purpose of (i) maintaining timely
payments or providing additional protection against losses on the Assets
included in such Trust Fund, (ii) paying administrative expenses, (iii)
establishing a minimum reinvestment rate on the distributions made in respect
of such Assets, (iv) guaranteeing timely distribution of principal and interest
on the Certificates of such Series, or (v) for such other purpose as is
specified in such Prospectus Supplement. Such arrangements may include
agreements under which Holders of the Certificates of a Series are entitled to
receive amounts deposited in various accounts held by the related Trustee upon
the terms specified in the related Prospectus Supplement. Such arrangements
may be in lieu of any obligation of the Servicers or the Administrator, if any,
to advance delinquent installments in respect of the Mortgage Loans. See
"Servicing of Mortgage Loans and Contracts -- Advances".
SERVICING OF THE MORTGAGE LOANS AND CONTRACTS
Except as otherwise noted, the description set forth below of the
servicing of Mortgage Loans is applicable to Mortgage Loans included in the
Trust Fund with respect to a Series of Certificates.
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
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by any discussion relating to the servicing of the Mortgage Loans and Contracts
set forth in the Prospectus Supplement.
To the extent specified in the related Prospectus Supplement, the
Mortgage Loans and Contracts will be serviced by one or more loan servicing
institutions, which may include the Servicer or a Subservicer, pursuant to a
subservicing agreement between each Subservicer and the Servicer (each, a
"Subservicing Agreement"), which may be entered into only with the prior
written consent of the Trustee and the Administrator, if any.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
When a Mortgaged Property has been or is about to be conveyed by the
borrower, the Servicer, on behalf of the Trustee, shall, to the extent it has
knowledge of such conveyance or prospective conveyance, enforce the rights of
the Trustee as the mortgagee of record to accelerate the maturity of the
related Mortgage Loan under any "due-on-sale" clause contained in the related
Mortgage or Note; provided, however, that the Servicer shall not exercise any
such right if the "due-on-sale" clause, in the reasonable belief of the
Servicer, is not enforceable under applicable law. In such event or in the
event the related Mortgage and Note do not contain a "due-on-sale" clause, the
Servicer shall enter into an assumption and modification Agreement with the
person to whom such property has been or is about to be conveyed, pursuant to
which such person becomes liable under the Note and, unless prohibited by
applicable law or the mortgage documents, the borrower remains liable thereon.
The Servicer is also authorized to enter into a substitution of liability
agreement with such person, pursuant to which the original borrower is released
from liability and such person is substituted as borrower and becomes liable
under the Note.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
With respect to any defaulted Mortgage Loan as to which no
satisfactory arrangements can be made for collection of delinquent payments or
the cure of any other event of default, the Servicer will take such action as
it shall deem to be in the best interest of the Certificateholders. Without
limiting the generality of the preceding sentence, the Servicer will, in
accordance with the servicing standard described above, (i) in the case of
Title I Mortgage Loans and Title I Contracts only, direct the Trustee (or any
Administrator) to submit an FHA Claim to the FHA, in accordance with FHA
Regulations, or (ii) in the case of Mortgage Loans and Contracts, take such
other action as the Servicer deems to be in the best interests of the
Certificateholders, which if no superior lien exists on the related Mortgaged
Property, could include a foreclosure upon such Mortgaged Property in the name
of the Trustee for the benefit of the Certificateholders, provided such action
was economically justified and would not affect the status of the REMIC or
cause a tax to be imposed upon the REMIC for federal income tax purposes.
Typically, however, the Servicer has chosen not to pursue foreclosures of
defaulted loans comparable to the Mortgage Loans and Contracts due to the costs
involved. In servicing mortgage loans and contracts secured by junior liens in
their portfolios, it will not be the Servicer's or any Subservicer's practice
to satisfy the senior mortgage(s) at or prior to the foreclosure sale of the
Mortgaged Property, or to advance funds to keep the senior mortgage(s) current.
In addition, if a defaulted mortgage loan or contract (together with any senior
lien indebtedness) has a high loan-to-value ratio, then the Servicer will be
less likely to foreclose on the related mortgaged property, even if the
Servicer has a first-lien position for such mortgage loan or contract. In the
event an FHA Claim is rejected by the FHA due to circumstances that constitute
a breach of the Transferor's representations and warranties in the Pooling and
Servicing Agreement, the Transferor will be required to repurchase the related
Title I Mortgage Loan or Title I Contract at the purchase price and in the
manner set forth in the Pooling and Servicing Agreement.
In connection with any collection activities or foreclosure, the
Servicer is required to exercise collection and foreclosure procedures with the
same degree of care and skill in its exercise or use, as it would exercise or
use under the circumstances in the conduct of its own affairs.
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WAIVERS AND DEFERMENTS OF CERTAIN PAYMENTS
The Pooling and Servicing Agreement requires the Servicer to make
reasonable efforts to collect all payments called for under the terms and
provisions of the Mortgage Loans and the Contracts. Consistent with the
foregoing, the Servicer may at its own discretion waive any late payment
charge, assumption fee or any penalty interest in connection with the payment
of a Mortgage Loan or a Contract or any other fee or charge which the Servicer
would be entitled to retain as servicing compensation and may waive, vary or
modify any term of any Mortgage Loan or Contract or consent to the postponement
of strict compliance with any such term or in any matter grant indulgence to
any borrower, subject to the limitations set forth in the Pooling and Servicing
Agreement and the FHA Regulations, if applicable.
SUBSERVICERS
The Servicer is permitted under the Pooling and Servicing Agreement to
enter into servicing arrangements with subservicers meeting the requirements of
the Pooling and Servicing Agreement, provided that the Trustee gives written
consent thereto. Notwithstanding any subservicing arrangements, the Servicer
shall not be relieved of its obligations under the Pooling and Servicing
Agreement to the Trustee and the Certificateholders, and the Servicer shall be
obligated to the same extent and under the same terms and conditions as if it
alone were servicing and administering the Mortgage Loans and the Contracts.
REMOVAL AND RESIGNATION OF SERVICER
To the extent specified in the Prospectus Supplement, the Trustee may
remove the Servicer upon the occurrence and continuation beyond the applicable
cure period of certain events described in the related Pooling and Servicing
Agreement. To the extent specified in the Prospectus Supplement, the Servicer
will not be permitted to resign from its obligations and duties except by
mutual consent of the Servicer, the Depositor, the Trustee and any other
persons so specified in the related Pooling and Servicing Agreement, or upon
the determination that the Servicer's duties are no longer permissible under
applicable law and such incapacity cannot be cured by the Servicer. No such
resignation shall become effective until a qualified successor has assumed the
Servicer's responsibilities and obligations. Upon removal or resignation of the
Servicer, a successor servicer will be appointed pursuant to the terms and
conditions set forth in the applicable Pooling and Servicing Agreement.
ADVANCES
To the extent specified in the Prospectus Supplement, neither the
Servicer, nor any Subservicer on behalf of the Servicer, shall have any
obligation to advance its own funds for any delinquent scheduled payments of
principal and interest on any Mortgage Asset or to satisfy or keep current the
indebtedness secured by any Superior Liens on the related Mortgaged Property.
To the extent specified in the Prospectus Supplement, no costs incurred by the
Servicer or any Subservicer in respect of servicing advances shall, for the
purposes of distributions to Certificateholders, be added to the amount owing
under the related Mortgage Asset.
SERVICING PROCEDURES
To the extent specified in the related Prospectus Supplement, the
Servicer and each Subservicer will service the Mortgage Loans and Contracts
pursuant to written guidelines promulgated by the Depositor or the Servicer.
The Servicer will exercise its best reasonable efforts to insure that the
Subservicers service the Mortgage Loans and Contracts in compliance with such
guidelines and in a manner consistent with industry standards.
Mortgage Loans. To the extent specified in the related Prospectus
Supplement, the Servicer and each Subservicer will be required to service and
administer the Mortgage Loans and will have full power and authority, acting
alone, to do any and all things in connection with such servicing and
administration which the Servicer may deem necessary or desirable and
consistent with the terms of the Pooling and Servicing Agreement. The Servicer,
in servicing and administering the Mortgage Loans, will be required to employ
or cause to be employed
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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 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
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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.
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.
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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 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."
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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 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
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Contracts therefor or (b) repurchase the Mortgage Loan or Contract from the
Trustee for a price equal to 100% of its principal balance plus interest
thereon as the date specified in the related Prospectus Supplement, plus the
amount of unreimbursed servicing advances made by the Servicer or any
Subservicer with respect to such Mortgage Loan. To the extent specified in the
related Prospectus Supplement, such purchase price will be deposited in the
Collection Account on such Determination Date and such repurchase and, if
applicable, substitution obligation will constitute the sole remedy available
to Holders of the Certificates of the applicable Series or the Trustee against
the Depositor for a material defect in a document relating to a Mortgage Loan
or Contract.
If the Prospectus Supplement for a Series of Certificates so provides,
then in lieu of agreeing to repurchase or substitute Mortgage Loans or
Contracts as described above, the Depositor may obtain such an agreement from
the entity which sold such Mortgage Loans or Contracts to the Depositor, which
agreement will be assigned to the Trustee for the benefit of the holders of the
Certificates of such series.
If a REMIC election is to be made with respect to all or a portion of
a Trust Fund, there may be federal income tax limitations on the right to
substitute Mortgage Loans or Contracts as described above.
EVIDENCE AS TO COMPLIANCE
The related Pooling and Servicing Agreement will provide that on or
before a specified date after the end of each of the Servicer's fiscal years
elapsing during the term of its appointment, beginning with the first fiscal
year ending after the Closing Date, the Servicer, at its expense, will furnish
to the Trustee and certain other Persons (i) an opinion by a firm of
independent certified public accountants on the financial position of the
Servicer at the end of the relevant fiscal year and the results of operations
and changes in financial position of the Servicer for such year then ended on
the basis of an examination conducted in accordance with generally accepted
auditing standards, and (ii) if the Servicer is then servicing any Mortgage
Loans, a statement from such independent certified public accountants to the
effect that based on an examination of certain specified documents and records
relating to the servicing of the Servicer's mortgage loan portfolio conducted
substantially in compliance with the audit program for mortgages serviced for
the United States Department of Housing and Urban Development Mortgage Audit
Standards, or the Uniform Single Audit Program for Mortgage Bankers (the
"Applicable Accounting Standards"), such firm is of the opinion that such
servicing has been conducted in compliance with the Applicable Accounting
Standards except for (a) such exceptions as such firm shall believe to be
immaterial and (b) such other exceptions as shall be set forth in such
statement.
LIST OF CERTIFICATEHOLDERS
Upon written request of the Trustee, the Registrar for a Series of
Certificates will provide to the Trustee, within fifteen days after receipt of
such request, a list of the names and addresses of all Holders of record of
such Series as of the most recent Record Date for payment of distributions to
Holders of that Series. Upon written request of three or more Holders of record
of a Series of Certificates for purposes of communicating with other Holders
with respect to their rights under the Pooling and Servicing Agreement for such
Series, the Trustee will afford such Holders access during business hours to
the most recent list of Holders of that Series held by the Trustee. With
respect to Book Entry Certificates, the only named Holder on the Certificate
Register will be the Clearing Agency.
The Pooling and Servicing Agreement will not provide for the holding
of any annual or other meetings of Holders of Certificates.
ADMINISTRATION OF THE CERTIFICATE ACCOUNT
The Pooling and Servicing Agreement with respect to a Series will
require that the Certificate Account be any of the following: (i) an account
maintained with a depository institution the debt obligations of which (or, in
the case of a depository institution which is a part of a holding company
structure, the debt obligations of the
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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;
(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;
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(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 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
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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.
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.
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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
3773 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.
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>
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Loss Experience
LOSS AND DEFAULT DATA:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
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 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 co- trustee jointly, or in any
jurisdiction in which the Trustee shall be incompetent or unqualified to
perform
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certain acts, singly upon such separate trustee or co-trustee who shall
exercise and perform such rights, powers, duties and obligations solely at the
direction of the Trustee.
The Trustee will make no representations as to the validity or
sufficiency of the applicable Pooling and Servicing Agreement, the related
Certificates, or of any Mortgage Loan, Agency Security, Contract or related
document, and will not be accountable for the use or application by the
Depositor or an Transferor of any funds paid to the Depositor or such
Transferor in respect of the Certificates or the related Assets, or amounts
deposited in the related Certificate Account or deposited into any other
account for purposes of making payments or distributions to Holders. If no
Event of Default has occurred, the Trustee will be required to perform only
those duties specifically required of it under the applicable Pooling and
Servicing Agreement. However, upon receipt of the various certificates, reports
or other instruments required to be furnished to it, the Trustee will be
required to examine them to determine whether they conform to the requirements
of the applicable Pooling and Servicing Agreement.
The Trustee may resign at any time and the Depositor or the Servicer,
as applicable, may remove the Trustee if the Trustee ceases to be eligible to
continue as such under the applicable Pooling and Servicing Agreement, if the
Trustee becomes insolvent or in such other instances, if any, as are set forth
in the applicable Pooling and Servicing Agreement. Following any resignation or
removal of the Trustee, the Depositor or Servicer, as applicable, will be
obligated to appoint a successor Trustee. Any resignation or removal of the
Trustee and appointment of a successor Trustee does not become effective until
acceptance of the appointment by the successor Trustee.
At any time, for the purpose of meeting any legal requirements of any
jurisdiction in which any part of the Trust Fund or property securing the same
may at the time be located, the Depositor and the Trustee acting jointly shall
have the power and shall execute and deliver all instruments to appoint one or
more Persons approved by the Trustee to act as co-trustee or co-trustees,
jointly with the Trustee, or separate trustee or separate trustees, of all or
any part of the Trust Fund, and to vest in such Person or Persons, in such
capacity, such title to the Trust Fund, or any part thereof, and, subject to
the provisions of the Pooling and Servicing Agreement, such powers, duties,
obligations, rights and trusts as the Depositor and the Trustee may consider
necessary or desirable.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS
The following discussion contains summaries of certain legal aspects
of residential mortgage loans which are general in nature. Because such legal
aspects are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Mortgage Loans is situated. The summaries are qualified in
their entirety by reference to the applicable federal and state laws governing
the Mortgage Loans.
In addition, the following discussion also contains a summary of the
Title I Program, which may be applicable to certain of the Mortgage Loans and
Contracts. With respect to each Series for which the related Trust Fund
includes Contracts, the related Prospectus Supplement will contain a discussion
of certain legal aspects of manufactured housing contracts.
GENERAL LEGAL CONSIDERATIONS
Applicable state laws generally regulate interest rates and other
charges that may be assessed on borrowers, require certain disclosures to
borrowers, and may require licensing of the Transferor, the Depositor, the
Trustee, the Administrator, the Servicer and any Subservicer. In addition, most
states have other laws, public policies and general principles of equity
relating to the protection of consumers and the prevention of unfair and
deceptive practices which may apply to the origination, servicing and
collection of the Mortgage Loans.
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
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the Mortgage Loans; (ii) the Real Estate Settlement Procedures Act and
Regulation X promulgated thereunder, which require certain disclosures to the
borrowers regarding the settlement and servicing of the Mortgage Loans; (iii)
the Equal Credit Opportunity Act and Regulation B promulgated thereunder, which
prohibit discrimination on the basis of age, race, color, sex, religion,
marital status, national origin, receipt of public assistance or the exercise
of any right under the Consumer Credit Protection Act; (iv) the Fair Credit
Reporting Act, which regulates the use and reporting of information related to
the borrower's credit experience; (v) the Federal Trade Commission Preservation
of Consumers' Claims and Defenses Rule, 16 C.F.R. Part 433, regarding the
preservation of a consumer's rights; (vi) the Fair Housing Act, 42 U.S.C. 3601
et seq., relating to the creation and governance of the Title I Program; (vii)
the Home Ownership and Equity Protection Act; and (viii) if applied, the
Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the "Relief Act").
Mortgages. The Mortgage Loans will be secured by either deeds of
trust, mortgages, deeds to secure debt or chattel mortgages, depending upon the
prevailing practice in the state in which the Mortgaged Property subject to a
Mortgage Loan is located. In some states, a mortgage creates a lien upon the
real property encumbered by the mortgage. In other states, the mortgage
conveys legal title to the property to the mortgagee subject to a condition
subsequent, i.e., the payment of the indebtedness secured thereby. There are
two parties to a mortgage, the borrower, who is the owner of the property and
usually the borrower, and the mortgagee, who is the lender. Under the mortgage
instrument, the borrower delivers to the mortgagee a note or bond and the
mortgage. Although a deed of trust is similar to a mortgage, a deed of trust
has three parties, the owner of the property and usually the borrower, called
the trustor (similar to a borrower), a lender called the beneficiary (similar
to a mortgagee), and a third-party grantee called the trustee. Under a deed of
trust, the borrower grants the property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
obligation. The trustee's authority under a deed of trust and the mortgagee's
authority under a mortgage are governed by applicable state law, the express
provisions of the deed of trust or mortgage, and, in some cases, with respect
to deeds of trust, the directions of the beneficiary. Some states use a
security deed or deed to secure debt which is similar to a deed of trust except
that it has only two parties: a grantor (similar to a borrower) and a grantee
(similar to a mortgagee). Mortgages, deeds of trust and deeds to secure debt
generally are not prior to liens for real estate taxes and assessments and
other charges imposed under governmental police powers. Priority with respect
to mortgages, deeds of trust and deeds to secure debt and other encumbrances
depends on their terms, the knowledge of the parties to such instrument and
generally on the order of recordation of the mortgage, deed of trust or the
deed to secure debt in the appropriate recording office.
Cooperative Loans. Certain of the Mortgage Loans may be Cooperative
Loans. The private, non-profit, cooperative apartment corporation owns all the
real property that comprises the project, including the land, separate dwelling
units and all common areas. The cooperative is directly responsible for project
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. If there is a blanket mortgage on the cooperative
apartment building and/or underlying land, as is generally the case, the
cooperative, as project borrower, is also responsible for meeting these
mortgage obligations. A blanket mortgage is ordinarily incurred by the
cooperative in connection with the construction or purchase of the
cooperative's apartment building. The interest of the occupant under
proprietary leases or occupancy agreements to which that cooperative is a party
are generally subordinate to the interest of the holder of the blanket mortgage
in that building. If the cooperative is unable to meet the payment obligations
arising under its blanket mortgage, the mortgagee holding the blanket mortgage
could foreclose on that mortgage and terminate all subordinate proprietary
leases and occupancy agreements. In addition, the blanket mortgage on a
cooperative may provide financing in the form of a mortgage that does not fully
amortize with a significant portion of principal being due in one lump sum at
final maturity. The inability of the cooperative to refinance this mortgage and
its consequent inability to make such final payment could lead to foreclosure
by the mortgagee providing the financing. A foreclosure in either event by the
holder of the blanket mortgage could eliminate or significantly diminish the
value of any collateral held by the lender who financed the purchase by an
individual tenant-stockholder of cooperative shares or, in the case of a pool
of Mortgage Loans including Cooperative Loans, the collateral securing the
Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership
of stock shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights
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to occupy specific units. Generally, a tenant-stockholder of a cooperative must
make a monthly payment to the cooperative representing such
tenant-stockholder's pro rata share of the cooperative's payments for its
blanket mortgage, real property taxes, maintenance expenses and other capital
or ordinary expenses. An ownership interest in a cooperative and accompanying
occupancy rights is financed through a cooperative share loan evidenced by a
promissory note and secured by a security interest in the occupancy agreement
or proprietary lease and in the related cooperative shares. The lender takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement and a financing statement covering the proprietary lease
or occupancy agreement and the cooperative shares is filed in the appropriate
state and local offices to perfect the lender's interest in its collateral.
Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant- stockholder as an individual as provided in
the security agreement covering the assignment of the proprietary lease or
occupancy agreement and the pledge of cooperative shares.
FORECLOSURE
Mortgages. Foreclosure of a mortgage is generally accomplished by
judicial action. Generally, the action is initiated by the service of legal
pleadings upon all parties having an interest of record in the real property.
Delays in completion of the foreclosure may occasionally result from
difficulties in locating necessary parties defendant. Judicial foreclosure
proceedings are often not contested by any of the parties defendant. However,
when the mortgagee's right to foreclose is contested, the legal proceedings
necessary to resolve the issue can be time consuming. After the completion of a
judicial foreclosure, the court generally issues a judgment of foreclosure and
appoints a referee or other court officer to conduct the sale of the property.
An action to foreclose a mortgage is an action to recover the mortgage
debt by enforcing the mortgagee's rights under the mortgage. Foreclosure is
regulated by statutes and rules and is subject to the court's equitable powers.
Generally, a borrower is bound by the terms of the mortgage note and the
mortgage as made and cannot be relieved from his default if the mortgagee has
exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature the court may exercise
equitable powers to relieve a borrower of a default and deny the mortgagee
foreclosure on proof that either the borrower's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith
or oppressive or unconscionable conduct such as to warrant a court of equity to
refuse affirmative relief to the mortgagee. Under certain circumstances a court
of equity may relieve the borrower from an entirely technical default where
such default was not willful.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, sometimes requiring
up to several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of
the parties' intent, if a court determines that the sale was for less than
reasonably equivalent value and such sale occurred while the borrower was
insolvent and within one year (or within the state statute of limitations if
the trustee in bankruptcy elects to proceed under state fraudulent conveyance
law) of the filing of bankruptcy. Similarly, a suit against the debtor on the
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
In some states, mortgages may also be foreclosed by advertisement
pursuant to a power of sale provided in the mortgage. Foreclosure of a mortgage
by advertisement is essentially similar to foreclosure of a deed of trust by
nonjudicial power of sale.
Foreclosure of a deed of trust or a deed to secure debt is generally
accomplished by a non-judicial trustee's sale under a specific provision in the
deed of trust or deed to secure debt which authorizes the trustee to sell the
property upon default by the borrower under the terms of the note, deed of
trust or deed to secure debt. In some states, prior to such sale, the trustee
must record a notice of default and send a copy to the borrower-trustor and to
any person who has recorded a request for a copy of a notice of default and
notice of sale. In
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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.
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.
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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 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
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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 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
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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 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
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provisions reflecting due process concerns for adequate notice require that
borrowers under deeds of trust receive notices in addition to those prescribed
statutorily. For the most part, these cases have upheld the statutory notice
provisions as being reasonable or have found that the sale by a trustee under a
deed of trust or under a mortgage having a power of sale does not involve
sufficient state action to afford constitutional protection to the borrower.
Some of the Mortgage Loans may not restrict secondary financing,
thereby permitting the borrower to use the Mortgaged Property as security for
one or more additional loans. Where the borrower encumbers the Mortgaged
Property with one or more junior liens, the senior lender is subjected to
additional risk. First, the borrower may have difficulty servicing and repaying
multiple loans. Second, acts of the senior lender which prejudice the junior
lender or impair the junior lender's security may create a superior equity in
favor of the junior lender. For example, if the borrower and the senior lender
agree to an increase in the principal amount of or the interest rate payable on
the senior loan, the senior lender may lose its priority to the extent any
existing junior lender is harmed or the borrower is additionally burdened.
Third, if the borrower defaults on the senior loan and/or any junior loan or
loans, the existence of junior loans and actions taken by junior lenders can
impair the security available to the senior lender and can interfere with or
delay the taking of action by the senior lender. The bankruptcy of a junior
lender may operate to stay foreclosure or similar proceedings by the senior
lender.
Forms of notes, mortgages and deeds of trust used by lenders may
contain provisions obligating the borrower to pay a late charge if payments are
not timely made. In certain states, there are or may be specific limitations
upon the late charges which a lender may collect from a borrower for delinquent
payments. Late charges are typically retained by servicers as additional
servicing compensation.
A portion of the Mortgage Loans contain "due-on-sale" clauses. These
clauses permit the lender to accelerate the maturity of the loan if the
borrower sells, transfers or coveys the property. The enforceability of these
clauses has been the subject of legislation or litigation in many states, and
in some cases the enforceability of these clauses was limited or denied.
However, the Garn-St. Germain Depository Institutions Act of 1982 (the
"Garn-St. Germain Act") preempts state constitutional, statutory and case law
that prohibits the enforcement of due-on-sale clauses and permits lenders to
enforce these clauses in accordance with their terms, subject to certain
limited exceptions. The Garn-St. Germain Act does "encourage" lenders to
permit assumption of loans at the original rate of interest or at some other
rate less than the average of the original rate and the market rate.
Exempted from the general rule of enforceability of due-on-sale
clauses were mortgage loans (originated other than by federal savings and loan
associations and federal savings banks) that were made or assumed during the
period beginning on the date a state, by statute or final appellate court
decision having statewide effect, prohibited the exercise of due-on-sale
clauses and ending on October 15, 1982 ("Window Period Loans"). However, this
exception applied only to transfers of property underlying Window Period Loans
occurring between October 15, 1982 and October 15, 1985 and does not restrict
enforcement of a due-on-sale clause in connection with current transfers of
property underlying Window Period Loans. Due-on-sale clauses contained in
mortgage loans originated by federal savings and loan associations or federal
savings banks are fully enforceable pursuant to regulations of the Office of
Thrift Supervision (the "OTS"), as successor to the Federal Home Loan Bank
Board which preempt state law restrictions on the enforcement of due-on-sale
clauses.
The Garn-St. Germain Act also sets forth nine instances in which a
mortgage lender covered by the Garn-St. Germain Act may not exercise a
due-on-sale clause, notwithstanding the fact that transfer of the property may
have occurred. These include 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.
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If interest rates were to rise above the interest rates on the
Mortgage Loans, then any inability of the Servicer or the subservicer to
enforce due-on-sale clauses may result in the Trust Fund containing a greater
number of Mortgage Loans bearing below-market interest rates than would
otherwise be the case, since a transferee of the property underlying a Mortgage
Loan would have a greater incentive in such circumstances to assume the
seller's Mortgage Loan. Any inability to enforce due-on-sale clauses may
affect the average life of the Mortgage Loans and the number of Mortgage Loans
that may be outstanding until maturity.
Upon foreclosure, courts have imposed general equitable principles.
These equitable principles are generally designed to relieve the borrower from
the legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right
of the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower failing to adequately maintain the property or
the borrower executing a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust or mortgages
receive notices in addition to the statutorily-prescribed minimum. For the most
part, these cases have upheld the notice provisions as being reasonable or have
found that the sale by a trustee under a deed of trust, or under a mortgage
having a power of sale, does not involve sufficient state action to afford
constitutional protections to the borrower.
Adjustable Rate Loans. The laws of certain states may provide that
mortgage notes relating to adjustable rate loans are not negotiable instruments
under the Uniform Commercial Code. In such event, the Trustee will not be
deemed to be a "holder in due course" within the meaning of the Uniform
Commercial Code and may take such a mortgage note subject to certain
restrictions on its ability to foreclose and to certain contractual defenses
available to a borrower.
Environmental Legislation. Certain states impose a statutory lien for
associated costs on property that is the subject of a cleanup action by the
state on account of hazardous wastes or hazardous substances released or
disposed of on the property. Such a lien will generally have priority over all
subsequent liens on the property and, in certain of these states, will have
priority over prior recorded liens including the lien of a mortgage. In
addition, under federal environmental legislation and under state law in a
number of states, a secured party which takes a deed in lieu of foreclosure or
acquires a mortgaged property at a foreclosure sale or assumes active control
over the operation or management of a property so as to be deemed an "owner" or
"operator" of the property may be liable for the costs of cleaning up a
contaminated site. Although such costs could be substantial, it is unclear
whether they would be imposed on a secured lender (such as a Certificate
Trustee, a PMBS Trustee, or a Trust Fund) to homeowners. In the event that
title to a property securing a Mortgage Loan in a pool of Mortgage Loans was
acquired by a Certificate Trustee, a PMBS Trustee, or a Trust Fund and cleanup
costs were incurred in respect of the property, the Holders of the related
Certificates might realize a loss if such costs were required to be paid. In
addition, the presence of certain environmental contamination, including, but
not limited to, lead-based paint, asbestos and leaking underground storage
tanks could result in the holders of the related Certificates realizing a loss
if associated costs were required to be paid. The Depositor, the Administrator,
the Underwriters, the Transferors, the Servicers, and any of their respective
affiliates (i) have not caused any environmental site assessments or
evaluations to be conducted with respect to any properties securing the
Mortgage Loans, (ii) are not required to make any such assessments or
evaluations and (iii) make no representations or warranties and assume no
liability with respect to the absence or effect of hazardous wastes or
hazardous substances on any property or any casualty resulting from the
presence or effect of hazardous wastes or hazardous substances.
In the event that title to a Mortgaged Property is acquired by the
Trust Fund and cleanup costs are incurred in respect of such property, the
certificateholders might realize a loss if such costs are required to be
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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 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.
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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 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
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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.
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
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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.
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
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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 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.
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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
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
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and a provision permitting prepayment in part or in full without penalty. The
Title I Lender must assure that the note and all other documents evidencing the
loan are in compliance with applicable Federal, state and local laws.
A written but unrecorded modification agreement executed by the
borrower may be used in lieu of refinancing a delinquent or defaulted loan to
reduce or increase the installment payment, but not to increase the term or
interest rate. A written modification agreement may also be used to refinance a
loan in order to reduce the interest rate, provided the loan is current.
Alternatively, the lender may negotiate an informal repayment plan for the
borrower to cure a temporary delinquency within a short period of time by
sending a letter to the borrower reciting the terms of the agreement. The
lender may not release any party from liability under the note or any lien
securing an insured loan without prior FHA approval.
FHA Regulations do not require that the borrower obtain title or fire
and casualty insurance as a condition to obtaining loan, except with respect to
manufactured home loans. If the property is located in a flood hazard area,
however, flood insurance in an amount at least equal to the loan amount is
required at the date of loan disbursement. The Borrower is required to
maintain flood insurance of at least the unpaid balance of the loan (or the
value of the property if state law so limits the amount of flood insurance).
Requirements for Title I Manufactured Home Contracts. The maximum
principal amount for any Title I Contract for a Manufactured Home must not
exceed the sum of certain itemized amounts, which include a specified
percentage of the purchase price of the manufactured home depending on whether
it is a new or existing home; provided that such maximum amount does not exceed
the following loan amounts: (i) $48,600 for a new or existing manufactured home
purchase loan; (ii) $16,200 for a manufactured home lot purchase; and (iii)
$64,800 for a combination loan (i.e. a loan to purchase a new or existing
manufactured home and the lot for such home). Generally, the term of a Title I
Contract for a Manufacture Home may not be less than six months nor greater
than 20 years and 32 days, except that the maximum term of a manufactured home
lot loan is limited to 15 years and 32 days and the maximum term of a
multimodule manufactured home and lot in combination is limited to 25 years and
32 days.
Borrower eligibility for a Title I Contract for a Manufactured Home
requires that the borrower become the owner of the property to be financed with
such loan and occupy the manufactured home as the borrower's principal
residence, except for a manufactured home lot loan which allows six months from
the date of the loan to occupy the home as the borrower's principal residence.
If a manufactured home is classified as realty, then ownership of the home must
be in fee simple, and also, the ownership of the manufactured home lot must be
in fee simple, except for a lot which consists of a share in a cooperative
association that owns and operates a manufactured home park. The borrower's
minimum cash down payment requirement to obtain financing through a Title I
Contract for a Manufactured Home is as follows: (i) at least 5% of the first
$5,000 and 10% of the balance of the purchase price of a new manufactured home
and at least 10% of the purchase price of an existing manufactured home for a
manufactured home purchase loan, or in lieu of a full or partial cash down
payment, the trade-in of the borrower's equity in an existing manufactured
home; (ii) at least 10% of the purchase price and development costs of a lot
for a manufactured home lot loan; and (iii) at least 5% of the first $5,000 and
10% of the balance of the purchase price of the manufactured home and lot for a
combination loan.
Any manufactured home financed by a Title I Contract must be certified
by the manufacturer to have been constructed in compliance with the National
Manufactured Housing Construction and Safety Standards Act of 1974 (42 U.S.C.
Sections 5401-5426), so as to conform to all applicable Federal construction
and safety standards, and with respect to the purchase of a new manufactured
home, the manufacturer must furnish the borrower with a one year written
warranty on a HUD approved form which obligates the manufacturer to correct any
nonconformity with all applicable Federal construction 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
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a manufactured home and suitably developed lot for the home in combination; or
the refinancing of an existing manufactured home already owned by the borrower
in connection with the purchase of a manufactured home lot or an existing lot
already owned by the borrower in connection with the purchase of a manufactured
home. In addition, the proceeds for a Title I Contract for a Manufactured Home
which is a manufactured home purchase loan may be used for the purchase,
construction or installation of a garage, carport, patio or other comparable
appurtenance to the manufactured home, and the proceeds for a Title I Contract
for a Manufactured Home which is a combination loan may be used for the
purchase, construction or installation of a foundation, garage, carport, patio
or other comparable appurtenance to the manufactured home. The proceeds from a
Title I Contract for a Manufactured Home cannot be used for the purchase of
furniture or the financing of any items and activities which are set forth on
the list published by the Secretary of HUD as amended from time to time.
Any Title I Contract for a Manufactured Home must be secured by a
recorded lien on the manufactured home (or lot or home and lot, as
appropriate), its furnishings, equipment, accessories and appurtenance, which
lien must be a first lien, superior to any other lien on the property which is
evidenced by a properly recorded financing statement, a properly recorded
security instrument executed by the borrower and any other owner of the
property or other acceptable instrument. With respect to any Title I Contract
involving a manufactured home purchase loan or combination loan and the sale of
the manufactured home by a dealer, the lender or its agent (other than a
manufactured home dealer) must conduct a site-of-placement inspection within 60
days after the date of the loan to verify that the terms and conditions of the
purchase contract have been met, the manufactured home and any options and
appurtenances included in the purchase price or financed with the loan have
been delivered and installed and the placement certificate executed by the
borrower and the dealer is in order.
Title I Underwriting Requirements. FHA Regulations require that,
before making a loan insured under the Title I Program, a Title I Lender
exercise prudence and diligence in determining whether the borrower and any
co-maker or co-signer is solvent and an acceptable credit risk with a
reasonable ability to make payments on the loan obligation. Prior to loan
approval, the Title I Lender is required to satisfy specified credit
underwriting requirements and to keep documentation supporting its credit
determination. As part of its credit underwriting, the Title I Lender must
obtain the following: (i) a dated credit application executed by the borrower,
any co-maker and any co-signer, (ii) written verification of current employment
and current income of the borrower and any co-maker or co-signer, (iii) a
consumer credit report stating the credit accounts and payment history of the
borrower and any co-maker or co-signer, (iv) on loans in excess of $5,000,
written evidence that the borrower is not over 30 days delinquent on any senior
lien instruments encumbering the improved property, (v) verification whether
the borrower is in default on any obligation owed to or insured or guaranteed
by the Federal Government and (vi) written verification of the source of funds
for any initial payment required of the borrower if such payment is in excess
of 5% of the loan. Before making a final credit determination, the lender is
required to conduct a face-to-face or telephone interview with the borrower and
any co-maker or co-signer to resolve any discrepancies in the information on
the credit application and to assure that the information is accurate and
complete. The Title I Lender's files must contain, among other things, the note
or other debt instrument, the lien instrument and a copy of the property
improvement contract (in the case of a dealer loan) or a detailed written
description of the work to be performed, the materials to be furnished and the
estimated cost (for a loan not involving a dealer or contractor).
The Title I Lender is required to satisfy itself that the borrower's
income is adequate to make the payments required under the loan and to pay the
borrower's housing and other recurring expenses. The borrower's housing and
other recurring expenses generally may not exceed a maximum percentage of gross
income as published from time to time in the Federal Register. The Title I
Lender is required to document any compensating factors that support the
approval of the loan if such expense-to-income ratios are not satisfied. A
Title I Lender is prohibited from approving a loan under the Title I Program
without the approval of the FHA if the lender has knowledge that the borrower
is past due more than 30 days under the original terms of an obligation owed to
or insured or guaranteed by the Federal Government or the borrower has made
material misstatements of fact on applications for loans or other assistance.
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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 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
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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.
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
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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 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
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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.
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,
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references to the Mortgage Loans, Agency Securities or Contracts will be deemed
to refer to that portion of the Mortgage Loans, Agency Securities or Contracts
held by the Trust Fund which does not include the fixed retained yield.
FEDERAL INCOME TAX CONSEQUENCES FOR REMIC CERTIFICATES
GENERAL
With respect to a particular Series of Certificates, an election may
be made to treat the Trust Fund or one or more segregated pools of assets
therein as one or more REMICs within the meaning of Code Section 860D. A Trust
Fund or a portion or portions thereof as to which a REMIC election will be made
will be referred to as a "REMIC Pool." For purposes of this discussion,
Certificates of a Series as to which one or more REMIC elections are made are
referred to as "REMIC Certificates" and will consist of one or more Classes of
"Regular Certificates" and one Class of "Residual Certificates" in the case of
each REMIC Pool. Qualification as a REMIC requires ongoing compliance with
certain conditions. Upon the issuance of each Series of REMIC Certificates,
Counsel to the Depositor will give its opinion generally to the effect that,
assuming (i) the making of an appropriate election, (ii) compliance with the
Pooling and Servicing Agreement, and (iii) continuing compliance with the
applicable provisions of the Code, as it may be amended from time to time, and
any applicable Treasury regulations adopted thereunder, each REMIC Pool will
qualify as a REMIC. The following general discussion of the anticipated
federal income tax consequences of the purchase, ownership and disposition of
REMIC Certificates, to the extent it relates to matters of law or legal
conclusions with respect thereto, represents the opinion of Counsel to the
Depositor, subject to any qualifications set forth herein. In addition, Counsel
to the Depositor has prepared or reviewed the statements in this Prospectus
under the heading "Certain Federal Income Tax Consequences -- Federal Income
Tax Consequences for REMIC Certificates," and is of the opinion that such
statements are correct in all material respects. Such statements are intended
as an explanatory discussion of the possible effects of the classification of
any Trust Fund (or applicable portion thereof) as a REMIC for federal income
tax purposes on investors generally and of related tax matters affecting
investors generally, but do not purport to furnish information in the level of
detail or with the attention to an investor's specific tax circumstances that
would be provided by an investor's own tax advisor. Accordingly, each investor
is advised to consult its own tax advisors with regard to the tax consequences
to it of investing in REMIC Certificates. With respect to each Series of REMIC
Certificates, the Regular Certificates will be considered to be "regular
interests" in the REMIC Pool and generally will be treated for federal income
tax purposes as if they were newly originated debt instruments, and the
Residual Certificates will be considered to be "residual interests" in the
REMIC Pool. The Prospectus Supplement for each Series of Certificates will
indicate whether one or more REMIC elections with respect to the related Trust
Fund will be made, in which event references to "REMIC" or "REMIC Pool" herein
shall be deemed to refer to each such REMIC 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
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treated entirely as qualifying assets for such entities (and the income will be
treated entirely as qualifying income). Moreover, the Final REMIC Regulations
provide that, for purposes of Code Sections 593(d)(1) and 856(c)(5)(A),
payments of principal and interest on the Mortgage Loans that are reinvested
pending distribution to holders of REMIC Certificates constitute qualifying
assets for such entities. Where two REMIC Pools are part of a tiered structure
they will be treated as one REMIC for purposes of the tests described above
respecting asset ownership of more or less than 95%. Notwithstanding the
foregoing, however, REMIC income received by a REIT owning a residual interest
in a REMIC Pool could be treated in part as non-qualifying REIT income if the
REMIC Pool holds Mortgage Loans with respect to which income is contingent on
borrower profits or property appreciation. In addition, if the assets of the
REMIC include buy-down Mortgage Loans, it is possible that the percentage of
such assets constituting "qualifying real property loans" or "loans secured by
an interest in real property" for purposes of Code Sections 593(d)(1) and
7701(a)(19)(C)(v), respectively, may be required to be reduced by the amount of
the related buy-down funds. REMIC Certificates held by a regulated investment
company will not constitute "Government securities" within the meaning of Code
Section 851(b)(4)(A)(i). REMIC Certificates held by certain financial
institutions will constitute an "evidence of indebtedness" within the meaning
of Code Section 582(c)(1). However, REMIC Regular Certificates acquired by
another REMIC on its Startup Day (as defined below) in exchange for regular or
residual interests in the REMIC will constitute "qualified mortgages" within
the meaning of Code Section 860G(a)(3). Qualification as a REMIC In order for
the REMIC Pool to qualify as a REMIC, there must be ongoing compliance on the
part of the REMIC Pool with the requirements set forth in the Code. The REMIC
Pool must fulfill an asset test, which requires that no more than a de minimis
amount of the assets of the REMIC Pool, as of the close of the third calendar
month beginning after the "Startup Day" (which for purposes of this discussion
is the date of issuance of the REMIC Certificates) and at all times thereafter,
may consist of assets other than "qualified mortgages" and "permitted
investments." The Final REMIC Regulations provide a "safe harbor" pursuant to
which the de minimis requirement will be met if at all times the aggregate
adjusted basis of any nonqualified assets (i.e., assets other than qualified
mortgages and permitted investments) is less than 1% of the aggregate adjusted
basis of all the REMIC Pool's assets.
If a REMIC Pool fails to comply with one or more of the requirements
of the Code for REMIC status during any taxable year, the REMIC Pool will not
be treated as a REMIC for such year and thereafter. In this event, the
classification of the REMIC for federal income tax purposes is uncertain. The
REMIC Pool might be entitled to treatment as a grantor trust under the rules
described in "-- Federal Income Tax Consequences for Certificates as to Which
No REMIC Election Is Made" herein. In that case, no entity-level tax would be
imposed on the REMIC Pool. Alternatively, the Regular Certificates may continue
to be treated as debt instruments for federal income tax purposes; but the
REMIC Pool could be treated as a taxable mortgage pool (a "TMP"). If the REMIC
Pool is treated as a TMP, any residual income of the REMIC Pool (i.e., income
from the Mortgage Loans less interest and original issue discount expense
allocable to the Regular Certificates and any administrative expenses of the
REMIC Pool) would be subject to corporate income tax at the REMIC Pool level.
On the other hand, an entity with multiple classes of ownership interests may
be treated as a separate association taxable as a corporation under Treasury
regulations, and the Regular Certificates may be treated as equity interests
therein. The Code, however, authorizes the Treasury Department to issue
regulations that address situations where failure to meet one or more of the
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
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with regard to Regular Certificates, regardless of the method of accounting
otherwise used by such Regular Certificateholders.
Original Issue Discount. Regular Certificates may be issued with
"original issue discount" within the meaning of Code Section 1273(a). Holders
of any class of Regular Certificates having original issue discount generally
must include original issue discount in ordinary income for federal income tax
purposes as it accrues, in accordance with a constant interest method that
takes into account the compounding of interest, in advance of receipt of the
cash or a portion of the cash attributable to such income. Based in part on
Treasury regulations issued on January 27, 1994 under Code Sections 1271
through 1273 and 1275 (the "OID Regulations") and in part on the provisions of
the 1986 Act, the Depositor anticipates that the amount of original issue
discount required to be included in a Regular Certificateholder's income in any
taxable year will be computed in a manner substantially as described below. In
general the OID Regulations apply to debt instruments issued on or after April
4, 1994, except that taxpayers may rely on the OID Regulations for debt
instruments issued after December 21, 1992. Alternatively, proposed Treasury
regulations issued December 21, 1992 may be treated as authority for debt
instruments issued after December 21, 1992 and prior to April 4, 1994, and
proposed Treasury regulations issued in 1986 and 1991 may be treated as
authority upon for instruments issued before December 21, 1992. Regular
Certificateholders should be aware, however, that the OID Regulations either do
not address, or are subject to varying interpretations with regard to, several
issues relevant to securities, such as the Regular Certificates, that are
subject to prepayment. The 1986 Act requires that the amount and rate of
accrual or original issue discount be calculated based on a reasonable assumed
prepayment rate for the Mortgage Loans in a manner prescribed by regulations
not yet issued ("Prepayment Assumption") and provides for adjusting the amount
and rate of accrual of such discount where the actual prepayment rate differs
from the Prepayment Assumption. The Committee Report indicates that the
regulations will require that the Prepayment Assumption be the prepayment
assumption that is used in determining the initial offering price of such
Certificates. The Prospectus Supplement for each Series of such Certificates
will specify the Prepayment Assumption determined by the Depositor for the
purposes of determining the amount and rate of accrual of original issue
discount. No representation is made that the Certificates will prepay at the
Prepayment Assumption or at any other rate. Moreover, the OID Regulations
include an anti-abuse rule allowing the Internal Revenue Service ("IRS") to
apply or depart from the OID Regulations where necessary or appropriate to
ensure a reasonable tax result in light of the applicable statutory provisions.
A tax result will not be considered unreasonable under the anti-abuse rule in
the absence of a substantial effect on the present value of a taxpayer's tax
liability. Investors are advised to consult their own tax advisors as to the
discussion herein and the appropriate method for reporting interest and
original issue discount with respect to the Regular Certificates.
Under the OID Regulations, each Regular Certificate (except to the
extent described below with respect to a Regular Certificate on which
distributions of principal are made in a single installment or upon an earlier
distribution by lot of a specified principal amount upon the request of a
Regular Certificateholder or by random lot (a "Retail Class Certificate")) will
be treated as a single installment obligation for purposes of determining the
original issue discount includible in a Regular Certificateholder's income. The
total amount of original issue discount on a Regular Certificate is the excess
of the "stated redemption price at maturity" of the Regular Certificate over
its "issue price." The issue price of a Regular Certificate is the first price
at which a substantial amount of Regular Certificates of that class are first
sold (other than to bond houses, brokers, underwriters and wholesalers). Unless
specified otherwise in the Prospectus Supplement, the Depositor will determine
original issue discount by including the amount paid by an initial Regular
Certificateholder for accrued interest that relates to a period prior to the
issue date of the Regular Certificate in the issue price of a Regular
Certificate and will include in the stated redemption price at maturity any
interest paid on the first Distribution Date to the extent such interest is
attributable to a period in excess of the number of days between the issue date
and such first Distribution Date. The stated 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
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interest is included in the stated redemption price at maturity. If the amount
of original issue discount is "de minimis" as described below, the amount of
original issue discount is treated as zero, and all stated interest is treated
as qualified stated interest. Distributions of interest on Regular Certificates
with respect to which deferred interest will accrue may not constitute
qualified stated interest, in which case the stated redemption price at
maturity of such Regular Certificates includes all distributions of interest as
well as principal thereon. Moreover, if the interval between the issue date and
the first Distribution Date on a Regular Certificate is longer than the
interval between subsequent Distribution Dates (and interest paid on the first
Distribution Date is less than would have been earned if the stated interest
rate were applied to outstanding principal during each day in such interval),
the stated interest distributions on such Regular Certificate technically do
not constitute qualified stated interest. The OID Regulations provide that in
such case a special rule, applying solely for the purpose of determining
whether original issue discount is de minimis, provides that the interest
shortfall for the long first period (i.e., the interest that would have been
earned if interest had been paid on the first Distribution Date for each day
the Regular Certificate was outstanding) is treated as original issue discount
assuming the stated interest would otherwise be qualified stated interest. Also
in such case the stated redemption price at maturity is treated as equal to the
issue price plus the greater of the amount of foregone interest or the excess,
if any, of the Certificate's stated principal amount over its issue price. The
OID Regulations indicate that all interest on a long first period Regular
Certificate that is issued with non-de minimis original issue discount will be
included in the Regular Certificate's stated redemption price at maturity.
Regular Certificateholders should consult their own tax advisors to determine
the issue price and stated redemption price at maturity of a Regular
Certificate.
Under a de minimis rule, original issue discount on a Regular
Certificate will be considered to be zero if such original issue discount is
less than 0.25% of the stated redemption price at maturity of the Regular
Certificate multiplied by the weighted average maturity of the Regular
Certificate. For this purpose, the weighted average maturity of the Regular
Certificate is computed as the sum of the amounts determined by multiplying the
number of full years (i.e., rounding down partial years) from the issue date
until each distribution in reduction of stated redemption price at maturity is
scheduled to be made by a fraction, the numerator of which is the amount of
each distribution included in the stated redemption price at maturity of the
Regular Certificate and the denominator of which is the stated redemption price
at maturity of the Regular Certificate. Although currently unclear, it appears
that the schedule of such distributions should be determined in accordance with
the Prepayment Assumption. In addition, if the original issue discount is de
minimis all stated interest (including stated interest that would otherwise be
treated as original issue discount) is treated as qualified stated interest.
Unless the Holder of a Regular Certificate elects to accrue all discount under
a constant yield to maturity method, as described below, the holder of a debt
instrument includes any de minimis original issue discount in income pro rata
as capital gain recognized on retirement of the Regular Certificate as stated
principal payments are received. If a subsequent Holder of a Regular
Certificate issued with de minimis original issue discount purchases the
Regular Certificate at a premium, the subsequent Holder does not include any
original issue discount in income. If a subsequent Holder purchases such
Regular Certificate at a discount all discount is reported as market discount,
as described below.
Of the total amount of original issue discount on a Regular
Certificate, the Regular Certificateholder generally must include in gross
income for any taxable year the sum of the "daily portions," as defined below,
of the original issue discount on the Regular Certificate accrued during an
accrual period for each day on which he holds the Regular Certificate,
including the date of purchase but excluding the date of disposition. Although
not free from doubt, the Depositor intends to treat the monthly period ending
on the day before each Distribution Date as the accrual period, rather than the
monthly period corresponding to the prior calendar month. With respect to each
Regular Certificate, a calculation will be made of the original issue discount
that accrues during each successive full accrual period (or shorter period from
the date of original issue) that ends on the day before the related
Distribution Date for the Regular Certificate. The original issue discount
accruing in a full accrual period would be the excess, if any, of (i) the sum
of (a) the present value of all of the remaining distributions to be made on
the Regular Certificate as of the end of that accrual period that are included
in the Regular Certificate's stated redemption price at maturity and (b) the
distributions made on the Regular Certificate during the accrual period that
are included in the Regular Certificate's stated redemption price at maturity,
over (ii) the adjusted issue price of the Regular Certificate at the beginning
of the accrual period. The present value of the
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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 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,
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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 four requirements. First, the issue price must not exceed the
noncontingent principal payments by more than the lesser of (i) 1.5% of the
product of the noncontingent principal payments and the weighted average
maturity or (ii) 15% of the noncontingent principal payments. Second, the
instrument must provide for stated interest (compounded or paid at least
annually) at (i) one or more qualified floating rates, (ii) a single fixed rate
and a single objective rate that is a qualified inverse floating rate, (iii) a
single fixed rate and one or more qualified floating rates; or (iv) a single
objective rate. Third, the instrument must provide that each qualified floating
rate or objective rate in effect during the term of the Regular Certificate is
set at a current value of that rate (one occurring in the interval beginning
three months before and ending one year after the rate is first in effect on
the Regular Certificate). Fourth, the debt instrument must not provide for
contingent principal payments. 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 (but greater than 0.65 for instruments issued on
or after August 13, 1996), 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. Before August 13,1996, 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. For
instruments issued on or after August 13, 1996, an objective rate is a rate
(other than a qualified floating rate) that is determined using a single fixed
formula and that is based on objective financial or economic information. 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 qualified floating rate. 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 qualified stated interest and
original issue discount, if any, that accrues 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
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for the Regular Certificate and (iii) the qualified stated interest that
accrues is adjusted for the interest actually paid. 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. Treasury regulations dealing with
contingent payment debt obligations were issued June 11, 1996 (the "Contingent
Debt Regulations"), and are generally effective August 13, 1996. The Contingent
Debt Regulations by their terms do not apply to REMIC regular interests.
However, the following paragraph describes the applicable Contingent Debt
Regulations as a method that may be considered reasonable.
The Contingent Debt Regulations apply a "noncontingent bond method" to
a debt instrument that is publicly traded or that is issued for cash or
publicly traded property. Under the noncontingent bond method, the issuer is
required to determine the comparable yield for the instrument and to construct
a projected payment schedule for the debt instrument consisting of all
noncontingent payments and a projected amount for each contingent payment. The
issuer is required to determine interest expense, and a holder is required to
determine interest income, according to the projected payment schedule
formulated by the issuer. Interest generally is accrued under the noncontingent
bond method according to generally applicable rules of the OID Regulations as
described above. Adjustments in the instrument's issue price and the holder's
basis are determined as if the projected payment schedule were the actual
payment schedule for the instrument. 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 holder
on the sale, exchange, or retirement of the instrument generally will be
treated as interest income or ordinary loss to the holder. A loss will be
treated as ordinary, however, only up to the amount of the holder'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.
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It is not clear how income should be accrued with respect to Regular
Certificates issued at a significant premium and with respect to REMIC
Certificates, the payments on which consist primarily of a specified portion of
the interest payments on qualified mortgages held by the REMIC ("Premium REMIC
Regular Certificates"). One method of income accrual would be to treat the
Premium REMIC Regular Certificate as a Certificate having qualified stated
interest purchased at a premium equal to the excess of the price paid by such
holder for the Premium REMIC Regular Certificate over its stated principal
amount. Under this approach, a holder would be entitled to amortize such
premium only if it has in effect an election under Section 171 of the Code with
respect to all bonds held by such holder, as described below. Alternatively,
all of the income derived from a Premium REMIC Regular Certificate could be
reported as original issue discount by treating all future payments under the
Prepayment Assumption as fixed payments, in which case the amount and rate of
accrual of original issue discount would be computed by treating the Premium
REMIC Regular Certificate as a Certificate which has no qualified stated
interest, as described above. Finally, the IRS could assert that the Premium
REMIC Regular Certificates should be taxable under the contingent payment rules
governing securities issued with contingent payments.
Market Discount. A purchaser of a Regular Certificate also may be
subject to the market discount rules of Code Sections 1276 through 1278. Under
these sections and the principles applied by the OID Regulations in the context
of original issue discount, "market discount" is the amount by which a
subsequent purchaser's initial basis in the Regular Certificate (i) is exceeded
by the stated redemption price at maturity of the Regular Certificate or (ii)
in the case of a Regular Certificate having original issue discount, is
exceeded by the sum of the issue price of such Regular Certificate plus any
original issue discount that would have previously accrued thereon if held by
an original Regular Certificateholder (who purchased the Regular Certificate at
its issue price), in either case less any prior distributions included in the
stated redemption price at maturity of such Regular Certificate. Such purchaser
generally will be required to recognize accrued market discount as ordinary
income as distributions includible in the stated redemption price at maturity
of such Regular Certificate are received, in an amount not exceeding any such
distribution. That recognition rule would apply regardless of whether the
purchaser is a cash-basis or accrual-basis taxpayer. Such market discount would
accrue in a manner to be provided in Treasury regulations and should take into
account the Prepayment Assumption. The Committee Report provides that until
such regulations are issued, such market discount would accrue either (i) on
the basis of a constant interest rate or (ii) in the ratio of stated interest
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
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maturity of such Regular Certificate multiplied by the weighted average
maturity of the Regular Certificate (determined as described above under "--
Original Issue Discount") remaining after the date of purchase. Treasury
regulations implementing the market discount rules have not yet been issued,
and therefore investors should consult their own tax advisors regarding the
application of these rules as well as the advisability of making any of the
elections with respect thereto.
Premium. A Regular Certificate purchased at a cost greater than its
remaining stated redemption price at maturity generally is considered to be
purchased at a premium. If the Regular Certificateholder holds such Regular
Certificate as a "capital asset" within the meaning of Code Section 1221, the
Regular Certificateholder may elect under Code Section 171 to amortize such
premium under a constant yield method that reflects compounding based on the
interval between payments on the Regular Certificates. The Committee Report
indicates a Congressional intent that the same rules that apply to the accrual
of market discount on installment obligations will also apply to amortizing
bond premium under Code Section 171 on installment obligations such as the
Regular Certificates, although it is unclear whether the alternatives to the
constant interest method described above under "-- Market Discount" are
available. Except as otherwise provided in Treasury regulations yet to be
issued, such amortizable bond premium will be treated as an offset to interest
income on a Regular Certificate rather than as a separate deduction item. This
election, once made, applies to all taxable obligations held by the taxpayer at
the beginning of the first taxable year to which such election applies and to
all taxable debt obligations thereafter acquired and is binding on such
taxpayer in all subsequent years. Purchasers who pay a premium for their
Regular Certificates should consult their tax advisors regarding the election
to amortize premium and the method to be employed.
Sale or Exchange of Regular Certificates. If a Regular
Certificateholder sells or exchanges a Regular Certificate, the Regular
Certificateholder will recognize gain or loss equal to the difference, if any,
between the amount received and his adjusted basis in the Regular Certificate.
The adjusted basis of a Regular Certificate generally will equal the cost of
the Regular Certificate to the seller, increased by any original issue discount
or market discount previously included in the seller's gross income with
respect to the Regular Certificate and reduced by amounts included in the
stated redemption price at maturity of the Regular Certificate that were
previously received by the seller and by any amortized premium.
Except as described in this paragraph, under "Original Issue Discount"
and under "-- Market Discount," any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate
as a capital asset will be capital gain or loss and will be long-term or
short-term depending on whether the Regular Certificate has been held for the
long-term capital gain holding period (currently more than one year). Gain from
the disposition of a Regular Certificate that might otherwise be capital gain
will be treated as ordinary income (i) if a Regular Certificate is held as part
of a "conversion transaction" as defined in Code Section 1258(c), up to the
amount of interest that would have accrued on the Regular Certificateholder's
net investment in the conversion transaction at 120% of the appropriate
applicable Federal 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
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described above under "-- Original Issue Discount," any gain on the sale or
exchange of such Certificate is treated as interest income.
TAXATION OF RESIDUAL CERTIFICATES
Taxation of REMIC Income. Generally, the "daily portions" of REMIC
taxable income or net loss will be includible as ordinary income or loss in
determining the federal taxable income of holders of Residual Certificates
("Residual Certificateholders"), and will not be taxed separately to the REMIC
Pool. The daily portions of REMIC taxable income or net loss of a Residual
Certificateholder are determined by allocating the REMIC Pool's taxable income
or net loss for each calendar quarter ratably to each day in such quarter and
by allocating such daily portion among the Residual Certificateholders in
proportion to their respective holdings of Residual Certificates in the REMIC
Pool on such day. REMIC taxable income is generally determined in the same
manner as the taxable income of an individual using a calendar year and the
accrual method of accounting, except that (i) the limitation on deductibility
of investment interest expense and expenses for the production of income do not
apply, (ii) all bad loans will be deductible as business bad debts and (iii)
the limitation on the deductibility of interest and expenses related to
tax-exempt income will apply. REMIC taxable income generally means the REMIC
Pool's gross income, including interest, original issue discount income and
market discount income, if any, on the Mortgage Loans, plus income on
reinvestment of cash flows and reserve assets, minus deductions, including
interest and original issue discount expense on the Regular Certificates,
servicing fees on the Mortgage Loans and other administrative expenses of the
REMIC Pool, amortization of premium, if any, with respect to the Mortgage
Loans, and any tax imposed on the REMIC's income from foreclosure property. The
requirement that Residual Certificateholders report their pro rata share of
taxable income or net loss of the REMIC Pool will continue until there are no
Certificates of any Class of the related Series outstanding.
The taxable income recognized by a Residual Certificateholder in any
taxable year will be affected by, among other factors, the relationship between
the timing of recognition of interest and original issue discount or market
discount income or amortization of premium with respect to the Mortgage Loans,
on the one hand, and the timing of deductions for interest (including original
issue discount) on the Regular Certificates, on the other hand. Because of the
way REMIC taxable income is calculated, a Residual Certificateholder may
recognize "phantom" income (i.e., income recognized for tax purposes in excess
of income as determined under financial accounting or economic principles)
which will be matched in later years by a corresponding tax loss or reduction
in taxable income, but which could lower the yield to Residual
Certificateholders due to the lower present value of such loss or reduction.
For example, if an interest in the Mortgage Loans is acquired by the REMIC Pool
at a discount, and one or more of such Mortgage Loans is prepaid, the Residual
Certificateholder may recognize taxable income without being entitled to
receive a corresponding amount of cash because (i) the prepayment may be used
in whole or in part to make distributions in reduction of principal on the
Regular Certificates and (ii) the discount income on the Mortgage Loans which
is includible in the REMIC's taxable income may exceed the interest and
discount deduction allowed to the REMIC upon such distributions on the Regular
Certificates. When there is more than one class of Regular Certificates that
distribute principal sequentially, this mismatching of income and deductions is
particularly likely to occur in the early years following issuance of the
Regular Certificates when distributions in reduction of principal are being
made in respect of earlier maturing classes of Regular Certificates to the
extent that such classes are not issued with substantial discount. If taxable
income attributable to such a mismatching is realized, in general, losses would
be allowed in later years as distributions on the later classes of Regular
Certificates are made. Taxable income may also be greater in earlier years than
in later years as a result of the fact that interest expense deductions,
expressed as a percentage of the outstanding principal amount of such a Series
of Regular Certificates, may increase over time as distributions in reduction
of principal 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
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Income; Excess Inclusions." The timing of such mismatching of income and
deductions described in this paragraph, if present with respect to a Series of
Certificates, may have a significant adverse effect upon the Residual
Certificateholder's after-tax rate of return. In addition, a Residual
Certificateholder's taxable income during certain periods may exceed the income
reflected by such Residual Certificateholder for such periods in accordance
with generally accepted accounting principles. Investors should consult their
own advisors concerning the proper tax and accounting treatment of their
investment in Residual Certificates.
Basis and Losses. The amount of any net loss of the REMIC Pool that
may be taken into account by the Residual Certificateholder is limited to the
adjusted basis of the Residual Certificate as of the close of the quarter (or
time of disposition of the Residual Certificate if earlier), determined without
taking into account the net loss for the quarter. The initial adjusted basis of
a purchaser of a Residual Certificate is the amount paid for such Residual
Certificate. Such adjusted basis will be increased by the amount of taxable
income of the REMIC Pool reportable by the Residual Certificateholder and
decreased by the amount of loss of the REMIC Pool reportable by the Residual
Certificateholder. A cash distribution from the REMIC Pool also will reduce
such adjusted basis (but not below zero). Any loss that is disallowed on
account of this limitation may be carried over indefinitely with respect to the
Residual Certificateholder as to whom such loss was disallowed and may be used
by such Residual Certificateholder only to offset any income generated by the
same REMIC Pool. The ability of a Residual Certificateholder to deduct net
losses with respect to a Residual Certificate may be subject to additional
limitations under the Code, as to which Residual Certificateholders should
consult their tax advisors.
A Residual Certificateholder will not be permitted to amortize
directly the cost of its Residual Certificate as an offset to its share of the
taxable income of the related REMIC Pool. However, such taxable income will not
include cash received by the REMIC Pool that represents a recovery of the REMIC
Pool's basis in its assets. Such recovery of basis by the REMIC Pool will have
the effect of amortization of the issue price of the Residual Certificates over
their life. However, in view of the possible acceleration of the income of
Residual Certificateholders described above under "-- Taxation of REMIC
Income," the period of time over which such issue price is effectively
amortized may be longer than the economic life of the Residual Certificates.
If a Residual Certificate has a negative value, it is not clear
whether its issue price would be considered to be zero or such negative amount
for purposes of determining the REMIC Pool's basis in its assets. The Final
REMIC Regulations do not address whether residual interests could have a
negative basis and a negative issue price. The Depositor does not intend to
treat a Class of Residual Certificates as having a value of less than zero for
purposes of determining the bases of the related REMIC Pool in its assets.
Further, to the extent that the initial adjusted basis of a Residual
Certificateholder (other than an original holder) in the Residual Certificate
is greater that the corresponding portion of the REMIC Pool's basis in the
Mortgage Loans or the Mortgage Loans underlying the Agency Securities, the
Residual Certificateholder will not recover a portion of such basis until
termination of the REMIC Pool unless Treasury regulations yet to be issued
provide for periodic adjustments to the REMIC income otherwise reportable by
such holder. The Final REMIC Regulations do not so provide. See "-- Treatment
of Certain Items of REMIC Income and Expense -- Market Discount" below
regarding the basis of Mortgage Loans to the REMIC Pool and "-- Sale or
Exchange of a Residual Certificate" below regarding possible treatment of a
loss upon termination of the REMIC Pool as a capital loss.
TREATMENT OF CERTAIN ITEMS OF REMIC INCOME AND EXPENSE
Original Issue Discount. Generally, the REMIC Pool's deductions for
original issue discount will be determined in the same manner as original issue
discount income on Regular Certificates as described above under "-- Taxation
of Regular Certificates -- Original Issue Discount," without regard to the de
minimis rule described therein.
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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 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
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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 required qualified liquidation.
Although not entirely clear, the Final REMIC Regulations indicate that the
significant value determination is made only on the Startup Day. The
anticipated weighted average life of a Residual Certificate with a principal
balance and a market rate of interest is computed by multiplying the amount of
each expected principal payment by the number of years (or fractions thereof)
from the Startup Day, adding these sums and dividing by the total principal
expected to be paid on such Residual Certificate based on the relevant
prepayment assumption and expected reinvestment income. The anticipated
weighted average life of a Residual Certificate with either no specified
principal balance or a principal balance and rights to interest payments
disproportionate to such principal balance, would be computed under the formula
described above but would include all payments expected on the Residual
Certificate instead of only the principal payments. The anticipated weighted
average life of a REMIC is a weighted average of the anticipated weighted
average lives of all classes of interests in the REMIC.
Under Treasury regulations to be promulgated, a portion of the
dividends paid by a REIT which owns a Residual Certificate are to be designated
as excess inclusions in an amount corresponding to the Residual Certificate's
allocable share of the excess inclusions. Similar rules apply in the case of
regulated investment companies, common trust funds and cooperatives. Thus,
investors in such entities which own a Residual Certificate will be subject to
the limitations on excess inclusions described above. The Final REMIC
Regulations do not provide guidance on this issue.
Mark to Market Rules. Under IRS temporary regulations, a "negative
value" REMIC residual interest is not a security for purposes of the
mark-to-market rules under the Code. A negative value REMIC residual interest
is a REMIC residual interest whose present value of anticipated tax liabilities
exceeds the present value of the expected future distributions, as determined
on the date of acquisition of the REMIC residual interest. For purposes of the
temporary regulations, the present value of anticipated tax liabilities is
determined net of any anticipated tax savings associated with holding the
residual interest as the REMIC generates losses. It is possible that a Residual
Certificate may constitute a negative value REMIC residual interest. Such
temporary regulations provide the IRS with the authority to treat any Residual
Certificate having substantially the same economic effect as a "negative value"
residual interest as a "negative value" residual interest. The IRS may also
issue final regulations which may retroactively treat a REMIC residual interest
as a "negative value" REMIC residual interest. The IRS has also issued proposed
regulations that provide that all REMIC residual interests are not considered
securities for purposes of the mark-to-market rules.
TAX-RELATED RESTRICTIONS ON TRANSFER OF RESIDUAL CERTIFICATES
Disqualified Organizations. If legal title or beneficial interest in
a Residual Certificate is transferred to a Disqualified Organization (as
defined below), a tax would be imposed in an amount equal to the product of (i)
the present value of the total anticipated excess inclusions with respect to
such Residual Certificate for periods after the transfer and (ii) the highest
marginal federal income tax rate applicable to corporations. The Final
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REMIC Regulations provide that the anticipated excess inclusions are based on
actual prepayment experience to the date of the transfer and projected payments
based on the Prepayment Assumption. The present value discount rate equals the
applicable Federal rate under Code Section 1274(d) that would apply to a debt
instrument that was issued on the date the Disqualified Organization acquired
the Residual Certificate and whose term ended on the close of the last quarter
in which excess inclusions were expected to accrue with respect to the Residual
Certificate. Such a tax generally would be imposed on the transferor of the
Residual Certificate, except that where such transfer is through an agent
(including a broker, nominee, or other middleman) for a Disqualified
Organization, the tax would instead be imposed on such agent. However, a
transferor of a Residual Certificate would in no event be liable for such tax
with respect to a transfer if the transferee furnishes to the transferor an
affidavit that the transferee is not a Disqualified Organization and, as of the
time of the transfer, the transferor does not have actual knowledge that such
affidavit is false. The tax also may be waived by the Treasury Department if
the Disqualified Organization promptly disposes of the Residual Certificate and
the transferor pays income tax at the highest corporate rate on the excess
inclusions for the period the Residual Certificate is actually held by the
Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions that are allocable to the interest in the
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
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restrictions. Information necessary to compute an applicable excise tax must be
furnished to the IRS and to the requesting party within 60 days of the request,
and the Depositor or the Trustee may charge a fee for computing and providing
such information.
Noneconomic Residual Interests. The Final REMIC Regulations would
disregard certain transfers of Residual Certificates, in which case the
transferor would continue to be treated as the owner of the Residual
Certificates and thus would continue to be subject to tax on its allocable
portion of the net income of the REMIC Pool. Under the Final REMIC Regulations,
a transfer of a "noneconomic residual interest" (defined below) to a Residual
Certificateholder (other than a Residual Certificateholder who is not a United
States Person, as defined below under "-- Foreign Investors") is disregarded
for all federal income tax purposes unless no significant purpose of the
transfer is to enable the transferor to impede the assessment or collection of
tax. A residual interest in a REMIC (including a residual interest with a
positive value at issuance) is a "noneconomic residual interest" unless, at the
time of the transfer, (i) the present value of the expected future
distributions on the residual interest at least equals the product of the
present value of the anticipated excess inclusions and the highest corporate
income tax rate in effect for the year in which the transfer occurs, and (ii)
the transferor reasonably expects that the transferee will receive
distributions from the REMIC at or after the time at which taxes accrue on the
anticipated excess inclusions in an amount sufficient to satisfy the accrued
taxes. The anticipated excess inclusions and the present value rate are
determined in the same manner as set forth above under "-- Disqualified
Organizations." A significant purpose to impede the assessment or collection of
tax exists if the transferor, at the time of the transfer, either knew or
should have known (had "improper knowledge") that the transferee would be
unwilling or unable to pay taxes due on its share of the taxable income of the
REMIC. Under the Final REMIC Regulations, a transferor is presumed not to have
improper knowledge if (i) the transferor conducted, at the time of the
transfer, a reasonable investigation of the financial condition of the
transferee and, as a result of the investigation, the transferor found that the
transferee had historically paid its debts as they came due and found no
significant evidence to indicate that the transferee will not continue to pay
its debts as they come due in the future; and (ii) the transferee represents to
the transferor that it understands that, as the holder of the noneconomic
residual interest, the transferee may incur tax liabilities in excess of any
cash flows generated by the residual interest and that the transferee intends
to pay taxes associated with holding of residual interest as they become due.
The Pooling and Servicing 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
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in or under the laws of the United States or any political subdivision thereof
or an estate or trust that is subject to United States federal income tax
regardless of the source of its income.
Sale or Exchange of a Residual Certificate. Upon the sale or exchange
of a Residual Certificate, the Residual Certificateholder will recognize gain
or loss equal to the excess, if any, of the amount realized over the adjusted
basis (as described above under "Basis and Losses") of such Residual
Certificateholder in such Residual Certificate at the time of the sale or
exchange. In addition to reporting the taxable income of the REMIC Pool, a
Residual Certificateholder will have taxable income to the extent that any cash
distribution to him from the REMIC Pool exceeds such adjusted basis on that
Distribution Date or Payment Date. Such income will be treated as gain from the
sale or exchange of the Residual Certificate. It is possible that the
termination of the REMIC Pool may be treated as a sale or exchange of a
Residual Certificateholder's Residual Certificate, in which case, if the
Residual Certificateholder has an adjusted basis in his Residual Certificate
remaining when his interest in the REMIC Pool terminates, and if he holds such
Residual Certificate as a capital asset under Code Section 1221, then he will
recognize a capital loss at that time in the amount of such remaining adjusted
basis.
The Committee Report provides that, except as provided in Treasury
regulations yet to be issued, the wash sale rules of Code Section 1091 will
apply to dispositions of Residual Certificates. Consequently, losses on
dispositions of Residual Certificates will be disallowed where the seller of
the Residual Certificate, during the period beginning six months before the
sale or disposition of the Residual Certificate and ending six months after
such sale or disposition, acquires (or enters into any other transaction that
results in the application of Code Section 1091) any residual interest in any
REMIC or any interest in a "taxable mortgage pool" (such as a non-REMIC owner
trust) that is economically comparable to a Residual Certificate. In any event,
any loss realized by a Residual Certificateholder on the sale will not be
deductible, but, instead, will increase such Residual Certificateholder's
adjusted basis in the newly acquired assets.
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
Prohibited Transactions. Net income from certain transactions by the
REMIC Pool, called prohibited transactions, will not be part of the calculation
of income or loss includible in the federal income tax returns of Residual
Certificateholders, but rather will be taxed directly to the REMIC Pool at a
100% rate. Prohibited transactions generally include (i) the disposition of a
qualified mortgage other than for (a) substitution within two years of the
Startup Day for a defective (including a defaulted) obligation (or repurchase
in lieu of substitution of a defective (including a defaulted) obligation at
any time) or for any qualified mortgage within three months of the Startup Day,
(b) foreclosure, default or imminent default of a qualified mortgage, (c)
bankruptcy or insolvency of the REMIC Pool or (d) a qualified (complete)
liquidation, (ii) the receipt of income from assets that are not the type of
mortgages or investments that the REMIC Pool is permitted to hold, (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
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guarantee, (iv) made to facilitate a qualified liquidation or clean-up call and
(v) as otherwise permitted in Treasury regulations yet to be issued.
Net Income from Foreclosure Property. The REMIC Pool will be subject
to federal income tax at the highest corporate rate on "net income from
foreclosure property," determined by reference to the rules applicable to real
estate investment trusts. Generally, property acquired by the REMIC Pool
through foreclosure or deed in lieu of foreclosure would be treated as
"foreclosure property" for a period of two years, with possible extensions. Net
income from foreclosure property generally means (i) gain from the sale of a
foreclosure property that is inventory property and (ii) gross income from
foreclosure property other than qualifying rents and other qualifying income
for a real estate investment trust.
Liquidation of the REMIC Pool
If a REMIC Pool and the Trustee adopt a plan of complete liquidation,
within the meaning of Code Section 860F(a)(4)(A)(i) and sell all of the REMIC
Pool's assets (other than cash) within a 90-day period beginning on the date of
the adoption of the plan of liquidation, any gain on the sale of its assets
will not result in a prohibited transaction tax, provided that the REMIC Pool
credits or distributes in liquidation all of the sale proceeds plus its cash
(other than amounts retained to meet claims against the REMIC Pool) to holders
of Regular Certificates and Residual Certificateholders within the 90-day
period.
Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar
year basis and to file federal income tax returns for federal income tax
purposes in a manner similar to a partnership. The form for such income tax
return is Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax
Return. Treasury regulations provide that, except where there is a single
Residual Certificateholder for an entire taxable year, the REMIC Pool generally
will be subject to the procedural and administrative rules of the Code
applicable to partnerships, including the determination by the IRS of any
adjustments to, among other things, items of REMIC income, gain, loss,
deduction or credit in a unified administrative proceeding. Generally, the
Depositor or the Trustee will be obligated to act as "tax matters person," as
defined in applicable Treasury regulations, with respect to the REMIC Pool, in
its capacity as either Residual Certificateholder or agent of the Residual
Certificateholders. If the Code or applicable Treasury regulations do not
permit the Depositor or the Trustee to act as tax matters person in its
capacity as agent of the Residual Certificateholders, the Residual
Certificateholder chosen by the Residual Certificateholders or such other
person specified pursuant to Treasury regulations will be required to act as
tax matters person.
Treasury regulations provide that a holder of a Residual Certificate
is not required to treat items on its return consistently with their treatment
on the REMIC Pool's return if a holder owns 100% of the Residual Certificates
for the entire calendar year. Otherwise, each holder of a Residual Certificate
is required to treat items on its return consistently with their treatment on
the REMIC Pool's return, unless the holder of a Residual Certificate either
files a statement identifying the inconsistency or establishes that the
inconsistency resulted from incorrect information received from the REMIC Pool.
The IRS may assess a deficiency resulting from a failure to comply with the
consistency requirement without instituting an administrative proceeding at the
REMIC Pool level.
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%
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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 the pass-through rate or Bond interest rate on Regular Certificates that are
issued in a single class or otherwise consistently with fixed investment trust
status or in excess of cash distributions for the related period on Residual
Certificates.
TAXATION OF CERTAIN FOREIGN INVESTORS
Regular Certificates
Interest, including original issue discount, distributable to Regular
Certificateholders who are nonresident aliens, foreign corporations, or other
Non-United States Persons (as defined below), will be considered "portfolio
interest" and therefore, generally will not be subject to 30% United States
withholding tax, provided that such Non-United States Person (i) is not a
"10-percent shareholders" within the meaning of Code Section 871(h)(3)(B) or a
controlled foreign corporation described in Code Section 881(c)(3)(C) and (ii)
provides the Trustee, or the person who would otherwise be required to withhold
tax from such distributions under Code Section 1441 or 1442, with an
appropriate statement, signed under penalties of perjury, identifying the
beneficial owner and stating, among other things, that the beneficial owner of
the Regular Certificate is a Non-United States Person. If such statement, or
any other required statement, is not provided, 30% withholding will apply
unless reduced or eliminated pursuant to an applicable tax treaty or unless the
interest on the Regular Certificate is effectively connected with the conduct
of a trade or business within the United States by such Non-United States
Person. In the latter case, such Non-United States Person will be subject to
United States federal income tax at regular rates. Investors who are Non-United
States Persons should consult their own tax advisors regarding the specific tax
consequences to them of owning a Regular Certificate. The term "Non-United
States Person" means any person who is not a United States Person. Payments on
Regular Certificates may subject a Non-United States Person to United States
federal income and withholding tax where such foreign person also owns,
actually or constructively, Residual Certificates issued by the same REMIC,
notwithstanding compliance with the certification requirements discussed above.
Residual Certificates
The Committee Report indicates that amounts paid to Residual
Certificateholders who are Non-United States Persons are treated as interest
for purposes of the 30% (or lower treaty rate) United States withholding tax.
Treasury regulations provide that amounts distributed to Residual
Certificateholders qualify as "portfolio interest," subject to the conditions
described in "-- Regular Certificates" above, but only to the extent that (i)
the Mortgage Loans were issued after July 18, 1984 and (ii) the Trust Fund or
segregated pool of assets therein (as to which a separate REMIC election will
be made), to which the Residual Certificate relates, consists of
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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.
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
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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."
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
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yield with respect to the Mortgage Loans underlying a Series of Certificates or
where the servicing fees are in excess of reasonable servicing compensation,
the transaction will be subject to the application of the "stripped bond" and
"stripped coupon" rules of the Code, as described below under "-- Stripped
Certificates" and "-- Premium and Discount -- Recharacterization of Servicing
Fees," respectively.
Tax Status. To the extent disclosed in the related Prospectus
Supplement, Counsel for the Depositor will deliver its opinion with respect to
Certificates described under this subsection "Standard Certificates" that:
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."
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Original Issue Discount. The IRS has stated in published rulings
that, in circumstances similar to those described herein, the original issue
discount rules will be applicable to a Certificateholder's interest in those
Mortgage Loans as to which the conditions for the application of those sections
are met. Rules regarding periodic inclusion of original issue discount income
are applicable to mortgages of corporations originated after May 27, 1969,
mortgages of noncorporate borrowers (other than individuals) originated after
July 1, 1982, and mortgages of individuals originated after March 2, 1984. Such
original issue discount could arise by the charging of points by the originator
of the mortgages in an amount greater than a statutory de minimis exception, to
the extent that the points are not for services provided by the lender. It is
generally not anticipated that adjustable rate Mortgage Loans will be treated
as issued with original issue discount. However, the application of the OID
Regulations to adjustable rate mortgage loans with incentive interest rates or
annual or lifetime interest rate caps may result in original issue discount.
Original issue discount must generally be reported as ordinary gross
income as it accrues under a constant yield method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
However, Code Section 1272 provides for a reduction in the amount of original
issue discount includible in the income of a holder of 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
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reported by a cash method holder may be slightly accelerated. See "-- Stripped
Certificates" below for a further description of the federal income tax
treatment of stripped bonds and stripped coupons.
In the alternative, the amount, if any, by which the servicing fees
paid to the servicers are deemed to exceed reasonable compensation for
servicing could be treated as deferred payments of purchase price by the
Certificateholders to purchase an undivided interest in the Mortgage Loans. In
such event, the present value of such additional payments might be included in
the Certificateholder's basis in such undivided interests for purposes of
determining whether the Certificate was acquired at a discount, at par, or at a
premium. Under this alternative, Certificateholders may also be entitled to a
deduction for unstated interest with respect to each deferred payment. The
Internal Revenue Service may take the position that the specific statutory
provisions of Code Section 1286 described above override the alternative
described in this paragraph. Certificateholders are advised to consult their
tax advisors as to the proper treatment of the amounts paid to the servicers as
set forth herein as servicing compensation or under either of the alternatives
set forth above.
SALE OR EXCHANGE OF CERTIFICATES
Upon sale or exchange of a Certificate, a Certificateholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its aggregate adjusted basis in the Mortgage Loans and other
assets represented by the Certificate. In general, the aggregate adjusted basis
will equal the Certificateholder's cost for the Certificate, increased by the
amount of any income previously reported with respect to the Certificate and
decreased by the amount of any losses previously reported with respect to the
Certificate and the amount of any distributions received thereon. Except as
provided above with respect to market discount on any Mortgage Loans, and
except for certain financial institutions subject to the 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.
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In general, a holder of a Stripped Certificate will be considered to
own "stripped bonds" with respect to its pro rata share of all or a portion of
the principal payments on each Mortgage Loan and/or " stripped coupons" with
respect to its pro rata share of all or a portion of the interest payments on
each Mortgage Loan, including the Stripped Certificate's allocable share of the
servicing fees paid, to the extent that such fees represent reasonable
compensation for services rendered. See discussion above under "-- 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
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<PAGE> 363
is appropriate. Counsel to the Depositor will not deliver any opinion on these
questions. Prospective purchasers to which such characterization of an
investment in Strip Certificates in material should consult their tax advisors
regarding whether the Strip Certificates, and the income therefrom, will be so
characterized.
The Strip Certificates will be "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
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<PAGE> 364
Certificates." To the extent that a subsequent purchaser's purchase price is
exceeded by the remaining payments on the Stripped Certificates, such
subsequent purchaser will be required for federal income tax purposes to accrue
and report such excess as if it were original issue discount in the manner
described above. It is not clear for this purpose whether the assumed
prepayment rate that is to be used in the case of a Stripped Certificateholder
other than original Stripped Certificateholder should be the Prepayment
Assumption or a new rate based on the circumstances at the date of subsequent
purchase.
Purchase of More Than One Class of Stripped Certificates. Where an
investor purchases more than one class of Stripped Certificates, it is
currently unclear whether for federal income tax purposes such classes of
Stripped Certificates should be treated separately or aggregated for purposes
of the rules described above.
Because of these possible varying characterizations of Stripped
Certificates and the resultant differing treatment of income recognition,
Stripped Certificateholders are urged to consult their own tax advisors
regarding the proper treatment of Stripped Certificates for federal income tax
purposes.
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Trustee will furnish, within a reasonable time after the end of
each calendar year, to each Certificateholder or Stripped Certificateholder at
any time during such year, such information (prepared on the basis described
above) as the Trustee deems to be necessary or desirable to enable such
Certificateholders to prepare their federal income tax returns. Such
information will include the amount of original issue discount accrued on
Certificates held by persons other than Certificateholders exempted from the
reporting requirements. The amounts required to be reported by the Trustee may
not be equal to the proper amount of original issue discount required to be
reported as taxable income by a Certificateholder, other than an original
Certificateholder. The Trustee will also file such original issue discount
information with the IRS. If a Certificateholder fails to supply an accurate
taxpayer identification number or if the Secretary of the Treasury determines
that a Certificateholder has not reported all interest and dividend income
required to be shown on his federal income tax return, 31% backup withholding
may be required in respect of any reportable payments, as described above under
"-- Federal Income Tax Consequences for REMIC Certificates -- Backup
Withholding."
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a Certificate evidences ownership in Mortgage Loans
that are issued on or before July 18, 1984, interest or original issue discount
paid by the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other Non-United States Persons
generally will be subject to 30% United States withholding tax, or such lower
rate as may be provided for interest by an applicable tax treaty. Accrued
original issue discount recognized by the Certificateholder on the sale or
exchange of such a Certificate also will be subject to federal income tax at
the same rate.
Treasury regulations provide that interest or original issue discount
paid by the Trustee or other withholding agent to a Non-United States Person
evidencing ownership interest in Mortgage Loans issued after July 18, 1984 will
be "portfolio interest" and will be treated in the manner, and such persons
will be subject to the same certification requirements described above under
"-- Federal Income Tax Consequences for REMIC Certificates -- Taxation of
Certain Foreign Investors -- Regular Certificates."
STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Certain Federal Income Tax Consequences" herein, potential investors should
consider the state income tax consequences of the acquisition, ownership, and
disposition of the Offered Certificates. State income tax law may differ
substantially from the corresponding federal tax law, and this discussion does
not purport to describe any aspect of the income tax laws of any state.
Therefore, potential investors should consult their own tax advisors with
respect to the various tax consequences of investment in the Offered
Certificates.
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<PAGE> 365
PLAN OF DISTRIBUTION
Certificates are being offered hereby in series through one or more
underwriters or groups of underwriters (the "Underwriters"). The related
Prospectus Supplement will set forth the terms of offering of a Series of
Certificates, including the public offering or purchase price of each Class of
Certificates of such Series being offered thereby or the method by which such
price will be determined and the net proceeds to the Depositor from the sale of
each such Class. Such Certificates will be acquired by the Underwriters for
their own account and may be resold from time to time in one or more
transactions including negotiated transactions, at fixed public offering prices
or at varying prices to be determined at the time of sale or at the time of
commitment therefor. The managing Underwriter or Underwriters with respect to
the offer and sale of a particular Series of Certificates will be set forth on
the cover of the Prospectus Supplement relating to such Series and the members
of the underwriting syndicate, if any, will be named in such Prospectus
Supplement.
In connection with the Sale of the Certificates, Underwriters may
receive compensation from the related Transferor or the Depositor or from
purchasers of the Certificates in the form of discounts, concessions or
commissions. Underwriters and dealers participating in the distribution of the
Certificates may be deemed to be Underwriters in connection with such
Certificates, and any discounts or commissions received by them from the
related Transferor or the Depositor and any profit on the resale of
Certificates by them may be deemed to be underwriting discounts and commissions
under the Securities Act. The Prospectus Supplement will describe any such
compensation paid by the related Transferor or the Depositor.
It is anticipated that the underwriting agreement pertaining to the
sale of any Series of Certificates will provide that the obligations of the
Underwriters will be subject to certain conditions precedent, that the
Underwriters will be obligated to purchase all such Certificates if any are
purchased and that the related Transferor or the Depositor will indemnify the
underwriters against certain civil liabilities, including liabilities under the
Securities Act, as amended.
LEGAL MATTERS
The legality of the Certificates and certain federal income tax
matters will be passed upon for the Depositor by Andrews & Kurth L.L.P.,
Dallas, Texas, and for the Underwriters by ____________________
______________________________________.
FINANCIAL INFORMATION AND ADDITIONAL INFORMATION
A new Trust Fund will be formed with respect to each Series of
Certificates. No Trust Fund will engage in any business activities or have any
assets or obligations prior to the issuance of the related Series of
Certificates. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
Copies of the Registration Statement to which this Prospectus forms a
part and the exhibits thereto are on file at the offices of the Securities and
Exchange Commission in Washington, D.C., and may be obtained at rates
prescribed by the Commission upon request to the Commission and inspected,
without charge, at the offices of the Commission.
Copies of FHLMC's most recent Offering Circular for FHLMC
Certificates, FHLMC's Information Statement and most recent Supplement thereto
and any quarterly report made available by FHLMC can be obtained in writing or
calling 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
101
<PAGE> 366
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> 367
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL TERMS
<TABLE>
<CAPTION>
PAGE
<S> <C>
"1986 Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
"Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
"Administrator" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"Annual Reduction" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
"Applicable Accounting Standards" . . . . . . . . . . . . . . . . . . . . . 48
"APR" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
"Assets" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 6
"Beneficial Owners" . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 28
"BIF" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
"Book Entry Certificates" . . . . . . . . . . . . . . . . . . . . . . . 9, 27
"Call Risk" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
"Certificate Account" . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
"Certificate Guaranty Policy" . . . . . . . . . . . . . . . . . . . . . . . 40
"Certificate Interest Rate" . . . . . . . . . . . . . . . . . . . . . . . . 3
"Certificateholders" . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
"Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
"Charter Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
"Class" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 1
"Clearing Agency Participants" . . . . . . . . . . . . . . . . . . . . 9, 27
"Clearing Agency" . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 27
"Code" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
"Collateral Value" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
"Commission" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
"Committee Report" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
"Companion Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . 24
"Compound Interest Certificates" . . . . . . . . . . . . . . . . . . . 2, 24
"Contract Loan Schedule" . . . . . . . . . . . . . . . . . . . . . . . . . 46
"Contract Pool" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
"Contracts" . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 6, 7, 35
"Conventional Contracts" . . . . . . . . . . . . . . . . . . . . . . . 7, 36
"Conventional Mortgage Loans" . . . . . . . . . . . . . . . . . . . . . . . 7
"Cooperative Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
"Cooperatives" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 29
"Credit Enhancement" . . . . . . . . . . . . . . . . . . . . 6, 9, 16, 17, 38
"Depositor" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 2, 52
"Disqualified Organization" . . . . . . . . . . . . . . . . . . . . . . . . 88
"Distribution Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
"DOL" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
"Due Period" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
"ERISA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 73
"excess servicing" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
"Excess Spread" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
"Exchange Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
"Extension Risk" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
"FDIC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49, 72
"FFI" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
"FHA Claims Administrator" . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
103
<PAGE> 368
<TABLE>
<S> <C>
"FHA Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
"FHA Reserve" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
"FHLMC Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
"FHLMC Certificate Group" . . . . . . . . . . . . . . . . . . . . . . . . . 33
"FHLMC Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
"FHLMC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 6
"Final REMIC Regulations" . . . . . . . . . . . . . . . . . . . . . . . . . 74
"FmHA Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
"FNMA Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
"FNMA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 6
"GNMA Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
"GNMA Issuer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
"GNMA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 6
"Guaranty Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
"Holders" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1, 9
"Housing Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
"improper knowledge" . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
"Interest Only Certificates" . . . . . . . . . . . . . . . . . . . . . 1, 24
"IRS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
"Issuer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 2, 22
"Manufacturer's Invoice Price" . . . . . . . . . . . . . . . . . . . . . . 36
"Market Discount" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
"Master Servicer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"Maximum Variable Interest Rate" . . . . . . . . . . . . . . . . . . . . . 4
"Minimum Variable Interest Rate" . . . . . . . . . . . . . . . . . . . . . 4
"Mortgage Asset Pool" . . . . . . . . . . . . . . . . . . . . . . . . . . . i
"Mortgage Assets" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
"Mortgage Loans" . . . . . . . . . . . . . . . . . . . . . . . . i, 6, 7, 75
"Mortgage Notes" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
"Mortgage Pool Insurance Policy" . . . . . . . . . . . . . . . . . . . . . 40
"Mortgage Pool" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
"Mortgage Rates" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
"Mortgaged Properties" . . . . . . . . . . . . . . . . . . . . . . . . . . 29
"Mortgages" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
"NCUA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
"noneconomic residual interest" . . . . . . . . . . . . . . . . . . . . . . 89
"Notional Principal Balance" . . . . . . . . . . . . . . . . . . . . . . . 22
"Offered Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . i
"OID Regulations" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
"Original Issue Discount" . . . . . . . . . . . . . . . . . . . . . . . 77, 83
"OTS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61, 72
"Parties in Interest" . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
"Permitted Investments" . . . . . . . . . . . . . . . . . . . . . . . . . . 38
"Plan Asset Regulations" . . . . . . . . . . . . . . . . . . . . . . . . . 73
"Plans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
"Policy Statement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
"Pool Insurer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
"Premium REMIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
"Prepayment Assumption" . . . . . . . . . . . . . . . . . . . . . . . . . . 77
"Principal Only Certificates" . . . . . . . . . . . . . . . . . . . . . 1, 24
"Principal Prepayments" . . . . . . . . . . . . . . . . . . . . . . . . . . 26
"Priority Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . 24
"Prohibited Transactions" . . . . . . . . . . . . . . . . . . . . . . . 23, 73
</TABLE>
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<PAGE> 369
<TABLE>
<S> <C>
"Prospectus Supplement" . . . . . . . . . . . . . . . . . . . . . . . . . . i
"PTC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
"Rating Agency" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
"Record Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
"Registrar" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
"Regular Certificates" . . . . . . . . . . . . . . . . . . . . . . . . 9, 75
"Reigle Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
"REIT" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
"Relief Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . 19, 55, 64
"REMIC Administrator" . . . . . . . . . . . . . . . . . . . . . . . . . . . ii
"REMIC Pool" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
"REMIC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii, 9, 75
"Reports" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
"Reserve Fund" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
"Residual Certificates" . . . . . . . . . . . . . . . . . . . . . . 9, 18, 75
"Residual Holders" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
"Retail Class Certificate" . . . . . . . . . . . . . . . . . . . . . . . . 77
"SAIF" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
"Scheduled Amortization Certificates" . . . . . . . . . . . . . . . . . . . 24
"Scheduled Principal" . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
"Secured Property" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
"Securities Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
"Senior Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
"Series" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
"Servicer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
"SMMEA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 72
"Special Allocation Certificates" . . . . . . . . . . . . . . . . . . . . . 24
"Special Hazard Insurance Policy" . . . . . . . . . . . . . . . . . . . . . 40
"Startup Day" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
"Subordinated Certificates" . . . . . . . . . . . . . . . . . . . . . . . . 38
"Subsequent Mortgage Assets" . . . . . . . . . . . . . . . . . . . . . 8, 37
"Subservicing Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . 42
"TAMRA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
"Thrift Institution" . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
"TILA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
"Title I Contracts" . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 36
"Title I Mortgage Loans" . . . . . . . . . . . . . . . . . . . . . . . 7, 29
"Title V" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
"TMP" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
"Transfer Report" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
"Transferor" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
"Trust Fund" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 1
"Trustee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
"UCC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
"Underlying Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
"Underwriters" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
"United States Person" . . . . . . . . . . . . . . . . . . . . . . . . . . 89
"Unsecured Contracts" . . . . . . . . . . . . . . . . . . . . . . i, 6, 7, 36
"VA Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
"Variable Interest Rate Certificates" . . . . . . . . . . . . . . . . . . . 1
"Window Period Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
</TABLE>
105
<PAGE> 370
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-16
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-24
The Mortgage Loan Pool . . . . . . . . . . . . . . . . . . . . . . . . . . . S-24
Description of the Certificates . . . . . . . . . . . . . . . . . . . . . . . S-30
The Guaranty Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-45
FHA Insurance for Title I Mortgage Loans . . . . . . . . . . . . . . . . . . S-48
The Depositor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-50
The Transferor and Servicer . . . . . . . . . . . . . . . . . . . . . . . . . S-51
Prepayment and Yield Considerations . . . . . . . . . . . . . . . . . . . . . S-54
Description of Book Entry Procedures . . . . . . . . . . . . . . . . . . . . S-62
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . S-63
ERISA Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-63
Legal Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-65
Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-65
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-66
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-66
Underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-66
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-68
PROSPECTUS
Prospectus Supplement . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii
Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
Incorporation of Certain Documents by Reference . . . . . . . . . . . . . . . iii
Table of Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
Summary of Prospectus . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Description of the Certificates . . . . . . . . . . . . . . . . . . . . . . . 21
Assets Securing or Underlying the Certificates . . . . . . . . . . . . . . . 28
Credit Enhancement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Servicing of the Mortgage Loans and Contracts . . . . . . . . . . . . . . . . 41
The Pooling and Servicing Agreement . . . . . . . . . . . . . . . . . . . . . 45
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
The Depositor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
The Servicer and the Transferor . . . . . . . . . . . . . . . . . . . . . . . 52
The Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Certain Legal Aspects of the Mortgage Assets . . . . . . . . . . . . . . . . 54
Legal Investment Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 72
ERISA Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . . . . . . 74
State Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
Financial Information and Additional Information . . . . . . . . . . . . . . 101
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.
$_________________
FIRSTPLUS HOME LOAN TRUST 199_-_
FIRSTPLUS
INVESTMENT CORPORATION
(DEPOSITOR)
FIRSTPLUS FINANCIAL, INC.
(TRANSFEROR AND SERVICER)
___________
PROSPECTUS SUPPLEMENT
[UNDERWRITER]
____________, 199_
<PAGE> 371
PART II
INFORMATION NOT REQUIRED TO BE IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Estimated expenses in connection with the issuance and distribution of
the securities, other than underwriting discounts and commissions*, are as
follows:
<TABLE>
<S> <C>
Registration Fee -- Securities and Exchange Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 344.83
Printing and Engraving Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . **
Accounting Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . **
Legal Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . **
Trustee Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . **
Blue Sky Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . **
Rating Agency Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . **
Miscellaneous Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . **
---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ **
=========
</TABLE>
- ---------
* To be provided for each Series of Securities on the cover page of the
related Prospectus Supplement.
** To be provided by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The form of Underwriting Agreement filed as Exhibit 1.1 hereto
provides for indemnification of the officers and directors of FIRSTPLUS
INVESTMENT CORPORATION (the "Company") and each person, if any, who controls
the Company within the meaning of Section 15 of the Securities Act of 1933 or
Section 20 of the Securities and Exchange Act of 1934 as follows:
(i) against any and all losses, liabilities, claims,
damages and expenses, joint or several, or actions in respect thereof,
whatsoever arising out of any untrue statements or omissions, or
alleged untrue statements or omissions made in the Registration
Statement (or any amendment or supplement thereto), or the Prospectus
(or any amendment or supplement thereto) in reliance upon and in
conformity with written information furnished to the Company by and
with respect to the Underwriter expressly for use in the Registration
Statement (or any amendment or supplement thereto) or the Prospectus
(or any amendment or supplement thereto);
(ii) against any and all loss, liability, claim, damage
and expense, joint or several, or actions in respect thereof,
whatsoever to the extent of the aggregate amount of any judgment
rendered or the aggregate amount paid in settlement of any litigation,
or relating to any investigation or proceeding by any governmental
agency or body or third party, commenced or threatened, or relating to
any claim whatsoever, in any such case based upon any such untrue
statement or omission, or any such alleged untrue statement or
omission; and
(iii) against any and all expense whatsoever (including the
fees and disbursements of counsel) incurred in investigation,
preparing for, or defending against any litigation or investigation or
proceeding by any governmental agency or body or third party,
commenced or threatened, or any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue statement or
omission, to the extent that any such expense is not paid under (i) or
(ii) above.
The Articles of Incorporation and By-Laws of the Company (Exhibit 3.1
and 3.2, respectively) provide that the Company shall indemnify its officers
and directors and may, in the discretion of the Board of Directors, indemnify
its other employees and agents to the fullest extent permitted by Nevada
statutory and decisional law if any such person was or is a party, or is
threatened to be made a party, to any threatened, pending or completed action,
suit or
II-1
<PAGE> 372
proceeding, whether civil, criminal, administrative, arbitrative or
investigative, by reason of the fact that such person is or was a director,
officer, employee or agent of the Company, or is or was serving at the request
of the Company as a director, officer, partner, venturer, proprietor, trustee,
employee or agent of another company, partnership, joint venture, trust,
limited liability company or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding.
ITEM 16. EXHIBITS
Exhibit
Number
--------
1.1 Form of Underwriting Agreement (1)
3.1 Amended and Restated Articles of Incorporation of FIRSTPLUS
INVESTMENT CORPORATION, as amended (4)
3.2 By-Laws (2)
4.1 Form of Pooling and Servicing Agreement (2)
4.2 Form of Indenture (5)
4.3 Form of Trust Agreement (5)
5.1 Opinion of Andrews & Kurth L.L.P. regarding the legality of the
Certificates (1)
5.2 Opinion of Andrews & Kurth L.L.P. regarding the legality of the
Securities (5)
8.1 Opinion of Andrews & Kurth L.L.P. regarding tax matters (1)
8.2 Opinion of Andrews & Kurth L.L.P. regarding tax matters (5)
10.1 Representative Form of Mortgage Note (1)
10.2 Representative Form of Mortgage (1)
10.3 Representative Form of Retail Installment Contract, Note and
Disclosure Statement (1)
10.4 Specimen of Certificate Insurance Policy (2)
10.5 Form of Subservicing Agreement (2)
10.6 Form of Loan Sale Agreement (2)
10.7 Form of Sale and Servicing Agreement (5)
10.8 Form of Administration Agreement (5)
10.9 Form of Agreement with Clearing Agency (2)
23.1 Consent of Andrews & Kurth L.L.P. (included as part of Exhibits 5.1
and 8.1)
23.2 Consent of Andrews & Kurth L.L.P. (included as part of Exhibits 5.2
and 8.2)
24.1 Power of Attorney (3)
*99.1 Form of Prospectus Supplement for Asset-Backed Certificates (filed
with the related Prospectus)
*99.2 Form of Prospectus Supplement for Asset-Backed Securities (filed
with the related Prospectus)
- -------------
* Filed herewith.
II-2
<PAGE> 373
(1) Previously filed with the Commission as an exhibit to the Registrant's
Amendment No. 1 to Form S-3 Registration Statement (File No. 33-65373)
on April 23, 1996 and incorporated by reference herein.
(2) Previously filed with the Commission as an exhibit to the Registrant's
Form S-3 Registration Statement (File No. 33-65373) on December 22,
1995 and incorporated by reference herein.
(3) Previously filed, in part, with the Commission as an exhibit to the
Registrant's Form S-3 Registration Statement (File No. 33-65373) on
December 22, 1995 and, in part, as an exhibit to the Registrant's
Amendment No. 1 to Form S-3 Registration Statement (File No. 33-65373)
on April 23, 1996, and incorporated by reference herein.
(4) Previously filed with the Commission as an exhibit to the Registrant's
Amendment No. 2 to Form S-3 Registration Statement (File No. 33-65373)
on May 10, 1996 and incorporated by reference herein.
(5) To be filed by amendment.
ITEM 17. UNDERTAKINGS
(a) The Company hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this registration
statement: (i) to include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933 (the "Securities Act"); (ii) to reflect
in the prospectus any facts or events arising after the effective date
of this Registration Statement (or the most recent post-effective
amendment hereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in this Registration
Statement; (iii) to include any material information with respect to
the plan of distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement; provided, however, that no such post-effective
amendment shall be required in the information which would be required
by clauses (i) and (ii) is contained in periodic reports filed by the
Company pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act") that are incorporated by
reference in this Registration Statement.
(2) That for the purpose of determining any liability
under the 1933 Act, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered which
remain unsold at the termination of the offering.
(b) The Company hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Company's annual report pursuant to section 13(a) or section 15(d) of the
Exchange Act that is incorporated by reference in the registration statement
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company pursuant to the foregoing provisions, or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company
II-3
<PAGE> 374
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of competent jurisdiction the question
whether such indemnification by it is against public policy as expressed int he
1933 Act and will be governed by the final adjudication of such issue.
II-4
<PAGE> 375
SIGNATURES
Pursuant to the requirements of the 1933 Act, the Company certifies
that it has reasonable grounds to believe that it meets all of the requirements
for filing on Form S-3 and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the City
of Columbia, State of South Carolina, on the 19th day of August, 1996.
FIRSTPLUS INVESTMENT CORPORATION
By: /s/ Kirk R. Phillips
-----------------------------------
Kirk R. Phillips, President
Each person whose signature appears below does hereby make, constitute
and appoint Kirk R. Phillips and Christopher J. Gramlich and each of them his
true and lawful attorney with full power of substitution to execute, deliver
and file with the Securities and Exchange Commission, for and on his behsalf an
in his capacity or capacities as stated below, any amendment (including
post-effective amendments) to the Registrations Statement with all exhibits
thereto, making such changes in the Registration Statement as the Registrant
deems appropriate.
Pursuant to the requirements of the Securities Act of 1933, this
Amendment Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Kirk R. Phillips Director and President August 19, 1996
----------------------------------------------------- (Principal Executive Officer)
Kirk R. Phillips
/s/ Mark J. Landry Director, Treasurer and Chief August 19, 1996
----------------------------------------------------- Financial Officer (Principal
Mark J. Landry Financial Officer and Principal
Accounting Officer)
/s/ Larry G. Studinski Director August 19, 1996
-----------------------------------------------------
Larry G. Studinski
/s/ Steven A. Rubin Director August 19, 1996
-----------------------------------------------------
Steven A. Rubin
</TABLE>
II-5
